Entire Rent History Must Be Weighed in Disputes, Panel Says

Entire Rent History Must Be Weighed in Disputes, Panel Says
by Brendan Pierson
New York Law Journal
December 5, 2012

The new stabilized rent of an apartment that had been illegally deregulated must be based on its entire rent history, not just the last four years, a state appellate panel said yesterday. The ruling is the latest in a series of tenant-friendly decisions to emerge in the wake of the Court of Appeals' 2009 ruling that apartments in buildings receiving J-51 tax benefits cannot be deregulated.

The Appellate Division, First Department, ruled in 72A Realty v. Lucas, 570514/10, that the four-year statute of limitations for rent overcharge actions does not apply when an apartment has been illegally deregulated, partly reversing a June 2011 decision by the Appellate Term.

Justices Angela Mazzarelli, David Saxe, Leland DeGrasse, Rosalyn Richter and Sheila Abdus-Salaam joined the unsigned opinion.

The panel remanded the dispute between an East Village woman and her landlord to Housing Court for further review of the apartment's rent history.

The landlord, 72A Realty, in 2008 filed a Housing Court action seeking to remove Sandra Lucas from her apartment after her lease expired. Market-rate tenants, unlike rent-stabilized tenants, are not entitled to an offer of lease renewal. 72A Realty claimed Lucas' unit became market-rate in 2001, when it became vacant and its legal rent exceeded $2,000, the threshold for deregulation at the time. The landlord said that the legal rent increased considerably thanks to about $30,000 worth of renovations.

The apartment had been rent-stabilized under the J-51 program, which gives landlords tax abatements to make improvements to their properties. Apartments in J-51 buildings are rent stabilized as a condition of the program.

Throughout the 1990s and 2000s, landlords of J-51 buildings would routinely deregulate apartments when possible under the Rent Stabilization Law, and claim a proportionately smaller tax abatement. The state Division of Housing and Community Renewal endorsed the practice.

However, in 2009 the Court of Appeals ruled in Roberts v. Tishman Speyer, 13 NY3d 270, that no apartment in a J-51 building could be deregulated as long as the tax abatement was in place. The decision gave rise to a slew of rent overcharge actions, such as the recently settled lawsuit brought by the tenants of Stuyvesant Town and Peter Cooper Village (NYLJ, Dec. 3).

The Court of Appeals left open several questions, including whether Roberts should apply retroactively.

In Lucas' case, Housing Court Judge Peter Wendt decided that it should, ruling in 2010 that her apartment was rent stabilized because her 76-unit building had been receiving J-51 benefits for the first few months of her lease in 2002.

Wendt said the landlord could have deregulated the unit after the J-51 benefits expired later in 2002 if it had given Lucas notice that it was planning to do so when she signed her lease. However, Wendt said, because the landlord gave her no such notice, the apartment must remain rent stabilized as long as she lives there.

To calculate Lucas' new, stabilized rent, Wendt used her rent from four years before the lawsuit began, $2,250, following the standard four-year statute of limitations for rent overcharge actions rather than trying to determine what the rent would be if the apartment had never been deregulated.

Wendt also awarded Lucas attorney fees, but denied her request for treble damages.

On appeal, the Appellate Term affirmed Wendt except on the issue of attorney fees. The Appellate Term panel, which consisted of Justices Martin Schoenfeld, Martin Shulman and Alexander Hunter, said it was not appropriate to award fees because the landlord believed, before Roberts, that Lucas' apartment was properly deregulated.

Both sides appealed.

The First Department panel said the lower courts should have looked beyond the four-year statute of limitations "in light of the improper deregulation of the apartment and given that the record does not clearly establish the validity of the rent increase that brought the rent-stabilized amount above $2,000."

The panel said the landlord had provided no documentation of the claimed $30,000 in renovations.

The panel also reinstated Lucas' claim for treble damages, ordering further proceedings on remand.

"Further inquiry upon remand is required to determine whether the overcharge was not willful, but rather the result of reasonable reliance on a DHCR regulation," the panel said.
Finally, the panel ordered a trial on whether Lucas' lease provides for attorney fees for the prevailing party, though it declined to weigh in on whether Lucas would be entitled to those fees if it does.

Robert Sokolski of Sokolski & Zekaria, who represents Lucas, said he was pleased with the decision.

"I'm delighted that they're not going to blindly accept the market rate from four years ago and reward the landlord for wrongdoing," Sokolski said. The decision, he added, "restores our faith in justice."

Sokolski said that, even if it turns out that the landlord was acting in good faith and does not have to pay treble damages or attorney fees, it was important for that issue to be heard in court, not decided on papers alone.

Oral arguments were heard on May 29.

Joel Zinberg, a solo practitioner who represents the landlord, could not be reached for comment.

Paul Gruber, a partner at Borah, Goldstein, Altschuler Nahins & Goidel, appeared as amicus curiae for Community Housing Improvement Program of New York Inc., a trade association representing more than 2,500 apartment-building owners throughout New York City.

Yesterday's decision is the latest in a series of First Department rulings answering questions left open by Roberts in tenants' favor.

In August 2011, it ruled in Gersten v. 56 7th Ave., 88 AD 3d 189, that Roberts is retroactive, just a few months after the Appellate Term reached that conclusion in Lucas' case.

This past June, it ruled in 73 Warren Street v. DHCR, 116585/09, that an apartment in a J-51 building cannot be deregulated even after the building's J-51 benefits ended as long as the same tenant stayed in the apartment, regardless of the tenant's income or rent.

And in October, it ruled in London Terrace Gardens v. City of New York, 109121/10, that a landlord cannot retroactively unwind its participation in J-51 by giving back all the tax benefits it received.