NEW YORK: An Introduction to Real Estate: Litigation

NEW YORK: An Introduction to Real Estate: Litigation

Adrienne B. Koch and Mark Walfish

In New York, litigation in general – and real estate litigation in particular – is emerging from the COVID-19 pandemic with a new set of tools that will enhance efficiency going forward.  In-person appearances are largely back at both the trial and appellate levels, but courts and litigants have learned that they are not always necessary; certain matters can be handled more efficiently through remote video conferencing.  That these tools appear to be here to stay is at least one positive legacy of the difficult pandemic years.

In the sections that follow, we first discuss certain unique aspects of practice in New York state’s commercial division, where real estate disputes are often litigated.  We then address some recent and ongoing developments.

Litigating in New York’s Commercial Division 

Much of New York’s real estate litigation is conducted in the commercial division of the Supreme Court of New York State, a specialized segment of the court established to adjudicate complex business disputes.  The commercial division has its own set of judges, who adjudicate only commercial cases.  It also has its own set of rules designed specifically to address the needs of such cases. A permanent Commercial Division Advisory Council – comprised of litigators, current and former members of the judiciary, and in-house counsel – continually studies the changing needs of the practice and regularly proposes and secures changes to those rules to meet those needs.  The result is a modern, practical, and efficient system well-suited to business litigation in general, and to real estate litigation in particular.

The judges of New York’s commercial division are well-versed in the principles and mechanisms of New York law that frequently arise in real estate litigation.  But the ubiquitous use of Delaware limited liability companies for real estate transactions also often means that Delaware law applies to various aspects of disputes among members or investors in New York real estate developments.  What results can be a complex combination of Delaware substantive law and New York procedural law – which the commercial division judges are also highly experienced in handling.

One other noteworthy aspect of litigation in the New York state courts is the interlocutory appeal.  Many non-final orders are immediately appealable to the Appellate Division, New York’s intermediate appellate court.  Absent a specific order to the contrary, an interlocutory appeal does not result in a stay of proceedings in the lower court and therefore does not delay the litigation.  It can, however, enhance efficiency: for example, if an order denying dismissal or summary judgment is ultimately going to be reversed on appeal, it is better to know that right away than to have to wait until the case is litigated to conclusion.  In an effort to improve that efficiency, beginning in January 2022 the Appellate Division launched a pilot program shortening the deadlines for interlocutory appeals of certain discovery orders in commercial division cases originating in New York County or Bronx County.

Recent and Ongoing Developments 

Litigation Under the Rent Stabilization Law 

In 2009, New York’s highest court (the Court of Appeals) determined that rent stabilized apartments located in buildings that were subject to certain tax benefits could not be removed from rent stabilization while the tax benefits were in effect, even if their rent reached a level that would otherwise have qualified them for such removal.  Because this was contrary to the practice that had until then been fully sanctioned by the governing agency (and followed by thousands of landlords), it spawned significant confusion about how to “re-regulate” apartments that had been mistakenly deregulated pursuant to that practice.  It also spawned dozens of lawsuits (including many class actions) against landlords seeking significant rent roll-backs and damages for alleged rent overcharges.

Since 2018, the Court of Appeals – which hears cases only by permission – has heard appeals in no fewer than six such cases, addressing issues ranging from the procedural mechanisms for challenging class allegations to the retroactivity of certain 2019 amendments to New York’s Rent Stabilization Law.  Later this year it will hear another one, addressing the question of what kind of conduct can constitute a “fraudulent scheme to deregulate” sufficient to entitle tenants to have their rent recalculated pursuant to a “default formula” that generally results in a substantial reduction of rent.  Although a decision from the Court of Appeals resolving this question will provide needed guidance for the many rent regulation lawsuits that continue to pend in the New York state court system, given the volume of those cases this may not be that court’s last word on the subject.

The Impact of COVID-19 

Meanwhile, New York courts are still grappling with the impact of the COVID-19 pandemic on the real estate sector.  Litigation directly related to the pandemic – including litigation over such issues as whether the pandemic triggered casualty or force majeure provisions in commercial leases and other kinds of real estate contracts – is still trickling through the courts.  The pandemic has generally not excused performance, but the results in individual cases depend in large part on the wording of the provision at issue.

As well, the U.S. Court of Appeals for the Second Circuit recently revived a constitutional challenge to a New York City ordinance that made personal guarantees of commercial leases permanently unenforceable with respect to any rent arrears that arose between March 7, 2020 and June 30, 2021.  The case continues to pend in the U.S. District Court for the Southern District of New York, which is now charged with determining whether the ordinance was a reasonable and appropriate means of addressing the legitimate public goal of “maintaining the small businesses necessary for functioning neighborhoods.”  A ruling that the ordinance is invalid could give rise to a new wave of litigation over the enforcement of such personal guarantees.

The pandemic continues to impact real estate litigation in less direct ways as well.  Substantively, although the New York City real estate market has been making a well-publicized comeback, the pandemic slowed sales and interrupted construction for a substantial period of time.  Some projects saw their funding impacted, fell behind schedule, or came in over budget, causing issues with partners, lenders, investors, and/or buyers.  These COVID-related disruptions are continuing to surface – sometimes as central factors and sometimes as peripheral ones – in real estate disputes.

Procedurally, there is continued debate in the courts over whether certain pandemic-related executive orders tolled statutes of limitations or merely suspended them.  If the orders resulted only in a suspension, then any limitations period that would otherwise have expired between March 20 and November 3, 2020 was extended until after the suspension was lifted, but limitations periods that would not otherwise have expired during that time remain unaffected.  On the other hand, if the orders instead resulted in a tolling, then any limitations period that began to run before (and had not expired by) March 20, 2020 is extended by 228 days.  This could be especially significant in the world of real estate litigation, where many claims are subject to limitations periods as long as six years (for claims based on contract or fraud) – meaning the effects of a 228-day toll could continue for more than half a decade.  It could take many months for the issue to be fully resolved, as the cases where it is being litigated continue to work their way through the court system.