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In re 20 Fifth Avenue, LLC

Supreme Court of New York, First Department

July 23, 2013

In re 20 Fifth Avenue, LLC, Petitioner-Respondent, New York State Division of Housing and Community Renewal, et al., Respondents-Appellants.

Respondents appeal from the judgment of the Supreme Court, New York County (Eileen A. Rakower, J.), entered January 10, 2012, granting the petition to annul a determination of respondent New York State Division of Housing and Community Renewal (DHCR), dated June 30, 2011, which vacated a percentage of a Major Capital Improvement rent increase that had previously been granted to petitioner building owner and ordered a refund of any increase collected from the tenants, and remanding the matter to DHCR for further proceedings.

Gary R. Connor, New York (Dawn Ivy Schindelman of counsel), for New York State Division of Housing and Community Renewal, appellant.

Bardavid Law, New York (Joshua E. Bardavid of counsel), for 20 Fifth Avenue Tenants Association, appellant.

Belkin Burden Wenig & Goldman, LLP, New York (Magda L. Cruz, Sherwin Belkin and Phillip Billet of counsel), for respondent.

Peter Tom, J.P., Richard T. Andrias, Dianne T. Renwick, Leland G. DeGrasse, JJ.

RENWICK, J.

In this appeal, we consider whether the New York State Division of Housing and Community Renewal (DHCR) is authorized to implement an apparently new policy to provide that when a building owner files a Major Capital Improvement (MCI) Application for exterior renovation (waterproofing and pointing), and defects (water damage) relating to the improvement are found in a relatively small number of the building's apartments, DHCR will deny the MCI application for all apartments in the building. We find that DHCR's failure to set forth its reasons for altering its policy — by going beyond the denial of the MCI as to the individual apartments affected — rendered its revocation order arbitrary and capricious.

Petitioner 20 Fifth Avenue, LLC is the owner of a residential apartment building located at 20 Fifth Avenue in Manhattan. The building contains 108 apartments, 72 of which are rent-regulated. 20 Fifth Avenue, LLC (the owner) spent approximately $987, 229 to upgrade the building, which project involved interior renovation (intercom service, boiler/burner, elevator, water tank) and exterior renovation (pointing and waterproofing). The exterior renovation part of the upgrade cost $547, 410.

An owner of rent-regulated apartments may seek to pass along the costs of an MCI to its tenants by filing an application with DHCR once the work is completed (see Rent Stabilization Law of 1969 [Administrative Code of City of NY] § 26-511 [c][6][b]; Rent Stabilization Code [9 NYCRR] § 2522.4[a][2][i]). In June 2001, the owner applied to DHCR to increase the rents of its regulated apartments on the basis that the internal and external renovation project qualified as an MCI. Some tenants objected to the external renovation aspect of the application 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.

On June 11, June 22 and June 23, 2005, and January 31, 2006, a DHCR inspector examined the building and reported water infiltration and peeling paint, among other things, in 10 out of the 72 rent-regulated apartments. On March 3, 2006, the DHCR rent administrator (RA) granted an MCI rent increase with regard to the apartments unaffected by the water damage. With regard to the affected apartments, the RA held that they would be "exempted, " that is, those apartments would be subject to the exterior renovation MCI increase only after the owner certified completion of necessary repairs to the apartments.

In response to the rent increase, 20 Fifth Avenue Tenants' Association (tenants' association) filed a petition for administrative review (PAR). The tenants' association argued that DHCR should have disapproved of the entire exterior renovation MCI rent increase because the evidence of water damage to the 10 exempted apartments rendered the entire renovation work defective and "unworkmanlike."

On May 20, 2010, DHCR denied the PAR. Addressing the tenants' association's water damage objection, DHCR ruled that "[t]he fact that a limited number of tenants (in this case, 10 out of a total of 108) may be experiencing problems with the work is not sufficient to warrant a denial of the MCI rent increase." Instead, the DHCR found that "the Rent Administrator properly exempted only the affected apartments from the exterior restoration increase."

On August 25, 2011, the tenants' association commenced an article 78 proceeding seeking annulment of DHCR's determination. In its petition, the tenants' association reiterated its position that the exterior renovation MCI rent increase should be revoked as to all regulated apartments because of the water damage in the exempted apartments. DHCR cross-moved to remand the matter to DHCR for further proceedings. Specifically, DHCR stated that it "wishes to review its order and evaluate our policy governing the grant of MCI rent increase applications where problematic conditions exist in individual apartments and/or common areas stemming from the MCI in question [emphasis added]"

By an order dated November 1, 2010, Supreme Court granted DHCR's cross motion, remanding the proceeding to DHCR. On remand, DHCR conducted new inspections of the exempted apartments. This time, the inspector found no evidence of water damages in four of the exempted apartments. Of the remaining six apartments, only one had a significant moisture reading ("100% percent wet") and "severe water damage and missing plaster." With regard to the remaining five apartments, the moisture meter read "dry, " and water damage was limited to the ...


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