Scott E. Mollen

Rent Stabilization—Court of Appeals Held That Real Property Tax Law §421-g Apartments are Not Subject to Luxury Deregulation Provisions of the Rent Stabilization Law

Plaintiffs, tenants of lower Manhattan apartments, sued their landlords (defendants). The defendants had received certain tax benefits pursuant to Real Property Tax Law (RPTL) §421-g, (§421-g) in connection with the conversion of their buildings from office use to residential use. They claimed that defendants failed to treat their apartments as rent stabilized (stabilized), notwithstanding that the defendants received benefits under §421-g. The defendants argued that the apartments are exempt from stabilization pursuant to the luxury deregulation provisions of the Rent Stabilization Law (RSL).

The trial court denied the defendants' motions for summary judgment and granted the plaintiffs' cross-motions declaring that the apartments were subject to stabilization. The Appellate Division reversed and granted the defendants' motions for summary judgment, declaring that the apartments had been properly deregulated and were not subject to stabilization.

The Appellate Division held that the luxury deregulation provisions of the RSL applied to apartments in buildings that received §421-g tax benefits, since §421-g did "not create another exemption" to deregulation. The court noted that apartments in such buildings would "never be rent-stabilized, because their initial monthly rents on virtually all such apartments were set, as here, at or above the deregulation threshold." It further acknowledged that "courts should construe statutes to avoid objectional, unreasonable or absurd consequences," but found that the Legislature had intended for §421-g(6) to "essentially nullify itself…." However, the court granted leave to the Court of Appeals.

The plaintiffs contended that the "plain language of RPTL §421-g(6) makes clear that any provisions of the RSL that would otherwise operate to exempt apartments from rent regulation, apart from those provisions exempting cooperatives and condominiums, do not apply to buildings receiving §421-g tax benefits" and that luxury decontrol is inapplicable to apartments during the time period when §421-g tax benefits are extended. The defendants countered that §421-g "renders the…dwelling units subject to the entire scheme of the RSL, including the luxury deregulation provisions which do not include a carve-out for buildings receiving…421-g benefits."

RPTL §421-g(6) provides in pertinent part that:

[n]otwithstanding the provisions of any local law for the stabilization of rents in multiple dwellings or the emergency tenant protection act of [1974], the rents of each dwelling unit in an eligible multiple dwelling shall be fully subject to control under such local law, unless exempt under such local law from control by reason of the cooperative or condominium status of the dwelling unit, for the entire period for which the eligible multiple dwelling is receiving benefits pursuant to this section.

That subdivision further directs that, after section 421-g benefits terminate,

such rents shall continue to be subject to such control, except that such rents that would not have been subject to such control but for this subdivision, shall be decontrolled if the landlord has included in each lease and renewal thereof for such unit for the tenant in residence at the time of such decontrol a notice in at least twelve point type informing such tenant that the unit shall become subject to such decontrol upon the expiration of benefits pursuant to this section.

The Court of Appeals (court) reviewed the rules of statutory interpretation and noted that when a question is "one of pure statutory reading and analysis, dependent only upon accurate apprehension of legislative intent, we need not and do not refer to an agency in construing a statute…." The court found that the Legislature's intention "as reflected in the language of the statute…, is clear and inescapable." It emphasized statutory language that provided that during the entire period when a multiple dwelling is receiving §421-g benefits, it "shall be fully subject to control" under the RSL, "notwithstanding the provisions of that regime or any other 'local law' that would remove those dwelling units from such control, unless exempt under such local law affirmed control by reason of the cooperative or condominium status of the dwelling unit…." The court emphasized that the statute did not provide that "eligible units shall be fully subject to 'the provisions of' any local law for the stabilization of rent."

The court did not believe that the "notwithstanding clause was intended to import into…§421-g(6) the entire RSL, including those provisions that would remove the units from control," since such reasoning "cannot be squared with the statutory language." The court opined, inter alia, that such construction would "simultaneously render superfluous the entire notwithstanding clause and the exception for cooperatives and condominiums" and that if the Legislature "intended to import the deregulation divisions of the RSL, it easily could have so stated…."

The court reasoned that the defendants' interpretation "fails to give effect to the language in RPTL §421-g(6) that provides a mechanism for landlord to 'decontrol' units that 'would have been subject to such control but for that provision,' after §421-g benefits have terminated." If the defendants were correct, 'there would be no need to provide a mechanism to preserve the ability to implement the control after those benefits terminated." Further, the defendants failed to "reconcile how, under their reading of the statute, some of the statutory exemptions from rent stabilization apply—such as those that exempt buildings renovated after 1974… whereas others, including luxury deregulation, do not." The court also rejected the defendants' reliance on the "luxury deregulation provisions themselves."

The court stated that the "statutory language unambiguously establishes the Legislature's intent in this case, "the legislative history is not to the contrary" and defendants have attempted to "acontextually use legislative history to 'muddy clear statutory language'…."

The court also reasoned that a letter from the mayor, and assurances by government agencies cannot "alter the language of the statute." Thus, the court held that "apartments and buildings receiving tax benefits pursuant to §421-g are not subject to luxury deregulation."

A dissenting opinion also analyzed the statutory language and legislative history of the §421-g and asserted that the "majority retroactively confers (a) heightened form of rent stabilization on buildings receiving…§421-g benefits" and "misinterprets the statutory text, disregarding the broader regulatory scheme and legislative purpose of the relevant statutes…."

The dissent argued that the majority had "glossed" over the context wherein the New York City government had "spearheaded the comprehensive legislation" containing RPTL §421-g, in an effort to address the fact that in the "early 1990's, Lower Manhattan was a depressed area." "Businesses were fleeing at 'an alarming rate' due in part to high taxes, economic development packages offered by neighboring regions, and…[a]ging skyscrapers increasingly stood empty—vacancy was at a post-World War II high, tax assessment values were 'in a downward spiral' and decreasing tax revenues were causing multi-million dollar losses to the City…." New York City had created a "Lower Manhattan Revitalization Plan" (LMRP), which embodied benefits "designed to entice businesses and the real estate industry to re-invest in" downtown, including real property tax abatements for buildings where the use was converted from office to residential.

The dissent further asserted that rent stabilization included "the entire regime in existence at that time, including its luxury decontrol provisions adopted only two years before, when the LMRP legislation was before the Legislature. That measure was adopted in 1995." The dissent asserted that in reliance on §421-g, owners purchased their buildings and applied for §421-g benefits. Prior to investing the owners sought "assurances from the New York City government that the entire rent stabilization regime—including its luxury decontrol provisions—would apply during the entire period that the owner received §421-g benefits." Thus, the dissent asserted that luxury decontrol provisions of the RSL applied to §421-g buildings.

The dissent noted that there was "no language in section 421-g(6) indicating that the Legislature intended to impose only a portion of the rent stabilization scheme—much less that it intended to exclude the critical luxury decontrol provisions in place at that time." The dissent stated that "in light of the Legislature's clear exemption of three other categories of building from luxury decontrol, the decision not to include section 421-g buildings in that list reflects an intent that they be fully subject to the entirety of the rent stabilization regulatory scheme, including its decontrol provisions." The dissent further asserted that the majority "largely ignore[d]" the legislative history of the LMRP and that §421-g helped induce developers to add almost 2,500 rent stabilized units to Lower Manhattan, a neighborhood that was then a "risky neighborhood."

The dissent also argued that the NYC Dept. of Housing Preservation and Development and NYS Div. of Housing and Community Renewal had issued regulations and guidance stating that "high-rent deregulation is available with respect to…§421-g units" and that "high-rent deregulation is available from the inception of the first residential tenancy" so that "property owners need not wait until the vacancy of the first tenant to treat a converted unit as deregulated…." The dissent agreed that agency rules and guidance "are not entitled to deference in this pure statutory interpretation case," but contended that the agency rules and guidance "cannot be dismissed as irrelevant."

The dissent further asserted that when "developers were induced by a legislative benefits package to purchase and convert obsolete, empty office buildings into apartments, in a depressed and empty neighborhood," the defendants consulted government agencies as to whether luxury decontrol was applicable to these apartments as part of their due diligence process and had been "consistently advised" that luxury decontrol applied. Relying on such representations, in addition to "DHCR guidance and legislative history," the defendants purchased and financed their properties. Defendants asserted that absent luxury decontrol, their investments would not have made "economic sense"

The dissent observed, inter alia, that in 1995, there was no "guarantee that renters could be drawn to Lower Manhattan" and the §421-g program succeeded. The dissent further noted that the majority's decision "may unfairly subject these…owners to substantial liability for rent overcharges in direct contravention of the representations that mobilized the real estate industry to transform Lower Manhattan in the first place." The dissent opined that soon, tenants in Lower Manhattan buildings "who agreed to lease luxury apartments at market rates (in this case, at up to $10,000 per month; and in the cases that will inevitably follow, at potentially higher rents) will converge on DHCR in an attempt to collect refunds, based on the majority's conclusion that their apartments should have been rent-stabilized for years."

The dissent argued that the "destabilization of the decades-old…§421-g and PHFL 654-d programs does nothing to further the worthy policies of rent stabilization and is unlikely to result in the inclusion of any additional apartments in the stabilization program. Even worse, the next time government looks to the private sector and asks developers to take risk and finance a revitalization program, potential investors will think twice about relying on a common sense reading of legislation, clear legislative history and the representations of implementing agencies—none of which protected them here from the majority's retroactive reading of statutory text that dramatically changes the terms of the bargain long after the Legislatures' goals have been achieved."

Comment: This case illustrates how knowledgeable administrative agencies and trial court, Appellate Division and Court of Appeals judges may disagree with respect to legislative history and statutory interpretation (See also Roberts v. Tishman Speyer Props., 62 A.D. 71 (2009). It is an important lesson to bear in mind when advising clients.

Kuzmich v. 50 Murray St. Acquisition LLC, Court of Appeals, 2019 NY Slip Op 05057, Case Nos. 50 & 51, decided on June 25, 2019, Opinions by Stein, J. Rivera, Fahey, Garcia, Wilson and Feinman, JJ. concur. Chief Judge DiFiore dissents and votes to affirm in opinions.

Co-ops—Contracts—Buyer Entitled to Cancel Contract for Purchase of Co-op and Return of Down Payment—Co-op's Approval Was Not "Unconditional"

The plaintiff purchaser had entered into a contract with the defendant seller involving a cooperative apartment. The plaintiff paid a down payment. Although the purchaser was described in the contract as the only "proposed occupant," plaintiff's application to the co-op board (board) disclosed that the purchase was for the occupancy of the purchaser's parents.

The board approved the application "upon the specific condition that plaintiff's parents, who will occupy the apartment, will have their names added to the stock and lease." The plaintiff had intended to be the sole owner. She "declined to make her parents co-owners." Since she was "unwilling to satisfy the imposed condition, she demanded the return of her down payment." The seller rejected the demand and declared the purchaser in default when she failed to appear and close on the closing date.

The complaint sought return of the down payment and damages based on claims for specific performance and breach of contract. The seller asserted several affirmative defenses and two counterclaims. The first counterclaim alleged that the purchaser "willfully failed to comply with the co-op's requirements that the intended occupants, who were not parties to the contract be named in the shareholder certificates. "The second counterclaim asserted a fraud claim based on the non-disclosure of the plaintiff's intention to have other occupants in the apartment." The seller moved for summary judgment on the first counterclaim. The purchaser sought summary judgment dismissing the counterclaims and awarding judgment on her claims. The seller sought leave to discontinue the fraud counterclaim.

The purchaser already owned and lived in an apartment in the same building. She asserted that before she signed the contract, she spoke with a member of the co-op board and its chairperson, to ask if she could purchase an apartment in the building for occupancy by her parents and that she had been assured there was no problem. Moreover, the intended occupancy by the parents was not kept from the defendant. An email which conveyed her offer stated that the purchaser would be "buying the unit for her parents" and an email from the seller's husband stated that "we and the board knew her parents were going to be living there."

The purchaser cited contract language which stated that the sale was "subject to the unconditional consent of the cooperative Corporation" and argued that since the board's approval was "merely conditional," the "necessary consent was never given" and the contract could be cancelled. The seller argued that the contract did not list the parents as intended occupants and the co-op board's consent was refused or not given, "due to Purchaser's bad faith conduct."

The court explained:

In the mortgage context, where a mortgage contingency clause creates a condition precedent to the contract of sale, ordinarily, "[t]he purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser's inability to obtain a mortgage commitment within the contingency period"…. "When a condition of a mortgage loan commitment is not fulfilled through no fault of the purchasers, their performance is excused, so long as they acted in good faith"…. By a parity of reasoning, in the context of the sale of a co-op apartment, where, as here, the contract of sale is explicitly made subject to the corporation's unconditional approval, the lack of the required unconditional approval should entitle the purchaser to the return of her down payment, at least where the purchaser acted in good faith.

However, a seller may be entitled to retain the down payment if it is established that the purchaser frustrated the performance of the agreement by affirmatively bringing about the failure of a condition precedent….

The court found that the evidence supported the purchaser's assertion that she had aced in "good faith throughout." The "seller and the board knew that the purchaser intended that her parents would reside in the apartment," and given the "absence of any evidence to the contrary, the lack of any such recitation in the contract fails to justify a finding that plaintiff acted in bad faith, or that she engaged in misrepresentation by omission with the purpose of bringing about the failure of the contract's condition precedent."

The court held that since the sale was subject to the co-op's unconditional consent, the co-op did not give its unconditional consent and there was no evidence that the purchaser acted in bad faith in order to "create the lack of unconditional consent," the purchaser was entitled to cancel the contract and recover her down payment. It also noted that the board's "imposed condition was not an inconsequential technicality; it would have a significant impact, which plaintiff was reasonably entitled to reject."

Paradise v. Wood, Supreme Court, Westchester Co., Case No. 59392/2018, decided July 9, 2019, Ruderman, J.

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