Rent Stabilization: Owner Can't Give Back J-51 Benefits

In the course of litigating Roberts, many tenant advocates argued that landlords who were benefiting from luxury deregulation­and who were at the same time enjoying J-51 tax benefits­were in effect "double dipping" at the taxpayers' expense. The Appellate Division in Roberts alluded to that argument in its March 5, 2009, opinion:
In 1992, Met Life applied for and began receiving property tax benefits under New York City's J-51 tax abatement program…which provided incentives for owners to rehabilitate and improve their buildings. One of the caveats of the J-51 program was that rent deregulation of residential units and buildings receiving J-51 abatements was prohibited. Met Life, and the successor owners of the Complex, have received approximately $24.5 million in real estate tax benefits since entering the program and are scheduled to remain in the program, and to continue to receive additional tax benefits, until 2017.
Administrative Code §11-243(i)(1) provides that the benefits of the J-51 program are limited to the owners of buildings that are subject to rent stabilization, rent control or the PHFL [Private Housing Finance Law]. The Rules of the City of New York likewise require a building receiving J-51 benefits to be subject to rent regulation for the duration of the period in which such benefits are received....[FN3] Following the Appellate Division and Court of Appeals rulings in Roberts, many owners were seized with the following idea: If obtaining luxury regulation while at the same time enjoying J-51 tax benefits was seen as double dipping, then owners should refund to the city all J-51 benefits received, and forfeit all future benefits, in return for the nunc pro tunc privilege of luxury deregulation. For most owners, this was an easy trade-off: In Roberts, for instance, the $24.5 million in tax benefits the landlord purportedly received no doubt paled in comparison to the value of deregulating apartments. The concept of giving back J-51 benefits seemingly had much to recommend it. The city would receive tens of millions of dollars in benefits already taken, and would be relieved of the obligation of honoring future benefits. Owners would have their rent rolls restored, the high tax assessments on their buildings would remain intact, and those landlords would pay high property taxes to the city without any corresponding tax benefits. In fact, in 2010, Senator Pedro Espada introduced legislation (S. 6811) which would have allowed owners to return J-51 benefits, and to waive future benefits, in exchange for the right to utilize luxury deregulation laws. The bill provided that the returned tax benefits would be used to create a program to freeze the out-of-pocket rents paid by low-income and moderate income rent regulated tenants who paid more than one-third of their income for rent and who earned less than $45,000 per year. The bill never became law, and owners turned to the courts for relief. However, in London Terrace Gardens v. City of New York, decided by the Appellate Division, First Department, on Oct. 23, 2012, the Appellate Division unanimously ruled that owners could not return J-51 benefits to the city. 'London Terrace Gardens' London Terrace Gardens is a housing complex located in Chelsea, consisting of approximately 1,000 rental units. In 2003, the New York City Department of Housing Preservation and Development (HPD) granted the owner J-51 benefits in the aggregate amount of $2.2 million, to begin on July 1, 2003. The owner believed, as almost everybody believed pre-Roberts, that the RSL provisions barring luxury deregulation in buildings receiving J-51 benefits applied only to buildings that became subject to the RSL by virtue of receiving such benefits, as opposed to buildings like those at London Terrace Gardens, which were rent-stabilized long before such benefits were obtained. The owner of London Terrace Gardens had luxury deregulated many apartments before receiving J-51 benefits in 2003, and, consistent with the Division of Housing and Community Renewal's interpretation of the RSL, continued to deregulate apartments thereafter. After the Court of Appeals ruled in Roberts, the owner wrote to HPD seeking to withdraw from the program ab initio and offering to return the benefits it had received to date. HPD denied the owner's request, stating that "'[t]he J-51 Program has no provision for voluntary withdrawal.'" The owner then commenced two actions. The first was an Article 78 proceeding against the city and HPD whereby the owner sought to rescind its "agreement" with the city as to J-51 benefits. The action alleged rescission, declaratory judgment, agency misconduct, and violation of due process. The second action, which added DHCR as a defendant, sought similar relief. The owner argued, in sum, that it would not have sought or accepted J-51 benefits had it known that such actions would re-regulate formerly deregulated apartments, and prevent deregulation in the future. The various defendants moved to dismiss the complaints. Both actions were assigned to New York County Supreme Court Justice Judith Gische, who has since been named to the Appellate Division. Supreme Court rejected the owner's rescission claim, holding that no contract had been entered into between the owner and the city:
At bar, there is no statutory or regulatory language relied upon by London Terrace to demonstrate that when the J-51 Program was enacted, the City intended to create any contractual rights between itself and the participating landlords. There is no language in the State enabling legislation that supports the finding that the permitted tax exemption programs were intended to operate on a contractual basis. Nor has London Terrace referenced any legislative history indicating such intention. The J-51 program is just that, a program, and no contractual rights are created as a result of a landlord's voluntary participation therein.[FN4]
Supreme Court continued:
Even were rescission available in non-contract matters, and even were the mistake mutual, the court finds, however, that rescission is still not available under the facts alleged in these actions. The mistake here is only a misunderstanding of applicable law. In Roberts v. Tishman-Speyer, supra, the Court of Appeals expressly held that its interpretation of the applicable statutory language, precluding luxury decontrol to J-51 program participants, required no particular agency expertise, but flowed from the "natural" reading of the statutory language. This type of mutual misunderstanding regarding the applicable law ... does not support the "undoing of the [underlying] transaction" (internal citation omitted, material in brackets in original).[FN5]
Supreme Court then dismissed both the Article 78 petition and the plenary action. Appellate Division On Oct. 23, in a unanimous opinion authored by Justice Sheila Abdus-Salaam, the First Department affirmed Supreme Court in all respects. The Court first held that the owner's claim for rescission was, in effect, an impermissible application to withdraw from the J-51 program:
There is no provision in the J-51 program for unilateral withdrawal from the program or for repaying the tax benefits in exchange for rescission from the program nunc pro tunc. On the contrary, the Rules of the City of New York provide that "rent regulation [requirements] shall not be terminated by the waiver or revocation of tax benefits. London Terrace asserts that it is not seeking a waiver of previously accepted benefits but instead, a finding that the benefits are deemed void ab initio. Still, in practical effect, under the guise of rescission, London Terrace is seeking a waiver, which is not permitted under the Rules of the City of New York" (internal citations omitted, material in brackets in original).
The Appellate Division, like Supreme Court, rejected the owner's rescission claim on the ground that "[t]he J-51 program is a tax benefit program­there is no contract or agreement to rescind." The Appellate Division also rejected the owner's underlying "mutual mistake" argument, but took pains to elaborate as to what the various parties were mistaken about:
Furthermore, even though DHCR, and perhaps also HPD, were under the same mistaken interpretation of the Rent Stabilization Law as was London Terrace prior to the Court of Appeals decision in Roberts, that interpretation is entirely unrelated to HPD's confirmation of London Terrace's eligibility for the J-51 program. As indicated in the J-51 Certificates issued by HPD, the presence of decontrolled units was relevant to HPD in determining the amount of J-51 benefits to be provided. Thus, any mistake as to the law by HPD regarding whether units could be decontrolled while receiving J-51 benefits was immaterial to HPD's decision to accept London Terrace into the J-51 program (italics in original).
The foregoing quote reveals yet another irony in the post-Roberts world for owners. Prior to Roberts, HPD would diminish the amount of J-51 benefits in proportion to the number of apartments that had been luxury deregulated; HPD did this, obviously, while under the impression that J-51 benefits and luxury deregulation could coexist. Thus, owners (like the owner of London Terrace Gardens) who obtained J-51 benefits not only inadvertently destroyed their past and future efforts to deregulate apartments, but received diminished benefits based on the existence of luxury deregulated apartments which, it turns out, were never luxury deregulated in the first place. Absent Court of Appeals intervention, London Terrace Gardens forecloses possibility that owners can regain the benefits of luxury deregulation by refunding benefits ab initio. One suspects that owners may be similarly unsuccessful when they approach HPD for additional J-51 benefits based on the fact that HPD's proportional diminution of benefits, based on the existence of so-called luxury deregulated apartments, was, in fact, in error. Warren A. Estis is a founding partner at Rosenberg & Estis, and Jeffrey Turkel is a partner at the firm. Endnotes: ENDNOTES 1. 62 A.D.3d 71, 874 N.Y.S.2d 97 (1st Dept. 2009), aff'd 13 N.Y3d 270, 890 N.Y.S.2d 388 (2009). 2. 13 N.Y.3d at 295. 3. 62 A.D.3d at 73-74, 75. 4. 2011 WL 1826851. 5. Id.