Landmark Court of Appeals Decision: What it means for you

Dear Clients,

On Thursday, April 2, 2020, the Court of Appeals issued a landmark opinion that is of industrywide significance. The opinion holds that Part F of the Housing Stability and Tenant Protection Act of 2019 ("HSTPA") cannot be applied retroactively so as to subject building owners to new or increased liability for past conduct. Specifically, in a 4-3 opinion, the Court held that retroactive application of the overcharge amendments in Part F of the HSTPA would unconstitutionally infringe on the owners' substantive due process rights.

We are pleased to share that Rosenberg & Estis, P.C. (Deborah E. Riegel, member, and Ethan R. Cohen, of counsel) successfully represented the owner in one of the four rent overcharge cases that were consolidated on appeal to the Court of Appeals. Each case involved an apartment that was treated as deregulated during the owners' receipt of J-51 tax benefits, prior to the Court of Appeals' 2009 decision in Roberts, wherein the Court concluded that luxury deregulation was unavailable during the receipt of J-51 tax benefits, rejecting DHCR's long-standing interpretation.

In the case handled by Rosenberg & Estis, Reich v Belnord Partners, LLC, 168 AD3d 482 (1st Dept 2019), the tenants took occupancy of the apartment in 2005 at a market rent following luxury deregulation. When the Court of Appeals decided Roberts in 2009, the owner registered the apartment as rent-stabilized and notified the tenants of the existence of the Roberts decision. Notwithstanding that notice, the tenants did not file an overcharge claim until 2016, more than six years after the owner had re-registered the apartment as rent-stabilized. Rosenberg & Estis successfully moved to dismiss the tenants' rent overcharge claim based on statute of limitations grounds and successfully represented the owner on appeal to the Appellate Division, which then granted leave to the tenants to appeal to the Court of Appeals.*

On June 14, 2019, after leave to appeal was granted, the Legislature enacted the HSTPA, making sweeping changes to the rent laws. As relevant here, Part F of the HSTPA drastically changed the method for determining the legal regulated rent in overcharge cases, substantially expanding the scope of an owner's potential liability by, among other things, (1) eliminating the statute of limitations, providing that an overcharge claim can be filed "at any time"; (2) eliminating the four-year lookback rule and permitting the Court to consider an apartment's entire rent history; (3) expanding the recovery period from four to six years; (4) expanding the record-keeping requirement for owners from four years to six years, and providing that the failure to maintain records, even beyond six years, is at the owner's peril; (5) expanding the treble damages penalty for willful rent overcharge from two years to six years; and (6) making the award of attorneys' fees mandatory, rather than discretionary.

After the HSTPA's enactment, the Court of Appeals requested that the parties address the applicability of the HSTPA. The tenants in the four appeals argued that the amendments contained in Part F of the HSTPA should be applied to their pending appeals, so as to retroactively modify the standards for determining rent overcharges, despite the fact that the alleged overcharges resulted from conduct that occurred prior to the enactment of the HSTPA. Rosenberg & Estis opposed the arguments asserted by the tenants, as well as those raised by various amicus curae, and argued that the HSTPA does not revive time-barred claims and cannot be applied retroactively to alter owners' substantive rights.

The Court of Appeals rejected the tenants' arguments and held that the amendments contained in Part F of the HSTPA: (1) do not revive overcharge claims that were time-barred at the time the HSTPA was enacted; and (2) unconstitutionally infringed on the owners' substantive due process rights if applied retroactively to past conduct and overcharges occurring prior to the enactment of the HSTPA. Accordingly, the Court held that overcharge claims must be resolved pursuant to the law in effect when the purported overcharges occurred.

While recognizing the Legislature's prerogative to implement policy changes prospectively, the Court explained that "retroactive application of the overcharge calculation amendments would merely punish owners more severely for past conduct they cannot change - an objective we have deemed illegitimate as a justification for retroactivity." If applied to past conduct, the amendments to the statute of limitations, four-year lookback rule, record-keeping requirements, and treble damages provisions would impose new and increased liability on owners for past conduct, and thus retroactively alter substantive rights in multiple ways.

The Court of Appeals decision has many far-ranging implications that are of significance to owners. While a lengthier summary is required to explain the substance and consequences of every issue addressed, certain critical holdings are highlighted for you below:

  • Statute of Limitations: The HSTPA does not apply retroactively to revive an overcharge claim that was time-barred at the time the HSTPA was enacted. Thus, a rent overcharge claim that was barred by the four-year statute of limitations on June 14, 2019 is forever barred.
  • Four-Year Lookback Rule in Cases Concerning Overcharges Prior to June 14, 2019: In rent overcharge cases concerning overcharges or owner conduct alleged to have occurred prior to the enactment of the HSTPA (June 14, 2019), the overcharge claim must be resolved pursuant to the law in effect at the time the alleged overcharge or conduct occurred. For such claims, the "base date rent" is the rent actually charged and collected on the date four years prior to the filing of the overcharge complaint, and overcharges must be determined by increasing the base date rent by all legally permitted increases during the four-year recovery period.
    • Applying pre-HSTPA law, use of the reconstruction method [going back to the beginning of time and reconstructing the legal regulated rent] or the sampling method [setting the base date rent by averaging the rents of other similar stabilized apartments] discussed by the Appellate Division in Taylor and/or Regina is improper.
    • Applying pre-HSTPA law, review of rental history outside the four-year lookback period is permitted only in the limited category of cases where the tenant produces evidence of a fraudulent scheme to deregulate the apartment and, even then, solely to ascertain whether fraud occurred. Review outside of the four-year lookback period is not permitted for calculation of the base date rent or to permit recovery for years of overcharges barred by the statute of limitations.
  • Willfulness and Fraud in post-Roberts Cases: The Court clarified that willfulness means "consciously and knowingly charging improper rent," such that a finding of fraud (or willfulness) is generally not applicable in post-Roberts cases, where owners relied on incorrect guidance from DHCR in luxury deregulating apartments, explaining that conduct cannot be fraudulent without being willful.
    • Therefore, absent proof of fraud, the default formula is not applicable in post-Roberts cases, including "where the base date rent is the result of a mere mistaken overcharge (not fraud) and the rent charged on the base date is known.
    • However, owners should be aware that if a tenant establishes a fraudulent scheme to deregulate an apartment, the Court of Appeals confirmed that it has sanctioned the use of the default formula in such cases for calculating the legal rent and the amount of any overcharge.
  • Record-Keeping Requirement: Pre-HSTPA law will apply to overcharge claims concerning overcharges or conduct alleged to have occurred prior to June 14, 2019. Thus, absent fraud, an owner will not be required to produce records, including individual apartment improvement records, for a period more than four years prior to the assertion of the overcharge claim.
  • Treble damages: For rent overcharge claims that arose prior to the enactment of the HSTPA, an owner will not be liable for the expanded six-year treble damage period, and, with respect to Roberts cases, reliance on DHCR's prior rulings will insulate an owner from a finding of willfulness.
  • Apartments Not Necessarily Stabilized for the Duration of the Tenancy After the Expiration of J-51 Tax Benefits: Under pre-HSTPA law, the analysis automatically affording rent-stabilized status to apartments for the duration of the tenancy should not be followed. In buildings affected by Roberts, apartments revert to their original rent-stabilized status after expiration of J-51 benefits. The Court explained, however, "[t]his is not to say that tenants of those apartments necessarily are entitled to rent stabilization for the duration of their tenancy. Under [pre]-HSTPA [law]...Nothing precluded the owner from pursuing luxury deregulation after J-51 benefits expired [and] the fact that the owner had not provided notices advising the tenants of its participation in the J-51 program is irrelevant."
    • Thus, although not specifically referenced in Part F of the HSTPA, owners may be able to successfully pursue luxury deregulation petitions for years prior to 2020. To the extent DHCR already denied such a petition, we advise that a PAR should be timely filed.
  • Filing Belated Registrations Does Not Necessarily Result in a Rent-Freeze for Overcharge Calculation Purposes: The failure to timely file rent registrations will not deprive an owner of its right to otherwise lawful increases. The Court explained, "the fact that...registration statements were filed retroactively is addressed by a separate statutory surcharge for late registration" and in any event, "rent freezing is inapplicable in Roberts cases where the failure to timely register resulted directly from DHCR's endorsement of a misunderstanding of the law." Thus, whether or not registrations were timely filed, an owner should be entitled to adjust the base date rent by legally permitted increases.

The landmark opinion provides a necessary framework within which tenants' claims can more predictably be evaluated. Following the enactment of the HSTPA, owners and lenders were significantly hampered in performing due diligence for acquisition and lending purposes. The Court of Appeals has now settled the law on critical issues that directly affect a building owner's potential liability for past conduct, thus providing a more definite method for evaluating rent rolls and determining the potential exposure from rent overcharge claims. The opinion should also provide more certainty for litigants and more consistency in the courts.

Do not hesitate to contact our firm to discuss the Court of Appeals' landmark opinion and how it may affect any of your buildings, projects, cases (past or present), or potential claims asserted against you.

Regards,

Deborah Riegel and Ethan R. Cohen

* The other three cases on appeal were: (1) Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal (164 AD3d 420 [1st Dept 2018]), in which the tenants took occupancy in 2005 at a market rent of $5,195 per month and filed an overcharge claim in 2009; (2) Raden v W7879, LLC (164 AD3d 440 [1st Dept 2018]), in which the tenants took occupancy in 1995 at a market rent of $2,350 per month and filed an overcharge claim in 2010; and (3) Taylor v 72A Realty Assoc., L.P. (151 AD3d 95 [1st Dept 2017]), in which the tenants took occupancy in 2000 at a market rent of $2,200 per month and filed an overcharge claim in 2014.