The opinion of the court was delivered by: Graffeo, J.:
This opinion is uncorrected and subject to revision before publication in the New York Reports.
In this appeal we consider whether the Division of Housing & Community Renewal (DHCR) is authorized to grant a major capital improvement rent increase while at the same time permanently exempting particular apartments from the obligation to pay additional rent when circumstances warrant. We hold that DHCR has been granted such authority and, on this record, it was not arbitrary or capricious for DHCR to permanently exempt five apartments.
Petitioner Terrace Court, LLC is the owner of a residential apartment building located at 202 Riverside Drive in Manhattan. The building contains 91 apartments, 37 of which are rent regulated. Terrace Court spent approximately $1.2 million to upgrade the building, which project involved pointing work and the replacement of masonry, lintels and parapets.
An owner of rent-regulated apartments may seek to pass along the costs of a "major capital improvement" (MCI) to its tenants by filing an application with DHCR once the work is completed (see Rent Stabilization Law [Administrative Code of City of NY] § 26-511 [c]  [b]; Rent Stabilization Code [9 NYCRR] § 2522.4 [a]  [i]). In May 2004, Terrace Court applied to DHCR to increase the rents of its regulated apartments on the basis that the construction project qualified as an MCI. It sought an additional $42.58 per month for each room in the 37 apartments. Some tenants objected to the proposal because the construction work had resulted in water from the exterior of the building seeping into their apartments and these conditions had not been rectified.
The tenants' association sent affidavits to DHCR, including a report from an architect who inspected the building and found that the leaks were consistent with water intruding from outside the building. The association also informed DHCR that the Department of Buildings issued a violation to Terrace Court in December 2004 regarding water-damaged apartments and alleged that the owner had not adequately performed the work on the building's facade. Terrace Court maintained that the project had been properly completed (it submitted reports from its experts to corroborate this claim) and that, in any event, it had addressed the tenants' complaints. The owner also advised DHCR that the violation from the Department of Buildings had been dismissed because the water in the identified apartments had been caused by a bathroom leak on an upper level of the building.
In September 2005, approximately 16 months after submission of the MCI application, a DHCR inspector and a Terrace Court employee inspected five allegedly damaged apartments. Each of these residences had walls in various states of disrepair and exhibited staining, discoloration, blistering or cracking. Actual moisture was detected in two of the apartments.
The Rent Administrator granted Terrace Court's MCI application in December 2005 and raised the monthly rents by $40.20 per room. The order, however, permanently exempted the five inspected apartments from the increase based on the tenants' complaints and the agency's inspection. Terrace Court filed a petition for administrative review (PAR) challenging the inspector's findings and claiming that DHCR lacked the authority to permanently exempt the five apartments. It asserted that the increases related to those residences should have been temporarily suspended until the problems were resolved. DHCR denied the PAR and determined that the permanent exemption for the five apartments was appropriate because the water conditions "existed in the apartments when work was completed just prior to the owner's filing of the application for an MCI rent increase" and the apartments still exhibited water damage at the time of the DHCR inspection.
Terrace Court then commenced this CPLR article 78 proceeding, asserting that it was arbitrary and capricious for DHCR to permanently exempt the five apartments from the rent adjustment. The tenants of the exempted apartments intervened in the proceeding and Supreme Court denied the petition. The court concluded that the imposition of permanent exemptions was supported by DHCR's "determination that the pointing work was not done effectively for the five exempted apartments" (2008 NY Slip Op 32125 [U]).
The Appellate Division affirmed, with two Justices dissenting (79 AD3d
630 [1st Dept 2010]). It held that DHCR acted rationally and did not
abuse its discretion as there was ample proof that the pointing work
had not been performed properly with regard to the exempted
apartments. The court found that no regulation, DHCR policy or
judicial precedent limited the agency to denying an MCI increase in
its entirety or granting a
temporary suspension of the adjustment. The Appellate
Division further observed that there can be instances in which DHCR
may have "ample reason to believe that [a] landlord would make (or had
made) the necessary repairs in a diligent fashion" but that, on the
record in this case, the agency "did not believe that [Terrace Court]
intended in good faith to address the situation, especially after it
vociferously denied the existence of a problem and then engaged in
unsuccessful efforts to fix it."
The dissenters found no rational basis for the permanent exemption of the five apartments because such a determination was alleged to be inconsistent with DHCR's pre-existing policy of temporarily suspending an MCI increase for apartments until necessary repairs are made and, in this case, the agency had not provided an adequate justification for departing from that practice.
Terrace Court appealed to this Court as of right and now challenges DHCR's decision to permanently exempt the five apartments as arbitrary and capricious, and violative of the agency's settled policy to temporarily suspend MCI increases until repairs are completed. According to the owner, temporary suspensions are mandated by a regulation and DHCR's action was unreasonable as a matter of law in the absence of an explanation by the agency regarding its departure from precedent.
It is true, as a general proposition, that administrative agencies are
required to follow their own
precedent (see e.g. Matter of Lantry v State of New York,
6 NY3d 49, 58 ) and an agency that deviates from its established
rule must provide an explanation for the modification so that a
reviewing court can "determine whether the agency has changed its
prior interpretation of the law for valid reasons, or has simply
overlooked or ignored its prior decision" (Matter of Charles A. Field
Delivery Serv. [Roberts], 66 NY2d 516, 520 ). The failure to
provide a justification for the change requires reversal even if there
is substantial evidence to support the agency's determination (see
Here, DHCR did not abandon this principle as its prior determinations
in similar cases were not restricted to temporary suspensions. There
have been at least several instances where the agency granted an MCI
rent increase along with permanent exemptions for particular
apartments, rather than issuing temporary suspensions.*fn1
In one such case, DHCR disagreed with the Rent
Administrator's decision to temporarily suspend an MCI increase and
instead imposed permanent exemptions.*fn2 Hence,
the underlying premise of Terrace Court's contention is
without merit and we reject its attempt to distinguish DHCR precedent
recognizing the availability of permanent exemptions.
Nor were temporary suspensions of the MCI increase mandated by Rent Stabilization Code (9 NYCRR) § 2522.4 (a) (13). This regulation provides, in pertinent part, that DHCR should not grant an MCI rent adjustment if the owner "is not maintaining all required services," however, the agency may grant the application "upon condition that such services will be restored within a reasonable time." Although Terrace Court believes that "all required services" encompasses water damage repairs, DHCR interprets the phrase as referencing services that are unrelated to the MCI project. Since an agency's interpretation of its own regulation is entitled to deference (see e.g. Matter of IG Second Generation Partners L.P. v New York State Div. of Hous. & Community Renewal, 10 NY3d 474, 481 ), we cannot say that DHCR's reading of subdivision (a) (13) is irrational. In the overall context of the MCI adjustment process, DHCR is supposed to grant a rent modification if an MCI project inures to the benefit of every tenant in a building (see Rent Stabilization Law [Administrative Code of City of NY] § 26-511 [c] ; Rent Stabilization Code [9 NYCRR] § 2522.4 [a]  [i] [c]; Matter of Riverside Equities v New York State Div. of Hous. & Community Renewal, 292 AD2d 313, 313-314 [1st Dept 2002]). Subdivision (a) (13) of the regulation, in contrast, envisions situations where (unlike here) an MCI application satisfies that requirement but the landlord has failed to provide other "required services" unrelated to the ...