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NYLJ -- Division of Housing and Community Renewal Improperly Interprets Special Guidelines 26

Posted by nyhawk on June 04, 2001 at 20:45:59:

PETITIONERS SOUGHT an order annulling a decision by respondent, the New York State Division of Housing and Community Renewal. The decision denied petitioners' Petition for Administrative Review, in their Fair Market Rent Appeal, by which they challenged the initial rent-stabilized rent set by the DHCR for their apartment, after it had ceased to be governed by rent control. The court found that the DHCR's interpretation of Special Guidelines 26 would abrogate the requirements for a maximum base rent increase and give a landlord credit for maximum base rent (MBR) increases that it neither applied for nor justified. Thus, petitioners' Article 78 petition was granted to the extent that the matter was remanded to the DHCR for recalculation of the relevant fair market rate by factoring in the MBR in a manner consistent with the findings in this court's opinion.


SCHAPER and FALCK v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL

New York Law Journal
June 5, 2001

SUPREME COURT

----------------------------------------------------------------------
Justice DeGrasse


Petitioners in this Article 78 petition seek an order annulling an Order and Opinion issued by respondent New York State Division of Housing and Community Renewal ("DHCR") dated June 21, 2000 (the "June 21st decision"). The June 21st decision denied petitioners' Petition for Administrative Review ("PAR") in their Fair Market Rent Appeal, by which they challenged the initial rent-stabilized rent set by DHCR for their apartment after it ceased to be governed by rent control.

Petitioners' landlord moves to intervene in this action. As the landlord is clearly an "interested party" whose interest may not be represented by the parties, the motion is granted. (CPLR 1012, 7802[d].)

Facts And Procedural History

Petitioners became the first rent stabilized tenants of the subject apartment, 5B at 929 West End Avenue in Manhattan, pursuant to a two year lease that commenced in December 1994. The monthly rent was set at $1050. Prior to the petitioners' tenancy the apartment had been rent controlled.

In February 1995 petitioners commenced a Fair Market Rent Appeal before respondent DHCR by which they challenged the initial stabilized rent set by the landlord in the lease. The landlord's answer stated that the apartment had been rent controlled until October 1993 and that the last applicable Maximum Base Rent ("MBR") was $302.62. The MBR is calculated for each eligible housing accommodation and is the highest possible rent that a landlord may charge for a given rent controlled apartment. Landlords may apply to DHCR for bi-annual increases in the MBR by submitting proof of various facts, including the maintenance of certain conditions of habitability at the relevant rent controlled apartments.

The landlord in this action claimed that it had performed extensive renovations to the apartment before renting to petitioners. In its answer the landlord calculated the amount by which the rent could be enhanced by these improvements. The landlord's computations, incorporating the stated MBR and the applicable portion of the claimed improvements, arrived at an initial fair market rent of $1,004.82, slightly less than the $1,050 rent charged petitioners.

DHCR sets the initial stabilized rent for decontrolled apartments by reference to two criteria: 1) the formula set in the annual Rent Guidelines Board Order, and 2) rents of comparable apartments in the building or area where the subject apartment is located. The latter criteria is used only if the landlord submits comparability data, which the landlord in this case did not. (See Powers Assocs. v. DHCR, 229 AD2d 349, lv denied 89 NY2d 808.) If the owner submits proof that improvements were made to the apartment, the rent is enhanced by 1/40th of the proven renovation costs. (RSC 2522.4.)

The rent administrator who decided the Fair Market Rent Appeal determined that the landlord had not correctly calculated the applicable MBR. The rent administrator invoked Special Guideline 26, promulgated by the Rent Guidelines Board, to increase the applicable MBR to $539.10. The rent administrator did not quote from Special Guideline 26 nor explain why it required an increase in the applicable MBR. The rent administrator disallowed some of the renovation costs claimed by the landlord, without specifying which ones, but found the majority to be adequately substantiated. The rent administrator found that the initial fair market rent was $1,164.08, and that the landlord, by charging petitioners $1,050, had waived his right to charge the higher amount.

Petitioners filed a PAR. The Deputy Commissioner upheld the rent administrator's decision, and provided more information concerning the rent administrator's findings. The Deputy Commissioner explained that Special Guideline 26 provided that the stabilized rent shall be set at "the greater of 35 percent of the maximum base rent as it existed or would have existed, or 40 percent above the maximum collectible rent paid by the prior tenant." (Emphasis supplied.) The Deputy Commissioner noted that DHCR has construed the italicized language quoted above to require that the MBR be updated to the date that the former rent-controlled tenant moved out. Therefore, even though the landlord in the instant case stopped seeking MBR increases after 1986-87, the Deputy Commissioner found that the rent administrator was correct in calculating the MBR as if the landlord had sought, and received, bi-annual MBR increases.

The Deputy Commissioner also detailed in his decision the expenses that the landlord had adequately proven should be included in the calculation of the initial fair market rate.

Petitioners then filed this Article 78 proceeding. They assert that Special Guideline 26, at least as construed by DHCR, contradicts several provisions of the Rent Stabilization Law that require landlords to establish the existence of certain facts before receiving an increased MBR. They also contest the validity of the landlord's claimed renovation costs that DHCR used in setting the initial rent stabilized rent for the apartment.

Discussion

Petitioners attack the DHCR's decision by arguing that DHCR's interpretation of Special Guideline 26 runs athwart numerous provisions of the rent control law. Petitioners point out that MBR increases are not automatic. Instead, the rent control law requires that a landlord establish the existence of numerous predicate facts before it may obtain an increased MBR. DHCR's interpretation of Special Guideline 26 ignores this statutory scheme by assuming that a landlord who has not applied to have its MBR increased is nonetheless automatically entitled to such an increase when DHCR calculates the initial stabilized rent for an apartment.

The court agrees with petitioners' analysis and finds that DHCR's interpretation of Special Guideline 26 is affected by an error of law and is arbitrary and capricious.

To qualify for an MBR increase a landlord must obtain an Order of Eligibility from DHCR. To obtain such an order, a landlord must submit a written certification six months before the effective date of the increase that it has cleared all rent-impairing violations of the premises, and at least 80 percent of all other violations. (NYC Administrative Code 26-405[h][6]; see RSL 26-405 g.[1][n][2]; Melohn v. DHCR, 190 AD2d 527.) DHCR can deny an Order of Eligibility on the basis of harassment of tenants (Meko Holding, Inc. v. Joy, 107 AD2d 278, appeal dismissed 65 NY2d 923) failure to provide essential services (230 East 52nd Street Assocs. v. DHCR, 131 AD2d 349) and a continuous uncorrected pattern of rent-impairing violations (Pearce, Mayer & Greer v. Joy, 63 AD2d 928, affd 48 NY2d 680).

DHCR's interpretation of Special Guideline 26 would abrogate these requirements, and give a landlord credit for MBR increases that it neither applied for nor justified. DHCR's argument that there is no indication in the record that the instant landlord was not eligible for MBR increases misses the point. Under the applicable sections of the Rent Control Law and Administrative Code, a landlord must affirmatively establish its entitlement to an MBR increase. Placing the burden on a landlord to prove it would have been entitled to MBR increases also comports with the usual evidentiary burdens in Fair Market Rent Appeals. In filing and Fair Market Rent Appeal a tenant need only allege 1) that the initial rent is in excess of the fair market rent, and 2) such facts, to the best of his or her information and belief, support such allegation. (RSC 2522.3[b].) The landlord must then establish that the rent being charged is legal. (See 319 East 50th St. Assocs. v. DHCR, 198 AD2d 28; Scherer, Residential Landlord-Tenant Law in New York, 4.245.)

Placing this burden on landlords, rather than on new stabilized tenants who have filed Fair Market Rent Appeals, makes practical sense. A tenant new to a building would have a difficult time establishing that a landlord would not have been entitled to MBR increases. Particularly where, as here, the apartment in question has undergone extensive renovations, it could require extensive detective work to establish that the landlord had failed to provide essential services to the previous, rent controlled, tenant. Conversely, landlords may reasonably anticipate that they will have to justify their entitlement to retroactive MBR increases during a Fair Market Rent Appeal, and so will keep records that will help them establish any such entitlement.

DHCR also attempts to justify its interpretation of special regulation 26 by arguing that "it is rational to infer that the intent of [the Rent Guidelines Board]" was to bring stabilized rents closer to market rates rents. While this may arguably have been the intent of the Rent Guidelines Board, that intent does not trump the tenant protections provided by applicable rent control laws and regulations.

While the court agrees with petitioners that DHCR's interpretation of special regulation 26 is unreasonable, the court declines to declare the special regulation "null and void on the ground that it is contrary to the Rent Stabilization Law and Code" as urged by petitioners. The regulation would not run afoul of applicable rent control laws and regulations if DHCR sought to obtain proof from a landlord that it would have been entitled to MBR increases had it applied for them. A landlord might have decided to forgo an MBR increase for an apartment because, inter alia, it was occupied by a building superintendent, a friend, or the owner herself. A landlord who could prove that it would have been entitled to past MBR increases would be entitled to inclusion of those increases in the calculation of the initial stabilized rent.[1] On remand to DHCR, the landlord in the instant action should be given this opportunity.

DHCR also argues that petitioners did not attack special regulation 26 before the rent administrator or as part of the PAR and that this constitutes a failure to exhaust administrative remedies. Petitioners argue, correctly, that failure to exhaust administrative remedies must be pleaded as an affirmative defense or waived. DHCR did not do so herein. However, this argument is beside the point. Failure to exhaust administrative remedies refers to a failure to use an administrative agency's appeal procedures. (E.g. Greco v. Trincellito, 206 AD2d 779, 780.) Here, the petitioners availed themselves of every opportunity for a hearing afforded by DHCR and have thus exhausted their administrative remedies. It is therefore incorrect to characterize petitioners' alleged failure to challenge Special Guideline 26 as a failure to exhaust administrative remedies.

It is nonetheless true that a petitioner may waive an issue by failing to raise it during an administrative proceeding. (See Chua v. Chassin, 215 AD2d 953, 954, lv denied 86 NY2d 708; Gionta v. DHCR, 155 Misc2d 669, 674.) No such waiver occurred here. In proceedings before DHCR it was the rent administrator, not the landlord, who first invoked Special Guideline 26 to increase the relevant MBR. Petitioners clearly challenged the increase of the MBR in their PAR and so preserved their challenge to Special Guideline 26 for judicial review.

The other branch of petitioners' challenge is that DHCR incorrectly accepted the landlord's proof of certain improvements in its calculation of the initial stabilized rent. It is undisputed that where there has been installation of new equipment or effectuation of improvements in an apartment, a landlord is entitled to increase the lawful rent of a stabilized apartment. (RSC 2522.4[a][4].)

The record before the court demonstrates that the rent administrator in the instant case properly allowed an increase based on the evidence presented by the landlord, and disallowed an increase for that portion of the claimed expenses that were more properly attributable to normal maintenance. Accordingly, this branch of petitioners' challenge fails.

Finally, petitioners' claim for attorneys' fees must fail as DHCR's arguments in this litigation had a reasonable basis in law and fact, even if they did not ultimately prevail in all respects. Attorneys' fees shall be awarded against the state only where the State's position was not "substantially justified." (CPLR 8601; see Sutherland v. Glennon, 256 AD2d 984.)

Conclusion

This Article 78 petition is granted to the extent that the matter is remanded to respondent for recalculation of the relevant fair market rate by factoring in the MBR in a manner consistent with the findings of this opinion. Upon remand, DHCR shall give intervener landlord the opportunity to carry its burden to demonstrate that it would have been eligible for increases in the MBR had it applied for them after 1986-87. If landlord is unable to do so, then the 1986-87 MBR shall be used to calculate petitioners' fair market rent. In all other respects the Article 78 petition is denied.

This constitutes the decision and judgment of the court.

--------------------------------------------------------------------------------

FootNotes:
[1]
Because special regulation 26 may be interpreted to avoid any conflict with other Rent Control laws and regulations, there is no need to join the Rent Guidelines Board herein as a necessary party, as DHCR urges.

Date Received: June 04, 2001

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