Bankrupt Tenant May Bust Up Rent-Control System

A rent-controlled lease in the city of New York is a fascinating sort of product from an economic standpoint: It is both property and not property. 

A rent-controlled lease in the city of New York is a fascinating sort of product from an economic standpoint: It is both property and not property. You can't sell your lease to a handsome stranger who offers to buy it. On the other hand, you often can bequeath it to a child or other relative who lives with you. No one can remove you as long as you pay the statutory rent, but if you leave it for more than a couple of years, it reverts to your landlord. It's a little bit mind-bending.

Well, prepare to have your mind bent even further, because this tension forms the center of a fascinating legal case. Mary Veronica Santiago, a rent-stabilized tenant, has declared bankruptcy. And the courts are considering whether her lease is a financial asset that can be sold off to pay her debts.

Santiago's landlord, who was notified of the bankruptcy proceeding as a matter of routine even though she's still paying her rent, contacted the court with an offer to pay off her debts in exchange for a surrender of the lease. The trustee agreed, a decision that was upheld by both a bankruptcy court and a federal district court. It's now before the 2nd Circuit Court of Appeals.

Santiago wouldn't be thrown out on the street -- the deal includes a nonstabilized lease that will let her live out the rest of her life in the apartment at a similar rent to the $700 a month she is paying now. However, under the new lease, her tenancy rights would not pass to her 50-year-old son upon her death, as the rent-stabilized lease would. Essentially, her lawyers are arguing that the lease should be like property, in that she gets to bequeath it to her son, but not like property, in that it can't be seized and sold to satisfy her debts. This doesn't seem like a very logical argument, which is probably why it has failed so far in the courts. The attorneys quoted in the article go off on a lot of tangents about the lack of affordable housing in New York City and the possibility that this will be used to seize food stamps, but none of them mounts any affirmative defense for allowing Santiago to treat the lease like an asset when it benefits her family but not when it doesn't.

It's safe to say that the landlords of other rent-controlled properties will be watching this case closely. The difference between the rent Santiago pays and the market rent her landlord could collect for her property probably amounts to tens of thousands of dollars a year, and many rent-controlled tenants are in a similar situation. It makes financial sense for a rent-controlled landlord to offer to pay off a five-figure -- or even six-figure -- debt in order to bring an apartment up to market rate, especially if the tenant is planning to pass the lease on to a child. If the appellate court upholds the lower-court rulings, the surrendering of rent-stabilized leases will become a standard part of bankruptcy in New York City.

At least, until the legislature forbids it. While the bankruptcy code and the bankruptcy courts are federal, exemptions are set by the states. I'd imagine that if this sort of thing becomes common, legislators will add rent-controlled leases to the list of assets that are protected from creditors in a bankruptcy ... leaving this as an interesting mental exercise in the nature of property.

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