ALBANY, N.Y., June 26 (Reuters) - New York City is not contractually obligated to continue a rent subsidy program for thousands of formerly homeless people, the state's top court ruled Tuesday in a sharply divided decision.

The city last year terminated the Advantage program, which provided rent subsidies of up to $1,000 per month for up to two years, after losing state and federal funding. The Legal Aid Society sued on behalf of tenants, arguing that the city was obligated to pay their rent because they had been precluded from other housing options, including homeless shelters, by joining the program.

The plaintiffs also maintained that a set of documents drawn up by the city that included terms such as "guarantee" and "will pay" were evidence of the city's intent to enter into a contract with tenants and landlords.

The Court of Appeals on Tuesday disagreed with the tenants in a 4-3 ruling.

"The courts are not empowered to second-guess the city by conjuring up a 'contract' from bits and pieces of documents meant to explain and condition participation in what was a voluntary government program," Judge Susan Read wrote for the majority.

Steven Banks, the attorney-in-chief of the Legal Aid Society, said in an interview that homeless shelters across the city will be overwhelmed as the remaining Advantage tenants leave their apartments. The shelters, Banks said, cost taxpayers more than the program.

Banks also said the city's termination of Advantage could discourage landlords from participating in future programs for homeless people, "because even the word 'guarantee' is not sufficient to ensure rent payments."

Under Advantage, which was launched in 2007, tenants could receive subsidies for up to two years if they met certain criteria, including working for at least 20 hours per week or receiving a fixed income benefit, such as Social Security Disability.

The federal government, state and city each paid one-third of the cost of the program.

BUDGET WOES

Last year, Governor Andrew Cuomo and state lawmakers passed a budget that cut the state's share of the funding. The federal government followed suit, prompting the city to end the program and Legal Aid to file its lawsuit.

In September Manhattan Supreme Court Justice Judith Gische dismissed the suit, saying the program was a social benefit that the city was free to terminate based on a lack of funding.

In March the Appellate Division, First Department, affirmed, finding further that the tenants had misconstrued the city's guarantees to pay subsidies as legally binding.

In oral arguments before the Court of Appeals earlier this month, Legal Aid argued that the city had entered into legal contracts.

In doing so, Steven Banks, Legal Aid's attorney-in-chief, cited letters that the city sent to tenants that stated: "The Advantage program guarantees that the subsidy portion of the rent will be paid directly to the landlord for one year."

The city countered that it had never intended to enter into a contract with landlords or tenants, since it knew the program was susceptible to budget woes.

The Court of Appeals on Tuesday agreed with the city, finding that obligating it to pay the subsidies "can only discourage governmental bodies from enacting voluntary programs to help the needy."

"They will fear being compelled by judges to continue such programs even if sources of funding are reduced or withdrawn," Read wrote.

Judges Victoria Graffeo, Eugene Pigott and Robert Smith concurred.

'UNSUSTAINABLE'

In dissent, Judge Carmen Ciparick said that if the city did not want to enter into a contract, it should not have used terms such as "guarantee" and "will pay" in Advantage program documents.

The documents "unambiguously memorialize a bargained-for exchange between the city and the Advantage landlords to which the parties mutually assented," Ciparick wrote. She was joined by Chief Judge Jonathan Lippman and Judge Theodore Jones.

The program's termination affected roughly 15,000 people, Legal Aid noted.

According to the New York City Department of Homeless Services, when Advantage payments ended in February, 6,482 households, or 18,764 individuals, were receiving subsidies. If the program had continued, the number of households that would have remained on Advantage as of July 1 would have been 3,385 or 8,417 individuals, a department official said.

The city's Corporation Counsel Michael Cardozo said in a statement, "As we maintained, the Advantage program was not a legally binding contract between the City and the tenants or landlords, but rather a social program. We believe the Court reached the right decision under the law."

New York City Department of Homeless Services Commissioner Seth Diamond said in a statement, "In the absence of state and federal partners, who carried the majority of funding, it was unsustainable for the City to maintain the Advantage program. Homeless Services is actively offering prevention services to households and landlords experiencing difficulties, and the overwhelming number of households who received the Advantage subsidy remain housed in the community."

The case is Jasmine Zheng, et al v. the City of New York, et al, New York State Court of Appeals, No. 147.

For the plaintiffs: Steven Banks of The Legal Aid Society.

For New York City et al: Eric Rundbaken of the New York City Law Department.

(Reporting by Dan Wiessner)

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