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A Lookback at a Decade of Court of Appeals Rent Decisions

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A Lookback at a Decade of Court of Appeals Rent Decisions

Postby TenantNet » Wed Mar 27, 2019 12:37 am

https://www.law.com/newyorklawjournal/2 ... decisions/

'Why Is New York City Rent So Damn High?'
A 'Lookback' at a Decade of Court of Appeals Rent Overcharge Decisions

This article is the first in a series examining developments in rent overcharge litigation, which has mushroomed in New York County in the decade since the Court of Appeals upheld the Appellate Division, First Department’s decision in 'Roberts v. Tishman Speyer Props., L.P.'

By Francis J. Lane III
March 26, 2019 at 02:35 PM

This article is the first in a series examining developments in rent overcharge litigation, which has mushroomed in New York County in the decade since the Court of Appeals upheld the Appellate Division, First Department’s decision in Roberts v. Tishman Speyer Props., L.P., 62 A.D.3d 71 (1st Dep’t 2009), aff’d 13 N.Y.3d 270 (2009).

That case voided the landlord’s illegal “luxury decontrol” of Lower Manhattan’s entire Peter Cooper Village/Stuyvesant Town apartment complex. See McK. Unconsol. Laws §26-504.3.

The Roberts decision found that the landlord had improperly claimed a real estate tax abatement for the complex under the “J-51 Program,” which also forbade owners from deregulating any rent-stabilized apartments for as long as their buildings were enrolled in the program. See RPTL §489.

It is interesting to note that Roberts was a tax law decision, and did not review any individual rent overcharge claims. Under New York City’s rent regulatory system, rent-stabilized or rent-controlled tenants normally submit such claims to the New York State Division of Housing and Community Renewal (DHCR).

In Roberts’ wake, however, it gradually became more common for tenants of improperly deregulated apartments to submit their (sometimes lucrative) rent overcharge claims directly to Supreme Court, which has concurrent jurisdiction over them with the DHCR.

In the decade since deciding Roberts, the Court of Appeals issued a number of rulings on issues that arise in rent overcharge litigation. The court’s decisions fall into four main categories; i.e., those which review: (1) Roberts overcharge claims; (2) Grimm overcharge claims; (3) “regulatory status” claims; and (4) Article 78 proceedings. Space requirements dictate that this article’s review of those holdings will be brief and will omit excessive editorial content.

A “Roberts-based claim” is an allegation of a rent overcharge that resulted from a landlord’s improperly deregulating a rent-stabilized unit while its building was enrolled in the J-51 real estate tax abatement program.

In Borden v. 400 E. 55th St. Assoc., L.P., 24 N.Y.3d 382 (2014), the Court of Appeals held that groups of tenants may assert Roberts-based claims jointly in a class-action suit, as long as they waive the treble damages authorized by RSL §26-516 (a). That statute permits landlords to avoid treble damages if they can overcome the presumption that an overcharge was “willful.”

The Borden holding noted that “there is little possibility of a finding of willfulness” for Roberts-based overcharge claims, since many owners were guided by a 1996 DHCR advisory opinion that landlords were allowed to seek luxury deregulation of rent-stabilized units in buildings enrolled in the J-51 program. The court deemed that the statute’s treble damages provision was a waivable “penalty,” whereas a finding of rent overcharge judgment was a compensatory “award.”

A “Grimm-based claim” is an allegation of a rent overcharge caused by a landlord fraudulently setting an excessive apartment rent. Under RSL §26-516, rent overcharge claims are governed by a four-year statute of limitations.

The day that fell four years before the tenant filed an overcharge complaint is known as the “base date.” The statute provides that an apartment’s “legal regulated rent” is “the rent indicated in the annual [DHCR] registration statement filed four years prior to the most recent registration statement [a/k/a the ‘base date rent’] … plus … any subsequent lawful increases and adjustments.”

The statute also forbids the “examination of the [apartment’s] rental history … prior to the four-year period preceding the filing of a complaint.” However, in Matter of Grimm v. DHCR, 15 N.Y.3d 358 (2010), the Court of Appeals held that “evidence of a landlord’s fraudulent deregulation scheme to remove an apartment from … rent stabilization” requires that the apartment’s “rental history may be examined for the limited purpose of determining whether a fraudulent scheme to destabilize the apartment tainted the reliability of the rent on the base date.”

If the base date rent is found to be unreliable, it may be recalculated using the DHCR’s “default formula” (contained in RSC §2526.1(g)(1)) in order to then determine the apartment’s “legal regulated rent,” and whether the tenant was overcharged.

Grimm cited to Thornton v. Baron, 5 N.Y.3d 175 (2005), which had involved an “illusory prime tenancy” scheme, and extended its holding so that the presence of “substantial indicia of fraud” of any sort is sufficient to disregard the RSC’s four-year “lookback” rule. In Matter of Cintron v. Calogero, 15 N.Y.3d 347 (2010), decided on the same day as Grimm, the court further held that rent overcharge calculations must include any standing DHCR rent reduction orders, even if the agency issued those orders before the four-year base date. Conason v. Megan Holding, 25 N.Y.3d 1 (2015), which was decided five years after Grimm, held that rent overcharge awards are limited to the four-year time period that preceded the filing of the claim, however.

A “regulatory status claim” is not a rent overcharge allegation, but is rather a request for a determination whether an apartment is, or is not, rent regulated. The two types of claims are often pled together as joint declaratory judgment requests. This is improper.

A major distinction between them is that regulatory status claims are not bound by the four-year statute of limitations that governs rent overcharge claims. Although no Court of Appeals decision contains this holding, a long line of unchallenged First Department decisions have confirmed it. See, e.g., Matter of Regina Metro. Co. v. DHCR, 164 A.D.3d 420, 435 (1st Dep’t 2018), citing East W. Renovating Co. v. DHCR, 16 A.D.3d 166, 167 (1st Dep’t 2005).

The Court of Appeals issued a number of post-Roberts holdings in cases that involved Article 78 petitions to challenge DHCR rent overcharge determinations. Its 2018 decision in Matter of Brookford v. DHCR, 31 N.Y.3d 679 (2018) reaffirmed the general rule favoring judicial deference; i.e., that “in reviewing an administrative agency determination, we must ascertain whether there is a rational basis for the action in question or whether it is arbitrary and capricious.”

However the Roberts decision pointedly noted an exception that, where “the question is one of pure statutory reading and analysis, … there is little basis to rely on any special competence or expertise of the administrative agency.” Roberts v. Tishman Speyer Props., L.P., 62 A.D.3d at 285.

The court’s 2012 decision in Matter of Terrace Ct. v. DHCR, 18 N.Y.3d 446 (2012) noted another exception that “[a] decision of an administrative agency which neither adheres to its own prior precedent nor indicates its reason for reaching a different result on essentially the same facts is arbitrary and capricious (emphasis added).” When all of the court’s post-Roberts rent overcharge decisions are examined, they suggest that the court is more willing to accept challenges to DHCR determinations than it is to other agencies’ orders. This may be due to a lack of confidence in the agency, or a perceived need to set limits for it.

Many of the court’s other post-Roberts decisions ruled on procedural matters that affect the DHCR. It was noted that Matter of Cintron v. Calogero held that the DHCR must incorporate any standing rent reduction orders when it calculates an apartment’s base date rent while deciding an overcharge claim. 15 N.Y.3d at 355-356; see also Scott v. Rockaway Pratt, 17 N.Y.3d 739 (2011).

Altman v. 285 W. Fourth, 31 N.Y.3d 178 (2018) held that the DHCR must also include the 20 percent “vacancy increase” to an apartment’s rent that is authorized by RSL §504 when calculating an apartment’s “legal regulated rent.”

Matter of Terrace Ct. v. DHCR, acknowledged that, while RSC §2522.4(a)(1) permits a landlord to permanently raise an apartment’s rent by 1/60th of the total cost of any qualifying “major capital improvement” (MCI) work that the landlord performs at the building, the DHCR may disallow an MCI increase if the work doesn’t meet the agency’s specifications. 18 N.Y.3d 453-54.

Jemrock Realty Co. v. Krugman, 13 N.Y.3d 924 (2010) made the same acknowledgment with respect to RSC §2522.4(a)(2), which permits a permanent rent increase of 1/40th of the cost of any qualifying “individual apartment improvement” (IAI) work that a landlord does in a unit. However, Jemrock also noted that a court reviewing a landlord’s proof of IAI work is not bound by the DHCR’s documentary evidence regulations, but should instead decide the issue “based on the persuasive force of the evidence” as a whole.

Finally, Matter of Brookford v. DHCR held that the agency must omit the income of a co-tenant who vacates a rent controlled apartment from its calculation of the unit’s “total annual income” when it rules on a landlord’s deregulation application.

Given the abrupt increase in rent overcharge decisions now being issued by the Appellate Divisions for the First and Second Departments (which will be discussed in later articles), practitioners can also expect more Court of Appeals rulings on this topic in the future.

Francis J. Lane III is a staff attorney in the Law Department of New York County Supreme Court Civil Branch. He can be reached at flane@nycourts.gov.
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