Landlords Claim Property Manager Breached Fiduciary Duty in How Rents Were Set

Landlords of several residential buildings sued their property management company and individual officers affiliated with the management company. Landlords claimed breach of contract, breach of fiduciary duty, disgorgement, restitution, unjust enrichment, negligence, and negligent misrepresentation. They also sought punitive damages.

Under the parties' management agreement, the management company received 5.5 percent of the total monthly income collected from the properties plus reimbursements. Landlords claimed that the company and its officers failed to apply individual apartment improvement (IAI) rent increases to legal regulated rents that landlords were legally entitled to charge after spending significant sums on apartment renovations. They also claimed that the company leased units to tenants at rates far below the average legal regulated rents for each building and for each building's neighborhood, failed to charge vacancy increases, and gave some tenants preferential rents far below the legal regulated or market rents. Landlords argued that the company improperly offered "sweetheart leases" to its friends, family, and vendors.  Overall, landlords claimed that the company failed to maximize the buildings' annual rent roll and asset value.

The management company and individual officers asked the court to dismiss the case before filing any answer. The court ruled for the company in part. The court dismissed against all parties the claims of breach of contract, disgorgement, restitution, unjust enrichment, negligence, negligent misrepresentation, and punitive damages. As to breach of fiduciary duty, the court dismissed any claims against the individual defendants but ruled that landlords could continue this claim against the management company. Landlords didn't point out specific management contract breaches, so their breach of contract claim was unsupported. And the contract didn't require the company to negotiate apartment leases in order to maximize rental income and property asset values, apply IAI increases, or maximize the annual rent roll. The contract required the company only to recommend, with landlord approval, things around the building to do to be in compliance with codes and correct any violations.

However, landlords did sufficiently allege that, as managing agent, the company owed landlords a fiduciary duty since they maintained a long-term business relationship that went beyond an arms-length transaction. The company was directed to file an answer to the remaining portion of the court complaint.

220 E. 26th St. LLC v. Kaled Mgt. Corp.: Index No. 652105/2020, 2022 NY Slip Op 30195(U)(Sup. Ct. NY; 1/20/22; Masley, J)