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In the case of L. K. Schwartz Co., Inc., v. Leyendecker, 68 the Appellate Term of the Supreme Court for the First Department affirmed without opinion, Mr. Justice Finch dissenting, a decision of the Municipal Court of the City of New York, Ninth District, Manhattan, where Mr. Justice Coleman, in his opinion, had fixed a rental upon the basis of a 612% allowance on the first 60 per cent. of the value of the property and a 10% allowance on the last 40% of value. Of course, it may perhaps fairly be said that the affirmance by the majority of the court in that case does not constitute an endorsement of the principle by which the result of the trial court was reached, but merely establishes that the result was correct and reached without reversible error.
In a lengthy dissenting opinion, Mr. Justice Finch says:“The principle which should govern, therefore, . . [is] .. a fair
, , return upon the reasonable value of the property at the time it is affected with the public use."
The holding of the justice is that the Housing Laws affect real property with a public use. Continuing, this opinion says: “This result may be reached by various approaches, and then the rule laid down in the case of People ex rel. Kings Co. Light Co. v. Wilcox 69 is quoted, in “which the cost of reproduction less accrued depreciation” is adopted as the proper basis upon which to figure return.
Again, the Appellate Term in the First Department in the case of Maitland v. Kerrigan 70 held that the cost of reconstruction of a building and the deduction of a reasonable figure for depreciation was not the proper method of ascertaining a value for the purpose of determining reasonable rent.
* Not yet reported.
In that case the evidence showed that the premises consisted of:
“a tenement house built over 20 years ago, and that it would cost about $100,000 to reconstruct the building at the present time. In 1920 the city assessed this property at the sum of $80,000, and assessed the land unimproved at the sum of $38,500. The landlord now asks us to accept the assessment of the city as to the unimproved land as correct, and to add to the assessed value of the unimproved land the cost of reconstruction of the building, deducting a reasonable figure for depreciation during the last 20 years, which he claims would be about 15 per cent."
The court, in refusing to adopt this method of ascertaining value, said:
“It is well established . . . that the value of real property is determined by the price at which property of similar character is bought and sold in the open market, and other criteria of value are used only when it is impossible to show such sales in the open market, and there is no evidence in this case of the price at which such sales have been made."
And the same court, in the case of Elvira Realty Co. v. Bracegirdle,71 makes a statement in the course of its opinion to the effect that at least the landlord is entitled to a rental which will afford him a “fair return upon his investment.” We quote from the concluding paragraph of the opinion:
“The landlord is not compelled to allow any tenant to remain in the premises, unless such tenant is ready to pay the landlord, either the rental which he has agreed to pay or a rental which is reasonable, and no rental can be considered as reasonable which is less than the amount which would be fixed by ordinary competition, and in addition is less than would afford the landlord a
71 115 Misc. 197, 187 N. Y. Supp. 518.
fair return upon his investment, if applied to all the apartments in the same house."
If we adopt the language of the opinion of the Appellate Term in the Second Department in the case of Hirsch v. Weiner as the true test to be applied, it may be possible to harmonize what otherwise would seem to be an unfortunate conflict of opinion. The court says: “Is not the owner's real investment in his property the sum it is worth—the amount for which he can sell it?” In other words, if market value of the property be regarded as the owner's real investment, the decisions, with the possible exception of Hall Realty Co. v. Moos,72 may be said to be in substantial unison.
POSITION OF LESSEE OF ENTIRE BUILDING
A problem which frequently is met in ascertaining reasonable rental values of apartments is in respect to a lessee of an entire building who pays a rental to the owner of the property. How is he to be regarded? Usually it is claimed by the lessee of an entire building who is the plaintiff or landlord in respect to tenants in actual occupation of the apartments therein, that the rental paid to the owner should be charged as an expense and deducted from gross income in ascertaining the net return on the property. This, however, does not seem wholly fair to the tenants in occupation of the apartments. The rent which such a lessee pays to the owner of the building, if allowed as an expense, tends to add to the burdens of the tenants in occupancy, the sublessees.
On the other hand, there are many lessees of entire buildings who have rights which may not and should not be disregarded. The leases may have antedated the "Housing
72 115 Misc. 506, 188 N. Y. Supp. 858.
Laws” and may, and in fact usually do, run for a term covering a period of many years. It is frequently the case that a lessee of the character described has deposited a substantial sum of money as security with the landlord or has made a considerable investment in improving the condition of the property. Such a lessee undoubtedly has rights which should be protected. There is nothing in the emergency laws indicating an intention to discriminate against the business of leasing and operating real property, which has long been a recognized business in the community.
At the same time, to allow such a lessee the same return as the owner of property is entitled to receive would place an added burden on the tenant. A very difficult problem is thus presented. Up to the present time there has been no court decision which has defined the rights of a lessee of the character described. The problem, perhaps, may be solved by the ascertainment of the value of the leasehold and allowing a reasonable return on that value, taking into consideration the rental paid by the tenant of the entire building to the owner. It would seem that the owner of property would not be entitled to as large a return on property where he makes a long term lease with ample security, as where he exercises the direct management of the property, either personally or through an agent. Where the owner makes a long-term lease with ample security, he, in large measure, eliminates risk and trouble and he should be satisfied with a smaller return than under ordinary conditions would be allowed under the recent decision in Hirsch v. Weiner.?
This risk and trouble is shouldered by the lessee of the entire building and he should receive compensation therefor in the return allowed him.
7: Appellate Term, 2nd Dept., 190 N. Y. Supp. 111.
Great care must be exercised in the ascertainment of reasonable rental returns to lessees not to open the door to the profiteering "leaster” whom the “Housing Laws" sought to eliminate, nor to lose sight of the Legislative intent to allow the tenant in occupation to remain in possession upon payment of a reasonable rent.
Nothing more than “a fair and reasonable rent for the premises " can be recovered in any event from the tenant in occupancy of an apartment and there should be no difference in that "fair and reasonable rent " whether the action be brought by a lessee of an entire building or by the owner.
REASONABLE RENT CANNOT BE DETERMINED ON A MOTION
The question of what is a reasonable rent cannot be determined by the court on a motion based upon affidavits. In order to have that issue properly determined, there must be a trial or hearing, unless the parties are able to stipulate covering that issue.74
HOW FAR CAN ONE TENANT PROFIT BY RENTALS PAID OTHER
TENANTS IN SAME BUILDING? The question frequently arises how far can one tenant profit at the expense of another in the same building and avail himself of the fact that such other tenant is paying what may appear to be too high a rental and a rent beyond what may be considered reasonable. The rule is that only the tenant so affected may take advantage of that fact. The rule is stated by the Appellate Term of the Supreme Court for the First Department, in an opinion written by Justice Lehman, as follows: 75
74 Cohen v. Spero, 186 N. Y. Supp. 579 (App. Term, 1st Dept.).
76 Elvira Realty Co. v. Bracegirdle, 115 Misc. 197, 187 N. Y. Supp. 518, 519