R&E Victory at Appellate Division, First Department in Kuzmich et al v 50 Murray Street Acquisition LLC

Dear Clients,

Rosenberg & Estis, P.C. recently secured a big victory for its client at the Appellate Division, First Department in Kuzmich et al v 50 Murray Street Acquisition LLC. The landmark decision represents an important part of the post-Roberts and post-Regina legal regime governing the calculation of rent overcharges in apartments held to have been improperly deregulated. The decision is yet further proof that R&E not only consistently achieves positive results in high-stakes cases for the benefit of its clients, but is a leader in shaping the law for the benefit of the New York real estate industry as a whole.

In Kuzmich, a group of tenants commenced an action in 2016 claiming, among other things, that their apartments had been improperly deregulated, that they should be deemed rent-stabilized tenants, and that they had been overcharged in violation of the Rent Stabilization Law ("RSL"). The subject apartment buildings had previously been office buildings, but were renovated and converted to residential use pursuant to the Real Property Tax Law 421-g program, a real property tax abatement program enacted in the mid-1990s to revitalize lower Manhattan. Apartments in buildings converted under the 421-g program were subject to the RSL during the period that the buildings received tax benefits. However, because the first rents for the subject apartments were above the then-existing deregulation threshold, the apartments were treated as free-market from their inception -- which was consistent with DHCR guidance at the time as well as 421-g's legislative history. Nevertheless, the Court of Appeals ultimately ruled in June, 2019 (before R&E became counsel for the owner) that the apartments were rent-stabilized and should have been so treated at all times.

The case was then remanded to Supreme Court to determine, among other things, the proper stabilized rents and any rent overcharges to be refunded to the tenants. Justice Edmead -- although finding that any overcharge was not willful -- had held that the rents and overcharges should be determined pursuant to the "default formula," historically applicable in connection with fraudulent deregulation schemes. Upon remand from the Court of Appeals, Justice Edmead adhered to her prior determination and referred the case to a Special Referee for a determination of rents and overcharges consistent with her prior order.

Faced with the prospect of a hearing predicated on a plainly incorrect overcharge calculation method, we moved for and were granted an interim stay of the hearing by the Appellate Division, First Department on October 17, 2019 and a full stay pending appeal on January 7, 2020. Of course, also casting a cloud over the case was the HSTPA, which had been enacted in June, 2019 and which potentially expanded the owner's liability for overcharges -- from four years to six, and with base date rents potentially determined with reference to the very first lease rather than the rent charged four years prior to the filing of the complaint. During the same period we were seeking a stay in Kuzmich, the Regina case challenging, among other things, the retroactive application of the HSTPA was being briefed and argued at the Court of Appeals.

Thanks in part to our talented R&E colleagues, on April 2, 2020 the Court of Appeals held in Regina that the HSTPA's overcharge calculation amendments could not be applied retroactively to overcharges that occurred prior to June 14, 2019 and that overcharges must be calculated in accordance with the law in effect at the time the overcharges occurred.

It remained an open question, however, whether Regina (which concerned overcharges in buildings that had received J-51 tax benefits) applied to overcharges in the 421-g context.

On October 29, the Appellate Division, First Department held that Regina does indeed apply in the 421-g context where, as in Kuzmich, the overcharges allegedly occurred prior to the HSTPA's enactment. The Court held that because Supreme Court had found that the overcharges in our case were not willful, "the default formula is inapplicable. Instead . . . the base date rent is the rent actually charged on the base date (four years prior to initiation of the claim) and overcharges are to be calculated by adding the rent increases legally available to the owner under the RSL." The ruling will drastically limit our client's overcharge liability and will also significantly curtail discovery once the matter returns to Supreme Court, as the base date rent for each tenant will be the rent charged four years prior to the 2016 filing and we will not need to trace the building's entire rent history back almost 20 years in order to determine the proper rents.

Please let us know if you have any questions about this landmark Appellate Division ruling.