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for it may be some evidence of its present value or it may not be, depending upon the time of, and the circumstances surrounding its purchase.”
On this same subject we quote several expressions of opinion from the Appellate Term of the Supreme Court for the First Department, which, it may be noted in passing, have not been entirely uniform.
In a case which has not attracted much attention, this court in a per curiam opinion apparently gave its endorsement to the employment of the same basis as was adopted in the Hirsch v. Weiner case, stating that the landlord is entitled to "a ten per cent return upon the value of the property at a liberal appraisal.” 614
In the case of Schwartz v. Deutsch,62 heard on appeal in February, 1921, the same court, speaking through Mr. Justice Lehman, said:
"The legislature evidently intended that the return upon the investment of the owner of the apartment, or at least upon the value of the premises, should be a material factor in determining what amount will constitute a reasonable rental."
In this case the court does not say which is the proper criterion to form a basis of a reasonable rental—the investment of the owner or the market value of the premises.
The Appellate Term in the Second Department, commenting upon this decision and the statement quoted from the opinion has this to say:
“This statement may mean that the value of the property is to be the factor only if it be less than the amount of the owner's
Gia Sperling v. Barton, 188 N. Y. Supp. 857. Italics ours,
investment. But why should such a rule prevail? If the investment of the owner be the basis it should be used in all cases. There should not be one basis for one case and a different basis for another. The courts cannot prescribe one rule for 'Mr. White' and another rule for ‘Mr. Black.' If the amount of the investment be the factor, then does it matter when the property was bought and the investment made? Or is not the owner's real investment in his property the sum it is worth—the amount for which he can sell it?
“If the rental value is to be determined in part by what the owner paid for the property, would he have any 'investment' if the property came to him by will? And if the investment exceeded the property's present value why should a tenant be obliged to pay a larger rent because of that fact? Though property has been acquired for $10,000 maybe a number of years ago, if it be fairly worth $15,000 now, why should not the owner who has held it all the time have a fair return upon the amount it now represents? If he sold it for $15,000 the new owner would be entitled to rentals based upon that figure. We think the change of ownership should not affect the rental value. That value is the same regardless of who the owner is or may be. Rental value is not a matter of individuality.”
Some support of the position of the Appellate Term in the First Department in assuming that the investment of the landlord must be regarded as the basis on which reasonable rent is to be computed is to be found in the decision of the higher court in one of the cases which tested the constitutionality of these Housing Laws, Levy Leasing Co. v. Siegel, where the court expressed itself as follows (italics
"The Legislature might have provided that a landlord should not exact a rental by which he would receive more than a specified
* Levy Leasing Co. v. Siegel, 194 App. Div. 482, 506, 186 N. Y. Supp. 5, affirmed 230 N. Y. 634,
percentage on his investment, but if that percentage were fixed too low, the statute would be open to attack on the ground that it was confiscatory, and whether it would be sustained as constitutional or annulled as unconstitutional would then have to be determined by the very standard prescribed in the statute, namely, whether it permitted the landlord to receive a reasonable income on his investment.” 64
Addressing itself to the argument that "reasonable rent" should be determined on the investment of the owner or on his equity in the property, the court in Hirsch v. Weiner, 65 in disapproving the argument, says:
“The evidence supports a finding that the fair market value of the premises at the time of the commencement of the action was $215,000 and the value of the land $25,000, leaving the value of the building $190,000.
"It is the appellant's contention that the landlords are entitled to a fair return only on the amount of cash actually paid as part consideration for the premises, viz., $49,750, and not upon the fair market value of the premises prevailing at the time for which rent is sought to be recovered, nor even upon the full consideration of $196,000. This contention is clearly unsound. The amount of cash paid by an owner when purchasing cannot help to determine the amount he should have as his net rental. If this were so, an owner whose property came to him by will or gift in any form would not be entitled to any net return and could charge as rent only enough to pay the expenses. And under such a rule an owner whose property was free and clear, though he may have borrowed from his bank or elsewhere every dollar he paid for it, would be entitled to and would obtain a larger net return than if he had mortgaged the property for a part or the whole of its cost. If a
64 Citing Willcox v. Consolidated Gas Co., 212 U. S. 19; Des Moines Gas Co. v. Des Moines, 238 id. 153; Municipal Gas Co. v. Public Service Comm., 225 N. Y. 89.
65 190 N. Y. Supp. 111.
house were purchased for $10,000 and the purchaser paid $1,000 in cash and gave back a purchase money mortgage for $9,000, he is still obligated to pay the $9,000. If appellant's theory were correct the buyer would only be entitled as net income for rent to a fair percentage, say at most 10 per cent. on the $1,000, or $100 a year, as net rent for a $10,000 property.
“We think it matters not, in determining the reasonableness of a rent charge, whether the property is mortgaged. Its rental value is in no way affected thereby. This is the recognized rule (People ex rel. Fitchburgh R. Co. v. Haren, 3 Supp. 86). If this were not the rule there would be discrimination, and the reasonable rental of one property would be larger than that of another though the properties and their operating expenses were identical. Take this as an illustration: Two houses exactly alike and adjoining each other, both free and clear and under same ownership and with the same amount of operating expense; each should yield the same return and there should be no difference in their rental value; but if the owner placed a mortgage on one of the houses the rental value of that one would be lessened, while the rental value of the other one would remain as it had been. This would be the result if the fair and reasonable net rents allowable were in excess of 6 per cent. or of the rate of interest carried by the mortgage.
"And the higher the rate of interest paid on the mortgage the greater would be the amount of the reasonable rent charge. This may be demonstrated: Assume property worth $5,000 free and clear, reasonable net return 10 per cent, or $500; operating expense, $500.; the reasonable gross rentals, upon this hypothesis, would be $1,000, the total of the expenses and the reasonable net return. Assume the same situation, except that the property is mortgaged for $3,000, with interest at 6 per cent.; then if the mortgage should be considered, the owner's net return of 10 per cent. would be figured only on the equity of $2,000 and would be $200; this amount, plus the operating expense of $500, plus interest on mortgage of $180 totals $880, which would be the reasonable gross rental. Assume again a situation as last stated, except that the interest rate on the mortgage was 5 per cent.: then the gross rental would be $850. Upon that basis the rental value increases as the interest rate on the mortgages increases, but decreases as the amount of the mortgage increases. And the logical conclusion from such a method of calculating rental value would be that if the mortgage equalled or exceeded the property's value the owner would not be entitled to any net return and the rental value would just equal the operating expenses.”
In another decision, A. C. & H. M. Hall Realty Co. v. Moos, decided in June, 1921, by the Appellate Term in the First Department,66 that court, through Mr. Justice Guy, expressed itself as follows:
“It was clearly the intent of the Legislature that a landlord should be restricted to such rentals as would yield not a reasonable income on values created by profiteering methods, but a reasonable income on his investment."
The court held in that case that it was error for the trial justice to permit a question as to the present market value of the premises to be answered; on the ground, apparently, that it would be "a value largely based upon the excessive rentals charged by owners of similar property, which led to the emergency the statute declared existed and which the statute was intended to remedy."
The Appellate Term in the Second Department, on the other hand, had previously decided that a landlord was entitled to offer expert evidence as to both fee and rental value, 67 and this decision the same court approves in its later decision of Hirsch v. Weiner, to which reference has been made.
88 115 Misc. 506, 188 N. Y. Supp. 858, now on appeal to the Appellate Division.
87 Graeber v. Nichols, 190 N. Y. Supp. 198.