This article's original title was taken from the alleged ancient Chinese curse "May you live in interesting times." It was changed to maintain clarity, and to dispel any misapprehension that the author might lurch into a discussion of COVID-19, racist scapegoating and/or partisan political posturing. Nope. And too bad for you. Instead of pushing topical hot buttons, this article discusses the "knock-on" effects of a turbulent decade of Court of Appeals rent overcharge jurisprudence, which is a topic known to induce narcolepsy.

In particular, there have been ominous ripple effects in the three loosely related fields of residential landlord/tenant litigation, residential property management, and real property-backed securities trading. This article proposes NO solutions. The frustrating truth is that many of the last decade's attempts to resolve problems plaguing rent overcharge litigation have instead led to—more problems. This is known as "the law of unintended consequences." The article is presented in three parts.

Part I

Unfortunately, the Court of Appeals has often been the main author of "unintended consequences" in the field of residential landlord/tenant practice. Its sporadic rulings sometimes sharply reversed lower court decisions and caused observers to strain to discern any consistent logic to the Court's reasoning. The modern era began in 2009 with Roberts v. Tishman Speyer Props., L.P. (13 NY3d 270 [2009]), a rent overcharge class action commenced by tenants of the Peter Cooper Village/Stuyvesant Town rental complex who argued that the property's owner had misused "luxury deregulation" procedure of the Rent Stabilization Code (RSC) to remove their apartments from rent stabilization while the complex was still enrolled in the so-called "J-51" real estate tax abatement program.

The owner responded that it did so in reliance on an administrative opinion by the New York State Division of Housing and Community Renewal (DHCR) that permitted that practice. The trial court rejected the tenants' argument, the Appellate Division, First Department, reversed, and the Court of Appeals upheld its reversal but did not accept the merits of the tenants' argument. Instead, the Court held that the DHCR had overstepped its competence by basing its advisory opinion on its own interpretation of Real Property Tax Law (RPTL) § 489, the tax statute which authorized the "J-51" program.

The court noted that the Rent Regulation Reform Act of 1993 had enacted an exception to the RSC under which buildings enrolled in the "J-51" program (or several other real estate tax abatement programs) were ineligible to use the "luxury deregulation" procedure for the duration of their enrollment in the program. Thus, the court invalidated the DHCR's advisory opinion, and confirmed the primacy of the State's taxing authority over the agency's rent regulatory powers.

By doing so, the court also essentially converted the tenants into unintended third-party beneficiaries of its ruling, which implicitly acknowledged their right to seek compensation for rent overcharges caused by the improper deregulation of their apartments. Notably, the Court rendered a nearly identical opinion ten years later in Kuzmich v. 50 Murray St. Acquisition LLC (34 NY3d 84 [2019]), which held that buildings enrolled in the real estate tax abatement programs created by RPTL §§ 421-g or 421-a were also precluded from using the RSC's luxury deregulation procedures. Although many practitioners viewed these decisions as anomalous landlord/tenant rulings, the court's focus was actually on tax law, and both rulings were consistent with a policy of upholding the supremacy of the State's taxing authority.

Nevertheless, Roberts and its progeny gave rise to a flood of rent overcharge claims based on improper apartment deregulation. Since they are potentially lucrative, most of those claims are now litigated in Supreme Court, even though the DHCR's administrative hearing process was formerly the preferred way to address rent overcharge disputes.

More confusion ensued after the First Department's ruling in Gersten v. 56 7th Ave. LLC (88 AD3d 189 [1st Dept 2011]) that the Roberts holding should be applied retroactively. The Court of Appeals undercut much of Gersten in its 2014 decision in Borden v. 400 E. 55th St. Assoc., L.P. (24 NY3d 382 [2014]), which held that, despite the statutory presumption that all rent overcharges are willful acts subject to treble damages (Rent Stabilization Law [RSL] § 26–516 [a]), "[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."

This ruling appeared to rewrite the statute's presumption of willfulness. However, recent First Department decisions express the view that, because the Roberts holding has been in effect and undisturbed since 2009, the need to comply with its requirements is now common knowledge, and landlords who still neglect to do so are behaving willfully. For example, in Grady v. Hessert Realty L.P. (178 AD3d 401 [1st Dept 2019]) the court observed that "defendants' assumption that the apartment was deregulated, based solely on a [misrepresentation] by prior management, amounts to willful ignorance, which constitutes willful conduct, particularly since defendants are sophisticated property managers and owners."

In Nolte v. Bridgestone Assoc. LLC (167 AD3d 498 [1st Dept 2018]), the court rejected a landlord's argument "that its conduct was not willful, because DHCR failed to issue revised policy guidelines for several years following the Roberts decision." As a result, the Court of Appeals' observation in Borden may now be dicta.

The court has also issued occasional procedural rulings that appeared to undercut the DHCR's mandate to interpret and apply the RSC. In Jemrock Realty Co., LLC v. Krugman (13 NY3d 924 [2010]), the court authorized trial courts to use a more lenient evidentiary standard when reviewing the legitimacy of "major capital improvement" (MCI) and "individual apartment improvement" (IAI) increases to an apartment's rent than the one which the DHCR uses. Rather than the RSC's strict list of acceptable forms of proof, trial courts are directed to assess "the persuasive force of the evidence." In Altman v. 285 W. Fourth LLC (31 NY3d 178 [2018]), the court authorized the inclusion of "vacancy increases" when determining an apartment's "legal regulated rent," despite the DHCR's view that the RSC only authorized their inclusion in an apartment's subsequent "vacancy lease."

Though these decisions appeared to upend the DHCR's role as arbiter of the RSC, they are instead consistent confirmations that rent overcharge claims which are filed in Supreme Court ab initio are subject to a different set of procedural rules (i.e., the CPLR). Nevertheless, they caused some upheaval by incentivizing counsel to file residential rent overcharge claims in Supreme Court rather than with the DHCR.

Finally, this April, the court rendered a decision in Matter of Regina Metropolitan Co., LLC v. DHCR, et al. (_ NY3d _, 2020 NY Slip Op 02127 [2020]) that appeared to undercut the New York State Legislature by holding that some of the reform provisions of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) should only be given prospective effect. June 14, 2019 was specified in Part F of the HSTPA as the Act's effective date, and that section specifically stated that its provisions "shall apply to any claims pending or filed on and after such date." Nevertheless, the court ruled that the HSTPA may only be applied prospectively because the Legislature's intent to give the statute retroactive effect was "insufficiently clear," and because doing so would violate the "public policy of repose" and the Due Process Clause of the U.S. Constitution's Fourteenth Amendment.

The dissent pointed out that parts of the majority's Constitutional analysis are suspect. It noted particular weakness in the majority's Due Process analysis, since federal law mandates a three-step process—the first of which is to "identify a property right"—and the majority failed to identify any such right. Id., *3. The federal courts recognize that "retroactive legislation can run afoul of substantive due process if it impairs "vested or property rights." Seidemann v. Professional Staff Congress Local 2334, _F Supp3d_, 2020 WL 127583 (SDNY 2020).

However, the dissent contended forcefully that one cannot acquire a "vested or property right" in the illicit collection of improper overcharges. The dissent also noted that longstanding federal precedent acknowledges that new legislation must govern pending cases, and does not recognize any property interest attaching to the application of the regulations in effect at the time that a cause of action accrues. See e.g., In Thorpe v. Housing Auth. of Durham, 393 US 268, 89 SCt 518, 21 LEd2d 474 (1969); Willoughby Development Corp. v. Ravalli County, 338 Fed Appx 581 (9th Cir 2009).

It should also be noted that members of New York's Legislature are unhappy with the Regina Metropolitan ruling, and some are now considering either an appeal to the U.S. Supreme Court or a legislative repeal of the holding. See https://www.nysenate.gov/newsroom/press-releases/brad-hoylman/statement-senator-brad-hoylman-court-decision-weakening. Nevertheless, at this point Regina Metropolitan is a final ruling that the HSTPA may not be applied retroactively. Unfortunately, this holding has neutered the Legislature's attempt to enact a standard procedure applicable to all rent overcharge claims, by instead dividing them into "new law" and "old law" claims.

Although the Court of Appeals unquestionably intended to provide guidance to resolve rent overcharge claims, its rulings have also caused residential landlord/tenant practice to become extremely complicated. This "unintended consequence" extends to other businesses as well. Part II of this article discusses the consequences felt in the field of residential property management.

Francis J. Lane III is senior staff attorney in the Law Department in Manhattan Supreme Court.