NEW YORK: An Introduction to New York

Practical Aspects Of Real Estate Litigation In New York 

Much real estate litigation in New York takes place in the commercial division of the state’s Supreme Court, 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 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.

Commercial division judges 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 Manhattan or the Bronx.

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 they would otherwise have qualified 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) seeking significant rent roll-backs and damages for alleged rent overcharges.

Since 2018, the Court of Appeals – which hears cases only by permission – has decided no fewer than seven 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. But although its most recent decision provided some clarity regarding 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” (which generally results in a substantial reduction of rent), that issue continues to spawn substantial litigation in the lower courts. Given the volume of those cases, it seems likely that the Court of Appeals will be called upon to weigh in again before long.

Commercial Leasing 

There have meanwhile been some ongoing developments relevant to commercial leasing. One relates to a New York City ordinance adopted during the COVID-19 pandemic, which made certain kinds of personal guaranties permanently unenforceable with respect to any rent arrears that arose between March 7, 2020 and June 30, 2021. In March of 2023, a lower federal court found that ordinance unconstitutional; an appeal from that ruling is pending. An affirmance could give rise to a new wave of litigation over the enforcement of these guaranties.

Another development relates to what are known as “good guy guaranties.” Such a guaranty addresses circumstances where a tenant vacates the premises before the lease expires. That tenant is in breach of the lease – and, in theory, remains liable for rent going forward (which the landlord may also have a right to accelerate). Under a “good guy guaranty,” the guarantor will not be liable for that future (and/or accelerated) rent if (a) the tenant gave reasonable notice of its intent to vacate; (b) the tenant paid all of its rent through the time it vacated; and (c) the tenant fully surrendered the premises in proper “broom clean” condition. Because commercial tenants are often single-purpose entities (and if they are vacating the premises before the end of the lease term, it often means that the business failed), this is a significant protection for the guarantor. But it benefits the landlord as well: it gives the tenant and the guarantor an incentive to return the space in an orderly fashion.

A handful of recent appellate decisions may make many existing “good guy guaranties” substantially less effective. These decisions held that if the guaranty provides that the tenant must “surrender” the premises, such “surrender” must conform to the terms of the lease. Because many leases provide that a surrender before the end of the term is not valid unless the landlord approves it in writing, these decisions effectively enable a landlord to eviscerate the protections of the “good guy guaranty” by simply refusing to approve the surrender. Tenants and guarantors can obviate this problem in the future by drafting the language of the guaranty differently. For existing leases, however, this case law may give rise to concern.

Statutes Of Limitations 

There has been 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 would be extended until after the suspension was lifted, but limitations periods that would not otherwise have expired during that time remain unaffected. But 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 would be extended by 228 days. This latter interpretation has now been adopted by at least two of the four divisions of New York’s intermediate appellate court. This is especially significant in 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.