Rosenberg & Estis, P.C. (“R&E”) has secured another critical appellate victory at the Appellate Division, First Judicial Department, which unanimously reversed the lower court and dismissed a tenant rent overcharge class action in its entirety, while making significant rulings which strengthen the position of New York property owners fighting claims of fraud and defending rent concession or “net effective rent” claims.
Member Ethan R. Cohen, the new Head of the R&E Appellate Litigation Department, working with Member Deborah E. Riegel, represented the property owner in Burrows v 75-25 153rd Street, LLC (“Burrows”). The decision represents another ground-breaking victory that has wide-reaching implications for the real estate industry and other putative class actions, particularly where tenants are asserting fraud claims or claims concerning rent concessions against building owners.
Riegel and Cohen together previously prevailed on behalf of R&E’s client in the groundbreaking decision of the Court of Appeals in the Matter of Regina Metro. Co., LLC v New York State Div. of Hous. and Community Renewal (2020) (“Regina”), and the decision in Burrows is a continuation of success for R&E’s Appellate Group in a string of high-profile and landmark appellate cases, including the pivotal Court of Appeals’ decisions in Regina and Casey v Whitehouse Estates, Inc. (2023) (“Casey”). Cohen played a substantial role in Regina, Casey and now Burrows.
In Burrows, some 13 years after the landlord’s predecessor first openly registered both initial legal regulated rents and lower preferential rents with DHCR in a building receiving 421-a tax benefits, the tenants of the building commenced a putative rent overcharge class action against the current landlord, following a trend of such class actions. The tenants claimed that the landlord’s predecessor engaged in fraud in registering the initial legal rents in 2007 because the law prohibited the use of preferential rents for initial tenants in 421-a buildings.
R&E moved to dismiss the claims, based on the four year statute of limitations. R&E further argued that the tenants could never establish the only “fraud exception” to the statute of limitations because fraud requires “reliance,” and here, the tenants could not have reasonably relied on the alleged errors in the initial registrations as a matter of law, because any error was plain on the face of registrations in 2007 and tenants failed to bring a claim until 2020.
Substantially based on R&E’s success before the Court of Appeals in Regina and Casey, the First Department agreed with R&E and held that tenants could not establish fraud to overcome the statute of limitations because they were on notice of the prior registrations, and, “[a]s the Court of Appeals recognized in Regina, reasonable reliance is as much an element of fraud in this context as in others.” Critically, the First Department confirmed that to assert a colorable claim of fraud, all elements of fraud must be pleaded, and each element must be set forth in detail, even in the context of rent overcharge.
The First Department specifically held that, “plaintiffs have failed to allege such a fraudulent scheme because neither plaintiffs nor their predecessors in interest could have reasonably relied upon the inflated legal regulated rents on the registration statements…the inflation of the legal regulated rents set forth on the publicly filed registration statements was evident from the registration statements themselves, negating the element of reliance as a matter of law.” The Court explained that, because “the registration history for each apartment shows, on its face, both a higher “Legal Regulated Rent” and a lower “Actual Rent Paid” under the initial lease…as a matter of law, neither plaintiffs nor any of their predecessors could have reasonably relied on the inflated ‘legal regulated rent’ figures.” Accordingly, the Court held that “since plaintiffs’ claims are based upon inflated figures for legal regulated rents that were registered far more than four years before the commencement of this action in 2020, their claims are time-barred.”
In addition, in Burrows, the tenants separately claimed that the landlord improperly used a “two-month-free” rent concession to manipulate the legal rent, and that the landlord was required to factor that rent concession into the tenant’s renewal lease as a “net effective rent” after the enactment of the Housing Stability and Tenant Protection Act of 2019 (“HSTPA”). The First Department also dismissed that claim and held that the Legislature had intended to equate concessions and preferential rents, it would have said so expressly. The Court held: “Although the HSTPA amended the RSL to prohibit an owner from withdrawing a preferential rent upon the renewal of a lease, nothing in the HSTPA or its legislative history indicates that the legislature intended to change the preexisting definition of a preferential rent…or to disturb the distinction between preferential rents and concessions promulgated by DHCR in fact sheet 40.” The Court confirmed that “it is plain that the benefit afforded to [the tenant] – two particular rent-free months, with the full monthly rent payable for each month of the remainder of the lease’s term – qualifies as a concession,” and not a preferential rent.
R&E’s victory in Burrows continues a series of significant appellate triumphs for R&E’s Appellate Litigation Department. In Regina, after the New York real estate industry was stunted by the passage of the HSTPA, Cohen, and Member Deborah Riegel, secured a precedent-setting victory in which the Court of Appeals held that retroactive application of the HSTPA was unconstitutional. The Court of Appeals also significantly held that tenants must establish all of the elements of fraud before a court may employ DHCR’s default rent formula against a landlord, a critical ruling for owners in New York, which the Court relied upon in Burrows.
In Casey, Cohen and R&E Special Counsel Jeffrey Turkel, whom Cohen succeeds as the Head of R&E’s Appellate Litigation Department, successfully appealed to the Court of Appeals from an order of the Appellate Division, First Department, in a decade-long litigation. The State’s highest court agreed with R&E’s arguments and unanimously held that the Appellate Division misapplied the historic Regina ruling. In Cohen’s second Court of Appeals victory in as many cases, the Court critically confirmed that fraud will only allow the punitive default rent formula to be used where a tenant shows that a fraudulent scheme to deregulate an apartment tainted the reliability of the rent on the base date rent four years prior to the action.