On April 2, 2020, nearly 10 months after the Housing Stability and Tenant Protection Act of 2019 (HSTPA) drastically amended the rent-regulatory laws of New York in favor of tenants, the New York State Court of Appeals has provided property owners in New York with some good news. While the decision is undoubtedly good news for property owners who have rent overcharge cases, this article will address additional case types positively impacted by this decision.

In a landmark 4-3 ruling (Matter of Regina Metro Co. v. New York State Div. of Hous.& Community Renewal, 2020 NY Slip Op 02127), the Court of Appeals ruled that the rent overcharge provisions of HSTPA, which became effective on June 14, 2019, may not be applied retroactively to rent overcharges that occurred prior to the effective date. The court also found that a provision mandating retroactive application of rent overcharge provisions did not comport with the requirements of constitutional due process. The court concluded that the legislature failed to demonstrate a rational basis for its expansion of an owner's liability for conduct that was otherwise permissible prior to the enactment of the statute.

The court in Regina based its ruling that the rent overcharge provisions of HSTPA may not be applied retroactively, in part upon a finding that a retroactive application of the rent overcharge provisions would improperly "create or considerably enlarge owners' financial liability for conduct that occurred, in some cases, many years, or even decades before the HSTPA was enacted and for which the prior statutory scheme conferred on owners clear repose."

While the Court of Appeals only addressed the issue of whether the rent overcharge provisions (Part F) of HSTPA should be applied retroactively, the court's ruling should have consequences extending far beyond the issue of rent overcharges to other provisions of HSTPA, which the New York State Homes and Community Renewal (HCR) and the courts have been applying retroactively.

This article will discuss additional provisions of HSTPA that HCR and the courts have been applying retroactively such as major capital improvement (MCI) rent increases, proceedings governing "IAI rent increases" (i.e., rent increases for individual apartment improvements), luxury deregulation proceedings, and administrative appeals.

MCI Proceedings

HSTPA states that changes to MCI provisions (Part K) took effect on June 14, 2019. HCR has been applying the new HSTPA provisions to MCI applications that were filed prior to the change in the law. This application essentially gave the HSTPA MCI provisions retroactive effect. The amendments to the laws governing MCI rent increases include amendments which:

• Increased the number of months over which the MCI should be amortized, from 84 months to 144 months for buildings containing 35 units or less and from 84 months to 150 months for all other buildings;

• Made an MCI rent increase, which was previously permanent, a temporary 30-year increase;

• Delayed by 60 days the effective date of an MCI rent increase from the first day of the month following the date of the order;

• Eliminated the "temporary retroactive component" of an MCI rent increase;

• Reduced the yearly cap on an MCI rent increase for an apartment from 15% or 6% of the apartment rent to 2%;

• Prohibited MCI rent increases for buildings with outstanding hazardous or immediately hazardous violations of housing maintenance, building and fire codes; and

• Exempted a building having 35% or less rent-regulated units from an MCI rent increase.

Notwithstanding contrary language in the statute, the Court of Appeals specifically invalidated retroactive application of the rent overcharge provisions of HSTPA. As a result, HCR has no legal basis for retroactive application of the MCI provisions that took effect on June 14, 2019. The unjust financial impact of HCR's retroactive application of the MCI provisions under the HSTPA has been far reaching.

A retroactive application of the MCI provisions of HSTPA would unjustly penalize building owners who justifiably relied upon the prior law at the time they performed such improvements. For example, a building owner that chose to perform an MCI at its building prior to the enactment of the HSTPA, had the right to expect that they would be entitled to rent increases in compliance with the law in effect at the time MCI was performed. A retroactive application of the HSTPA especially penalizes an owner of a building having 35% or less rent-regulated units, who expended a substantial sum of money performing an MCI prior to the effective date of the HSTPA. These owner's believed they would be entitled to an MCI increase based upon this improvement. A retroactive application would negate any increase for such improvement, resulting in a financial loss for the owner that was never previously contemplated.

Likewise, a building owner who cured all immediately hazardous violations at the time the application was filed should not be unfairly penalized by a retroactive application of HSTPA. Requiring an owner to cure violations that had not been issued at filing, is an unfair retroactive application of HSTPA.

IAI Increases

HSTPA provides that improvements made in an apartment (Part K) after June 14, 2019 would be governed by new limitations on spending and costs. HCR has publicly stated that work performed and completed under the prior law is subject to the new HSTPA limitations, if the lease commenced after the effective date of the law. The amendments to the laws governing IAI's, include amendments which:

• Provided that an IAI is a 30-year temporary increase;

• Limited the cost of an improvement upon which an IAI increase to $15,000;

• Limited an owner to no more than three separate IAI increases within a 15-year period; and

• Reduced the amount of an allowable IAI increase from 1/40 to 1/168 of the cost of the improvement for an apartment located in a building containing 35 units or less and from 1/60 to 1/180 of the cost of the improvement for an apartment located in a building containing more than 35 units.

In a "clean-up bill" enacted shortly after the enactment of HSTPA, the legislature clarified, that the provision increasing amortization of costs, restricting increases to no more than three increases in a 15-year period, and the $15,000 limit would begin with the first IAI performed after June 14, 2019.

While adjudicating complaints and applications filed after the effective date of HSTPA, HCR has been notifying building owners that it intends to apply the IAI provisions of HSTPA to work performed prior to June 14, 2019. Unlike the portion of the statute relating to rent overcharge provisions, the IAI provisions of HSTPA do not provide for retroactivity. Given the Court of Appeals ruling that a retroactive application of the overcharge provisions is unconstitutional, implicitly there is no legal basis for any retroactive application of HSTPA. HSTPA rules relating to IAI increases should only apply to work performed after the effective date of the statute.

Luxury Deregulation Proceedings

HSTPA (Part D) repealed high rent vacancy and high income-high rent deregulation effective June 14, 2019, so that rent-regulated apartments may no longer be deregulated. Without even addressing the merits of the applications, HCR has been applying the new rules set forth in HSTPA retroactively, summarily dismissing pending luxury deregulation applications, including applications which may have been administratively delayed by HCR.

HCR also sent out a notice that attempts to rescind final orders of deregulation after all administrative and judicial remedies had been exhausted. The notice advises owners and tenants that the apartment would not be deregulated if the rent stabilized lease was still in effect for the apartment. These notices attempt to nullify orders of deregulation. In Gersten v. 56 7th Avenue, 88 A.D.3d 189 (1st Dept.2011) app. withdrawn 18 N.Y.3d 854 (2012), deregulation orders issued prior to a court decision that invalidated deregulation where the building was receiving a tax benefit were upheld where all avenues of review had been exhausted or expired. Not only does the notice violate established precedent but pursuant to Regina, this is also a due process violation and unlawful retroactive application of a statute that was intended to be prospective only.

Administrative Appeals

HCR has been applying HSTPA to pending administrative appeals and ignoring the law in effect at the time the appeal was filed. Pursuant to longstanding HCR policy, when a party files an administrative appeal, HCR would grant or deny the appeal, but would not put the party filing the appeal in a worse position than it was in before the appeal was filed.

It is settled law that when HCR adjudicates an appeal relating to a rent-stabilized apartment, it is not permitted to conduct a de novo review of the underlying proceeding. Rather, it is only permitted to consider arguments raised in the appeal. See Matter of Rizzo v. New York State Div. of Hous. & Community Renewal, 6 N.Y.3d 104 (2005).

HCR has been sending notices advising appellants that appeals filed before the HSTPA was enacted would be processed under the new law (HSTPA). The appellants were notified that application of the HSTPA may result in increased liability. The notices provide the appellant with the option to either withdraw the appeal or risk substantial penalties. While this may be an attempt to clear a backlog of administrative appeals, it is a clear due process violation under Regina. An appellant has the right to expect that the processing of its appeal would not be further penalized based upon a law that was not in effect at the time the underlying proceeding was commenced.

Conclusion

While Regina only dealt with the rent overcharge provisions of the statute, HCR and the courts should immediately cease the retroactive application of any provisions of HSTPA. There is no rational basis for retroactive application of the provisions of the statute, which result in the imposition of unjust penalties on property owners.

Although the Court of Appeals' decision was limited to rent overcharge proceedings, HCR and the courts should reasonably conclude that the Court of Appeals would hold that all other provisions of HSTPA are only be applied prospectively.

David B. Cabrera is a senior partner at Borah Goldstein Altschuler Nahins & Goidel P.C.