Supreme Court, Appellate Division, First Department, New York.
SCHACK et al.
v.
HANDEL et al.
May 31, 1946.
Appeal from Supreme Court, New York County; Irving L. Levey, Justice.
Proceedings in the matter of the application of Goldie Schack and another for
an order requiring Samuel Handel and Louis Handel, individually and as
copartners doing business as Handel Sportswear, and others to show cause why
emergency rents being paid by them should not be increased. From an order
directing payment of increased rents, petitioners, named respondents, and
certain other respondents appeal.
Affirmed.
West Headnotes
[1] Landlord and Tenant 200.24
233k200.24 Most Cited Cases
(Formerly 233k200(11/2))
In determining reasonable rent under Emergency Commercial Rent Law, probable
life of improvements having some degree of permanency should be considered in
fixing amount to be charged in particular year as extraordinary expenses of
repairs which would not ordinarily recur annually. McK.Unconsol.Laws, § §
8522(k), 8524.
[2] Landlord and Tenant 200.28
233k200.28 Most Cited Cases
(Formerly 233k200(11/2))
Actual experience should be given great weight in fixing probable cost of
maintenance and operation of leased premises for purpose of determining
reasonable rent thereof under Emergency Commercial Rent Law, but it does not
require court to accept concise sums spent in particular year for such items as
cost of same items during years of emergency for which rent is being fixed.
Mc.K.Unconsol.Laws, § 8524.
[3] Landlord and Tenant 200.24
233k200.24 Most Cited Cases
(Formerly 233k200(11/2))
An allowance for depreciation of leased building is not true item of cost of
maintenance or operation thereof within Emergency Commercial Rent Law requiring
consideration of such cost in determining reasonable rent. McK.Unconsol.Laws, §
8524.
[4] Landlord and Tenant 200.28
233k200.28 Most Cited Cases
(Formerly 233k200(11/2))
The Emergency Commercial Rent Law, requiring consideration of cost of
maintenance and operation of leased property, including amounts paid for taxes
and services furnished, confines such cost to sums actually paid out or
incurred. McK.Unconsol.Laws, § § 8522(k), 8524.
[5] Landlord and Tenant 200.28
233k200.28 Most Cited Cases
(Formerly 233k200(11/2))
In determining amount allowable for taxes on leased premises as expense of
maintenance and operation to be considered in determining reasonable rent under
Emergency Commercial Rent Law, trial court properly considered tax reductions
made by Supreme Court for earlier years in certiorari proceedings such as were
pending for year involved. McK.Unconsol.Laws, § 8524.
[6] Landlord and Tenant 200.28
233k200.28 Most Cited Cases
(Formerly 233k200(11/2))
Owners, not tenants of commercial premises have right to fix commensurate amount
of fire insurance to be carried by tenants and may consider rise in building
costs in insuring property, so as to authorize allowance of amount of premiums
paid for fire insurance thereon as item of cost of maintenance and operation in
determining reasonable rent under Emergency Commercial Rent Law, though amount
of such insurance exceeds structural value or cost of reproducing insured
buildings, if amounts expended for premiums are not unreasonable, arbitrary or
capricious. McK.Unconsol.Laws, § 8524.
[7] Landlord and Tenant 200.24
233k200.24 Most Cited Cases
(Formerly 233k200.23, 233k200(11/2))
The provision of Emergency Commercial Rent Law that net annual return of 6 per
cent. on fair value of entire leased property, including land, plus 2 per cent.
of principal for amortization of mortgages thereon, is presumed to be
reasonable, does not require that actual payment of less than 2 per cent.
amortization shall control issue of reasonable return, but such presumptive
percentages are merely aids in determining prima facie reasonable return.
McK.Unconsol.Laws, § 8521 et seq.
[8] Landlord and Tenant 200.24
233k200.24 Most Cited Cases
(Formerly 233k200.23, 233k200(11/2))
The burden imposed by rent increases, granted under Emergency Commercial Rent
Law, should be apportioned as against each tenant of leased premises, giving due
consideration to amount and character of space occupied by each of them and
return from entire premises. McK.Unconsol.Laws, § 8524.
[9] Evidence 571(7)
157k571(7) Most Cited Cases
Where testimony of expert witness, called by tenants of various lots in three
adjoining buildings operated as single unit by same landlords, that lofts in
each building were of same rental value, was all the proof introduced on such
subject, court properly apportioned increased rent granted landlords among
tenants accordingly. McK.Unconsol.Laws, § 8524.
**409 *4 Leon Himmelfarbe, of New York City, for petitioners appellants-
respondents.
Dreyer & Traub, of Brooklyn (I. Nathanson, of Brooklyn, of counsel; Samuel
Kirschenbaum, of Brooklyn, on the brief), for respondents-appellants Samuel
Handel and others.
Leo J. Linder, of New York City (Stanley J. Mayer, of New York City, of
counsel), for respondent-appellant Zell Products Corporation.
Milton Koerner, of New York City, for respondents-appellants Custom Bilt Shirt
Co., Inc., and Louis Rosenthal.
Before MARTIN, P. J., and TOWNLEY, GLENNON, CALLAHAN, and PECK, JJ.
CALLAHAN, Justice.
The petitioners, who are landlords of three adjoining buildings operated as a
single unit and known as 530 Broadway, New York City, applied to the Supreme
Court for an order requiring the tenants occupying commercial space in said
premises to show cause why the emergency rents being paid by said tenants should
not be increased. There are four stores in the premises. Two of the stores
were used for retail business. These tenants were not made parties for the
reason that the proceeding was commenced before the adoption of Chapter 314 of
the Laws of 1945, McK.Unconsol.Laws, § 8551 et seq., extending the emergency
rent laws to retail stores. The two remaining store tenants were conducting
enterprises therein which came within the Commercial Rent Law.
McK.Unconsol.Laws, § 8521 et seq. They were made parties, but one of them has
settled his dispute with the landlords.
Special Term computed the gross emergency rents of the premises at $64,726.60,
fixing the same at 15% above the gross rentals as of March, 1943. It found that
the reasonable allowable income should be $68,398.09 and directed a payment of
increased rents by each of the tenants who were parties.
In determining the proceeding the Trial Court made specific findings concerning
the reasonable value of the property, the cost of maintenance **410 and
operation thereof, and the amount of unpaid mortgage. It added the reasonable
expense for maintenance and operation to an allowance which it made of 6% of the
value found and 2% of the unpaid mortgage, and thus computed at the figure of
$68,398.09 above mentioned.
*5 Both the landlords and the contesting tenants appeal, advancing numerous
assignments of error. Both sides complain of the valuation arrived at. The
landlords contend that the expenses for operation and maintenance as determined
by the court are insufficient. The tenants contend that the allowance of 2%
amortization was improper. Some of the tenants further contend that the
increased rents plus the rent from the three stores, the tenants of which are
not parties, would exceed the allowable income fixed by the court. Some further
contend that the increases allowed were improperly apportioned as between
tenants. We will discuss these various claims of error in the order mentioned.
The Trial Court fixed the fair value of the premises at $400,000. Although the
findings declare this sum to be the value of the buildings, it seems clear that
the court intended to include land and buildings in such valuation. The
assessed valuation for the year 1944-45 for tax purposes was $515,000.
Certiorari proceedings were pending in which the petitioners were seeking to
reduce that assessment. Petitioners purchased the properties herein on April 1,
1944, for $345,000. The assessed valuation for the year 1943-44 was $535,000,
but this figure had been reduced by the Supreme Court in certiorari proceedings
to $392,000. The assessed valuation for 1942-43 had also been reduced to
$402,000 in certiorari proceedings.
Considering all of the circumstances, and giving due weight to testimony of the
expert witnesses called by both sides, we are of the opinion that the valuation
fixed by the Trial Court of $400,000 was warranted by the evidence.
Numerous items of the expense of maintenance and operation as fixed by the
court are complained of by the landlords. They, as petitioners, introduced
evidence of the alleged actual costs of operation during a year after they
acquired the premises, and for several years prior thereto when it was in other
ownership. The Trial Court disallowed some items of expense which had actually
been incurred, and reduced others. Three items of expense which were eliminated
by the court seem proper items, but the aggregate amount thereof is so small
that we will not discuss them in detail as their omission did not substantially
change the result arrived at.
The Trial Court sharply reduced amounts claimed as expenses for repairs,
plumbing, painting, elevator repairs, decorating, and supplies. It allowed a
single sum of $2500 to cover all these items as against petitioners' claimed
disbursements of $10,471.64 therefor. The tenants' expert witness estimated
$4,200 would be required to cover these items.
*6 The Commercial Rent Law provides, see § 4, Chap. 3 of the Laws of 1945, as
amended by Chap. 315, Laws of 1945: '* * * In the determination of the amount
of such reasonable rent: (a) due consideration shall be given to the cost of
maintenance and operation of the **411 entire property (including land and
building in which such commercial space is located) including amounts paid for
taxes assessed against such property, and to the kind, quality and quantity of
services furnished, but excluding amortization or interest paid or accrued on
any incumbrances thereon * * *.'
Subdivision (k) of section 2 of the same statute defines 'services' to mean:
"Services.' Repairs, decorating and maintenance, the furnishing of light, heat,
steam, hot and cold water, telephone, elevator service, cleaning service, linen
service, janitor service, the removal of refuse and any other facility or
privilege connected with and furnished by the landlord for the use or occupancy
of the commercial space.'
[1] It will thus be seen that the statute requires that due consideration be
given to the cost of maintenance as well as that of operation in fixing a
reasonable rent. Here, however, several of the repair items claimed were
expenses of an extraordinary nature which would not ordinarily recur annually.
The probable life of improvements having some degree of permanency should be
considered in fixing the amount to be charged as expenses for such items for a
particular year.
[2] Of course, actual experience should be given great weight in fixing the
probable cost of maintenance and operation, but we do not construe the statute
to require the court to accept the precise sums spent in a particular year as
the cost of the same items during the years of the emergency for which the rent
is being fixed. For example, in the present case the court might well have
allowed but a fraction of the sum claimed for such items as a new roof, change
of heating equipment and various elevator alterations. Accordingly, we hold
that while a substantial reduction of petitioners' claim for repairs, etc., was
warranted on the proof, a figure at least as high as that estimated by the
tenants' witness ($4,200 yearly) would have been more in keeping with the
evidence as the probable cost of repairs.
[3][4] An item which the petitioners-landlords claim should have been included
in the cost of operation, but which the trial court omitted, was one for
depreciation of the building. We find that the Trial Court was correct in
omitting this item. An allowance for depreciation would not be a true item of
the cost of maintenance or operation of a building. Reading the present statute
as a whole, we hold it was the legislative intent to confine the *7 cost of
maintenance and operation in proceedings of the present nature to sums actually
paid out or incurred.
Under earlier 'rent' laws, see L.1920, chs. 136, 944, and subsequent
amendments, depreciation was permitted to be taken into consideration in fixing
reasonable rents. See Hall Realty Co. v. Moos, 200 App.Div. 66, 192 N.Y.S. 530;
Nod-Away Co., Inc., v. Woehr, 209 App.Div. 907, 205 N.Y.S. 579. But the scheme
of the earlier statute differed substantially from that followed in the present
laws. Under the earlier rent laws unjust, unreasonable and oppressive rents
were prohibited and the courts were authorized to fix a fair rent. No emergency
rent was fixed by statute. Under the present emergency laws rents are to be
maintained at the rate paid on March 1, 1943, plus 15%. **412 In order to fix a
higher rent an application to increase must be submitted to the Supreme Court or
an arbitrator. While the item of depreciation may be considered by the court or
arbitrator upon an application to increase rents in determining what is a fair
return, this does not mean that the court or arbitrator must include any sum for
depreciation as an item of cost of maintenance or operation of the premises. It
would seem rather that the legislature had taken depreciation into consideration
in the presumptively fair return of 6% and 2%.
[5] Petitioners complain that the Trial Court, in fixing the item of taxes as
an expense, allowed less than the actual taxes. In doing so the court took into
consideration the results obtained in the certiorari proceedings relating to
earlier years, and that like proceedings were pending for the year 1944-45. We
consider it was within the province of the Trial Court to give consideration to
these facts in determining the proper amount to allow for taxes.
[6] Another expense item complained of was the sum allowed for cost of
insurance. The buildings were insured against fire for $500,000, although
petitioners' expert computed the structural value or cost of reproduction as of
1941 at $345,000. The total of premiums paid amounted to $1139.82. The Trial
Court reduced this sum to $1000. Petitioners claim that the owners and not the
tenants should have the right to fix the commensurate amount of fire insurance
to be carried, and that the owners might take into consideration the present
rise in cost of building in insuring their property. With this contention we
agree as a general statement of the principle that should govern proceedings of
the present nature, as long, at least, as the amounts expended are not
unreasonable, arbitrary or capricious.
*8 [7] This brings us to a consideration of the item complained of by the
tenats, namely, the item of 2% amortization of the outstanding mortgage. In the
present case the owners were actually paying only 1% amortization. The tenants
contend that for this reason the court should have allowed only 1%.
We think that the parties misapprehend the effect of the provisions of the
statute with respect to the figures of 6% return and 2% amortization. The law
says that upon application to increase rents the court or arbitrator shall
determine the reasonable rent based on the fair rental value of the tenant's
space. A net annual return of six per centum on the fair value of the entire
property, including the land, plus two per centum of principal for amortization
of any mortgages thereon, is presumed to be a reasonable return. However, the
statute fixes as the measure of allowable rent in all cases a sum that would
produce a reasonable return to the owner. The statute does not make the 6% or
the 2% a precise measure of the return nor does it make said percentages the
maximum or minimum return. They are figures as to which a statutory presumption
of fair return is created. The statute does not require that the actual payment
of less amortization than 2%, or perchance payment of a greater amount of
amortization, shall control the issue as to what is to be allowed as a
reasonable return.
**413 It is clear that the statute did not intend to provide that a property
encumbered by mortgages was to be allowed a greater amount as a reasonable
return than one free and clear of mortgage indebtedness. If it did, its
constitutionality might be rendered questionable. It provides that the question
to be decided upon each application for increased rents, is what is a reasonable
rent based on fair rental value. The presumptive figures of 6% and 2% are
merely aids in determining what return is prima facie reasonable.
In Matter of Frankel (Hatters' Oakhide Boxes), 269 App.Div. 531, at page 533,
56 N.Y.S2d 316, at page 318, we said: 'While the court is to determine what
constitutes a reasonable rent for the commercial space, the amount is to be
arrived at by a mathematical computation in accordance with a formula set forth
in the law.'
In that case the only proof introduced was on the part of the landlord. We
held, in effect, that the formula set forth in the statute as indicating the
presumptively fair return should be followed in the absence of other proof.
[8][9] Some of the tenants complain that in fixing the amount of increased
rent for the various lofts the court did not take into consideration the
comparative value of same. The statute says, *9 § 4: '* * * (b) such rent
shall be fixed in such a manner that it shall not exceed a fair and reasonable
proportion of the gross rentals from all the commercial space in the entire
building, giving due consideration to the amount and character of the commercial
space used or occupied by such tenant, provided, however, that the gross rentals
from all such commercial space shall not exceed a fair and reasonable proportion
of the gross rentals from the entire building. * * *'
In a proceeding under section 4 of the Commercial Rent Law, the burden imposed
by any increases granted should be apportioned as against each tenant, giving
due consideration to the amount and character of the space occupied by it, and
the return from the entire premises. Here the Trial Court fixed the reasonable
rental value of all lofts in each of the three buildings alike, varying the
amounts in the different buildings, but making no distinction (except in one
instance) as between the respective lofts in each building. The lofts within
each building were alike in area, but differed in size in the various buildings.
The expert witness called by the tenants testified that lofts within each
building were of the same rental value. This appears to be all the proof
introduced on the subject. It would, therefore, seem that the court apportioned
the increased rent on the basis of the evidence.
Some tenants contend that, taking into consideration the rents of the three
stores, the tenants of which are not parties, the amount of gross income would
exceed the $68,398.09 fixed by the court as the allowable rent. As we read the
record the Trial Court allowed $52,560 as the gross allowable income from the
lofts, and $7500 as like income from a store used for commercial purposes. This
would make a total of $60,060. To this would have to be added at least an
amount equal to the emergency rents for the three remaining stores, which we
compute **414 at $10,695, or a grand total to $70,755 as allowable income.
Taking into consideration the increase for cost of operation to the extent which
we have indicated herein, we find that $70,755 would represent the fair return
from the whole premises based on reasonable rental value, and that the increases
of rents as imposed by Special Term were, therefore, substantially correct.
The final order should be affirmed with one bill of costs to the tenants-
respondents-appellants, Samuel Handel and Louis Handel, individually etc., et
al., Zell Products Corporation, and Custom Bilt Shirt Co., Inc., and Louis
Rosenthal.
*10 Order unanimously affirmed with one bill of costs to the tenants-
respondents-appellants, Samuel Handel and Louis Handel, individually, etc., et
al., Zell Products Corporation, and Custom Bilt Shirt Co., Inc., and Louis
Rosenthal. Settle order on notice with corrected findings in accordance with
opinion. All concur.
62 N.Y.S.2d 407, 271 A.D. 1
END OF DOCUMENT