This article is the second in a series examining developments in rent overcharge litigation over the past 10 years in the Appellate Division, First Department. It is in three parts because the First Department has issued more decisions on this topic than any other appeals court. It was observed that the First Department's rulings since 2009 have reviewed: (1) Roberts overcharge claims; (2) Grimm overcharge claims; (3) “regulatory status” claims; (4) Article 78 petitions; and (5) other miscellaneous legal issues. This article discusses decisions from the second and third categories.

'Grimm'-Based Rent Overcharge Claims

A “Grimm-based claim” is an allegation of an overcharge caused by a landlord's fraudulent deregulation of an apartment to impose an excessively high rent. Matter of Grimm v. DHCR, 15 N.Y.3d 358 (2010) involved a landlord's “illusory prime tenancy” scheme. It was followed by Conason v. Megan Holding, 25 N.Y.3d 1 (2015), wherein the Court of Appeals held that it is appropriate to examine an apartment's rental history from before the four-year statute of limitations that governs rent overcharge claims to determine whether the apartment's “base date rent” is also the apartment's “lawful regulated rent” whenever a tenant has “alleged substantial evidence pointing to the setting of an illegal rent in connection with a stratagem devised … to remove tenants 'apartment from the protections of rent stabilization.” This holding encompasses many types of fraudulent deregulation schemes. Many of the First Department's post-Roberts opinions on Grimm-based overcharge claims are simply terse rulings that there was, or was not, sufficient evidence of “a fraudulent deregulation scheme” to justify a “lookback.” Some decisions provided more detailed appellate guidance, however.

Matter of 215 W 88th St. Holdings v. DHCR, 143 A.D.3d 652 (1st Dep't 2016) held that “the inclusion of a fraudulent nonprimary residence rider in the tenants' initial lease rendered it a legal nullity.” This holding implicitly broadened Grimm's definition of “fraudulent schemes to deregulate” to encompass a landlord's use of such “fraudulent nonprimary residence riders.”

Butterworth v. 281 St. Nicholas Partners, 160 A.D.3d 434 (1st Dep't 2018) stated that the combination of: (1) an unexplained large rent increase; (2) a landlord's simultaneous cessation of filing annual DHCR registration statements; and (3) the inclusion of an unclear “deregulation rider” in the tenant's first lease; constituted evidence of “sufficient indicia of fraud” to justify a “lookback.”

Matter of 333 E. 49th Partnership, LP v. DHCR, 165 A.D.3d 93 (1st Dep't 2018) involved a Manocherian tenancy wherein the landlord leased 23 rent-stabilized apartments to a corporate entity, which then illegally sublet all of those apartments at inflated rents in an “illusory prime tenancy” scheme. The First Department held that it was unnecessary to demonstrate collusion between the landlord and the corporate tenant because: (1) it was clear that the prime tenant could not simultaneously occupy 23 apartments; and (2) the building's staff were aware of the sublessors' presence.

Matter of Regina Metro. Co. v. DHCR, 164 A.D.3d 420 (1st Dep't 2018) held that a Roberts-based overcharge allegation (i.e., one that arose from the landlord's improper deregulation of an apartment in a building enrolled in the “J-51 real estate tax abatement program”) does not constitute evidence of “a fraudulent scheme to evade the Rent Stabilization Law,” since such overcharges are inadvertent, rather than fraudulent.

Recent First Department decisions with cursory findings that there was enough evidence of fraud to justify a Grimm “lookback” included: Kreisler v. B-U Realty, 164 A.D.3d 1117 (1st Dep't 2018); Meyer v. 224 Lafayette St., 165 A.D.3d 598 (1st Dep't 2018); and Nolte v. Bridgestone Associates, 167 A.D.3d 498 (1st Dep't 2018). Recent decisions with the opposite finding included: Matter of 160 E. 84th St. Assoc. LLC v. DHCR, 160 A.D.3d 474 (1st Dep't 2018); Matter of Lowinger v. DHCR, 161 A.D.3d 550 (1st Dep't 2018); Matter of Trainer v. DHCR, 162 A.D.3d 461 (1st Dep't 2018); Raden v. W 7879, 164 A.D.3d 440 (1st Dep't 2018); and Arnold v. 4-6 Bleecker St. LLC, 165 A.D.3d 493 (1st Dep't 2018).

Regulatory Status Claims

A “regulatory status claim” is not a rent overcharge allegation, but rather a request for a determination whether an apartment is rent regulated (or not). Such claims were addressed in the First Department's pre-Roberts decisions in East W. Renovating Co. v. DHCR, 16 A.D.3d 166 (1st Dep't 2005) and Matter of H.O. Realty v. DHCR, 46 A.D.3d 103 (1st Dep't 2007), which held that the four-year period statute of limitations in Rent Stabilization Law (RSL) §26-516(a)(2) may be disregarded “if done not for the purpose of calculating an overcharge but rather to determine whether an apartment is regulated.” In Gersten v. 56 7th Ave., 88 A.D.3d 189 (1st Dep't 2011), the First Department further observed that “pursuant to [the] RSL, the rent regulated status of an apartment is a continuous circumstance that remains until different facts or events occur that change the status of the apartment,” and held both that “a tenant should be able to challenge the deregulated status of an apartment at any time during the tenancy, and that “landlords must prove the change in an apartment's status from rent stabilized to unregulated even beyond the four-year statute of limitations for rent overcharge claims.” The First Department recently reaffirmed the Gersten holding. See Rosa v. Koscal 59, 162 A.D.3d 466 (1st Dep't 2018).

Miscellaneous Cases

Among the First Department's miscellaneous rent overcharge decisions are several concerning apartments governed by the Rent Control Law (RCL). In Extell Belnord v. Uppman, 113 A.D.3d 1 (1st Dep't 2013)) which involved a regulatory status claim, the court found that a DHCR approved private agreement between the landlord and the prior tenant which purported to remove an apartment from rent control and subject it to rent stabilization, was void against public policy. Matter of RAM I v. DHCR, 123 A.D.3d 102 (1st Dep't 2014) held that a rent controlled apartment “becomes rent stabilized” while its building is enrolled in the J-51 program, and resumes its original status when a building exits the program. However, the court also held that rent-controlled apartments remain exempt from luxury deregulation, since the RCL contains no luxury deregulation provision. Matter of Park v. DHCR, 150 A.D.3d 105 (1st Dep't 2017) involved a rent-controlled apartment which the court deemed to have become rent-stabilized when its rent-controlled tenant died (see RCL §26-403[e][2][i][9]). The apartment retained that status while its building was enrolled in the J-51 program, during which time the landlord applied for luxury deregulation. The First Department upheld the deregulation, because the RCL requires the first rent-stabilized tenant of a formerly rent-controlled unit to file a timely Fair Market Rent Appeal (FMRA) to challenge the apartment's new first rent, and the tenant in Park had failed to do so.

The First Department also issued several decisions involving “Manocherian tenancies;” i.e., those in which a corporate entity is the tenant of record of a rent-stabilized apartment. See Manocherian v. Lenox Hill Hosp., 229 A.D.2d 197 (1st Dep't 1997). Matter of 333 E. 49th Partnership, LP v. DHCR, 165 A.D.3d 93 (1st Dep't 2018) reaffirmed that the RSL allows certain not-for-profit entities to lease multiple rent-stabilized apartments and sublet them to its “affiliated personnel” (i.e., employees) without requiring the landlord's consent. Fox v. 12 E. 88th LLC, 160 A.D.3d 401 (1st Dep't 2018) reaffirmed that “a corporation is entitled to a renewal lease where the lease specifies a particular individual (i.e., employee) as the occupant and no perpetual tenancy is possible.” When the tenant in Fox requested a renewal lease in his own name, the First Department treated the situation as a “deregulation event” by the corporation which removed the apartment from rent stabilization.

The First Department also rendered several decisions that ruled on the doctrine of collateral estoppel in the context of rent overcharge claims. Gersten v. 56 7th Ave. LLC, 88 A.D.3d at 189 and Matter of Sun v. Lawlor, 96 A.D.3d 685 (1st Dep't 2012) both invoked the doctrine to give preclusive effect to DHCR determinations on the ground that challenges to those were governed (and barred) by the “rule of administrative finality,” instead of the statute of limitations. Extell Belnord v. Uppman, 113 A.D.3d at 1 declined to apply the doctrine of collateral estoppel where doing so would result in enforcing an agreement that was void against public policy. Finally, in Arnold v. 4-6 Bleecker St., 165 A.D.3d 493 (1st Dep't 2018), the First Department found that a successor landlord was collaterally estopped from challenging a DHCR order that had found the prior landlord liable for rent overcharges.

Francis J. Lane III is a staff attorney in the Law Department of New York County Supreme Court, Civil Branch. He can be reached at [email protected].