Newsletter Exclusive Article:
The Long Term Impact of the New York State Court of Appeals Ruling
On Housing Stability and Tenant Protection Act of 2019
On April 2nd, the New York State Court of Appeals issued a landmark opinion In the Matter of Regina Metropolitan Co., LLC v. New York State Division of Housing and Community Renewal, and three related cases, including Reich v. Belnord Partners, in which Rosenberg & Estis, P.C. represented the owner. In a decision with far reaching implications for the industry, the Court of Appeals held that Part F of the Housing Stability and Tenant Protection Act of 2019 cannot be applied retroactively, because to do so would subject building owners to new or increased liability for past conduct. The ruling stated that the retroactive application of the overcharge amendments in Part F of the HSPTA would unconstitutionally infringe on owner’s substantive due process rights.
Each of the cases involved an apartment that was treated as deregulated during the owner’s receipt of J-51 tax benefits, prior to the Court of Appeals’ 2009 decision in Roberts, wherein it concluded that luxury deregulation was unavailable during the receipt of J-51 tax benefits. The Roberts decision rejected the long-standing interpretation of the law by the lower Courts and DHCR and had the effect of re-regulating thousands of apartments previously deregulated in good faith in reliance on the then interpretation of the law. It also opened the floodgates to rent overcharge claims by tenants arising out of the Roberts decision. The 2019 enactment of the HSTPA exacerbated these issues by eliminating the existing statute of limitations and extending both the lookback period for determination of rent overcharges and the recovery period in which tenants could recover damages, including the expansion of treble damages.
In Rosenberg & Estis‘ case, Reich v. Belnord Partners, LLC, the tenants took occupancy of the apartment in 2005 at a market rent following luxury deregulation. Following the Roberts decision in 2009, the owner registered the apartment as rent stabilized and notified the tenants of those rights, and the tenants waited more than six years, until 2016, to file a claim of rent overcharge. After Rosenberg & Estis was successful before both Supreme Court and the Appellate Division in obtaining a dismissal of the tenants’ rent overcharge claim, the tenants were granted leave to appeal to the Court of Appeals.
The tenants’ appeal to the Court of Appeals was heard after the state legislature enacted the HSTPA, which made sweeping changes to rent laws. Part F of the HSTPA drastically changed the method to determine the legal regulated rent in overcharge cases and expanded the scope of an owner’s potential liability by eliminating the statute of limitations, providing that an overcharge claim can be filed at any time, eliminating the four-year lookback rule and permitting the Court to consider an apartment’s entire rent history, expanding the recovery period from four to six years, expanding the record keeping requirement, expanding the treble damages penalty for willful rent overcharge from two years to six years, and making the award of attorney’s fees mandatory, rather than discretionary.
In what would ultimately be a substantial strategic error, the tenants 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. As a consequence of the tenants’ claims, the Court of Appeals invited the parties to submit supplemental briefing with respect to the application of the HSTPA, and asked the parties to advise the Court what issues, if any, they believed that the Court should resolve. Rosenberg and Estis opposed the tenants’ arguments, as well as those raised by various amicus curae, and argued that the HSTPA could not survive constitutional scrutiny of its impact on owners’ substantive rights, nor could it revive those claims that were already time-barred because of the expiration of the statute of limitations.
The Court of Appeals adopted Rosenberg and Estis’ analysis and held that the amendments contained in Part F unconstitutionally infringed on the owner’s substantive due process rights if applied retroactively to past conduct and overcharges prior to HSTPA and do not revive the overcharge claims that were time-barred. The Court held that overcharge claims must be resolved pursuant to the law in effect when the purported overcharges occurred.
The Court of Appeals decision has many far-ranging favorable implications that are significant to owners, including:
· 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. Pursuant to the law in effect prior to the HSTPA, review of the rental history 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. Review of the renal history outside of the four-year look back period is only permitted 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.
· 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.”
· 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 rulings prior to Roberts 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.
· Filing Belated Registrations Does Not Generally 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.
Owners should be mindful of one aspect of the Regina decision that clarified the manner in which the default formula is to be applied. If a tenant establishes a fraudulent scheme to deregulate an apartment, the Court of Appeals sanctioned the use the default formula in such cases for calculating the legal rent and the amount of any overcharge.
Five months after the Regina decision, the Courts have largely applied the limitations imposed by the Court of Appeals. In Schrader v. Lichter Real Estate Number One, L.L.C., 2020 N.Y. Slip Op. 32501(U), another case handled by Rosenberg & Estis, the Supreme Court granted the owner summary judgment dismissing tenants’ complaint and holding that the conduct alleged – – failure to offer rent stabilized leases, renewals, and lease riders, and to register the apartments with DHCR – – is insufficient to establish fraud, and referable to owners’ belief that it was entitled to rely on the then existing DHCR guidance and regulations.
In Dugan v. London Terrace Gardens, L.P., 2020 WL 4212776, the Appellate Division, First Department vacated the lower court’s methodology for calculating the legal rents and determining rent overcharges and remanded the matter for the court to establish a methodology consistent with Regina. Similarly, relying on Regina, the First Department held in Corcoran v. Narrows Bayview Company, LLC, 183 AD3d 511, that a tenant’s claim for treble damages based on alleged willful deregulation of an apartment and failure to file rent registrations was properly dismissed where the owner followed DHCR’s pre-Roberts guidance.
While the post-Regina case law is largely good news for owners, Gold Rivka 2 LLC v. Rodriguez, 68 Misc.3d 1210(A) is cautionary. Ruling on motions by both the owner and the tenants to apply the holdings of Regina, the court found that because the tenants had established a fraudulent scheme to deregulate the premises, the rent must be set at the lowest rent registered for a comparable apartment in the building on the date that the tenant first took occupancy, and thereafter frozen until the owner registered the apartment with DHCR.
This landmark opinion has just begun to be examined by the lower courts, in part due to its issuance during the COVID pandemic. It does, however, provide stability and a framework for owners and lenders to evaluate tenant claims and potential liability in connection with acquisitions and lending.