Respondent State of New York Division of Housing and Community Renewal (DHCR) and intervenor-respondent 151 Owners Corp. appeal from an order and judgment (one paper) of the Supreme Court, New York County (Shirley Werner Kornreich, J.), entered January 11, 2008, which vacated a determination of DHCR denying petitioner's rent overcharge complaint and remanded the matter to DHCR to consider whether the registration statement for petitioner's apartment on the base date was reliable.
The opinion of the court was delivered by: Acosta, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Richard T. Andrias, J.P., David Friedman, John T. Buckley, James M. Catterson & Rolando Acosta, JJ.
In this appeal we are asked to consider the obligation of respondent Division of Housing and Community Renewal (DHCR) when a rent overcharge complainant makes a colorable argument that there are genuine issues that an owner committed fraud by charging an illegal rent, even if more than four years passed before the complaint was filed.
The basic facts are undisputed. The rent-stabilized apartment at issue was registered with DHCR in 1999 at a monthly rent of $587.86. The following year, instead of using the required rent-setting formula to determine the rent that it could legally charge the next tenants of the apartment, the owner, through an agent, notified prospective tenants Tracy Hartman and Jon Bozak that the rent for the subject apartment was a fictitious and illegal $2,000 per month, but that if Hartman and Bozak agreed to make repairs and paint the apartment at their own expense, the rent would be reduced to an equally fictitious and illegal $1,450. The offer was accepted, and the rent was memorialized in a non-regulated written lease agreement. Neither Hartman nor Bozak ever received a statement showing the apartment was registered with DHCR. The rent for they year 2000 represented a 150% increase over the previous year.
On April 1, 2004 petitioner moved into the apartment, at the pre-existing illegal rental rate of $1,450. Thereafter, on July 19, 2005, petitioner filed a rent overcharge complaint with DHCR. In its answer, the owner, intervenor 151 Owners Corp., acknowledged that the premises had not been registered since 1999. In September 2005, 151 Owner's Corp., through its purported managing agent, Michelle Goldstein, filed registration statements for 2001, 2002, 2003, 2004 and 2005.
In an order dated June 21, 2006, the DHCR Rent Administrator denied petitioner's Complaint of Rent Overcharge on the ground that the base date of the proceeding is July 19, 2001, which was four years prior to the filing date of the complaint (at which time the rent was $1,450), and that the rent adjustments subsequent to the base date have been lawful, so that there was no rent overcharge. The Rent Administrator erroneously failed to address the issue of whether the registration statement in effect on the base date was unreliable because of the possibility that the owner had committed fraud by charging an illegal rent to the previous tenants of the apartment. Petitioner subsequently filed a Petition for Administrative Review, which was denied by DHCR. The determination simply calculated the rent, assuming without discussion that the registration on the base date was legitimate.
The Rent Regulation Reform Act of 1997 (L 1997, ch 116) clarified and reinforced that the statute of limitations for a rent overcharge complaint is four years*fn1. However, as this Court has previously held, a default formula "should be used to determine the base rent in an overcharge case where . . . no valid rent registration statement was on file as of the base date" (Levinson v 390 W. End Assoc., L.L.C., 22 AD3d 397, 401 , citing Thornton v Baron, 5 NY3d 175, 180 n1 ). That is, while the applicable four-year statute of limitations reflects a legislative policy to "alleviate the burden on honest landlords to retain rent records indefinitely" (id. at 181), and thus precludes us from using any rental history prior to the base date, where there is fraud or an unlawful rent, the lease is rendered void. The legal rent should be established by using the lowest rent charged for a rent-stabilized apartment with the same number of rooms in the same building on the base date.
Based on the facts in this case, DHCR acted arbitrarily, capriciously and in disregard of its obligation in failing to consider whether the rent charged to petitioner was unlawful, and thus whether establishing a rental rate based on the Thornton formula was appropriate. The tenants immediately preceding petitioner were never given a rent-stabilized lease rider, were never provided with annual registration statements, and were not told how their initial monthly rent was calculated. Therefore, if the rent in 2001 was established at an illegal rate, that lease as well as petitioner's lease at the same rate is a nullity, and the default formula would be the appropriate mechanism for determining the base rent. Sanctioning the owner's behavior on a statute of limitations ground "can result in a future tenant having to pay more than the legal stabilized rent for a unit, a prospect which militates in favor of voiding agreements such as this in order to prevent abuse and promote enforcement of lawful regulated rents" (Drucker v Mauro, 30 AD3d 37, 40 , lv dismissed 7 NY3d 844 ). Knowing that the owner agreed to "lower" the rent to the previous tenants should have caused DHCR to determine whether the owner complied with rent regulations rather than to summarily dismiss petitioner's rent overcharge complaint.
The dissent attempts to distinguish Thornton in order to support its contention here that DHCR acted rationally. The dissent correctly points out that the Court of Appeals properly applied the default formula in Thornton, since the landlord in that case improperly removed the apartment from rent stabilization, thus rendering the leases void ab initio. However, that is precisely why remand to DHCR is appropriate here, where there are indicia of fraud. Given the specific facts of this case, DHCR should not be allowed to turn a blind eye to what could be fraud and an attempt by the landlord to circumvent the Rent Stabilization Law. Our holding merely follows the holding in Thornton. If DHCR fulfills its obligation to investigate whether there was fraud by the landlord, and finds that there was indeed fraud, then use of the default formula would be necessitated. Unlike what the dissent suggests, our holding does not summarily mandate use of the default formula in the instant case.
The dissent also ignores our explicit holding in Drucker, based on well settled law that "the parties to a lease governing a rent-stabilized apartment cannot, by agreement, incorporate terms that compromise the integrity and enforcement of the Rent Stabilization Law. Any lease provision that subverts a protection afforded by the rent stabilization scheme in not merely voidable, but void" (Drucker, 30 AD3d at 39). The dissent seems to conflate when the default formula should be applied with DHCR's affirmative obligation to determine whether fraud has been committed in instances such as this.
Here, DHCR also inexplicably failed to examine the peculiar nature of the transfer of the building and to consider the connection between the prior owner and the current owner. The current owner contends that it purchased the building from a previous owner, giving the impression that there was no connection between the two. However, although the two owners have different corporate names, they are both controlled by the same individual. In fact, title to the building was transferred without any purchase price or tax being paid. In circumstances where, as here, there is an indication of possible fraud that would render the rent records unreliable, it is an abuse of discretion for DHCR not to investigate it. To be sure, if DHCR is permitted to turn a blind eye to a situation such as this, the ...