A Home, Not A Hotel

They came from Australia, from Denmark, and from many places in between. They came bearing luggage, and they stayed for a night, for a weekend, sometimes for a week or more. Then they left the building and, before long, fresh visitors arrived to take their place.

This building is not a hotel. It’s the South Star, a 147-unit high-rise condominium in downtown Manhattan. The Australians and the Danes, the people from Massachusetts and Montana and Idaho – they had all come to stay in Apartment 11-A. It was owned by Sophie Grishanova, who lived elsewhere and generated a handsome revenue stream by renting the apartment out to tourists for short stays. It’s an increasingly common practice in a city that attracts more than 54 million visitors a year. With hotel prices and occupancy rates high, many tourists are on the lookout for a bargain on lodging. And many New Yorkers are happy to oblige by renting their apartments for short-term stays at prices no hotel could hope to touch.

There were two small problems with what Grishanova was doing: it’s illegal, and it’s a violation of the condo’s bylaws and house rules.

Revolving Door

It was in the spring of 2012 that the residents and staff of the South Star began to suspect that something was afoot. One day, a member of the board of managers was chatting with the doorman in the lobby when a woman got off the elevator, dragging a suitcase behind her. Neither man had seen her before. She asked them if it would be possible to get her deposit back before leaving for the airport.

The board member and the doorman were stunned. This woman had obviously been renting an apartment. A little digging revealed that several unit-owners appeared to be renting their apartments to short-term visitors without the board’s knowledge or approval.

Soon after that revelation, Patrick Kennell, a lawyer, was elected board president of the South Star, a 1920s office tower that was converted to a condominium in 2007. Right away, he and his fellow board members got busy trying to prevent unit-owners from treating their apartments like hotel rooms. It’s a practice that, besides being illegal, exposes residents to a stream of unvetted occupants and the potential for trouble – from annoying noise to serious crime – that comes with them.

“We sent a warning letter to every unit saying that the practice is illegal, it’s against our bylaws, and anyone doing it will be hit with a $1,000 fine,” Kennell says. The letter also stated that the fine would be added to the unit-owner’s monthly common charges, and any short-term renters would be evicted and treated as trespassers if they tried to re-enter the building.

The practice stopped, with one exception: Apartment 11-A.

The board discovered that Grishanova had placed an ad for her apartment on Craigslist, a classified advertisements website. After culling the communications between residents and the front desk, the directors also learned that she had asked the doormen to grant entry to more than 30 of her “friends” and “guests” and “family members.” Most stayed overnight, for a weekend, or a week – but rarely the minimum of 30 consecutive days required by state and city law for a sublet.

The board members sent Grishanova two certified letters, to no avail. Then they sent an e-mail alerting her that she was being fined $1,000. This was followed by a conference call among Grishanova, Kennell, and two other board members.

“She didn’t exactly deny that people were staying in her apartment,” Kennell says. “She said it was her apartment and we couldn’t tell her what to do with it. I asked her point-blank why she didn’t rent it out legally, and she said she didn’t want to pay the application fee for a legal sublet. We believe the real reason was that she could make more money renting it out as a hotel room.”

Can She Do It?

What the Russian-born Grishanova actually said during that conference call, according to court documents, was: “This is America. I can do what I want.”

The five members of the board concluded that their only recourse was the unpalatable – and potentially expensive – one of going to court. So in December 2012, the board filed suit in state supreme court seeking an injunction. The court issued a temporary restraining order, giving Grishanova five days to evict three people staying in her apartment. The board installed surveillance cameras by the elevator on the 11th floor and instructed the doormen to keep a log of all unknown visitors. They thought the restraining order would do the trick. They thought wrong.

The lawsuit quickly went nuclear, with Grishanova challenging the board at every turn. She filed a countersuit, alleging harassment and defamation. When that case was dismissed, she tried to make a tenant a co-owner of the apartment, but the board countered that she had failed to give them the required right of first refusal. She then tried to sell her apartment, but the board had put a lien on it for unpaid fines and common charges totaling $11,000. This effectively blocked the sale. Finally, in May 2013, she paid up. A month later, the sale went through.

The court awarded the board $25,000 in attorneys’ fees; its request for another $35,000 of attorneys’ fees is yet to be heard. Of the 14 motions filed in court, it prevailed on every one.

Aftermath

But the legal victory brought little rejoicing. “It was one of the most extreme examples of this process,” Kennell says. “The litigation has been very difficult. It’s unfortunate she wanted to turn it into a war, but I think we had no choice but to pursue it. It’s such a dangerous practice to have unscreened people coming into your building that boards simply have to pursue litigation. It means spending money, but it’s a safety issue. I think we were fulfilling our fiduciary duty.”

The board’s attorney agrees. “This was extreme,” says Steven Sladkus, head of the real estate litigation department at the law firm of Wolf Haldenstein Adler Freeman & Herz. “Normally, a unit-owner confronted with this issue backs down. They realize they’re on the wrong side of the argument. But this unit-owner tried every trick under the sun to legitimize what she’d done. The board felt, rightly, that they had a fiduciary duty to protect unit-owners.”

The practice of turning apartments into hotel rooms, or bed-and-breakfasts, has become so common that it has attracted the attention of legislators, the state’s bar association, and the state attorney general.

In 2010, state Senator Liz Krueger, a Manhattan Democrat, sponsored a bill designed to close loopholes in the state’s long-standing Multiple Dwelling Law. In most residential apartment buildings, under the law, renting space for less than 30 consecutive days is illegal, unless the resident is present during the visitor’s stay. Leases, bylaws, and house rules may also forbid it.

“This started with tenants’ concerns,” Krueger told the New York Post when her bill to tighten the Multiple Dwelling Law was passed by the legislature and signed by the governor. “People they had never seen before had keys to the front door.”

Last fall, state Attorney General Eric Schneiderman took notice, issuing subpoenas for the records of the popular website Airbnb, after speculating that the estimated 15,000 New Yorkers who have rented their apartments through the site are costing the state millions of dollars by dodging the 5.8 percent hotel occupancy tax. The company mounted a counteroffensive, and by early this year nearly 250,000 people had signed a petition to legalize short-term rentals in the city.

“It’s become a cottage industry,” says Dennis H. Greenstein, a partner in the law firm of Seyfarth Shaw and a co-chair of the New York State Bar Association’s committee on cooperatives and condominiums. “In the past few years, we’ve been hearing about apartments subletting or renting for very short terms. In co-ops, they’re not getting the required board approval. In condos, they’re ignoring the board’s right of first refusal and the bylaws. Sublet fees are lost, and there are safety issues for other tenants. It upsets people in the building when they don’t know who the new people are.”

At a continuing education seminar offered by the bar association earlier this year, Greenstein gave a talk on the issue that attracted more than 200 lawyers. He told his audience that it can be difficult to spot illegal short-term rentals, especially in larger buildings, but sometimes a board’s job is made easier because short-term renters make themselves almost comically apparent.

“The telltale signs are seeing people coming in with luggage on a regular basis,” he says. “We’ve even heard of people coming down and asking the doorman for fresh towels, or where the restaurant is.”

But smart co-op and condo boards understand that having an unauthorized hotel in the building is no laughing matter. It’s an invitation to trouble they don’t need. “I feel strongly it’s a very serious safety issue to have unscreened, unknown people coming and going in a building,” Kennell says. “Particularly in a building like ours, where we have a lot of children. It’s not funny. Boards need to take it very seriously.”

Meanwhile, Grishanova now lives in Brooklyn. To this day, she maintains she did nothing wrong. “My position is that I’ve never violated any rules,” she says. “A legal co-owner and her boyfriend occupied my apartment the whole time.” She has appealed the court’s ruling in favor of the South Star.

==HABITAT SIDEBAR==

The Problem That Won’t Go Away

Patrick Kennell, president of the board of directors at the South Star condominium, offers advice on how to handle illegal bed-and-breakfast setups in your building.

Acknowledge the Situation. My advice would be to be serious and consistent, and get out in front of the problem. Some boards tend to hope that it will just go away; it probably won’t. I think that board members have a duty to the rest of the unit-owners and residents to make sure that kind of activity is stopped.

Take Action. Do whatever you have to do – hopefully not the lawsuit route – but whatever you have to do, be aggressive about it. And when I say be aggressive, I mean on all levels. I wouldn’t just go out and sue somebody in the first instance. I would try to resolve it with the unit-owner if I can, but the staff and the doormen have to be the first line of defense. From our perspective, our board knew about it right after we took over, in July 2012, and that’s when we started to take action. But there’s only so much the doormen can do. These people own units in the place, and they can be very sneaky.

Expect Expenses. The time that I’ve spent personally on it – I can’t even estimate – it’s been an inordinate amount of time. Luckily we have a very good board, and we were able to multitask a number of issues when we took over. But in terms of the money, the attorneys’ fees alone had been close to – I want to say somewhere around $90,000 to $100,000; it could be even more. In trying to stop one bed-and-breakfast, we took a stepped approach, where we first put out a building-wide warning, hoping that would stop it. Then we put out a warning letter directed to the responsible unit-owner, which we hoped would stop it, and a second warning letter to her, which we hoped would stop it. And in some of those, you know, we sort of let her know that we intended to take it further if we needed to, whether that was a lawsuit or getting the authorities involved.

Keep Residents in the Loop. Our board is very transparent; we communicate with our building a lot. We constantly kept the residents updated through our BuildingLink e-mails and memos. I recommend that to any board who’s going through this situation – make sure that the rest of the unit-owners know what’s going on and understand the seriousness of it, because they can be a good ally as well as a watchful eye. Our building, our community, is completely, completely supportive of the board in making these moves. So we put out a building-wide notice to everybody to make sure that everyone was on the same level playing field, everyone knew what the policy was going to be going forward, there were going to be fines issued, etc. When we filed suit, when we got our first restraining order; and finally when she was found in contempt, we let the ownership know.

This is an edited transcript of an interview conducted by Habitat publisher Carol J. Ott.