Apartment buildings in New York City. (Photo: Victor J. Blue/Bloomberg)

This article is the third in a series examining developments in rent overcharge litigation over the past 10 years in the Appellate Division, First Department. It reviews the Department's many rulings in Article 78 proceedings that challenged orders of the New York State Division of Housing and Community Renewal (DHCR). The frequency of these rulings indicates that the First Department was often dissatisfied with the DHCR's performance of its duty as the enforcer and arbiter of the Rent Stabilization Code (RSC). Normally, in Article 78 proceedings, “judicial review of an administrative determination is limited to whether such determination was arbitrary or capricious or without a rational basis in the administrative record.” Matter of Partnership 92 LP & Bldg. Mgt. Co., Inc. v. DHCR, 46 A.D.3d 425 (1st Dep't 2007), aff'd 11 N.Y.3d 859 (2008). However, in the context of DHCR rent overcharge rulings, it was noted that “[a] decision of an administrative agency which neither adheres to its own prior precedent nor indicates its reason for reaching a different result on essentially the same facts is arbitrary and capricious” Matter of London Leasing L.P. v. DHCR, 153 A.D.3d 709 (2d Dep't 2017). More importantly, “where the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations.” Matter of Regina Metro. Co. v. DHCR, 164 A.D.3d 420 (1st Dep't 2018). This is significant because it suggests a policy that the courts should only defer to the DHCR on questions of fact finding or the application of rent regulations, but that they need not defer to the agency's interpretation of statutes such as the Rent Stabilization Law (RSL) or the Real Property Tax Law (RPTL). This reasoning policy was followed in Jemrock Realty Co. v. Krugman, 72 A.D.3d 438 (1st Dep't 2010), which applied the Court of Appeals' holding that, when reviewing a rent overcharge claim, a court should resolve issues of proof “based on the persuasive force of the evidence,” and not by applying the DHCR's documentary evidence rules. Further, the First Department recognizes that Supreme Court has concurrent jurisdiction with the DHCR over rent overcharge claims (Downing v. First Lenox Terrace Assoc., 107 A.D.3d 86 (1st Dep't 2013)), but also that it may invoke the doctrine of primary jurisdiction to transfer them directly to the agency (Olsen v. Stellar W. 110, 96 A.D.3d 440 (1st Dep't 2012)). Older precedent appeared to favor this, since the DHCR's mission includes any “questions relating to rent regulation.” Davis v. Waterside Hous. Co., 274 A.D.2d 318 (1st Dep't 2000). However, recent decisions deemed it proper for Supreme Court to retain jurisdiction over class action overcharge suits (Maddicks v. Big City Props., 163 A.D.3d 501 (1st Dep't 2018); Roberts v. Ocean Prime, 148 A.D.3d 525 (1st Dep't 2017); Gerard v. Clermont York Assoc., 143 A.D.3d 478 (1st Dep't 2016)), and claims alleging fraud (Kreisler v. B-U Realty, 164 A.D.3d 1117 (1st Dep't 2018)).

Many First Department decisions discussed the proper methodologies for the DHCR to use when calculating an apartment's “base date,” “base date rent” and/or “legal regulated rent.” Both RSC §2526.1 and RSL §26-516 define a rent overcharge as the difference between the base date rent that the tenant actually paid, and the legal regulated rent that the tenant should have paid. Both statutes include a rebuttable presumption that all overcharges are willful acts which entitle tenants to treble damages. The statutes also place a four-year limitations period on overcharge claims, although the RSC only allows tenants to receive treble damages for two of those years, while the RSL allows four.

Regarding “base dates,” Gersten v. 56 7th Ave., 88 A.D.3d 189 (1st Dep't 2013) held that they fall on the day four years before the filing of the overcharge complaint. Gordon v. 305 Riverside Corp., 93 A.D.3d 590 (1st Dep't 2012) clarified that the filing date, and not the date of service, controls.

Regarding “base date rent,” Matter of Regina Metro. Co. reaffirmed the general rule that, absent evidence of fraud, the amount is determined by simple reference to the rent listed on the DHCR apartment registration statement that was in effect on the base date. Matter of 333 E. 49th Partnership, LP v. DHCR, 165 A.D.3d 93 (1st Dep't 2018) noted that the RSC defines an apartment's “legally regulated rent” as “the rent charged on the base date, plus … any subsequent lawful increases and adjustments.” Those will be discussed later.

The previous article discussed cases in which the First Department found “evidence of fraud.” This article notes that, in such cases, the First Department allows calculation of an apartment's base date rent by the RSC's “default formula” (RSC §2522.6(b)(3)(i)). Altschuler v. Jobman, 135 A.D.3d 439 (1st Dep't 2016); Matter of 215 W 88th St. Holdings v. DHCR, 143 A.D.3d 652 (1st Dep't 2016); Kreisler v. B-U Realty, supra.; Meyer v. 224 Lafayette St., 165 A.D.3d 598 (1st Dep't 2018). That formula sets the base date rent at “the lowest rent registered . . . for a comparable apartment in the building in effect on the date the complaining tenant first occupied the apartment.” The First Department also allows use of the default formula where a landlord fails to file a DHCR registration statement, to provide its own apartment rent records, or to give a valid excuse. Matter of Bondam Realty Assoc., L.P. v. DHCR, 71 A.D.3d 477 (1st Dep't 2010).

Where a landlord fails to file a DHCR registration or to keep an apartment's rent records in reliance on the erroneous 1996 DHCR opinion allowing the deregulation of rent-stabilized units in J-51 buildings, the First Department allows the “sampling method” (RSC §2522.6(b)(3)(iv)) to set the apartment's base date rent. Matter of 160 E. 84th St. Assoc. v. DHCR, 160 A.D.3d 474 (1st Dep't 2018). This method fixes an apartment's base date rent from “an amount based on data compiled by the DHCR, using sampling methods determined by the DHCR, for regulated housing accommodations.” In other words, it is a DHCR proprietary formula not easily applied in court.

RSC §2522.6(b)(3)(iii) sets an apartment's base date rent figure by reducing it to the last registered amount paid by the apartment's prior tenant (if it was occupied during the four-year overcharge period). Matter of London Terrace Gardens L.P. v. DHCR, 149 A.D.3d 521 (1st Dep't 2017) allowed an apartment's base date rent to be set via this method, but did not promulgate a rule for using it. No First Department decisions have yet mentioned the fourth method for calculating base date rent that is contained in RSC §2522.6.

Regarding the “lawful increases and adjustments” to an apartment's base date rent, the RSC permits: (1) the percentage increases to rent-stabilized renewal leases that the Rent Guidelines Board periodically promulgates (“RGBO increases”—RSC §2522.5(b)); (2) a 20% “vacancy increase” (RSC §2522.8(a); (3) a .6% “longevity increase” (id.) ; (4) a permanent increase of 1/40th of the total cost of any Individual Apartment Improvement (IAI) work in a unit (RSC §2522.4(a)(1)); and (5) a permanent increase of 1/60th of the total cost of any Major Capital Improvement (MCI) work on the building (RSC §2522.4(a)(2)). RSC §2528.3 also requires landlords to file annual DHCR apartment registrations, and RSC §2528.4 bars those who don't file “proper and timely statements” from “collecting any rent in excess of the base date rent, plus any lawful adjustments allowable” until they comply. Matter of 215 W 88th St. Holdings v. DHCR, supra, held that the bar includes RGBO increases. The First Department consistently holds that late registration statements containing false information are not “proper,” under RSC §2528.4, but are instead “legal nullities” which justify the statutory rent freeze. Jazilek v. Abart Holdings, 72 A.D.3d 529 (1st Dep't 2010); Bradbury v. 342 W. 30th St., 84 A.D.3d 681 (1st Dep't 2011); Nolte v. Bridgestone, 167 A.D.3d 498 (1st Dep't 2018); Matter of Enriquez v. DHCR, 166 A.D.3d 404 (1st Dep't 2018).

RSC §2522.4(a) permits landlords to take vacancy and longevity increases without prior DHCR approval. The First Department holds that these must be included as “lawful increases and adjustments” to an apartment's base date rent when calculating its legal regulated rent. Jazilek v. Abart Holdings, supra; 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); Matter of 233 E. 5th St. v. Smith, 162 A.D.3d 600 (1st Dep't 2018). The First Department also requires standing DHCR rent reduction orders to be included. Scott v. Rockaway Pratt, 17 N.Y.3d 739 (1st Dep't 2011); Matter of Nelson v. DHCR, 95 A.D.3d 733 (1st Dep't 2012); Matter of Sun v. Lawlor, 96 A.D.3d 685 (1st Dep't 2012).

RSC §2522.4 requires landlords to apply for IAI and MCI increases, and to submit documented proofs of their work and payment. The First Department holds that a landlord's failure to do so justifies the imposition of the RSC's rent freeze. Altschuler v. Jobman, supra; Bradbury v. 342 W. 30th St., supra.

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].