Scott E. Mollen

Landlord-Tenant—Rent Stabilization Law—NY Court of Appeals Held Overcharge Calculation and Treble Damages Provisions of the Housing Stability and Tenant Protection Act of 2019 May Not Be Applied Retroactively—Claims Must Be Resolved Pursuant to Law in Effect When Alleged Overcharges Occurred

This NY Court of Appeals decision presents "a common issue under the Rent Stabilization Law (RSL): what is the proper method for calculating the recoverable rent overcharge for New York City apartments that were improperly removed from rent stabilization during receipt of J-51 benefits prior to (the NY Court of Appeals decision) in "Roberts v. Tishman Spyer Props., L.P." (Roberts).

When leave to appeal to the Court of Appeals was granted in these cases, the RSL required that "absent, fraud, an overcharge was to be calculated by using the rent charged on the date four years prior to filing of the overcharge complaint (the 'lookback') as the 'base date rent,' adding any legal increases applicable during the four-year lookback…and computing the difference between that legal regulated rent and the rent actually charged to determine if the tenant was overcharged during the recovery period." In those cases, "consideration of rental history predating the four-year lookback and statute of limitations (SOL) period was prohibited."

During the pendency of the appeals, the Legislature enacted the Housing Stability and Tenant Protection Act of 2019 (HSTPA). This decision focused on Part F of the HSTPA which includes amendments that, inter alia, "extend the (SOL), alter the method for determining legal regulated rent for overcharge purposes and substantially expand the nature and scope of owner liability in rent overcharge cases…."

The subject tenants asserted that "the new overcharge calculation provisions" are applicable to these appeals that were "pending at the time of the HSTPA's enactment…." Some of the overcharge claims go back "more than a decade before the new legislation…."

The validity of Part F was not an issue. However, "significant issues" were raised concerning "whether that presumption against retroactive application of statutes has been rebutted and, if so, whether application of certain amendments relating to overcharge calculation in Part F…involving conduct that occurred years prior to its enactment comports with fundamental notions of substantial justice embodied in the Due Process Clause." The court noted that "[r]etroactive application of the overcharge…amendments would 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 statutes "conferred on owners' clear repose."

Since "application of these amendments to past conduct would not comport with our retroactivity jurisprudence or the requirements of due process," the court held that the subject claims must be resolved "pursuant to the law in effect when the purported overcharges occurred."

The court resolved the issues based "entirely on conventional and time-honored principles of judicial review." The court acknowledged its obligation to "defer to the Legislature in matters of policy making," but noted that the judicial branch has the responsibility to "interpret and safeguard constitutional rights and review challenged acts of our co-equal branches of government"—not to "make policy" but "to assure the protection of constitutional rights…." This decision did not address the "vast majority" of the HSTPA or its "prospective application."

These rent overcharge cases "arose in the wake of (the Roberts decision) interpreting RSL provisions relating to [NYC's] J-51 program…." Buildings that receive J-51 benefits became subject to rent stabilization. From 1993 until enactment of the HSTPA, the RSL "luxury deregulation" provisions permitted owners of stabilized units to deregulate if the rent exceeded a statutory threshold and the tenant vacated or the tenant's "combined income exceeds a statutory threshold." Roberts rejected DHCR's "longstanding statutory interpretation" that the statutory language barring deregulation of apartments during receipt of J-51 benefits was inapplicable to buildings that had already been subject to the (RSL) prior to receipt of those benefits.

The subject apartments had been treated as "deregulated consistent with then-prevailing DHCR regulations …" before "the court rejected that guidance in Roberts." The tenants took occupancy prior to Roberts and believed that they were renting non-stabilized apartments at market rents. "None of these tenants had promptly challenged the deregulated status of their apartments and years and in some cases, over a decade had elapsed during which the "tenants and their landlords renewed and renegotiated free-market leases…." After Roberts, those tenants commenced overcharge claims.

Prior to enactment of the HSTPA, overcharge claims were subject to a four-year SOL. The Rent Regulation Reform Act of 1997 (1997 RRRA) "precluded examination of the rental history…prior to the four-year period preceding commencement of the overcharge action…." The 1997 RRRA also embodied a "record retention provision directing that certain owners shall not be required to maintain or produce any records relating to rentals…for more than four years prior to the most recent registration or annual statement of such accommodation…." Thus, that statute "permitted owners to dispose of records outside of the four-year period…."

Since owners were not required to file registration statements with DHCR once an apartment was deregulated, where apartments were deregulated more than four years prior to the filing of an overcharge complaint and tenants "failed to promptly challenge the deregulated status of the apartment, there might be no rent registration on file for the base date, or any time within the four-year lookback period." Under the pre-HSTPA law, "the base date rent was…the rent actually charged on the base date-i.e., four years prior to the overcharge complaint—even if no registration statement had been filed reflecting that rent."

The court had "recognized a limited common-law exception to the otherwise-categorical evidentiary bar, permitting tenants to use such evidence only to prove that the owner engaged in a fraudulent scheme to deregulate the apartment." "[U]nder prior law, a review of rental history outside the four-year lookback period was permitted only in the limited category of cases where the tenant produced evidence of a fraudulent scheme to deregulate and, even then, solely to ascertain whether fraud occurred – not to furnish evidence for calculation of the base date rent or permit recovery for years of overcharges barred by the (SOL)…." Following Roberts, "there was understandable confusion regarding how the decision should be implemented, including whether Roberts should be given retroactive effect and if so, how that should be accomplished."

The court stated inter alia, that the "reconstruction method, applied by DHCR (in one subject case,) violated the pre-HSTPA law by requiring review of rental history outside the four-year limitations and lookback period in the absence of fraud."

The court had authorized consideration of rental history "outside the lookback period only for the 'limited purpose' of determining whether a fraudulent scheme existed…." The court reasoned that use of the "default formula or other alternative approaches to determining base date rent would comply with pre-HSTPA law if applied to these cases, [since] nothing in the RSL indicates that such methods apply here." The court noted that "[w]hile alternative methods proposed by the tenants are reflected in the regulations, they are available only where the rent charged on the base date cannot be established…a situation not present in any of these Roberts cases…." The court asserted that there was "no indication that, under the pre-HSTPA law, an overcharge resulting from the improper (but non-fraudulent) luxury deregulation warranted anything but the application of the standard lookback provisions."

The court declined to "recognize an additional common law exception that would create or increase the amount of overcharge damages in order to give proper effect to Roberts." The court explained that "civil liability is always bounded by the public policy of repose and embodied in [SOLs] …" and "[o]vercharge liability under the RSL is no different. That Roberts revealed particular conduct to be illegal does not mean that tenant must be able to recover a certain measure of monetary damages for…rent increases despite their failure to seek recovery within the limitations and lookback periods." The court noted that as a result of Roberts, "they may now enjoy rent stabilization protection." Thus, the court clarified that, "under pre-HSTPA law, the four-year lookback rule and standard method of calculating legal regulated rent governed in Roberts overcharge cases, absent fraud."

In one subject case, the court held that the Appellate Division "properly annulled DHCR's overcharge determination, which violated the lookback rule by relying on a reconstructed rent, despite finding that the overcharge was not willful (and there was no colorable fraud claim)." In a second case, the Court held that "the de minimis overcharge was properly calculated." The court held that a third case had been properly dismissed based on the tenant's failure to allege a colorable claim of fraud and absence of allegations indicating that, applying the standard overcharge calculation method, there was an overcharge during the recovery period. In a fourth case, the court modified an Appellate Division order in order to "grant summary judgment dismissing the overcharge claim based on the owner's unrebutted evidence that there were no overcharges using the standard calculation method." The court held that the "overcharge calculation amendments cannot be applied retroactively to overcharges that occurred prior to their enactment."

Part F "extended the four-year (SOL) for overcharge claims to six years" and "entirely abolished the lookback rule in favor of new requirements," the "base date rent is no longer defined as the rent charged or reflected in the registration statement on the base date but that reflected in the 'most recent reliable' registration statement filed six 'or more' years before the most recent registration…." "Examination of rent history that predates the period covered by the former lookback rule is no longer precluded" and courts "are now required to 'consider all available rent history which is reasonably necessary' to investigate overcharge claims and determine legal regulated rent, regardless of the vintage of that history and including reports kept by owners, tenants and agencies…." Additionally, an owner's "election not to maintain records" does "not limit the authority of DHCR or a court to examine the rental history further…." Although the RSL previously provided for only two years of treble damages for willful overcharges, "treble damages are now recoverable for the entire six-year limitations period…."

The tenants contended that the new limits should be applied to their appeals since the HSTPA provides that Part F "shall take effect immediately and shall apply to any claims pending or filed on and after such date…." The owners argued that the effective date language "does not evince a clear legislative intent to apply the new overcharge calculation provisions retroactively,…and further contend…that retroactive application of the new overcharge calculation methodology to these appeals will violate due process protections in the State and Federal Constitutions."

The court stated that "if applied to past conduct, the amendments to the (SOL), overcharge calculation and damages provisions in Part F of the HSTPA would impose new liability and thus have a 'retroactive effect'- altering substantive rights in multiple ways." By expanding the (SOL) from four to six years, tenants could recover for a "nonfraudulent conduct occurring during an additional two years preceding the former recovery period—conduct that was beyond challenge under the prior law." The "imposition of treble damages for four additional years of overcharges –…– clearly increases the scope of liability for past wrongs if applied retroactively…."

Part F now "renders reviewable rent increases that were shielded by the prior lookback rule, permitting the reconstruction of the legal regulated event based on any relevant records in the apartment's entire rental history." Although tenants may directly recover "only for overcharges occurring during the six years preceding the complaint, the damages calculations for those years may now effectively incorporate conduct—illegal increases—preceding that period and occurring at any point in the rental history."

The court reasoned that the amendment "is not merely,…a procedural change regarding what evidence could be considered …, it expands the scope of owner liability significantly based on conduct that was inoculated by the old law…." The court reasoned that the retroactive impact is even more significant "when considered…with the HSTPA amendments to the record retention requirements." The HSTPA "provides that an owner can be penalized indirectly for a disposal of records that was legal under the prior law but will now hinder the owner's ability to establish the legality of (and non-willfulness of any illegal) rent increases outside the lookback period, – which under the new legislation – impact recovery even in the absence of fraud."

The court found that Part F impairs "rights owners possessed in the past, increasing their liability for past conduct and imposing new duties with respect to transactions already completed." The court acknowledged that "no party doing business in a regulated environment like the New York City rental market can expect the RSL to remain static." However, the court held that applying the amendments to past conduct "is not related to legislative decisions about proper division of economic burdens going forward, and does not simply upset expectations about the continuing future availability of a favorable regulatory mechanism." Rather, "retroactive application of the provisions would undermine considerable reliance interests concerning income owners already derived from rents collected on real property years—if not decades—before."

Retroactive legislation is viewed with "great suspicion," based on "considerations of fairness that dictate that an individual should have an opportunity to know what the law is and to conform their conduct accordingly…." The U.S. Supreme Court warned that "careful consideration of retroactive statutes is warranted because 'the Legislature's unmatched powers allow it to sweep away subtle expectations suddenly and without individualized consideration' and 'its responsivity to political pressures poses a risk that it may be tempted to use retroactive legislation as a means of retribution against unpopular groups or individuals….'" Therefore, "'it takes a clear expression of the legislative purpose…to justify a retroactive application' of a statute…."

The court found that the "claims pending" language in Part F's "effective date provision is insufficient to indicate the Legislature intended retroactive application in a manner that revives time-barred claims" and that the Part F "claims pending" language was "sufficiently clear to evince legislative intent to apply the amendments to at least some timely overcharge claims that were commenced prior to enactment." The court stated that the Legislature had "evinced…clear intent to apply Part F to timely pending claims, …, where the overcharge calculation issue was unresolved at the time the HSTPA was enacted."

The court noted that "in order to comport with due process,…retroactive legislation must be supported by a rational basis…." Retroactive statutes are constitutional when they employ "brief, defined periods that function…to assist in effectuating the legislation, and statutory retroactivity that—even if more substantial—is integral to the fundamental aim of the legislation." However, "even short periods of retroactivity will be invalidated absent the requisite rational basis."

The court opined that expanding a tenant's "total overcharge recovery well beyond what was provided under the prior law" would "severely impact substantive rights." The retroactivity period is not "brief." "[T]he retroactive period be bounded only by the length of the apartment's rental history. Such a vast period of retroactivity upends owners' expectations of repose relating to conduct that may have occurred many years prior to the recovery period." "[O]wners may be held liable…for purported historical overcharges that were once supported by documentation." With respect to treble damages, owners may be "unable to meet their burden to prove a negative-lack of past willfulness" and the HSTPA makes "treble damages mandatory for all six years of the new recovery period, rather than for three years preceding the filing of the complaint."

Moreover, there are "limits on retroactive imposition of liability even when it is related to a rational goal," and "retroactivity concerns are further heightened where, here, the new statutory provisions 'affect contractual or property rights, matters in which predictability and stability are of prior importance….'"

The court acknowledged that the owners knew that their rights and obligations were subject to the requirements of the RSL, but when "the parties' freedom of contract" is curtailed in a "significant degree when the governing law (essentially incorporated in the annual leases) is altered retroactively years later, long after the expired contracts had been performed, the impact on contract rights is unusually significant." The court believed that if Part F was applied retroactively, it would impair "real property rights by diminishing or possibly eliminating the constitutionally protected return on investment owners realized in the past" and have "a 'destabilizing effect' that is especially severe." In one case, under the former law, an owner would have to pay overcharge damages of $10,271.40, while the new approach the damages would be $285,290.39. The court found no indication that the Legislature "considered the harsh and destabilizing effect on the owners' settled expectations, much less had a rational justification for that result."

The court acknowledged that "prospective application of Part F" could address the legislative concerns as to the need "to prevent speculative, unwarranted and abnormal increases in rents; the acute shortage of housing accommodations caused by high demand and decreased supplies; and the need with respect to those being charged market rents, to avoid profiteering and other disruptive practices…." However, the court stated that "retroactive application to cases pending in the appellate pipeline" does not serve such legislative purpose and the HSTPA could not "deter conduct that has already occurred…."

The court noted that retroactive application Part F will not "return apartments to rent stabilization or ensure propriety of rents collected in the future." Rather, it "will merely punish owners more severely for past conduct that they cannot change"—an objective the court has "deemed illegitimate as a justification for retroactivity…."

The court did not believe that the Part F amendments addressed overcharges arising from deregulations later revealed to be by Roberts and addressed post-Roberts judicial confusion regarding how to calculate such overcharges. Such assertion was "unsupported by the text of the statute or its legislative history, which makes no reference to Roberts" and the amendments "apply to all overcharge claims – not merely those flowing from an improper deregulation, much less a Roberts deregulation."

Furthermore, retroactive application of Part F would "impose treble damages for past conduct and that is impermissible." "A rational justification" in a retroactivity context, "is one commensurate with the degree of disruption to settled substantial rights and, in this instance, that standard has not been met." The court held that the "overcharge calculation and treble damages provisions in Part F may not be applied retroactively, and these appeals must be resolved under the law in effect at the time the overcharges occurred."

Additionally, the court stated that "[i]n an attempt to delegitimatize our analysis by association, our three dissenting colleagues raise a ghost of Lochner v New York (198 U.S. 45(1905)), an outdated and long-discredited Supreme Court precedent that has nothing to do with retroactivity…." The court agreed that "legislative judgments are presumptively constitutional and are subject to a rational basis analysis in which policy preferences of judges have no role." The court suggested that the dissent "never seriously engages with this issue (retroactivity) or the substantial body of precedent governing it." Lochner, "under the guise of due process analysis," involved a Supreme Court decision to strike "down economic legislation if viewed as unwise from a public policy stand point…."

The court concluded that by holding the Part F provisions may not be applied retroactively, it was doing "nothing more" than exercising our "system of checks and balances," i.e. the court was safeguarding "the rights afforded under our state [and federal constitutions]."

A dissenting opinion asserted that "for the first time in its history, our Court has struck down, as violative of substantive due process, a remedial statute duly enacted by the Legislature…." The dissent reasoned, inter alia, that "the prior Rent Control law offered no clear repose; rather, it produced different judicial and administrative interpretations about how to calculate rent overcharge awards for past conduct. The Legislature…resolved that question, as is its right. Moreover, even had the prior statute granted 'clear repose', the Legislature remains free to alter damage awards for unlawful rents obtained by unlawful past conduct" and '"claim-revival' jurisprudence…establishes the Legislature's right to do so." The dissent believed that the majority resurrected and discredited Lochner decision and, inter alia, stated that by "[a]nswering a question not raised below, the Court decides where the legal analysis not argued by the parties, applied to imagined factual circumstances on a nonexistent factual record." The dissent asserted that the majority had wielded "substantive due process as a sword to strike down the remedial economic legislation" and thereby "vitiates the political choices of New York's Legislature."

The dissent observed that since N.Y. Court Appeals is an unelected body, nominated by the Governor, confirmed by the Senate and not subject to a popular vote it lacks power to legislate. Additionally, landlords have "numerous other reasons to retain records including IRS audits (7 years); proof of depreciation of various assets (up to 40 years for residential and real property); corporate record retention policies and the like." The dissent argued that "[t]he majority's mere speculation that landlords may have destroyed records in reliance of the previous rent laws is…insufficient to establish the existence of the fundamental right in those provisions" and "no landlord here has claimed that it had failed to preserve old records, much less that it did so in reliance on this statutory provision."

The dissent also noted that punitive damages may serve as a deterrent. Since the relevant plaintiffs are "not entitled to (punitive damages) as a matter of law …, deciding the constitutionality of that provision is not necessary to deny their claims." "Whether the retroactive application of treble damages rose to such a level as to be punitive rather than redistributive might pose a constitutional problem under the Ex Post Facto Clause. Such a determination,…would need to await the award of treble damages in a particular case." Therefore, "retroactive application of these damages may pose a constitutional issue that lower courts can evaluate if relevant to some case at bar."

The dissent asserted that the "greatest irony" is a comparison of the majority's opinion "with our Court's treatment of the RRRA, which…altered the rent regulation laws in a way that substantially favored landlords." The dissent cited other statutes that affected landlords' rights, and where the courts deferred to the Legislature.

The dissent opined that the majority "has applied a different framework to HSTPA than to every other economic and regulatory statute and abandoned procedural rules along the way. The proud Court that recognized the Legislature's right to address the crises caused by tenement-based labor is here unrecognizable, as we deny the Legislature the right to determine how best to address New York City's housing crisis." Finally, the dissent stated that it "may not have arrived at the plan devised by the Legislature in the HSTPA. But that is not (the dissent's) job. Our Frankensteinian role in resurrecting Lochner by assembling ill-fitting fragments of moribund doctrines frightens (the dissent), because it portends ill for the future."

Regina Metropolitan Co. v. New York State Div. of Hous. & Community Renewal, Appellate Division, 1st Dept., NY Slip Op 02127, decided April 2, 2020, Chief Judge DiFiore and Judges Stein, Garcia and Feinman concur. Judge Wilson dissents in an opinion in which Judges Rivera and Fahey concur.

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