Deregulation of rent regulated apartments can result in tenants losing the apartments they reside in, often times for decades, while giving landlords long-awaited opportunities to obtain market rents when such apartments do, in fact, become vacant. Depending on whether you are the landlord or the tenant, this can be a life-altering event, both positive and negative, respectively.

Almost daily we read about tenants who may be at or near the monetary threshold for deregulation complaining that their landlords are not maintaining their buildings in habitable conditions in order to force them to move out. When this occurs, the landlords can then make major renovations that will bring the apartments up to fair market value, if such renovations meet the requirements of the Division of Housing and Community Renewal (DHCR). Such renovations can include Major Capital Improvements (MCI) and/or Individual Apartment Improvements (IAI).

Rent Act of 2015

For most rent regulated tenants in New York City, their annual or bi-annual renewal leases will not be impacted by deregulation unless, over the course of many years, the rent has inched its way up in excess of $2,700. Under the Rent Act of 2015, the deregulation threshold was increased from $2,500 to $2,700. The new Rent Act also provided that there will be an annual adjustment of the threshold amount, commencing every January 1, based upon the percentage amount of a one-year lease renewal as determined the previous June by the Rent Guidelines Board (RGB). (Rent Stabilization Law [RSL] §26-511(c)(14)(ii))

The amounts vary in each locality where such regulations exist. Currently, in New York City the amount is $2,733.75, which became effective on Jan. 1, 2018. According to the NYS Department of Homes and Community Renewal (HCR), the deregulation rent threshold (DRT) for NYC will increase to $2,774.76 for the period commencing on Jan. 1, 2019 through Dec. 31, 2019. (www.nyshcr.org [09/2018])

Apartments can become deregulated for various reasons: (1) Unless forced out by harassment, once a rent-controlled tenant vacates, rent control is no longer an option to the next tenant. However, if the apartment is in a building of six or more units the apartment may ultimately become rent stabilized. Initially, the landlord can seek fair market value for the premises and the new tenant has a right to file a Fair Market Rent Appeal. If successful, the apartment will become rent stabilized. (2) Co-op and condo conversions remove apartments from rent regulations unless there is an eviction plan where the tenant can either purchase the premises or vacate after a specified period of time. Upon vacatur, the apartment is deregulated. (3) Buildings that are receiving certain tax abatements and exemptions [i.e.: 421-a and J-51] will be deregulated when the abatements and exemptions expire and the leases themselves expire, provided the landlord notified the tenants of this in their initial lease and subsequent renewal leases, or if the tenant vacates sooner than the expiration of the lease term. (4) The landlord petitions DHCR to deregulate specific apartments because the rent has reached the threshold level, as set forth above, and/or the tenant's income exceeds $200,000. (See DHCR Fact Sheet #26 Guide to Rent Increases for Rent Stabilized Apartments in New York City [www.nyshrc.org]) The landlord must notify the tenant of its intention to seek deregulation by serving him/her with a “Notice of Apartment Deregulation Pursuant to High Rent Vacancy—2018” [HRV-N] (www.nyshcr.org [Rent Stabilization Code (RSC) §2520.11(u) and Tenant Protection Regulations §2500.9(s)])

Generally, upon vacatur, the landlord can add a 20 percent vacancy increase, in addition to the RGB percentage increases in effect, to the last legally registered rent for two-year vacancy leases. For one-year vacancy leases, the increase would be 20 percent minus the difference between the one- and two-year percentage increases as set forth by the RGB, in addition to that one-year percentage. The first lease entered into between the landlord and tenant is referred to as the vacancy lease.

Many landlords offer their tenants preferential rents, sometimes for a particular lease term, other times for an entire tenancy. To avoid confusion, the Rent Act of 2015 codified how much a landlord can increase the rent in a vacancy lease where the vacating tenant had a preferential lease. Accordingly, the vacancy lease rent increase that can be applied to the tenant's legal rent “shall not exceed: five percent of the previous legal regulated rent if the last vacancy lease commenced less than two years ago; ten percent of the previous legal regulated rent if the last vacancy lease commenced less than three years ago; fifteen percent of the previous legal regulated rent if the last vacancy lease commenced less than four years ago; twenty percent of the previously legal regulated rent if the last vacancy lease commenced four or more years ago.” RSL §26-511(c)(5-a) (See DHCR Fact Sheet #5 Vacancy Leases in Rent Stabilized Apartments for additional increases that may be applicable [www.nyshrc.org])

The balance of this article will focus on deregulation based on the rent threshold (DRT) and/or the household income threshold as noted in (4) above.

Recent Court of Appeals Cases

This past spring the Court of Appeals rendered two decisions, Altman v. 285 W. Fourth LLC, 31 N.Y.3d 182 (DiFiore, J, decided 4/26/18) and Matter of Brookford, LLC v. New York State Division of Community Renewal, 31 N.Y.3d 683 (Feinman, J., decided 6/14/18) regarding the deregulated rent threshold and the calculation of total annual income, respectively.

'Altman v. 285 W. Fourth LLC'. The issue in Altman was “whether the 20% vacancy increase should be included when calculating the legal regulated rent for purposes of determining whether the subject apartment has reached the $2,000 deregulation threshold in the Rent Stabilization Law,” based on the law then in effect. The court concluded that the vacancy increase must be included in that calculation. It is important to note at the outset [as the court stated in the only footnote is this decision] that the statute[s] in question and the interpretation thereof predates the changes made in the Rent Act of 2015 and, thus, the amendments are not addressed therein.

Altman subleased the subject premises from the tenant of record, Ryder, who resided there since 1993. Ryder had a rent stabilized lease with the prior landlord with a legal regulated rent of $1829.49 per month. In 2004, the landlord sued both Altman and Ryder for nonpayment of rent. In 2005, the matter was settled by stipulation in which Ryder would surrender all rights to the apartment and Altman entered into a new lease with a “Deregulation Ryder for First Unregulated Tenant” which stated that said apartment was no longer rent stabilized because the rent was or became $2000 after vacancy. That same year the prior owner removed the apartment from registration with DHCR based on “high rent vacancy” (HRV).

Subsequently, in 2007, the current landlord purchased the premises and entered into a new renewal lease with Altman based on the fair market rent of $2,600. “Under the terms of the agreement, Altman agreed to refrain from challenging the nonregulated status of the apartment and further agreed that, if he did so, it would be 'conclusively presumed' that he had entered into the agreement with the intent to obtain its benefits by fraud in the inducement.”

Between 2008 and 2014, the landlord commenced a series of nonpayment proceedings in which Altman did not challenge the regulatory status of the apartment. However, in 2014 he sought a declaratory judgment as to the regulatory status of the apartment, as well as injunctive relief requiring the landlord to provide him with a rent stabilized lease, a determination of the proper regulated rent and a money judgment for rent overcharges.

The Supreme Court, based on the then statute in effect, determined that the rent of the vacating tenant did not have to reach or exceed the $2,000 DRT as long as the addition of the 20 percent vacancy increase brought the rent over that amount, in which case the premises would become deregulated.

In 2015, the Appellate Division, First Department, reversed (127 A.D.3d 654). While acknowledging that the landlord was entitled to a 20 percent vacancy increase following the tenant's departure, it did not trigger the DRT if the rent at the time of vacancy did not exceed $2,000 on its own. The case was remanded to the Supreme Court for a calculation of the rent overcharges due to the plaintiff, and to set a legal rent subject to a final determination by DHCR. The landlord appealed and the Appellate Division affirmed (143 A.D.3d 415 [1st Dept. 2016]). The Court of Appeals granted leave to appeal (29 N.Y.3d 903 [2017]) and reversed.

The crux of this case was the interpretation of the then applicable statute which read in relevant part as follows: “any housing accommodation which becomes vacant on or after [April 1, 1997] and before the effective date of the rent act of 2011 and where at the time the tenant vacated such housing the legal regulated rent was two thousand dollars or more per month; or, for any housing accommodation which is or becomes vacant on or after the effective date of the rent regulation reform act of 1997 and before the effective date of the rent act of 2011, with a legal regulated rent of two thousand dollars or more per month.” RSL §26-504.2(a) (emphasis added)

In analyzing the above portion of the statute, the court focused its attention on the key word “or” in reaching an opposite conclusion than the Appellate Division. It pointed out that the Appellate Division relied on the first clause only in reaching its decision, which refers to deregulation based on the legal regulated rent “at the time the tenant vacated” the subject premises.

“By contrast, the second clause provides that the key consideration when there is a vacancy is the legal regulated rent, without reference to the rent at the time of the tenant's vacatur. Given that the second clause is an alternative to the first (preceded by 'or'), it must mean something different from the first clause—i.e., something other than the legal regulated rent at the time the tenant vacated the apartment. Thus, it is reasonable to read the plain language of the second clause to refer to the legal regulated rent (including the available statutory increases) applicable to the apartment after the tenant's vacancy.” Here, there is “no doubt that the legislature intended to include the vacancy increase.”

Words have meaning and the interpretation of the inclusion or omission of a single word or phrase can change the entire outcome of a case. (See, for example, Congregation Netzach Yisroel v. Santana, 32 M.3d 556 (Civ. Ct., Heymann, J.) where the petitioner sought to evict the sole remaining rent stabilized tenant in a building purchased to develop a Yeshiva, among other things. The statute that enabled a nonprofit entity to be exempt from rent stabilization (RSC §2524.4 [b][1]) was very specific in its language. Here, the entire case hinged on the phrase “exclusively for charitable and educational purposes” and because the petitioner's goals and purposes were beyond the scope intended by the Legislature, the proceeding was dismissed. (emphasis added))

Prior to the Rent Act of 2015, the deregulation statutes used the phrase “any housing accommodation with a legal regulated rent of …” which is what prompted the confusion Altman finally resolved for all matters pending pre-June 15, 2015. Clarifying the threshold amount upon vacatur, post June 15, 2015, the amended statute refers to “any housing accommodation with a legal regulated rent that was two thousand seven hundred dollars or more per month” at the time it becomes vacant. Therefore, there is no longer a need for uncertainty or guesswork in determining whether the DRT has been met upon a tenant's vacatur (emphasis added)

Matter of Brookford, LLC v. New York State Division of Housing and Community Renewal. While Altman addressed the issue of reaching the rent threshold of $2,000 or more at the time a tenant vacated a regulated apartment, Brookford dealt with the apportionment of income between an occupant and non-occupant of an apartment to determine whether the income of the tenant reached, or exceeded, the income deregulation threshold.

The tenant in this case lived in a rent-controlled apartment. In 2006, the owner of the building served her and her husband with an Income Certification Form (ICF). Upon their failure to return the form, the petitioner filed a petition with DHCR for verification that the occupants' income exceeded the deregulation income threshold [then $175,000] for the two-year period preceding the filing of the ICF. The tenant then asserted to DHCR that a year before the filing of the ICF her husband permanently vacated the subject premises to reside in a nursing home. Although they filed joint income tax returns for the 2004-2005 calendar years, the income was apportioned. As such, her total income alone, as the sole occupant of the apartment, was below the income threshold for both years. The DHCR agreed and denied the owner's petition for deregulation and its subsequent petition for administrative review (PAR). Petitioner brought an Article 78 proceeding in Supreme Court which affirmed the DHCR. While an appeal was pending in the Appellate Division, DHCR moved for an order of remand which was granted. On remand, DHCR again upheld its decision to deny a PAR. The Appellate Division affirmed, holding that DHCR properly excluded the husband's income “from the total annual calculation income for 2004 and 2005.” (142 A.D.3d 433, 434 [1st Dept. 2016]) The Appellate Division granted petitioner leave to appeal to the Court of Appeals.

The court discussed the Rent Regulation Reform Act (RRRA) of 1993 which provided for owners to deregulate housing accommodations. “For proceedings commenced before July 1, 2011, RCL [Rent Control Law] (Administrative Code [AC]) §26-403.1(a)(2) allows for the deregulation of a housing accommodation when, among other things, the 'total annual income' exceeds $175,000 in the two calendar years preceding the filing of an ICF. 'Total annual income means the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence other than on a temporary basis' (citation omitted). Annual income is fined as the federal adjusted gross income (AGI) as reported on the New York State income tax return (citation omitted)” (emphasis added).

Here, the majority zeroed in on the words “who occupy” the housing accommodation as their primary residence. “To read the statute as petitioner and the dissent suggest would mean that the total annual income may include those that do not occupy the housing accommodation as their primary residence. 'Such a construction, resulting in the nullification of one part of the [statute] by another, is impermissible, and violates the rule that all parts of a statute are to be harmonized with each other' (citations omitted).” (For proceedings commenced on or after July 1, 2011, the total annual income must exceed $200,000 (see RCL [AC] §26-403[a][2])).

The court proceeded to note how the DHCR and the Department of Tax and Finance (DTF) coordinate their procedures to “allow such individuals [such as the tenant herein] to segregate items of the federal [AGI] of the nonresident spouse so those amounts will not be included in the income determination.” The court further stated that the determination by DHCR was neither arbitrary nor capricious in excluding the husband's income, as the wife was the “sole” occupant of the premises and her income was below the income deregulation threshold.

Judge Michael Garcia, in a lengthy dissent stated: “Ultimately, in creating the luxury deregulation scheme, I do not believe the Legislature ever intended to allow wealthy couples to apportion their joint income among multiple households. The majority's approach undermines the very purpose of luxury deregulation, which was intended to address the 'glaring inequity' of taxpayer dollars being used to subsidize the rents of wealthy New Yorkers. The plain language of the statute was meant to prevent that result; we should adhere to it. Accordingly, I dissent.”

In response to the dissent, the court found that there was no “manipulation” on the part of the tenant/occupant to achieve this result and that the petitioner conceded that the husband vacated his apartment in 2005 due to ill health and subsequently died thereafter.

Conclusion

With the Democrats poised to take control of the State Senate in January 2019, coupled with a Democratic Assembly, major changes regarding rent regulated apartments will be in the pipeline. In addition to possible amendments to deregulation, there will be a major overhaul, if not complete removal, of MCI's and IAI's that are passed along to tenants and become a permanent part of their base rent in perpetuity for all future rent increases. It remains to be seen if the Governor will sign on to a potentially major shift to the left with the many proposed changes in the housing regulations or maintain a more centrist position if he is considering a run for the Presidency in 2020.

George M. Heymann, a retired NYC Housing Court Judge, is of counsel at Finz & Finz, PC and adjunct professor of law at Maurice A. Deane School of Law at Hofstra University.