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Home | K&S Blog | CASUALTY/FIRE INSURANCE AND ILLEGAL BASEMENT TENANTS IN YOUR HOME OR CONDOMINIUM (PART I)
CASUALTY/FIRE INSURANCE AND ILLEGAL BASEMENT TENANTS IN YOUR HOME OR CONDOMINIUM (PART I)

02/16/2012

   In this article we will address the problem with illegal basement rentals and the problems they pose in case of any litigation involving the tenant or any casualty to the property.  Usage of illegal basements is a common occurrence in Lakewood, Brooklyn and many other city neighborhoods.  Such rentals are fraught with pitfalls if the space being rented to tenants is not recorded on the Certificate of Occupancy, as a separate residential unit.  This article will discuss this issue from a New York City viewpoint.  The next installment will address this issue from a New Jersey perspective.

   On the one hand, homeowners are strongly motivated to get the extra $800 or $900 in monthly income by renting out their illegal basements.  The extra funds surely come in handy when making that large monthly mortgage payment.  Indeed, may new homeowners count on that money to bridge the personal budget gap many families have.

   On the other hand, the difficulties that can occur, when problems arise, often outweigh the benefits.

THE LITIGATION SCENARIO IN NEWYORK CITY

   Adequate housing is scarce in New York City.  While the authorities will generally not bother homeowners who have tenants in their illegal basements, that doesn’t mean that you are home free.  Many homeowners that attempt to evict tenants in the New York City court system, soon find out that throwing a non-paying basement tenant out of his or her apartment is almost an impossibility.  If you are lucky, it can take several years.  If not, you may never get the tenant out (absent a consensual buyout).

   I have the honor of having a close friend who has been occupying someone’s basement, rent free, for the past ten years.  I have attempted to secure community funding or alternate housing to assist this fellow, so far without success.  

   So the landlord is stuck with his non-paying asset, potentially until one of two things happen:  either the landlord finds alternative housing for this tenant or pray that some natural cause takes care of the problem.

   I do not justify such behavior.  Obviously, it is ethically and morally reprehensible.  It violates one of the Ten Commandments, but it happens more often than you may think.  So before you accept a tenant for your basement, you must factor this issue into your analysis.

INSURANCE PROBLEMS
 
   An associate of our firm from Lakewood, reports that he has a friend whose insurance company disclaimed coverage for a total loss of the subject house, due to a fire.  The fire apparently started in the basement kitchen area being used by an illegal tenant in the property.  It is questionable whether this property owner will ever be able to secure any proceeds from the insurance company for his almost total loss of property value.

   It doesn’t have to be a $500,000 loss to hurt the pocketbook.  Obviously, any smaller loss may be disclaimed by your insurance company.  For example, Allstate is a particularly difficult insurance company to work with.  Allstate specializes in looking for and finding ways to deny coverage to their insureds.  Their motto, “You’re in good hands with Allstate” is oxymoronic.

   I have personally had the displeasure of litigating three cases with Allstate, one of them through actual trial in New York State Supreme Court.  Allstate would rather spend tens of thousands of dollars on insurance defense, than pay a claim against it.

   Unfortunately, there is no way to pre-clear an illegal basement with your insurance carrier.  So, you will only know if your insurance company will refuse to pay your claim based upon this defense when something bad happens to your house or condominium.  This recipe  doesn’t make for a “good night’s sleep.”

RECOMMENDATION
 
   Do it the right way.  Get your basement legalized even if it costs $20,000 or $30,000.  A good set of architectural plans and a good contractor are the key to getting your basement legalized.  That actual legalization will be the subject of another installment.  Respectfully, I don’t think you should rent out to illegal tenants in any case for all of the reasons mentioned above.  Better safe, than sorry.
 
 
 

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