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In a victory for New York residential landlords, the majority on a divided Manhattan appeals court found that there is a hard four-year limit to calculate damages in rent overcharge cases involving buildings where landlords are reaping the benefits of a controversial and complex tax abatement credit.

The 3-2 ruling by a panel of the Appellate Division, First Department, potentially limits the amount that tenants can seek in rent overcharge cases concerning previously rent-regulated units in buildings where owners have been the recipient of New York City's J-51 benefit. The benefit gives landlords a break on their real estate taxes for improving their buildings but prohibits them from deregulating units while they collect the credit.

If there is not evidence that a landlord used fraud to take units out of regulation, Justices David Friedman, Marcy Kahn and Peter Moulton held, then the base rent to calculate the overcharge to a tenant should be based on the rent charged four years prior to when the tenant filed their complaint.

The majority's holding is “great for landlords” in the city, said Horing Welikson & Rosen name partner Niles Welikson, who represented Regina Metropolitan Co., the owner of the Upper West Side apartment building that is at issue in the case.  

“This couldn't be more clear that in the absence of fraud you don't go back more than four years,” Welikson said, saying that, under existing case law, New York City landlords have overcharged in suits like those filed against his client.

But Darryl Vernon of Vernon & Ginsburg, who represented tenants in a formerly rent-regulated apartment at the building on West 96th Street, said the majority's finding runs afoul of a unanimous 2017 ruling by the First Department finding that, even if there is no evidence of fraud, the overcharge calculation should be based on the rent charged on the date when the landlord began illegally charging a market rate rent.

“Three judges today went against unanimous precedent and eviscerated the rights of tenants who were unlawfully taken out of rent regulation,” Vernon said. He said he will file for leave to appeal the ruling to the state Court of Appeals.   

The unanimous ruling from last year, Vernon noted, was signed by Justice Judith Gische, who penned the opinion for the two-judge dissent, which included Justice Barbara Kapnick, in the Regina Metropolitan case.

Alleged abuse of J-51, an incentive enacted in the 1950s to encourage landlords to improve aging tenements in the city's housing stock, was the impetus for Gov. Andrew Cuomo announcing an initiative in 2016 to return up to 50,000 illegally deregulated apartments to rent regulation and is the subject of four proposed class action suits filed last year in Manhattan Supreme Court.

The tax benefit was also thrust into the limelight in a 2009 decision by the Court of Appeals in Roberts v. Tishman Speyer, a case involving the sprawling Peter Cooper Village and Stuyvesant Town apartment complexes on Manhattan's East Side said owners must keep rents regulated while they received the J-51 credit, invalidating a rule New York State Division of Housing and Community Renewal (DHCR) that allowed owners to deregulate apartments that rent for more than $2,000 or that houses tenants who make incomes above a certain level.

Prior to the ruling in Roberts, the First Department majority said, there was wide misunderstanding among the real estate industry and in the DHCR as to when landlords could charge market rate for their units while receiving J-51 benefits.  

Regina Metropolitan effectively began receiving the tax benefit in the 1999-2000 tax year and continued receiving it through 2013.

In 2003, the regulated rent subject apartment in the Regina Metropolitan case was $2,097 but the landlord, claiming a misunderstanding of the law, increased the rent to the market rate of $4,500

In 2005, the tenants in the suit against the landlord signed a lease for a monthly rate of $5,195, which stated that their apartment was not subject to rent regulation. At the time, according to the majority opinion, the regulated rent should have been $3,325, and that the overcharges for the four-year period should be based on what the regulated rent should have been.