The post-pandemic renaissance of commercial-to-residential conversions in New York City is no longer a speculative talking point within the City’s real estate community. Instead, these conversions are spawning like wildfire and have become a central focus of the city’s strategy to combat its housing shortage crisis.
The confluence of record office-vacancy rates, motivated capital, and newly unfurled lattice work of state and municipal incentives has created an unprecedented pipeline of conversion projects. However, the friction for these projects lies between landlords and their commercial tenants whose leases often stand in the way.
This article analyzes the statutory framework that is propelling the current wave of conversions and the increasingly litigated issues that arise in conversion projects.
Government Incentives
In the Spring of 2024, the addition of §467-m to the Real Property Tax Law (“RPTL”), which was followed shortly thereafter by the New York City Council’s December 2024, “City of Yes for Housing Opportunity” zoning package, served as the catalysts for incentivizing commercial-to-residential conversions.
Section 467-m of the RPTL—also known as the Affordable Housing from Commercial Conversions Act—offers an as-of-right property-tax exemption of up to 35 years, conditioned on a permanent set-aside of affordable units, use of prevailing-wage labor, and compliance with newly promulgated building-code carve-outs for adaptive reuse. “Real Property Tax Law Section 467-M,” (May 31, 2024).
The City of Yes initiative overlays that regime with floor-area bonuses, relaxed light-and-air standards, and streamlined discretionary review for buildings constructed before 1990, in high-density districts.
Collectively, the Affordable Housing from Commercial Conversions Act and City of Yes initiative lower both the economic and regulatory cost of entry for developers seeking to convert commercial spaces to residential properties—yet neither displaces the private-law reality that existing leaseholds must be addressed before demolition permits can be pulled. “City of Yes for Housing Opportunity,” NYC Planning, (Dec. 5, 2024).
Commercial Tenant Harassment: The Evolving Landscape
While §§22-901 et seq. of the New York City Administrative Code (“NYC Admin. Code”) is widely recognized as a formidable tool in a tenant’s arsenal since its enactment in 2016, the proliferation of commercial-to-residential conversions is increasingly bringing this statute to the forefront. Section 22-902 of the NYC Admin. Code defines actionable harassment as “any act or omission by or on behalf of a landlord that would reasonably cause a commercial tenant to vacate, surrender, or waive any rights,” coupled with at least one enumerated wrongful act.
Some of the statutorily enumerated wrongful acts include a landlord “causing repeated interruptions or discontinuances of one or more essential services[,]” isolated instances of a landlord “causing an interruption or discontinuance of an essential service for an extended period of time[,]” conduct through which a landlord “substantially interfere[es] with a commercial tenant’s business by commencing unnecessary construction or repairs on or near covered property[,]” and allegations of a landlord “repeatedly commencing frivolous court proceedings against a commercial tenant[.]”
Notably, two features make this statute uniquely potent.
First, Section 22-903 of the NYC Admin. Code dispenses with the customary requirement—pursuant to CPLR §6301 et seq.—of showing irreparable harm when a tenant seeks injunctive relief. In other words, a plausible allegation of harassment suffices to obtain a temporary restraining order that can potentially freeze conversion work mid-stream. Predictably, this can cause massive monetary damage and delays with a landlord’s conversion project.
Second, this provision arms tenants with a private right of action for, among other things, compensatory damages, punitive damages, attorney fees, and injunctive relief for the immediate restoration of essential services.
Since the harassment statute was enacted in 2016, the reported case law in the realm of commercial-to-tenant conversions has been sparse, and the practical applications of the statue have been limited to general landlord-tenant disputes.
However, one seminal case involving New York’s commercial tenant harassment law in a conversion case is 62-64 Third Ave LP v. Elvis Cafe LLC, 213 N.Y.S.3d 709 (Civ. Ct., N.Y. Cty. July 18, 2024). In 62-64 Third Ave LP, the petitioner-landlord commenced a summary nonpayment proceeding seeking possession and payment of overdue rent against the tenant on allegations that the tenant failed to pay rent pursuant to the terms of the parties’ lease.
In response to these claims, the tenant raised several affirmative defenses, with one involving allegations of commercial tenant harassment against the petitioner.
In deciding the petitioner’s motion for summary judgment, the court analyzed the tenant’s four allegations of the petitioner’s conduct which allegedly constituted commercial tenant harassment: (i) parking of a truck near a handicap entrance to the underlying premises; (ii) engaging in demolition working in areas near, but not directly in or to, the underlying premises; (iii) turning off the heat in the upstairs portion of the underlying premises—which did not include the respondent’s restaurant—but which conduct the respondent claimed caused a pipe to burst in the respondent’s restaurant; and (iv) commencing several landlord-tenant proceedings against the respondent.
In issuing its decision granting the petitioner’s motion for summary judgment as to possession only, the court cited to NYC Admin. Code §22-903(b) which states that a “commercial tenant shall not be relieved of the obligation to pay any rent for which the commercial tenant is otherwise liable [because of harassment]” and that” “[a]ny monetary remedy awarded to a commercial tenant pursuant to subdivision a of this section shall be reduced by any amount of delinquent rent or other sum for which a court finds such commercial tenant is liable to the landlord.”
Critically, the court in 62-64 Third Ave LP clarified that while “[a]ny triable issues of fact in harassment warrants a trial for damages…it will not frustrate the issuance of judgment of possession.” 62-64 Third Ave LP, 213 N.Y.S.3d at 3.
Ultimately, the court found that triable issues of fact exist as to certain allegations of commercial harassment and, on that basis, the petitioner was not entitled to an award of summary judgment on its claims for the payment of overdue rent but, rather, that such monetary claims must be further adjudicated by the Court. See e.g., 45 Broadway Owner, LLC v. Wealth Mgmt. Assocs., LLC, 217 N.Y.S.3d 466 (Sup. Ct., N.Y. Cty. Aug. 5, 2024) (allegations of commercial tenant harassment do not relieve a tenant of its obligation to pay rent and being evicted as a consequence thereof).
While the law in the commercial tenant harassment ambit will continue to develop as commercial-to-residential conversion projects plow forward throughout New York City, the crucial holding of 62-64 Third Ave LP must not be ignored, as commercial tenants may be subject to eviction in the event of their failure to pay rent even in the face of colorable commercial tenant harassment claims.
Demolition Clauses and Buyouts
To best arm themselves, landlords must turn to demolition clauses—which are also often known in common parlance as redevelopment clauses—to shield against harassment claims by ensuring that their leases contain clear and unambiguous early termination conditions in the event of a future demolition or redevelopment.
In fact, the petitioner in 62-64 Third Ave LP was faced with this exact issue, as it sought to evict the respondent not only for the respondent’s alleged failure to pay rent, but also in light of the petitioner’s claims that the parties’ lease contained a demolition clause that invoked the petitioner’s contractual right to terminate the parties’ lease.
Here, the court held that the “demolition” clause of the parties’ lease provided that “if the Landlord procure[d] an order of demolition and/or intend[ed] to demolish the building containing the Premises, then Landlord, upon giving Tenant 180 days written notice, [had] the right to terminate this Lease.” 62-64 Third Ave LP, 213 N.Y.S.3d at 5. On this basis, the court found that the petitioner properly served the 180-day termination notice and was fully within its contractual right to terminate the parties’ lease in toto.
Commercial landlords may utilize these demolition clauses in support of a conversion project to afford themselves the right to terminate an extant lease upon delivery of required prerequisite notices.
It is of the utmost importance, however, to ensure that commercial leases contain well-drafted and unambiguous demolition clauses, as courts will often strictly scrutinize these provisions to ensure that a commercial landlord properly invoked an early termination right under the context of demolition. Oriburger, Inc. v. B.W.H.N.V. Associates, 305 A.D.2d 275 (1st Dept. 2003) (holding that genuine issues of material fact existed as to whether the landlord’s notice of termination was sufficient and as to whether the landlord intended to actually demolish the leased premises as a required condition precedent to invoking the parties’ early termination demolition clause).
In the event that a commercial lease agreement does not contain a sufficient demolition clause, or other rights to early termination, a commercial landlord may be forced to resort to engaging in buyout negotiations to remove a tenant before its lease expires. In fact, these types of “buyout” contingencies are not at all uncommon in the world of commercial-to-residential conversions.
Financing term sheets for conversion projects now often carry a “tenant relocation” line item, yet owners still benefit enormously from minimizing those payouts. The calculus is simple: every dollar spent on a buyout dilutes a developer’s internal rate of return, or profitability forecasts.
Where a commercial landlord is unable to legally terminate an extant lease on the basis of a demolition or redevelopment right, and where buyouts are untenable, a commercial landlord may be able to seek an early termination based upon a commercial tenant’s default.
Notwithstanding, another tool within a commercial tenants’ legal arsenal to avoid forfeiture of their valuable leasehold interests is the Yellowstone injunction.
While eviction proceedings are most often the preferred forum for landlords seeking to summarily remove a tenant from a leased premises, disputes involving the dispossession of a commercial leasehold typically end up in Supreme Court vis-à-vis a tenant’s Yellowstone action.
Here, whenever a commercial tenant is served with a notice to cure a default, the tenant may seek a Yellowstone injunction, a unique action that allows a tenant to stall any eviction by showing: (i) an existence of a commercial lease; (ii) the tenant’s receipt of a notice to cure; (iii) an application made prior to the cure period’s expiration; and (iv) the tenant’s readiness to cure the conditions and circumstances that form the basis of the notice to cure.
Although not necessarily available for adjudication under the otherwise “incurable” invocation of a demolition clause, a commercial landlord seeking to evict a tenant on the basis of a substantive (or procedural) default could nonetheless be thwarted, or, at the very least, substantially delayed in recovering its space following the tenant’s commencement of a Yellowstone action, as the elements to be shown for obtaining a Yellowstone are fairly perfunctory.
As such, the Yellowstone serves as another powerful weapon in a tenant’s legal playbook. Naturally, the Yellowstone is disfavored by commercial landlords in comparison to the much speedier summary landlord tenant proceeding, which are generally faster, less costly, and do not allow for discovery as of right.
Consequently, now more than ever, it behooves a landlord to always ensure that its commercial leases are drafted to contain strong demolition and redevelopment protections. These lease protections will allow commercial landlords to safely prepare for a future conversion project, including those which were otherwise previously unanticipated, by providing specific procedural timelines and notice periods for early lease termination.
In New York City’s post-COVID world of increased remote work and decreased utilization of office space—particularly in older buildings with less attractive amenities—commercial landlords will only benefit from the transactional certitude that affords them comfort of ensuring that a conversion may fit into their future developmental or recapitalization plans.
Conclusion
The COVID-induced rupture of New York’s office-leasing market has collided with a long-festering housing deficit, and lawmakers have responded in kind with incentivized programs that seek to promote commercial-to-residential conversions.
While still a relatively new occurrence, the potential legal fallouts from conversions will invariably become more commonplace on the dockets of the New York Supreme Courts and Housing Courts.
Accordingly, both commercial landlords and tenants alike will best be served to familiarize themselves with the substantive and procedural legal mechanisms that are germane to these disputes and will only arise as the conversion boom precipitates.
Moreover, practitioners must arm themselves with transactional creativity and meticulous litigation readiness because, inherent in New York’s conversion renaissance, the fight for square footage is being waged as often on the drafting table as in the courtroom.
"The Conversion Renaissance," by Massimo F. D’Angelo and William M. Pekarsky, was published in the New York Law Journal on May 16, 2025.
Reprinted with permission from the May 16, 2025, edition of the New York Law Journal © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.