Tuesday, August 14, 2012

Global Warming, the UN and my Unhappy Experience as a Landlord

by Mike Dorf

A recent NY Times story detailed how a UN program aimed at curbing global warming by issuing carbon credits for the destruction of greenhouse gases has led firms (mostly in China and India) to create more of the harmful gases in the first place.  The story is presented as straight news but it carries obvious lessons about the risks of unintended consequences and the need to think through how self-interested and unscrupulous people will react to the incentives that the law creates.

On a much smaller scale and of much less consequence, consider my recent experience as a landlord.  I moved from New York City to Ithaca in 2008, just as credit markets were seizing up, thus making it very difficult for buyers to get loans.  Accordingly, rather than sell my apartment, I rented it to my former next-door neighbors.  My apartment had one more room than the one they had been renting, they had another baby on the way, and so it seemed like a natural fit.  They seemed to be good tenants in the ensuing four years, paying their rent on time and not making unreasonable demands.  Even though I probably could have gotten a higher rent by putting the apartment back on the market, I was covering my costs (mortgage interest, maintenance and taxes), so I was content.  I knew I didn't want to be a landlord over the long term, so I figured I would just stick with these tenants until the sale market seemed to have picked up.

In the relevant subset of the market, that occurred this past spring and so I notified my tenants in April that I was going to sell the apartment and therefore would not be renewing their lease when it expired at the end of July.  I told the tenants I'd be happy to sell to them if they made me a fair offer and could even give them a bit of a break on price because I wouldn't need to use a real estate agent.  They said they needed to think about it but didn't make an offer and so I listed the apartment with an agent.

Under the terms of the lease, the tenants were supposed to permit "reasonable access" for showing the apartment.  My tenants said they didn't want the apartment shown late at night or early in the morning, and I agreed that this was fine, but when it actually came time for showings, they insisted that the apartment could only be shown for two hours per week, to be chosen by them.  I cajoled and pleaded but that was all I got.  Worse, the tenants insisted that they, or more precisely, the husband of the couple, be present during showings.  He invoked privacy and security concerns.  I told him I sympathized; it's not fun to have strangers poking around your home, I acknowledged, but that's the way the business works, and if you cooperate, we'll get a buyer quickly.

I believe that the husband--whom I'll call "Fred"--was indeed sensitive about his and his family's privacy but I also began to suspect that Fred really didn't want to move out and was therefore trying to sabotage the possibility of a sale.  To give Fred an incentive to cooperate, I told him that I would give him his last two months rent-free if I was able to get a buyer during his tenancy.  That offer appeared to lead to greater cooperation--although still only two showings per week at times of his choosing.  Despite this limited access, I got an offer I liked and signed a contract, thinking I was out of the woods.  That was early May.

As July approached, the tenants showed no sign of preparing to move.  A couple of times I asked Fred when he planned to move out, so I could schedule maintenance and cleaning before the closing.  I was given vague answers.  In early July, Fred told me that he was having a health issue that might require surgery and that if so, he could not move out for several months because he would need to recuperate.  This was plainly nonsense.  I told Fred something like this: "I feel bad for you and hope your medical issue resolves, but it really has no bearing on where you live.  The surgery will occur in a hospital, not my apartment, and my apartment is no better equipped for convalescence than any other apartment you might rent.  Meanwhile, the buyers have made their own moving plans on the assumption that they will have a vacant apartment to move into."  Fred said he didn't know how he could organize a move under such conditions.  Once again, I wasn't sure whether this was simply irrationality brought on by fear for Fred's medical situation or a kind of extortion, but I told Fred that he could hire movers who would take care of everything, so moving would not strain him.  Reminding him that he was risking losing two free months of rent, I even sweetened the deal and offered to pay his moving expenses.

Over a week passed with no response and so I looked into my legal remedies.  I learned that under New York State law, if a residential tenant stays beyond his lease term, the landlord may sue for a "summary" eviction, but that despite its name, this procedure could take six months before a warrant of eviction would issue.  By then, the buyers might decide to walk away from the deal, and though putting the apartment back on the market after the tenant was finally evicted might result in as good or an even better sale price, it might also result in a lower price, and in the meantime, I'd have to pay the carrying costs while showing a vacant apartment.  Knowing all of this, I contacted Fred and tried to impress upon him the difference between what he'd get if he left in a timely fashion--two months free plus moving expenses--and what he'd lose if he didn't--a ruined credit rating following a judgment of eviction and liability for damages and attorneys' fees (per the standard-form lease).  Even though this deal would cost me the equivalent of about three months' rent, it was worth it in order to avoid having to re-list the vacant apartment, a process that could take substantially longer than three months to conclude and would carry considerable risk.  I also felt an obligation to the buyers to do everything I could to deliver a vacant apartment by the contractual closing date.

In the end, the combination of carrots and sticks worked--or maybe Fred really was planning to leave on time all along and was simply acting irrationally.  But the bottom line is that I'm no longer a landlord.  A friend even suggested that I could choose not to give my now-former tenants the two months rent plus moving expenses, as these were promises made without consideration.  (For the non-lawyers out there, the general rule is that a binding contract requires an exchange of promises, not just a one-way promise.  What each side promises is called "consideration.")  I even did a little research and found a 2012 New York Appellate Division real estate case that stated the following proposition: "it is a fundamental principle of contract law that a promise to perform an existing obligation is not valid consideration."  Nevertheless, I paid what I had promised simply to be done with the whole affair and avoid litigation.

The incident left me marveling at how tenant-friendly New York law is.  In some other states I could have resorted to self-help--changing the locks or shutting off the electriicity, for example.  By contrast, if I did that in New York, I would have been liable for treble damages, even though the tenants were legally obligated to vacate.  Holdover tenants have serious legal rights in New York.

It is not difficult to see why.  The law takes as its paradigm case tenants who are holding over because they have nowhere else to go.  Most disputes in landlord/tenant court will involve owners of multiple units renting to people of modest means.  There will thus be a serious imbalance of power that the landlord can exploit, and the law steps in to level the playing field.  In addition, there is probably some element of redistribution at work in NY law: As between the landlord who stands to lose some money when a tenant holds over and a tenant who risks homelessness if he and his family are evicted unjustly (or even justly), the law considers the tenant's plight more deserving.  I agree with that prioritization.

The difficulty in my case, however, is that we did not fit the paradigm.  I was not a real estate tycoon with deep pockets who can spread any loss from one apartment over the balance of my holdings.  I owned one apartment with a substantial mortgage.  Meanwhile, my tenants were not people of modest means.  They were both professionals with substantial income and assets.  So there was no imbalance of power and there was no risk that the law's insistence on the terms of the lease would lead to the tenants becoming homeless.

Accordingly, the application of the general principles of NY landlord/tenant law to my situation looks like a mismatch between the law and its justification.  We might analogize Fred (assuming he was not simply acting irrationally) to the unscrupulous polluters in China and India who create more greenhouse gases in order to exploit the UN program aimed at curbing greenhouse gases.

In both situations, the key question is whether it would be possible to re-write the law in a way that distinguishes between the sorts of circumstances in which it ought to apply and those in which it ought not apply.  I don't know enough about the UN greenhouse gas program to hazard a guess about how it might be tweaked to close the loophole but I will say that the landlord/tenant case is tricky.

One might be tempted to have two sets of rules, one tenant-friendly set for rent-stabilized apartments, Section 8 housing and other leases involving vulnerable tenants, and a second, more balanced set of rules for more well-to-do tenants.  But such an approach could create its own unintended consequences.  Already landlords prefer well-off tenants to impecunious ones.  A bifurcated system of remedies would only exacerbate that tendency, leading to housing shortages and higher rents for poor tenants.

Perhaps the sorts of considerations that justify tenant-friendly landlord-tenant law in NY are strong enough to justify its application in all cases, notwithstanding the opportunities it creates for even well-off tenants to threaten to hold over.  If so, then the three months' free rent I gave to my possibly-unscrupulous tenants was simply the price I paid for a system that protects the truly vulnerable.  I'd sure like to think so, anyway!

12 comments:

Paul Scott said...

I agree with your friend. Once he was out, don't pay him. ;)

Hashim said...

Your analogy is unfair -- to the polluters.

The polluters are acting perfectly lawfully in taking advantage of a poorly crafted regulatory regime. Your tenants, by contrast, were threatening unlawful action in taking advantage of a poorly crafted regulatory regime.

Michael C. Dorf said...

Hashim raises a really interesting issue that is in some sense at the heart of debates about contract law and law more generally: whether holding over is "unlawful." Holmes thought that a contract is simply an option to either fulfill the terms of the contract or to breach and pay damages. Law-and-econ-inspired academics tend to agree and often generalize to law more broadly. This issue was at the core of Hashim's disagreement with Neil's discussion of the tax power holding in CJ Roberts's opinion in the health care case.

Now one might say that even if the Holmesian view is generally correct, it doesn't help my former tenants because a lease is different: By holding over, the tenants weren't simply violating the terms of the lease; once the lease expired, they had no legal right to be in my apartment and were thus trespassers. But the problem with this view (much as I wished it were true) is that NY law does not treat holdover tenants in the same way as it treats most trespassers. So I think there's at least a case to be made that holdover tenants are acting lawfully (albeit unethically).

In the end, perhaps this is only a disagreement about the meaning of the word "lawful."

The Dismal Political Economist said...

There is another law involved here, the Law of Unintended Consequences. In order to support and protect the interests of renters New York State has extremely favorable laws with respects to renters.

One result in that these laws actively discourage investors making rental housing available, thus decreasing the supply of rentals and increasing the rents. Thus one impact of these laws is that they work to the detriment of would be renters.

Having lived in New York State for a substantial amount of time I cannot imagine anyone seeking to be a landlord. You got off easy.

Joe said...

The NY law balances the possibilities and determines the end result as a whole benefits more people than the alternative.

Some other rule would lead to other people being burdened, arguably unfairly. Given the numbers involved particularly, no rule would work for all.

Somehow, all the same, there is plenty of landlords and tenants, though the law does suggest a certain type of landlord might not want to be here.

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