‘Manhattan Rent Is Definitely Too Damn High!’ A ‘Lookback’ at a Decade of First Department Rent Overcharge Decisions: Part 1

This article is the second in a series examining developments in rent overcharge litigation over the past 10 years. It reviews rulings by the Appellate Division, First Department, which has issued more decisions on this topic than any other appeals court. Indeed, the gradual rise in rent overcharge litigation in New York County can be traced directly to the First Department’s 2009 decision in Roberts v. Tishman Speyer Props., L.P., which was upheld by the Court of Appeals. 62 A.D.3d 71 (1st Dep’t 2009), aff’d 13 N.Y.3d 270 (2009). The landlord in Roberts had improperly removed the entire Peter Cooper Village/Stuyvesant Town apartment complex from rent stabilization while it was enrolled in the “J-51 real estate tax abatement program.” See RPTL §489. The court’s high profile ruling against the landlord begat a trend towards filing rent overcharge claims in the courts, instead of submitting them to the New York State Division of Housing and Community Renewal (DHCR), the administrative agency created as the venue for such claims. The increase in appellate rulings followed this uptick in Supreme Court overcharge filings. The First Department’s post-Roberts decisions have reviewed: (1) Roberts (i.e., J-51-based) overcharge claims; (2) Grimm (i.e., fraud-based) overcharge claims; (3) “regulatory status” claims; (4) Article 78 petitions; and (5) other miscellaneous legal issues. For the sake of space, only the first topic is discussed in this article.

A “Roberts-based claim” is an allegation of a rent overcharge arising from a landlord’s improper deregulation of a rent-stabilized unit in a building enrolled in the J-51 program. The First Department’s first major post-Roberts ruling was in Gersten v. 56 7th Ave. LLC, 88 A.D.3d 189 (1st Dep’t 2011), which held that the Roberts holding should be applied retroactively. As a result, tenants may now challenge improper apartment deregulations that took place before Roberts was decided. The tenants in Gersten had failed to file timely deregulation challenges, however, so the court found them collaterally estopped from challenging a later DHCR order that recognized the improper deregulation.

Gordon v. 305 Riverside Corp., 93 A.D.3d 590 (1st Dep’t 2012) held that: (1) the “base date” for determining a rent overcharge claim is the date “four years prior to the filing of the complaint,” rather than the date of service of the complaint (see RSC §2520.6); and (2) if an apartment in a J-51 building is vacant on the base date, then the rent stated on the base date’s lease is not necessarily the apartment’s “legal regulated rent.” This was because RSC §2526.1 used to require a landlord to offer the first tenant to enter such an apartment after the vacancy a rent-stabilized lease. Since the tenant in Gordon was given a market-rate lease instead, the court found that the rent on that lease was incorrect. The court did not address the proper method for calculating the apartment’s “legal regulated rent,” however.

That issue was taken up in 72A Realty Assoc. v. Lucas, 101 A.D.3d 401 (1st Dep’t 2012) and Taylor v. 72A Realty Assoc., L.P., 151 A.D.3d 95 (1st Dep’t 2017), both of which proscribed a “lookback” whenever an apartment’s base date rent appears to be improper. However, those decisions were partially abrogated last year in Matter of Regina Metro. Co., LLC v. DHCR, 164 A.D.3d 420 (1st Dep’t 2018), which will be discussed later.

In Matter of London Terrace Gardens, L.P. v. City of New York, 101 A.D.3d 27 (1st Dep’t 2012), the First Department held that landlords may not unilaterally waive or rescind their participation in the J-51 program, since that program “is a tax benefit program and there is no contract or agreement to rescind.”

In Matter of Schiffren v. Lawlor, 101 A.D.3d 456 (1st Dep’t 2012) the First Department held that an apartment which is rent-stabilized when it’s building enters the J-51 program continues to be rent-stabilized when its enrollment ends, but that afterwards “an owner has a right to seek luxury deregulation in appropriate cases.” Such circumstances existed in Matter of Bramwell v. DHCR, 147 A.D.3d 556 (1st Dep’t 2017), which involved an unregulated apartment that became rent stabilized because its building entered the J-51 program. Bramwell held that the landlord was entitled to request deregulation immediately after the building’s exit from the program without first serving the tenant a “J-51 notice or lease rider.”

Matter of RAM I LLC v. DHCR, 123 A.D.3d 102 (1st Dep’t 2014) applied Schiffren’s rationale to a rent-controlled apartment. The First Department noted that the Rent Control Law (RCL) operates differently from the Rent Stabilization Law (RSL), and that, while both types of apartments resume their original status when a building exits the J-51 program, rent-controlled apartments remain exempt from luxury deregulation, since the RCL contains no luxury deregulation provision. Matter of Park v. DHCR, 150 A.D.3d 105 (1st Dep’t 2017) involved a rent-controlled apartment which the court deemed to have become rent-stabilized when its rent-controlled tenant died (see RCL §26-403(e)(2)(i)(9)), and to have retained that status while its building was enrolled in the J-51 program. The landlord nevertheless applied for luxury deregulation during that period. The First Department found that the RCL requires the first rent-stabilized tenant of a formerly rent-controlled unit to file a timely Fair Market Rent Appeal (FMRA) to challenge the first rent. Since the tenant in Park had failed to do so, the court upheld the deregulation.

Downing v. First Lenox Terrace Assoc., 107 A.D.3d 86 (1st Dep’t 2013) predated the Court of Appeals’ decision in Borden v. 400 E. 55th St. Assoc., L.P., 24 N.Y.3d 382 (2014) by one year in holding that multiple tenants in an improperly deregulated J-51 building could submit joint overcharge claims in a class action, provided that they waived the treble damages authorized by RSL §26-516(a).

Altschuler v. Jobman 478/480, LLC, 135 A.D.3d 439 (1st Dep’t 2016) confirmed the rule that landlords who improperly deregulate apartments in J-51 enrolled buildings may not assert justifiable reliance on a 1996 DHCR advisory opinion that this was a permissible practice. It is possible that this rule is out of step with the Court of Appeals’ observation in Borden v. 400 E. 55th St. Assoc., L.P., 24 N.Y.3d 382 (2014) that “there is little possibility of a finding of willfulness” in connection with a Roberts deregulation. The First Department seemed to recognize this in Matter of 160 E. 84th St. Assoc. LLC v. DHCR, 160 A.D.3d 474 (1st Dep’t 2018), which found that the absence of fraud in a Roberts deregulation makes it more appropriate to use the RSC’s “sampling method” instead of the “default formula,” (both are set forth in RSC §2522.6(b)(3)) to determine an apartment’s proper “base date rent” when computing an overcharge. It is suggested that the Court of Appeals should revisit Borden’s “willfulness” rule.

Stulz v. 305 Riverside Corp., 150 A.D.3d 558 (1st Dep’t 2017) involved a landlord who admitted that it had overcharged a rent-stabilized tenant in a J-51 building, and returned the money. Fox v. 12 E. 88th LLC, 160 A.D.3d 401 (1st Dep’t 2018) involved a “Manocherian apartment” (i.e., a rent-stabilized unit with a corporate tenant) in which the original tenant combined two units and transferred the tenancy of the new apartment to a corporation that he owned. However, the tenant inadvertently used a market-rate lease, even though the building was enrolled in the J-51 program. The First Department held that this amounted to a vacatur by the original tenant which allowed the landlord to claim luxury deregulation of the unit.

The First Department’s latest Roberts-related ruling was the aforementioned Matter of Regina Metro. Co., LLC v. DHCR. That case held that, absent a showing of fraud, a court may not look back more than four years before the filing of a rent overcharge complaint to set an apartment’s base date rent. This abrogated so much of 72A Realty Assoc. v. Lucas and Taylor v. 72A Realty Assoc., L.P. as had permitted a “lookback” whenever an apartment’s base date rent was in question due to an improper Roberts deregulation. Although the overcharge in Regina was a Roberts-based claim, the court opted to apply the Grimm rule (which will be discussed next) to disallow the “lookback.” Justice Gische wrote the majority opinion in Taylor and the dissent in Regina, and argued that doing so caused an injustice by permitting improper deregulations and rents to be perpetuated, in violation of both the Roberts and Gersten holdings. It is suggested that her views should be given greater consideration.

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.