The 'Lucas' Decision and the 'Four Year Rule'

The 'Lucas' Decision and the 'Four Year Rule'
by David S. Hershey-Webb and William J. Gribben
New York Law Journal
January 11, 2013

When the Court of Appeals ruled in Roberts v. Tishman Speyer Properties,[FN1] that apartments in buildings receiving J-51 tax benefits remain subject to rent stabilization and cannot be deregulated at least as long as the benefits are in effect, it left a number of issues unresolved. One of the biggest issues left open was how to establish a legal regulated rent where a landlord had charged "market" rent, rather than a rent-stabilized rent, while in receipt of J-51 benefits. The decision in 72A Realty v. Lucas,[FN2] of Dec. 4, 2012, begins to provide an answer.[FN3] In Lucas, the Appellate Division, First Department, rejected the "Four Year Rule" under which legal regulated rents (and overcharges) are calculated based upon the rent that was being charged on the "base date" defined as four years prior to a tenant filing a complaint or raising a defense of rent overcharge.[FN4]

Ruling in 'Lucas'

Sandra Lucas moved into an apartment in September 2002 pursuant to market lease. At the time, the landlord was receiving J-51 tax benefits. When her lease expired in August 2008, the landlord refused to renew it and brought an expiration of lease holdover. Lucas argued that because the landlord was receiving J-51 benefits that she was rent-stabilized and also that she had been overcharged since she was being charged a market rent. The housing court, citing Roberts, found that she was rent stabilized and, applying the Four Year Rule, set the rent at $2,250, the amount paid in a market rent lease in effect in October 2004, four years prior to her raising the overcharge counterclaim.[FN5]

The landlord's affidavit in the case stated that $30,000 had been spent in renovations to the apartment in 2001, allowing the rent to rise above the $2,000 per month threshold for deregulation of vacant apartments.[FN6] Under the Four Year Rule, however, what took place in 2001 (or any time prior to October 2004) would be irrelevant, and so the housing court did not consider those facts.

The Appellate Term affirmed the housing court's rent calculation using the Four Year Rule. However, the Appellate Division rejected that approach, stating, in two sentences that have tenant advocates smiling (and landlord advocates grimacing):

"The courts below, however, erred in setting the base date rent for the overcharge counterclaim at the $2,250 per month rate based on the market rate in the lease effective for October 2004. While that date is correct under CPLR 213-a, 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 free market lease amount should not be adopted, and the matter must be remanded for further review of any available record of rental history necessary to set the proper base date rate."

After 'Lucas'

Based upon the Lucas holding, the Four Year Rule is no longer applicable to J-51 cases and in its place is a review of any available record of rental history necessary to set the proper base date rate without any regard as to how far back that review goes. That means that tenants will not be locked into base date market rents in J-51 cases. Landlords who complain that records are unavailable have no safe harbor since the Rent Stabilization Code does not impose the four year look back rule when the issue is one of rent stabilization coverage.[FN7]

The court did not address, but certainly did not preclude, application of the "default formula" (the lowest regulated rent paid for a comparable apartment on the base date)[FN8] or a freezing of the rent at the amount of the last registered rent.[FN9] Certainly these two rent setting options are now viable alternatives to the Four Year Rule.

Landlords who have kept their records and are able to establish a rental history that justifies the first rental amount paid by a market tenant are in the strongest position to argue that the starting point should be the base date rent and that all allowable rent increases from the base date forward are legal. Those landlords who fall short of this mark may encounter rough seas. A landlord who cannot establish the necessary rental history that resulted in deregulation of the apartment, including the last regulated tenant's rent, the longevity of that tenancy and the proof required to justify IAIs (vacancy improvements),[FN10] may find the default formula or some type of rent freeze imposed.

Lucas is the third recent appellate decision to limit the applicability of the Four Year Rule.[FN11] The Four Year Rule is no longer applicable in cases where there is a colorable claim of fraud or where there is a rent reduction order in effect.

In tossing out the Four Year Rule in J-51 cases the court rejected the premise that tenants must be locked into base date market rents regardless of how such rents were determined. Since landlords began to deregulate J-51 apartments under the 1993 Reform Act, long before the Court of Appeals held in Roberts that such deregulations were not permitted, a wooden application of the Four Year Rule would have permitted landlords to reap the benefit of many years of ill begotten rent increases, while saddling tenants with unjustified rents. Not now.

David S. Hershey-Webb and William J. Gribben are partners at Himmelstein, McConnell, Gribben, Donoghue & Joseph.

Endnotes:

1. 13 NY3d 270, 918 NE2d 900, 890 NYS2d 388 (2009).

2. 2012 NY Slip Op 08241 (1st Dept.).

3. The court also reversed the Appellate Term's denial of the tenant's right to recover legal fees and treble damages. This article will not address those issues.

4. Rent Stabilization Law 26-516(a)(2) and CPLR 213-a. There are two aspects to the Four Year Rule: how far back a court can look to calculate the rent and how many years of overcharges a tenant can collect. No court has held that more than four years of overcharges can be collected, only that the rent history going back more than four years may be examined in some instances to determine the rent.

5. 2010 NY Slip Op 20197 [28 Misc.3d 585].

6. RSL 26-504.1, et seq. In June 2011 the Legislature raised the rent threshold from $2,000 to $2,500 and the income threshold to $200,000, effective beginning with the 2012 Filing Period. Rent Act of 2011.

7. RSC 2526.1(a)(2)((ii); East West Renovating v. DHCR, 16 AD3d 166 (1st Dept. 2005).

8. Matter of Grimm v. State of New York Div. of Hous. & Community Renewal Off. of Rent Admin., 15 N.Y.3d 358 (N.Y. 2010). The "default formula" may be utilized either where there is 'fraud" as in Grimm or where the landlord is unable to produce reliable rent records. Matter of 610 West 110th Street, DHCR Admin. Rev. Dckt. No. WH410024RO (Feb. 20, 2009).

9. Bradbury v. 342 West 30th Street Corp., 84 AD3d 681, 924 NYS2d 349 (1st Dept. 2011); Jazilek v. Abart Holdings, 72 AD3d 529, 899 NYS2d 198 (1st Dept. 2010); Hargrove v. DHCR, 244 AD2d 241, 664 NYD2d 767 (1st Dept. 1997)

10. RSL 26-511(c)(13). Prior to Sept. 24, 2012, a landlord could include 1/40 of the cost of a renovation to a vacant apartment in the legal regulated rent. Landlords can now include 1/60th of the cost except in buildings with 35 or fewer units where the calculation is still 1/40th. Rent Act of 2011.

11. Grimm, supra; Cintron v. Calogero, 15 N.Y.3d 347, 912 N.Y.S.2d 498 (2010)(can court look back more than four years where there is a DHCR rent reduction order in effect).