Municipalities on Long Island are struggling to control rental properties. In Southampton, rental properties are governed by Chapter 270 of the Southampton Town Code (the “Code”). Section 270-3 of the Code establishes that an owner of a residential property shall not permit or allow its use or occupancy as a rental without first obtaining a permit. If an owner does rent without a permit, section 270-13(a) of the Code prohibits the owner’s collection of rent.
In Schwartz v. Torrenzano, 49 Misc.3d 943, 16 N.Y.S.3d 697, (Suffolk Co. 2015), the Supreme Court held that Southampton’s rental permit law creates a private cause of action allowing, in certain circumstances, a tenant to recoup rent paid to its landlord. The trial court’s holding in Schwartz was recently cited with approval by the Appellate Division, Second Department in Ader v. Guzman, 135 A.D.3d 671, 23 N.Y.S.3d 292 (2d Dept. 2016).
In Ader, tenants demanded the return of their rent after discovering that their summer rental lacked a permit. The Appellate Division, relying in part upon Schwartz, affirmed the Supreme Court’s holding that the Code affords tenants an implied private right of action and that the Ader lease was unenforceable. The Appellate Division held that because Southampton’s rental permit law is intended to protect the public health and prevent fraud, enforcing the illegal lease and permitting the landlord to keep the tenants’ rent violates public policy.
In a companion case, Ader v. Guzman & Corcoran Realty Group, LLC, et al., 135 A.D.3d 668, 22 N.Y.S.3d 576 (2d Dept. 2016), the Appellate Division held that Real Property Law §443(4)(b) does not impose a duty upon real estate brokers to investigate whether a rental property is properly permitted. Despite the Court’s holding, the New York State Department of State, in a guidance letter dated April 19, 2016, cautioned that “notwithstanding the decision in Guzman, a broker who fails to demonstrate a working knowledge of the property being marketed, fails to demonstrate the level of competency required to transact business as a licensee in violation of Real Property Law §§441 and 441-c.” The Department further warned that a broker’s commission “premised upon an unlawful agreement is ‘unearned’ in violation of Real Property Law §441-c.”
It is clear that from the Department’s perspective that brokers must make reasonable efforts to verify the legal status of the properties they offer and that, where a broker has actual knowledge that a property lacks a permit or is otherwise illegal, such information must be affirmatively disclosed.