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In re Park

Supreme Court of New York, First Department

April 6, 2017

In re Catherina Park, et al., Petitioners-Appellants,
New York State Division of Housing and Community Renewal, et al., Respondents-Respondents.

         Petitioners appeal from the judgment of the Supreme Court, New York County (Paul Wooten, J.), entered October 27, 2015, denying the petition to annul a final order of respondent New York State Division of Housing and Community Renewal (DHCR), dated August 12, 2014, which denied the Petition for Administrative Review and affirmed the order of the DHCR Rent Administrator, dated May 9, 2013, which dismissed petitioners' Fair Market Rent Appeal as time-barred and determined that the subject apartment became decontrolled on May 1, 2005, and dismissing the proceeding brought pursuant to CPLR article 78.

          Sokolski & Zekaria, P.C., New York (Daphna Zekaria of counsel), for appellants.

          Mark F. Palomino, New York (Martin B. Schneider of counsel), for New York State Division of Housing and Community Renewal, respondent.

          Robert M. Olshever, PC, New York (Robert M. Olshever of counsel), for 27 Washington Sq. North Owner LLC, respondent.

          Richard T. Andrias, J.P., Paul G. Feinman, Judith J. Gische, Marcy L. Kahn, JJ.

          GISCHE, J.

         This is yet another appeal that requires us to resolve issues in the aftermath of the Court of Appeals' decision in Roberts v Tishman Speyer (13 N.Y.3d 270');">13 N.Y.3d 270 [2009]). The disputes before us arise from the Fair Market Rent Appeal (FMRA) petitioners filed with respondent New York State Division of Housing and Community Renewal (DHCR), implicating both the regulatory status of their apartment and the legality of the rent they were charged from the time they first took occupancy in 2010.

         The DHCR decision being challenged in this article 78 proceeding denied the FMRA as untimely because it was filed more than four years after the apartment was no longer subject to the rent control laws following the death of the previous tenant in 2004. DHCR rejected petitioners' contention that the applicable statute of limitations should be disregarded because the owner had engaged in fraud. DHCR also rejected petitioners' claim that the owner's late notices and/or registrations had extended the time period within which petitioners could file an FMRA challenging the owner's efforts to set an initial rent following the apartment's removal from rent control. Finally, on the merits, DHCR concluded that petitioners were not entitled to either a rent-regulated apartment or regulated rent because in 2010, when they first took occupancy, the apartment was no longer receiving any J-51 tax benefits and had become vacant at a time when the legal vacancy rent clearly exceeded $2, 000 per month, an amount sufficient to make it high-rent/vacancy, "luxury" decontrolled (Rent Stabilization Law of 1969 [Administrative Code of City of NY] [RSL] § 26-504.2[a]). We find that the motion court properly dismissed the petition because DHCR's determination was neither arbitrary nor capricious, it was supported by a rational basis and was not affected by any error of law (CPLR 7803; Matter of Classic Realty v New York State Div. of Hous. & Community Renewal, 2 N.Y.3d 142, 146 [2004]; see Matter of Boyd v New York State Div. Hous. & Community Renew, 23 N.Y.3d 999');">23 N.Y.3d 999 [2014]).

         Most of the critical events in this case that have transpired over the past decade are either unrefuted or undisputed. In November 2010, petitioners first became the tenants of apartment 3C at 27 Washington Square North in Manhattan, pursuant to a one year written lease. Although the building was, at one time, part of the J-51 tax abatement program [1], by the time the parties entered into their first lease, the J-51 benefits had already expired. Petitioners initially paid a market rent of $7, 400 per month for the six room apartment, which consisted of three bedrooms, two bathrooms, three fireplaces, central air-conditioning, an updated kitchen and bamboo floors [2]. Prior to their tenancy, apartment 3C had been occupied by Uta Hagen Berghof, a rent-controlled tenant. Berghof occupied the apartment from 1984 until her death in April 2004. At the time of Berghof's death, the registered maximum base rent (MBR) for the apartment was $1, 548.48 a month.

         After tenant Berghof died, the owner undertook major renovations to the apartment. The owner provided DHCR with copies of its contracts with an architect, various contractors, and service providers, as well as invoices marked "paid, " statements, bills and cancelled checks, all in support of the owner's claim that the work had not been ordinary repairs, but a gut renovation of the apartment. The owner also produced documentary support for its claim that the expenditures for these individual apartment improvements (IAIs) had exceeded $200, 000 [3].

         In setting a fair market rent for the vacant apartment in 2005, the owner sought to take advantage of two increases that were available to it under the rent regulation laws. One increase was simply due to the apartment becoming vacant; that increase, which was equal to 50% of the MBR, raised the rent from $1, 548.48 to $2, 322.72 (RSL § 26-513[b][1], Rent Guidelines Board Order No. 36). The other increase was equal to 1/40th of the cost of the owner's IAI expenditures, which in this case was $5, 034.57 ($201, 382.89 x 1/40th) (RSL § 26-511[c][13]). Adding these amounts to the registered MBR increased the rent to $7, 357.29.

         The first tenant to rent the apartment after it was renovated was Piers Playfair. Playfair and the owner entered into an unregulated, two year lease, commencing May 1, 2005, at a monthly rent of $7, 200. In returning the apartment to a free market, unregulated status in 2005, the owner relied on a two-step analysis. First, as a result of Berghof's death, the rent controlled apartment became vacant, making it subject to rent-stabilization (see New York City Rent Control Law [65 McKinney's Unconsol. Laws] [RSL] § 26-403[e][2][i][9]; see also DHCR Fact Sheet #6). This first step was consistent with prevailing law and remains unchallenged. The second step taken by the owner was to decontrol the apartment on the basis that the rent exceeded the high rent/vacancy threshold for luxury decontrol (RSL § 26-504.2[a]). Although the building was part of the J-51 tax abatement program in 2005, the landlord's belief that it could rely on the luxury decontrol laws to return the apartment to the free market was consistent with the DHCR's interpretation of the relevant laws and regulations at that time (Roberts, supra at 281). This second assumption turned out to be incorrect.

         Playfair remained the tenant of apartment 3C for over four years. He renewed the lease twice, first for a two-year term commencing May 29, 2007 at a monthly rent of $7, 825, and then again for a one-year term commencing November 1, 2009 at a monthly rent of $7, 600. On September 30, 2010, before the last renewal lease expired, Playfair surrendered the apartment and moved out. Throughout most of the time that Playfair occupied the apartment, the owner was receiving J-51 tax exemption benefits for the building. The benefits expired, however, in June 2010, shortly before Playfair permanently vacated the apartment. Although it does not appear that while he was in occupancy Playfair was served with an RR-1, which is the notice setting an initial fair market rent for an apartment that is removed from rent control, Playfair never filed his own FMRA.

         In 2009, the Court of Appeals decided Roberts, rejecting DHCR's position that buildings independently subject to rent stabilization, but also participating in the J-51 tax benefits program, could deregulate apartments pursuant to the luxury decontrol laws while they were actually receiving J-51 benefits. The Court held that owners of rent stabilized apartments in buildings receiving J-51 benefits remain subject to rent stabilization for at least as long as the J-51 benefits are in force (see 28 RCNY at 5-03[f]; Roberts, supra at 286). Roberts expressly left open certain important issues, including whether it had retroactive effect (id. at ...

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