Here is the legal question: What is the base date rent when an apartment is improperly deregulated in 2003 during the J-51 tax benefit period, a tenant moves into that apartment in August 2005, files an overcharge complaint with the DHCR (Division of Homes and Community Renewal) on November 2, 2009, and there is no colorable indicia of fraud? The answer, according the the Appellate Division for the First Department, published today in Matter of Regina Metro. Co., LLC v New York State Division of Housing and Community Renewal (DHCR), is a strict interpretation of CPLR (Civil Practice Law and Rules) 213-a, Rent Stabilization Law 26-516(a)(2) (preclusion of rental history review before the base date), and Rent Stabilization Code 2526.1(a)(2)(ii) (preclusion restated).
Before we go any further, let’s clear up what the base date is: it’s the date four years immediately prior to the filing of an overcharge complaint with the DHCR or Supreme Court, both of which have jurisdiction regarding overcharges. For example, if you file an overcharge complaint today, August, 16, 2018, the base date will be August 16, 2014. In general, it’s true that the courts and the DHCR are bound by a four year statue of limitation when adjudicating overcharge complaints. Stated broadly, no rental history can be explored or examined prior to that date. Over time, however, that limitation slowly chipped away, thanks to a linage of case law such as Grimm v. DHCR, 15 NY3d 358 (2010). In Grimm, the Court of Appeals held that the DHCR or court can investigate the apartment’s rent history beyond four years when the base date is tainted by a “colorable indicia of fraud”. In other words, if a tenant can bring forward convincing evidence that the base date rent is tainted by fraudulent landlord or owner behavior, the court or DHCR can look beyond four years of rental history to determine the proper base date rent. That base rent is then used as the foundation to calculate overcharges.
While Regina doesn’t get into the mess of what “colorable indicia of fraud” is, since there was no finding of fraud, it tackles another mess: base date rent determination in the J-51 context. The J-51 tax benefit program conveys rent stabilized status to apartments in buildings that were either converted into residential, or an existing residential building that undergoes rehabilitation. Until about 2009, owners receiving J-51 benefits routinely deregulated apartments, justified through the use of high rent vacancy deregulation (in other words, when an apartment’s rent is above the deregulation threshold after a vacancy). In 2009, the Court of Appeals in Roberts v. Tishman-Speyer Props., L.P., 13 NY3d 270 (2009), found that owners that receive J-51 tax benefits cannot deregulate apartments through high rent vacancy, contrary to a long held (albeit mistaken) belief by owners and even the DHCR. Then the First Department (hey, today’s court!) found in Roberts v. Tishman Speyer Props., L.P., 89 AD3d 445 (1st Dept 2011) and Gersten v. 56 7th Ave. LLC, 88 AD3d 189 (1st Dept 2011), aka Roberts II, that Roberts applied retroactively, meaning that if a tenant was in occupancy in while the owner received J-51 tax benefits, the tenant’s apartment is still rent stabilized to this day – and there is no statute of limitation. It gets complicated if subsequent tenants move in, but thankfully that’s beyond the competence of the Regina court.
What apparently is in the competence of the Regina court is the setting of the base date rent in the improper, but not fraudulent, J-51 deregulation context. The tenants advocated before the DHCR to apply the default formula, or what the last reliable legal regulated rent was in 2003, which was $2,096.47. The owner advocated for strict 4 year interpretation, and to merely apply what the rent was on the base date, which was $5,195. The rent administrator of the DHCR rejected both arguments and went back to 2003, which it accepted as the last reliable legal regulated rent. From there, the rent administrator applied all allowable increases as if the apartment was never improperly deregulated, and determined a legal regulated rent of $3,325.24. The rent administrator found, importantly, no colorable indicia of fraud, as the overcharge was not willful. Overcharge damages, however, were calculated at a whopping $207,192.59, and with interest, a grand total of $283,192.59.
The rent administrator applied rent stabilization code 2526.1(a)(2)(ix) to examine the rent history beyond four years, and the First Department’s 72 Realty Assoc. v. Lucas, 101 AD3d 401 (1st Dept 2012), as justification to reject the market rate lease in effect on the base date. The court stopped short of giving the DHCR agency deference, stating the DHCR’s “…method of calculation violates the Rent Stabilization Law and the applicable state of limitations.”
The court points out the rent stabilization code provision relied upon by the DHCR is “inopposite, as it applied only to apartments that were “vacant or temporarily exempt from regulation pursuant to section 2520.11…” The court furthers, that it was not “vacant”, as clearly the tenants at issue were living there, and it was not temporarily exempt, since that exception to the law of rent stabilization only apply in limited circumstances, none of which applied to the case at bar.
The language used by the court is a very strong and strict interpretation of the four year statute of limitation, and flat out rejection of the rent stabilization code relied upon by the DHCR. Agency reliance on Lucas appears to have survived, nebulous court analysis notwithstanding. There are several important take aways from the court’s analysis:
1) Taylor v. 72A Realty Assoc., L.P., 151 AD3d 95 (1st Dept 2017), the case that endorsed the very method of rent calculation the DHCR used here, is eviscerated. The First Department at the very least agrees that a literal interpretation of CPLR 213-a could “allow the owner to collect rent that might be in excess of what it could have otherwise charged plaintiffs”, and indeed believes the Taylor court and dissent in the case here have “cogent” policy reasons for this rent calculation method, however, “the legislature has made a different policy determination.” The First Department states plainly, “Taylor runs athwart of the Court of Appeals’ decision in Grimm and Boyd and the bulk of the authority in this Department…” The court’s decision can be summed as follows: if fraud is absent, and barring some exception not applicable here, the four year rule strictly applies. Need some ointment for that burn?
2) “Rent history” means the “records of the landlord and the tenant, as embodied in ledger books, cancelled checks, rent receipts, expired lease, and the like.” The dissent asserted that CPLR 213-a’s four year “rent history” language applies only to the rent history filed with the DHCR, which the owner had not registered with since 2003. Nice try.
3) A base date, market rate lease of an improperly deregulated apartment can be rejected, despite a tortured analysis of 72A Realty Assoc. v Lucas. The majority state the “DHCR is not limited to calculating the base date rent according to the market rate that obtained pursuant to the parties’ lease, and that the agency has the discretion to implement other methods of base date rent calculation that do not run afoul of the limitation period.” That language by the court seems to be in concert with the Lucas holding, despite the court being rather dismissive and unclear regarding the DHCR’s reliance on the case. After the court rejects the DHCR’s reliance on the rent stabilization code, the court states, “72 Realty Assoc. was decided before the Court of Appeals’ decision in Matter of Boyd (23 NY3d 999), and it does not discuss Grimm or the need for some fraudulent behavior by the landlord as a predicate to an examination of rental history beyond four years.”
So, was the DHCR right to rely on Lucas? It’s difficult to say, since there is not an outright rejection by the court, and of course there’s the supportive language cited above. The court’s hang up appears to be be related to the DHCR’s use of a case that doesn’t involve looking beyond four years as its authority to reject the base date market lease. But that’s just a guess, since there is little further guidance and just more confusion. The majority cites to Matter of 160 E. 84th St., Assoc. LLC v. DHCR, 160 AD3d 474 (1st Dept, 2018), which is more peculiar than helpful. It’s notable the court points to 160 E. 84th St., considering 160 E. 84th cites to Lucas. As the dissent points out, Matter of 160 E. 84th St. deals with base date rent setting when fraud is involved. We can only question what relevance it has here, particularly when Lucas deals with base date setting when fraud is not at issue. The dissent reassures us that since Lucas does not involve fraud, “Lucas remains viable and, contrary to the majority’s analysis, neither Grimm nor Boyd affect its authority.” Implicitly, the DHCR can still use sampling methods under rent stabilization code 2522.6(b)(2).
The court leaves the DHCR with the order to “recalculate the overcharge and proper rent using a base date rent of four year before the filing of the overcharge complaint.” The base date rent was $5,195, and if that holds, the tenant’s overcharge complaint of nearly $300,000 evaporates into a mere $10,271.40. The dissent points out that will leave the legal rent, after applying all allowable increases, at $6,334.12. So much for affordable housing. In all fairness, the court did not specify exactly what the rent must be on the base date, merely that the DHCR must not go beyond the base date when determining that number. Acceptable methodology, and where we go from here, remain a mystery.