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Bed and Breakfast

May a rent-controlled tenant living in a co-op use her apartment as a bed-and-breakfast establishment? The answer was a clear "no" in Peck v. Lily Lodge where the use was a clear violation of both the rent control law and the governing documents of the co-op.

In this case, plaintiff Norman Peck was the owner of shares and holder of the proprietary lease for rent-controlled Apartment 11C located at 325 West End Avenue in Manhattan. Defendant Lily Lodge was a longtime tenant who occupied the premises under the city's rent and rehabilitation law. Defendant Oldest Daughter Enterprises Inc. d/b/a All Around the Town d/b/a New World Bed & Breakfast (ODE) was in the business of "booking" "affordable" accommodations for out-of-town visitors in the homes of its Manhattan "clients."

On April 15, 2002, Peck received a letter from 325 West End Avenue Owners Inc., the entity that owned the building, advising him that Lodge was operating a bed and breakfast out of Apartment 11C, in violation of his proprietary lease. The co-op informed Peck, that Lodge's stream of transient tenants was compromising the safety and security of the other residents, and that it was incumbent upon him to remedy the violation or risk losing his $1.5 million worth of shares as well as his leasehold interest in the premises.

Enclosed with the co-op's letter were several documents reflecting that individuals - many of whom had been referred to Lodge by ODE - paid roughly $100 a night (plus a fee to ODE) for a room plus bath in Apartment 11C. These guests were issued keys, were given limited use of the apartment's kitchen, and were told to check out by 11:00 A.M. A flyer with these and other instructions was also enclosed, as was a "Bed and Breakfast Receipt" issued to a three-night guest (in reality a detective hired by the co-op) named Ed Riley, dated March 26, 2002.

On May 21, 2002, Peck served on Lodge a notice of termination, based upon her alleged profiteering from the use of the apartment "in breach of a substantial obligation of [her) tenancy." Peck said that if Lodge did not move out by June 20, 2002 (the date on which her month-to-month tenancy would expire), he would begin summary proceedings to remove her, and would demand the fair market value of her use and occupancy during the period of her holding over. Peck informed Lodge that "a breach of a substantial obligation of a tenancy based upon use of the Premises for impermissible business purposes resulting in profiteering is not subject to cure as a matter of law and accordingly this is the only Notice you will receive."

When Lodge did not move out, on or around July 31, 2002, Peck started a lawsuit in which he sought: (a) an order of ejectment and (b) a judgment for the fair market use and occupancy of the apartment from July 1, 2002, through the date of judgment, in an amount to be determined by the court.

In her answer, Lodge asserted the following 11 affirmative defenses: (1) the complaint should be dismissed because plaintiff had not served the statutorily required "Notice to Cure" upon Lodge; (2) Lodge was permitted to have "roommates" under Real Property Law 235-f; (3) Lodge had at all times complied with the rent control laws and had not run a "bed and breakfast" out of Peck's apartment; (4) Lodge's "roommates" had come and gone on a regular and "open and notorious" basis since 1991, without any objection from the cooperative owner of the building or its staff, with the result the landlord had "waived" his current complaints; (5) any cause of action accrued in 1991, and so was time-barred; (6) "upon information and belief," the termination notice was not properly served; (7) estoppel; (8) laches, coupled with the argument that Lodge needed roommates to meet plaintiff's exorbitant rents; (9) plaintiff's (unspecified) culpable conduct; (10) any violation had been "cured" because plaintiff had not had any further roommates since receipt of the notice of termination; and (11) plaintiff could collect only the rent-controlled rent and not market-value "use and occupancy" charges.

By way of counterclaims, Lodge asserted that: (1) Peck owed her at least $60,000 for forcing her to relinquish her legal right to have "roommates," and (2) Peck owed her treble damages, or at least $250,000, for charging rent in excess of the legal rent for the apartment.

Simultaneously with his lawsuit, Peck brought on an order to show cause, seeking a preliminary injunction directing that defendant Lodge and/or anyone acting on her behalf immediately cease and refrain from reserving and/or renting any room or rooms at Apartment 11C at 325 West End Avenue on a transient basis for a fee, as well as directing defendant Lodge to pay Peck for her use and occupancy of said apartment as it became due at the current rate of $2,753.46 per month.

Peck's application was supported by affidavits from two other shareholders, who were neighbors of Lodge's, and who complained that Lodge was defeating the residents' expectation of security by admitting a steady stream of strangers into elevators and other public areas of the building; and they expressed anxiety about the safety of the building's children. Lodge did not dispute Peck's allegations except to explain that her rent was so high that she was obliged to supplement her income by "rent[ing] rooms on an occasional basis to different roommates."

Lodge acknowledged that some of these "roommates" were "referred" to her by ODE. She believed that her "roommate" practice was entirely legal, not least because the building's concierge staff observed and even assisted her guests for more than a decade without complaining. She accused Peck and the two tenants who had supported his application of acting out of venal motives. By decision and order dated November 18, 2002, the court granted Peck's application to the extent of restraining Lodge from renting any of her rooms to transient lodgers during the pendency of this action.

In support of her application for summary judgment, Lodge submitted an affidavit in which she related that she was 73 years old, had lived in the contested apartment for 39 years and, as an "acting teacher," subsisted on a limited income. In 1991, Lodge, needing a source of money to supplement her income in order to pay her steep rent, consulted "a service," ODE, to help her find "roommates." She had put up "temporary roommates" ever since. At no time did she "profit" from the "roommate" arrangement; and she had since discontinued accommodating "roommates."

Lodge argued that Peck's complaint should be dismissed because it is legal in New York for a rent-controlled tenant to charge "rent and even excessive rent to her roommate" - i.e., profiteering is impossible in the roommate context. In the alternative, Lodge insisted, Peck's complaint should be dismissed because a predetermined notice to cure must, under the applicable rent control laws, be served to afford a long-term rent-controlled tenant like Lodge the opportunity to save her leasehold by giving her ten days to cure whatever "violation of a substantial obligation of her tenancy" the landlord is alleging. This is not a case of an incurable violation, since Lodge's roommate complaint could be simply cured by Lodge's promise that she will never again rent out rooms in her apartment.

Peck opposed Lodge's motion, and cross-moved to dismiss Lodge's affirmative defenses and counterclaims as well as her plea for summary judgment on various causes of action. Peck pointed out that this was not a case of "roommates" but of a commercial "bed and breakfast" business; and he insisted that he was not required to serve a notice to cure since Lodge's behavior was not susceptible of cure.

Appended to Peck's papers was an affidavit from Kathleen Kruger, the president of ODE. Kruger related that she had for twelve years been "in the business of arranging affordable accommodations for out-of-towners in the homes of our clients here in Manhattan." Kruger did not operate a "roommate referral service," and has never referred a "roommate" to Lodge. She had, however, regularly booked transient guests in Lodge's two spare bedrooms, according to a bed-and-breakfast contract signed by Lodge and Kruger on June 10, 1992. This contract provided, among other things, that Lodge would offer "guests" a bedroom, bath, and limited kitchen privileges by the night, week, or month, in exchange for which Lodge would receive 75 percent and Kruger 25 percent of the moneys charged. Kruger had supplied a substantial quantity of booking tickets representing referrals from her to Lodge between 1997 and May 2002.

Lodge certified that Kruger's records of her "referrals" of guests to Lodge during 1997-2002 are essentially accurate, although she otherwise accuses Kruger of lying. According to Lodge, Kruger assured Lodge that her hosting of roommates was perfectly legal, and Lodge reiterated that no one from the building ever challenged her or her customers. Lodge contradicted Kruger's assertion that Lodge's guests were confined to their bedrooms, insisting that they had the run of the whole apartment. Moreover, Lodge herself was always in residence, and she never overcharged her guests. She speculated that over the years she had given shelter to a multitude of scholars and artists, whose sojourns benefited the city. At the least, Lodge submitted, there were issues of fact requiring a trial, partly because Peck - as he admitted at his deposition - had no firsthand knowledge of the facts, including how much rent Lodge collected from her guests. Lodge insisted that she needed further discovery from the co-op.

Peck and Kruger then submitted affidavits in which they took issue with several of Lodge's assertions (e.g., that Kruger ever counseled Lodge on the legality of her bed and breakfast). In addition, a neighbor of Lodge's submitted a further sworn statement to the effect that even after Peck acquired the TRO, she saw strangers with suitcases coming and going out of Lodge's apartment, causing her to fear for the safety of herself and her three children. A former building superintendent further stated that he did question Lodge about her numerous visitors, but that she explained that they were relatives and friends.

In order to prevail on a motion for summary judgment, the court observed that the proponent must make a prima facie showing of entitlement to judgment as a matter of law by providing sufficient evidence to eliminate any material issues of fact requiring a trial. Here, the court said that Lodge had failed to carry her burden of proving her entitlement to judgment as a matter of law, since she had not produced any convincing evidence supporting her argument that she hosted only occasional "roommates" and so was not "profiteering."

Lodge had also not established that Peck was obliged to serve her with a notice to cure before he could evict her. Conversely, Peck had proved by voluminous admissible evidence that he was entitled to summary judgment on his first and second causes of action, for an order of ejectment. In response to Peck's showing, Lodge had not come forward with specific facts suggesting that a genuine issue for trial existed.

As a general rule, a landlord may not evict a tenant from a rent-controlled or rent-stabilized apartment unless "[t]he tenant is violating a substantial obligation of [her] tenancy." A lease provision limiting use and occupancy of an apartment to private residential purposes has been declared to be a substantial obligation of the tenancy. The lease at issue here contained such a restriction.

Eviction was warranted only where the violation of such a substantial obligation - i.e., use of a residential rent-controlled or rent-stabilized apartment as other than a private dwelling - is "significant." Here, the court held that the evidence produced by Peck established that Lodge's use of her apartment as a "bed and breakfast" materially diverged from the character of the residential building, seriously threatened her landlord Peck's $1.5 million worth of shares as well as his leasehold interest in the premises, and significantly disturbed the building's other tenants in the peaceful use of their apartments.

Lodge insisted that her guests were actually roommates such that she is protected by RPL 235-f ("the Roommate Law") and cannot be charged with profiteering. However, this contention was unsupported by any credible evidence. A "roommate" is a long-term co-occupant of an apartment with the leaseholder, with whom she shares the entire living area. All of the evidence in this case - except for some self-serving representations by Lodge - indicated that her guests were numerous, short-term, and restricted in their use of the apartment's space. If, as the record indicates, they were also charged sums which in the aggregate exceeded the legal monthly rent, which the landlord himself could not legally charge a sublessee, the court said that the tenant was making a profit or "profiteering" - that is, she was commercializing the apartment and defrauding her landlord. When Lodge succeeded in renting both rooms every night, as she wished, she netted $4,500 a month ($6,000 a month, less ODE's 25 percent) - far in excess of her 2003 rent of $2,753.46 a month. Lodge also charged her guests 8.25 percent sales tax, although it was not clear whether she thereafter remitted these sums to the proper authorities.

As with rent stabilization laws, one of the purposes for which the rent control laws were enacted was to forestall profiteering, since profiteering "subverts the integrity of the rent-stabilized [/rent-controlled] scheme... to prevent 'exactions of unjust, unreasonable and oppressive rents' " in a desperately tight residential housing market.

The court said that courts elsewhere have held that where a ground for eviction is "incapable of any meaningful cure" (e.g., where there has been a chronic pattern of nonpayment of rent), the landlord need not serve the pre-petition, 10-day notice to cure which is otherwise required by the city rent and eviction regulations. As in other chronically unpaid-rent cases, the court held that where a cure is impossible, the landlord is relieved of his obligation to serve on the tenant the usual 10-day notice to cure. In addition, the court dismissed all of Lodge's affirmative defenses and counterclaims.

Accordingly, Lodge's motion for summary judgment was denied and it was ordered that Peck's cross-motion, which sought summary judgment for an order of ejectment, was granted.

Comment: The facts of this case led the court to conclude that the defendant was operating a bed-and-breakfast establishment in a co-op, which is inimical to the underlying purpose of a co-op enterprise. Transient occupancy involves a commercial enterprise, which has no place in a building designed to provide housing for its shareholders. The courts invariably frown upon such operations and not even the so-called roommate law could be invoked to help the tenant's position.

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