Landlord Wins Legal Fight With Tenants Over J-51 Rent Overcharges
Rosenberg & Estis, P.C. has secured an important victory in the Court of Appeals, which unanimously held that the Appellate Division, First Department, incorrectly ruled that property owner William Koeppel fraudulently increased rents on 72 apartments at 350 East 52nd Street in Turtle Bay, a 15-story, 137-unit apartment property also known as Eastgate House.
The Rosenberg & Estis team representing Whitehouse Estates, Inc. included Howard W. Kingsley, Member, Jeffrey Turkel, Special Counsel, and Ethan R. Cohen, Member. Jeffrey Turkel and Ethan R. Cohen successfully briefed and argued the case in the Court of Appeals before Acting Chief Judge Cannataro and Judges Rivera, Garcia, Wilson, Singas and Troutman
The landlord had luxury deregulated 72 apartments in the East Side building while receiving a J-51 tax abatement. The Court found that he did not commit fraud by the manner in which he attempted to register and recalculate the rents for the 72 apartments after the Court of Appeals ruled in the 2009 Roberts case that such deregulations were not permitted by the rent laws.
In a precedent-setting decision, the New York State Court of Appeals found that the Appellate Division misinterpreted the historic Regina v DHCR ruling, which only permitted a review of rental history outside a four-year lookback period where there was evidence of a fraudulent scheme to deregulate.
The Court of Appeals’ March 16 reversal of that decision held that fraud will only allow the four-year lookback period to be breached, and the punitive default rent formula to be used, where the alleged fraud taints the reliability of the base date rent. The Court observed that the owner’s alleged fraud — its recalculation of the stabilized rents in 2011 and 2012 — could not have possibly tainted the rent paid on the October 14, 2007 base date. The Court also observed that the only alleged fraud that could trigger the default rent formula — which enables tenants to revert to the lowest regulated rent in the building — is a fraudulent scheme to deregulate apartments. This did not occur at 350 East 52nd Street, as registering apartments as stabilized, and recalculating legal rents, did not so qualify.
In 2021, the Supreme Court sided with the tenants of 350 East 52nd St., dramatically reducing rents in affected apartments by some 60 percent, a decision that ultimately forced the owner into bankruptcy. “That decision has been completely reversed by the Court of Appeals decision,” said Howard W. Kingsley.
The Court of Appeals decision paves the way for the landlord to recover payment of the actual legal rents over the many prior years– some of which haven’t been paid for years and amount to hundreds of thousands of dollars. It may also stave off the foreclosure of 350 East 52nd St.
“This is a tremendous result for our client, who has been driven into bankruptcy by an erroneous decision by the Supreme Court that dramatically lowered the rents,” said Jeffrey Turkel.
On remittal, Supreme Court will determine the rents for each apartment in the class action in accordance with the Court of Appeals decision. To do so, the Court of Appeals held that, instead of the default formula, “the rent ‘actually charged on the base date’…should be used and rent increases legally available to [the landlord] pursuant to the RSL during the four-year period should be added.” The Court explained that “[o]n remittal, that assessment must be made for each apartment,” to determine the legal rents and how much each tenant owes the landlord. According to Kingsley, that could easily amount to hundreds of thousands of dollars in unpaid rent, but there may be instances where there are minor overcharges over the many years.
The case dates back to 2011 when a group of tenants filed a lawsuit alleging Koeppel overcharged on rent while receiving the J-51 property tax break. Raising rents ultimately allowed the landlord to remove some apartments from rent regulation under the old luxury vacancy deregulation rules. However, the following year, while the fallout of the controversial 2009 Roberts v Tishman Speyer ruling was being sorted out, the Court of Appeals decided that certain units couldn’t be removed from regulation, and landlords who had done so could not be retroactively penalized under certain circumstances.
In consultation with the DHCR – the state entity responsible for operating regulations – Koeppel immediately re-registered all of the apartments and offered tenants new stabilized leases at reduced rents. However, the tenants then filed the class action lawsuit, claiming on appeal that the landlord fraudulently recalculated the rents, and asserting that their rent should be calculated under DHCR’s default rent formula, which would have dramatically reduced their stabilized rents while at the same time increasing their overcharge claims.
Rosenberg & Estis attorneys argued that under the historic Regina v DHCR, the default formula could only be used when fraud tainted the reliability of the base date rent and suggested a scheme to deregulate the apartments.
Turkel and Cohen successfully argued that nothing the landlord did in 2011 could taint the reliability of the accepted 2007 base date rents, such that there was no fraud and the default rent formula could not be used. In a written memorandum the Court noted, “Regina also held that ‘deregulation of [ ] apartments during receipt of J-51 benefits was not based on a fraudulent misstatement of fact but on a misinterpretation of the law [and so] a finding of willfulness is generally not applicable to cases arising in the aftermath of Roberts [and] [b]ecause conduct cannot be fraudulent without being willful, it follows that the fraud exception to the lookback rule is generally inapplicable to Roberts overcharge claims’” (Regina, 35 NY3d at 356 [internal quotations and citations omitted]).
The Court found that Koeppel’s original deregulation of the apartments was based on the same misinterpretation of the law and was not fraudulent. The landlord’s subsequent re-registering of the apartments under the oversight of DHCR was not fraudulent because it did not taint the reliability of the rents the tenants actually paid on the October 14, 2007 base date.
In reversing the lower court’s decision, the Appeals Court said the tenants failed to offer evidence that the base date rents were unreliable and failed to prove any fraud.
“Many tenants haven’t paid rent in the building for years, decimating the rent roll and forcing the property owner into foreclosure,” Kingsley said. “The court’s misinterpretation of the law substantially injured this property owner.”
“The owner was put in an impossible position by the DHCR, which told him he could deregulate units,” Turkel said. “The owner had no willful intent to defraud, and, in fact, had done his best to abide by the ever-shifting rules.”
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Source: Real Estate Weekly