Scott E. Mollen

Moratorium on Manhattan Hotel Conversions—NYC Local law No. 50—Upheld

This decision involved appeals arising from a plenary action and an Article 78 proceeding challenging Local law No. 50 (2015) (law). The law limits conversions of Manhattan hotels that have at least 150 units. It provides for a two-year moratorium, which was later extended to four years, on the “conversion to full-time residential use of more than 20 percent of qualifying hotels 'primary hotel space'” which is defined “essentially as living and sleeping space for guests.” Conversions commenced in the 24 months before the law's effective date are exempt. The law's purpose is to permit “study of the effect on the city's economy of such residential conversions of large hotels.” The Legislature found that large hotels “are essential to vacation and business travelers, important generators of well-paying jobs, and anchors for surrounding economic activity.” The Legislature also expressed its concern that “conversions are continuing apace and may be 'irreversible'…..”

Although the law permits owners of qualifying hotels to seek a waiver from the NYC Board of Standards and Appeals (BSA), waivers are “not as a right.” When considering waiver application, the BSA must determine whether limits on the conversion permit a “reasonable rate of return” and consider “practical difficulties or unnecessary hardship” in the application of the law, “so that the spirit of the law shall be observed, the public safety and welfare secured, and substantial justice done….” The law provides “criteria for determining a 'reasonable financial return'” and any waiver must be a “minimal waiver necessary to afford relief'.”

The petitioner, a non-profit corporation which represents members of the real estate industry, alleged that approximately 175 Manhattan hotel properties are impacted by the law. The petitioner contended that by limiting hotel owners' rights to convert their properties to condominiums and other residential uses, the law “reduced the value of the affected properties to an unspecified degree.” The petitioner's claims included “taking without just compensation, due process (under the theory that the law lacks a rational basis), and equal protection (under the theory that the law encumbered the class of hotel owners for the benefit of their employees).”

The Appellate Division (court) explained that those claims were not before it on the subject of appeal. The petitioner also sought a permanent injunction enjoining the city from enacting similar legislation “without complying with the Uniform Land Use Review Process (ULURP) and the State Environmental Quality Review Act (SEQRA).”

The city had moved to dismiss the action and proceeding on the grounds that the petitioner lacked standing and the claims were not ripe. The trial court dismissed all of the claims based on lack of standing and had not reached the ripeness issue. The Appellate Division denied the motion to dismiss all claims, except those asserted under 42 USC (§ 1983).

The court found that the petitioner had standing with respect to the plenary action and the Article 78 proceeding under ULURP, but found that petitioner lacked standing under SEQRA. The court stated that the petitioner had demonstrated that it is an “appropriate representative of” its members' interests and that no individual participation by any of its members “is required for it to assert its claims of the statute's facial invalidity.” The court cited the petitioners alleged injuries and viewed such allegations as “bolstered” by the law's “declaration of legislative intent.”

The legislative intent cited the “recent conversion history” based on “current market conditions” and noted that several hotel owners had “already announced their intention” to convert “at least some of their hotel rooms to residential apartments.” The court reasoned that if hotel conversions in the current market were not more profitable than the current use, “there would be no need for” the law. The court opined that the dissent's view of standing was “unduly restrictive.”

The court explained that the dissent would require the petitioner to demonstrate that a member applied for a construction permit during the moratorium or shown plans to convert 20 percent or more of their primary hotel space to residential use, that the member was not exempt from the law and the member had “unsuccessfully applied to the BSA for a waiver.” The court stated that the dissent's view “fails to account for the alleged diminution of property value, or, at a minimum, for the immediate and actual injury associated with the costs . . . for a permit or a waiver.”

The court believed that a requirement for evidence of diminished property values “overlooks that 'proof of special damage or in-fact injury is not required in every instance to establish that the value or enjoyment of one's property is adversely affected…..” However, the court agreed that the petitioner cannot assert a SEQRA claim in the Article 78 proceeding. The petitioner did not demonstrate that environmental concerns were “germane” to its organizational purposes, “which focus on the economic and political health of the real estate industry” and the petitioner's alleged environmental harm was “nothing more than economic harm…..” The petitioner's constitution mentioned “environment only once” and it related to “economic impact.”

The petitioner argued that SEQRA concerns all of its members in “proximity” to hotels because of “potential impacts on traffic, noise, air quality, waste disposal and demand for public services.” The court found that such arguments had been rejected by the NY Court of Appeals.

The court explained that the petitioner's constitutional claims were ripe for adjudication. Since the trial court held that petitioner lacked standing, it did not reach such issue. The court noted that facial challenges “are generally ripe the moment the challenged regulation or ordinance is passed….” and such claim is not dependent upon the “extent to which petitioners are deprived of the economic use of their particular pieces of property or the extent to which these particular petitioners are compensated….” The court distinguished petitioner's facial challenge from the “as applied” challenges involved in cases cited by the dissent. Those cases involved individuals who challenged zoning laws “as applied to their specific properties.”

The court found it irrelevant that the law included a waiver process, since waiver was not “as a right” and was “palliative for owners, not a panacea.”

The petitioner claimed that approximately 29 members are covered by the law and that the law has an “immediate negative effect on the value of the affected hotel properties in…violation of these owners' constitutional rights….” The court held that “the plaintiffs have stated a facial challenge and their claims are ripe for review.”

The court explained that a claimant asserting a facial challenge “must establish that no set of circumstances exists that under which the challenged statute would be valid….” The court acknowledged that it “remains to be seen whether (petitioner) can substantiate these allegations.” However, the court concluded that the pleadings were sufficient to “survive a motion to dismiss.” Since the petitioner had not addressed the §1983 claims, those claims were deemed abandoned.

The court also rejected the petitioner's request to enter an immediate judgement on its Article 78 petition. When a CPLR 7804 (f) motion is denied, a respondent “should normally be allowed to answer to assert any colorable defenses” and the petitioner's “proof must be put to the test.…” Accordingly, the court denied the motion to dismiss all claims except the §1983 claims.

A dissenting opinion agreed that the SEQRA and § 1983 claims should be dismissed. However, the dissent believed that the petitioner had made only “speculative and amorphous allegations of potential future economic harm and has not satisfied the requirements for organizational standing, in that its constitutional claims are not ripe for review….” The dissent would have affirmed the dismissal of the Article 78 proceeding and the plenary action in their entirety.

The dissent noted inter alia, that the petitioner had not identified any owner of a qualifying hotel who had applied for a construction permit who would not be exempt, and who would have been denied a waiver by the BSA. Since the petitioner had not even identified “a member who claimed to have a future intention to convert its property….” The dissent asserted the claims were based on “speculation” that a petitioner's member will seek to convert a qualifying hotel and will be denied a waiver.

The dissent also argued that the petitioner did not provide “competent proof,” such as “appraisals or market evaluations,” to show that the “moratorium resulted in an immediate diminution of property values.” The dissent asserted that a broker's affidavit failed to establish an injury in fact since its statements were “conclusory and speculative.” The broker claimed that he lost a potential commission that he could have earned “only if the unspecified owners placed an unspecified hotel on the market,” the potential purchasers had plans to convert more than 20 percent of the sleeping space, the potential purchasers had plans to apply for a permit during the moratorium, and the broker negotiated and closed the deal. The dissent also stated that the “modest expense” of pursuing a waiver did not constitute an “injury in fact.”

The dissent also believed the petitioner failed to allege that it would suffer a specific economic harm arising from the law and therefore it failed to show that it had a “legally cognizable interest” under SEQRA, i.e., the petitioner failed to establish environment harm “distinct from that of the public at large….”

Additionally, the dissent argued that the petitioner's challenges were “plainly as-applied challenges” and such challenges require “an analysis of the facts of a particular case to determine whether the application of the law, even when constitutional on its face, deprived the individual to whom it was applied of a protected right….” Moreover, the dissent asserted that for constitutional challenges to be ripe, there had to be a “final determination that inflicts an actual injury….”

Thus, the dissent would find that until a hotel owner applies for a waiver, the “due process and takings claims are premature….” The dissent also contended that the due process and takings claims require inquiry to the law's specific effects on members' “interests and individualized proof….” Here, the petitioner failed to identify any member who was treated “differently from a similarly situated class, and resolving the merits would require a court to examine the specific ways in which the law treated specific (petitioner) members.” Thus, the dissent would affirm the dismiss of the Article 78 proceeding and the plenary action.

Matter of Real Estate Bd. Of N.Y. v. City of New York, App. Div., 1st Dept., Case Nos. 160081/15, 101798/15, 6109, decided Aug. 23, 2018. Opinion by Moulton, JJ. Renwick, J.P., Mazzarelli, Webber, JJ. concur. Andrias, J. dissents in part.

Landlord-Tenant—Court Found DHCR Better Suited to Resolve Overcharge Rent Regulation Claims

This decision involved a motion by defendants pursuant to CPLR 3211(a)(2) and (7) for an order dismissing the complaint on the grounds that the NYS Div. of Housing and Community Renewal (DHCR) has “primary jurisdiction over the issues related to plaintiffs' rent overcharge claims and that other claims are insufficiently stated in the second amended complaint.”

The court explained that although it had “concurrent jurisdiction with DHCR on issues relating to rent regulation, in light of the fact that the issues raised in this proceeding are particularly suited to resolution by DHCR, which has expertise in these matters, plaintiffs' claims are best addressed by DHCR in the first instance.”

The court reviewed judicial precedent, including an appellate decision which held that the trial court had properly retained jurisdiction over rental overcharges issues, rather than referring such issues to the DHCR, where certain issues remained open. However, given the subject facts, the court reasoned that “[d]eferring the matter to DHCR's discretion would also promote 'a uniformity of ruling which is essential to comply with the purposes of the regulatory statute.'”

Prior judicial decisions have observed that “rent regulation issues are matters routinely within DHCR's area of expertise.” Furthermore, “the doctrine of primary jurisdiction is intended to co-ordinate the relationship between courts and administrative agencies to the end that divergence of opinion between them not render ineffective the statutes with which both are concerned, and to the extent that the matter before the court is within the agency's specialized field, to make available to the court in reaching its judgment the agency's views concerning not only the factual and technical issues involved but also the scope and meaning of the statute administered by the agency.”

The plaintiffs argued that the defendants' jurisdictional argument should have been asserted earlier during the two years while the case was pending, and that they will be prejudiced by the delay. The court noted, however, that the parties were “in the midst of exchanging document discovery and… no depositions have been conducted.”

The plaintiffs' first cause of action allege fraud in the rent regulation process and in defendants' rent registrations. There were no claims for common law fraud. The court explained that DHCR “has jurisdiction over and expertise in the determination of a tenant's rent stabilization status and proper rent registrations and may award damages for fraud committed by a landlord.”

The court further noted that plaintiffs may not pursue a claim pursuant to the General Business law §349 related to alleged violations of the rent regulation laws. The court further held that plaintiffs' claim pursuant to 42 USC §4852d was “insufficiently pleaded.”

Accordingly, the court dismissed the complaint

560-568 Audubon Tenants Ass'n v. 560-568 Audubon Realty, Sup. Ct., N.Y., Index No. 154661/16, decided Sept. 13, 2018, Jaffe, J.

 Scott E. Mollen is a partner at Herrick, Feinstein.