We write with regard to an article published in the New York Law Journal on Monday, July 6, 2020, entitled "'Regina' and Fraud: A Much Needed Clarification" written by Nativ Winiarsky. The article purports to analyze a recent decision issued by the Court of Appeals, Regina Metro Co. LLC v. New York State Div. of Housing & Community Renewal, (2020 NY Slip Op 02127 [Apr. 2, 2020]) ("Regina"), and concludes that the "default formula" is only available when a tenant successfully establishes that the base date rent is the result of a "complete fabricated event."

The article is both misleading and errant. 

Putting aside Mr. Winarsky's lack of objectivity—he and his colleagues at Kucker Marino Winiarsky & Bittens, LLP primarily represent landlords in multiple pending matters where the default formula is at issue—the analysis is simply wrong. The author contends that for purposes of calculating a rent overcharge claim, Regina requires divorcing the determination of the legal regulated rent from a determination of an overcharge. In other words, the article claims that a tenant who successfully shows an inflated rent on the operative base date (the rent in place four years before the filing of the complaint) will receive the difference between what was paid, and what should have been paid (trebled if the overcharge was willful), but that the inflated, wrongfully-procured rent remains enshrined as the legal regulated amount.

Had the Court of Appeals meant to reach that result in Regina, it would have said so, clearly and unambiguously. That Mr. Winiarsky requires twenty dense paragraphs to winkle out support for his conclusion is telling.

A careful analysis of the author's contentions demonstrates their absurdity. Take, for example, a hypothetical landlord who deregulated a unit in a J-51 building back in 2010—after the Court of Appeals held such deregulations were improper in Roberts v. Tishman Speyer, 13 NY3d 270 2009—and who then failed to register a unit until 2016. And, assume that when the landlord finally did re-register, in addition to taking wrongful credit for ineligible improvements, it utilized multiple vacancy increasing, even though the vacating tenants had been unaware of their rent-stabilized status and attendant rights. 

For a tenant suing in 2020, the writer would require enshrining the impermissible improvement and vacancy increases in the rent history as the legal regulated rent on the 2016 base date. Not only would that allow a landlord to get away with violating the law, but it would afford the wrongdoer a judicial imprimatur for a legal regulated rent derived from conduct in violation of the rent regulations . Reasonable minds can disagree on some aspects of Regina, but we do not see how anyone can reach the conclusion that the Court of Appeals required the enshrinement of a legal regulated rent derived from blatantly illegal conduct.

Nevertheless, the column's writer believes that is what Regina demands, and asserts that the Court of Appeals rationalized enshrining an illegal rent by allowing the tenant to prosecute a separate overcharge claim. That theory also makes little sense. A court calculates rent overcharges as the difference between the incorrect rent, and the actual one. The article is conspicuously silent as to how to calculate the correct rent for purposes of performing the proposed overcharge calculus. For our hypothetical landlord, do we "back out" the non-qualifying improvements, and the vacancy increases for the tenants who were deceived about their regulated status, and who paid more than they should have? If so, how would that square with Regina's express prohibition against reviewing conduct preceding the lookback period for determining an overcharge? Or are we to ignore the misconduct, and pretend that the incorrect base date rent is the actual correct rent when determining the overcharge amount? If so, there would never be overcharges, and the supposed "rationalization" of allowing an overcharge claim would be illusory.

Contrary to the article, Regina's legal regulated rent and overcharge methodology is incredibly simple and can be summed up in four sentences. (1) Look at the rent on the base date. (2) If the tenant has proffered evidence suggesting that that rent is inaccurate because there was a fraudulent scheme to evade the rent regulations (such as acting contrary to established law) a court can review whatever evidence is available, pre-dating the base date rent, to determine if a fraudulent scheme, in fact, existed. (3) If the latter did occur, the default formula applies. (4) If not, the base date rent is the legal regulated rent. 

What could be easier? The reason that the landlords in Regina escaped the default formula is because they acted in reliance on DHCR's then-extant guidance when they deregulated the impacted units. Our hypothetical landlord, on the other hand, would not be as fortunate, because it opted to act contrary to appellate authority.

The article's closing paragraphs cite to Corcoran v. Narrows Bayview Co., LLC, (183 AD3d 511 [1st Dept 2020]), and claim that the decision supports the author's Regina interpretation—that an illegal rent must be enshrined in the rent history. That is not so. The Corcoran landlord, deregulated units in reliance on DHCR guidance, and the action was filed in 2010, before appellate authority required re-regulation of units that had been deregulated pre-Roberts. In other words, unlike our hypothetical landlord, but like the landlords in Regina, the landlord in Corcoran was found to have done nothing deceitful.

Finally, we note that the piece conveniently ignores two recent decisions running totally contrary to the proffered thesis. In 435 Central Park West v. Park Front, (183 AD3d 509 [1st Dept 2020]), the building was subject to rent stabilization on April 12, 2011, the date when the property left federal government oversight. (Id. at 509). The landlord engaged in leasing activity, which purportedly tainted the rent. Citing Regina, the First Department held, "[i]n the event it is proven that defendant engaged in a fraudulent rent overcharge scheme to raise the pre-stabilization rent of each apartment, tainting the reliability of the rent on the base date, then the lawful rent on the base date for each apartment must be determined by using the default formula devised by DHCR." (Id. at 509).

And, in Townsend v. B_U Realty Corp. (67 Misc3d 1228 [A] [Sup Ct, NY County 2020]), the landlord (like our hypothetical landlord) failed "to promptly register its apartments as rent-stabilized when the applicability of Roberts was clear in March 2012," and the court concluded  that that lapse "serves as proof of a fraudulent scheme to deregulate." (Id. at 12, citing Nolte v. Bridgestone Assoc., LLC, 167 AD3d 498, 498 [1st Dept 2018]). Additionally, the Townsend decision applied the default formula.

Suffice it to say, that rather than rely on the article's analysis, readers would be better served to review 435 Central Park West, Townsend, and Regina, for themselves.

Lucas A. Ferrara is a partner, and Roger A. Sachar an associate, with Newman Ferrara LLP. The firm represents tenants in a number of cases where the default formula is at issue.