New ApartmentsThis is the final article in a series about developments in rent overcharge litigation that have taken place since 2009, when the Court of Appeals upheld the ruling of the Appellate Division, First Department, in Roberts v. Tishman Speyer Props., L.P., 62 A.D.3d 71 (1st Dep't 2009), aff'd 13 N.Y.3d 270 (2009). Its goal is to offer modest observations about legal policy considerations that ought to be addressed.

This first policy observation comes from the portion of the Court of Appeals' Roberts decision that found that the DHCR had misinterpreted both Real Property Tax Law (RPTL) §498 and RSL §26-504.1. The court noted the DHCR's lack of competence to rule on tax matters, and also that the “DHCR's reading … [of RSL §26-504.1] is contrary to the plain text of the statute.” 13 N.Y.3d at 286-287. The Roberts appeal did not involve rent overcharge claims, but instead presented a certified question about the effect of the J-51 real estate tax abatement program on the RSL's luxury deregulation provision. Thus, Roberts is correctly characterized as a tax law decision which ruled on an RPTL exemption. Court of Appeals precedent holds that, “in construing a tax exemption statute, the well-settled rule is that if ambiguity or uncertainty occurs, all doubt must be resolved against the exemption … [m]oreover, a statute authorizing a tax exemption will be construed against the taxpayer unless the taxpayer identifies a provision of law plainly creating the exemption … [t]hus, the taxpayer's interpretation of the statute must not simply be plausible, it must be the only reasonable construction.” Matter of Charter Dev. Co. v. City of Buffalo, 6 N.Y.3d 578, 582 (2006). The policy consideration favors the State's taxing authorities over individuals who claim exemptions because “an exemption is not a matter of right, but is allowed only as a matter of legislative grace.” Matter of 677 New Loudon v. State of N.Y. Tax Appeals Trib., 19 N.Y.3d 1058, 1060 (2012). Against this contextual backdrop, it is easy to surmise why the Court of Appeals ruled as it did in Roberts: By violating the requirements of the J-51 program, the landlord had received the benefit of a massive real estate tax abatement to which it was not entitled, and thereby became a tax evader.

Normally, a tax cheat's punishment includes reimbursing the government for any tax underpayment, with interest, and additional civil and criminal penalties (as Wesley Snipes, might attest). It is unknown whether the New York City Department of Taxation and Finance ever took such punitive action against the Roberts defendants or any other landlords that misused the J-51 abatement (although it certainly had the authority to do so). Indeed, the State Legislature took the additional step of enacting RSL §26-516 to give tenants a private right of action for treble damages against overcharging landlords, as well. This is clearly punitive statute since it provides for treble damages instead of simple reimbursement, and sets forth a presumption that all rent overcharges are willful acts. Since the Court of Appeals recognized Roberts landlords as tax cheats, then RSL §26-516 is simply another civil penalty to which they are subject. Indeed, the court recognized the statute's punitive nature in Borden v. 400 E. 55th St. Assoc., L.P., 24 N.Y.3d 382, (2014). How, then, to account for the court's additional dicta in Borden that, “[f]or Roberts cases, defendants followed the [DHCR]'s own guidance when deregulating the units, so there is little possibility of a finding of willfulness”? 24 N.Y.3d at 398. This effectively shifted the burden of proving willfulness back to overcharged tenants, in defiance of the statute's plain language, and immunized an entire class of tax cheat landlords from a Legislatively intended penalty. It is submitted that the Court of Appeals was incorrect to do so. Indeed, three years earlier, in Gersten v. 56 7th Ave., 88 A.D.3d 189 (1st Dep't 2011), the First Department had already rejected a Roberts landlord's argument that it had relied, in good faith, on a 1996 DHCR advisory opinion that landlords were free to seek luxury deregulation of apartments in J-51 buildings. The First Department stated that “[a] contrary ruling would essentially allow landlords throughout the City to collect rent in excess of those allowed by the RSL based upon a faulty statutory interpretation.” Last year, the First Department reiterated its rejection of a Roberts landlord's “asserted reliance on a 'pre-Roberts' framework to justify their actions.” Kreisler v. B-U Realty, 164 A.D.3d 1117, 1118 (1st Dep't 2018). It is further submitted that this view harmonizes better with the Legislature's intent – expressed in the RPTL and the RSL – that tax cheating landlords should be penalized, both publicly and privately. To further this policy, it is therefore suggested that the Court of Appeals revisit and reverse the Borden dicta.

The next policy observation is drawn from an Appellate Division, Second Department, historical discourse on the DHCR's mission to create a regulatory regime to give effect to the legislative goals of the RSL and the Emergency Tenant Protection Act of 1974. Bartis v. Harbor Tech, 147 A.D.3d 51 (2016). That mission persists, however 1974 was a long time ago, and the rent regulation regime that the DHCR created then is ill suited to current times. Judge Gische's dissent in Matter of Regina Metro. Co. v. DHCR discussed one design flaw. She pointed out that Roberts deregulations often result in landlords' discarding rent records for apartments that were actually rent-stabilized, and that this lack of records, in turn, precludes the DHCR from accurately determining an apartment's actual “legal regulated rent.” 164 A.D.3d at 420-28. Judge Gische argued that the disparity between inaccurate “base date rents” and accurate “legal regulated rents” should addressed by flexibly applying the RSC's four-year “no lookback” rule; however, the majority rejected this approach. Id. It is suggested that the legislative policy to protect rent-stabilized tenancies is still better served by agency action than by judicial intervention. It is therefore submitted that the DHCR should redesign the RSC's rent registration regime to give it a 21st century update. In 1974, before the computer age (and presumably to avoid a colossal logistical burden on the itself), the DHCR promulgated a regime that allowed landlords to register rent-stabilized apartments on an “honor system,” and often to deregulated them without agency oversight. The DHCR itself only reviewed rental increase and deregulation applications that applied to rent-controlled apartments. Today, the continuation of these practices is indefensible. At a minimum, modern technology permits the DHCR to maintain a database of all types of rent regulated apartment units in New York City, and to use algorithms to control the upward or downward modification of their legal monthly rents. Modern technology could also lessen landlords' burden of filing annual registration paperwork, and replace it with a regime where landlords instead submit omnibus applications for rent increases and/or deregulation. The burden to maintain accurate registration records to resolve such applications would be where the Legislature always intended it to be—on the DHCR. Further, the decade-long increase in private rent overcharge litigation since Roberts demonstrates a widespread lack of trust in the DHCR's current, voluntary compliance rent registration regime. It is therefore submitted that the agency should undertake these changes at the earliest possible opportunity.

The final policy observation concerns the fact that tenants are currently permitted to file answers in Housing Court that raise counterclaims for rent overcharge. CCA §§110, 208; see Matter of Rockaway One Co. v. Wiggins, 35 A.D.3d 36 (2d Dep't 2006); Bldg Mgt. Co. v. Orelli, 59 Misc.3d 148(A) 2018 N.Y. Slip Op. 50811(U) (App Term, 1st Dep't 2018); 72A Realty Assoc. v. Lucas, 32 Misc.3d 47 (App. Term, 1st Dep't 2011). It is submitted that they should not be. Housing Court possesses no equitable jurisdiction, may only adjudicate several types of non-jury special proceedings, and permits no discovery. See, e.g., Tener v. Cremer, 89 A.D.3d 75 (1st Dep't 2011). Special proceedings are a procedural vehicle designed to deliver justice via expedited review. However, as discussed in part one of this article, rent overcharge claims are rarely capable of expedited review since they require a document intensive, two-step fact finding process to resolve. Thus, it would appear that such claims are incompatible with Housing Court practice. As a result, it is submitted that the CCA should be amended to divest the Housing Court's jurisdiction over rent overcharge claims, and/or that the Chief Administrator of the Courts should issue a directive requiring Housing Court to refer all rent overcharge counterclaims to the DHCR, pursuant to the doctrine of primary jurisdiction.

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].

Other articles in this series: