Aej 534 E. 88TH, LLC v. N.Y. State Div. of Hous. & Cmty. Renewal

• Decision Date: 11 May 2021
• Docket Number: 13130,Index No. 157908/18,Case No. 2019-5717
• Citation: 150 N.Y.S.3d 92,194 A.D.3d 464
• Parties: In the Matter of AEJ 534 EAST 88TH, LLC, Petitioner–Appellant, v. NEW YORK STATE DIVISION OF HOUSING & COMMUNITY RENEWAL, Respondent–Respondent.
• Court: New York Supreme Court — Appellate Division

194 A.D.3d 464

150 N.Y.S.3d 92

In the Matter of AEJ 534 EAST 88TH, LLC, Petitioner–Appellant,

v.NEW YORK STATE DIVISION OF HOUSING & COMMUNITY RENEWAL, Respondent–Respondent.

13130

Index No. 157908/18

Case No. 2019-5717

Supreme Court, Appellate Division, First Department, New York.

ENTERED May 11, 2021

Robert M. Olshever, P.C., New York (Robert M. Olshever of counsel), for appellant.

Mark F. Palomino, New York (Aida P. Reyes of counsel), for respondent.

Gische, J.P., Moulton, Gonza´lez, Scarpulla, JJ.

Judgment, Supreme Court, New York County (Carol R. Edmead, J.), entered July 3, 2019, denying the petition to annul the order of respondent New York State Division of Housing and Community Renewal (DHCR), dated June 27, 2018, which granted in part both AEJ's and tenant's petitions for administrative review (PAR) of an order of the Rent Administrator, dated July 14, 2017, which determined the legal regulated rent, and affirmed the rent-stabilized status of tenant's apartment, and dismissing the proceeding brought pursuant to CPLR article 78, unanimously modified, on the law and the facts to defer the determination of the legal rent to the Housing Court Judge, and otherwise affirmed, without costs.

In this article 78 proceeding, AEJ 534 East 88th LLC appeals from Supreme Court's denial of its petition to annul a June 27, 2018 determination by respondent New York State Division of Housing and Community Renewal (DHCR) finding that apartment 4C (apartment) located at 534 East 88 ^th Street in Manhattan (building) and occupied by nonparty Sharon Hayes is rent-stabilized. DHCR also determined the base date rent for the apartment, as the basis for calculating an overcharge, by using a self-described "bridging the gap" formula. AEJ contends that in making these determinations Supreme Court and DHCR incorrectly applied Rent Stabilization Code (RSC) [9 NYCRR] § 2526.1(a)(3)(iii) as amended in January 2014. AEJ claims that the 2005 non-regulated lease, given to the prior tenant, met the requirements of the former version of that statute then in effect. It then argues in the alternative that either the rent-stabilized rent was legitimately set and there is no overcharge, or that the apartment was legally removed from rent-stabilization pursuant to the applicable high rent vacancy decontrol provisions.

We find that Supreme Court correctly denied AEJ's petition insofar as it seeks reversal of DHCR's determination that the apartment is rent-stabilized. DHCR's examination of the apartment's rental history to determine its regulated status had a rational basis (see Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal , 35 N.Y.3d 332, 375, 130 N.Y.S.3d 759, 154 N.E.3d 972 [2020], rearg. denied sub nom Raden v. W7879, LLC, 35 N.Y.3d 1079, 130 N.Y.S.3d 426, 154 N.E.3d 12 [2020] [ Regina ]; Gersten v. 56 7th Ave. LLC, 88 A.D.3d 189, 207, 928 N.Y.S.2d 515 [1st Dept. 2011] ; Matter of Kostic v. New York State Div. of Hous. & Community Renewal, 188 A.D.3d 569, 570, 137 N.Y.S.3d 297 [1st Dept. 2020] ; East W. Renovating v. New York State Div. of Hous. & Community Renewal, 16 A.D.3d 166, 167, 791 N.Y.S.2d 88 [1st Dept. 2005] ). DHCR erred, however, in establishing the base date rent by using the last registered rent from 1990 and then adding subsequent rent-stabilized rent increases to bring it up to date as of March 2010. The rent history of the apartment beyond the four year look back should not have been examined to determine the base rent for overcharge purposes (see Regina, 35 N.Y.3d at 352, n. 4, 130 N.Y.S.3d 759, 154 N.E.3d 972 ). Rather the base date rent is what Hayes actually paid four years prior to the date when AEJ filed its request for administrative determination (AD request) with DHCR.

Many of the relevant facts, events and circumstances are not in dispute or are unrefuted. The building was owned and operated by hospitals and their affiliates starting in 1982 and continuing for decades thereafter. In September 2004, nonparty 534 East 88 ^th (prior owner), purchased the building. While the apartment housed hospital staff from at least September 1999 to March 19, 2004, it was temporarily exempt from rent-stabilization pursuant to RSC 2520.11(f).¹ The issues on appeal principally concern whether, as AEJ claims, the apartment became deregulated when the temporary exemption ended, or whether, as DHCR determined, it resumed its rent-stabilized status. In addition, if the apartment is rent-stabilized, whether DHCR properly determined the base date rent on which to calculate any overcharge.

After it ceased being used for hospital housing, the apartment remained vacant for several months until June 1, 2005 when the prior owner obtained a new tenant (Adriana Teixeira). Teixeira was offered a standard form of nonregulated apartment lease "for apartments not subject to the rent-stabilization law" (caps and bold omitted). Although the Teixeira lease was for $2,300 per month, it included a preferential lease rider requiring her to only pay a lower rent of $2,000 a month. The preferential lease rider states that: "The Legal Regulated Rent is $2,300.00. The Tenant acknowledges that the subject apartment is no longer subject to the Rent Stabilization Law & Code, and that this Lease shall in no way affect the lawful base rent for the subject apartment." According to AEJ, the apartment became deregulated in 2005, because the "first rent" charged and paid by Teixeira after the temporary exemption ended exceeded $2,000 per month, coinciding with the high rent vacancy threshold then in effect.

In March 2010, the apartment was leased to a new tenant (Hayes). Hayes was offered a one-year nonregulated lease commencing March 1st. Although the lease was for $2,300 per month, it also contained a preferential rent rider allowing Hayes to pay a lower rent of $1,600 a month through February 28, 2011; $1,800 from March 1, 2011 to February 28, 2013; $1,926 from March 1, 2013 to February 28, 2015; and $2,004 from March 1, 2015 to February 29, 2016. The preferential lease rider states that "[t]he Tenant acknowledges that the subject apartment is no longer subject to the Rent–Stabilization Law & Code and that this lease shall in no way affect the lawful base rent for the subject apartment." A second rider to the lease states that:

"THIS RIDER AND THE APARTMENT ARE NOT SUBJECT TO RENT–STABILIZATION, RENT CONTROL OR ANY OTHER RENT REGULATION."

Paragraph 31 of this rider further states:

"NO RENT–STABILIZATION COVERAGE THE APARTMENT IS NOT SUBJECT TO THE RENT–STABILIZATION LAW, RENT CONTROL OR ANY OTHER FORM OF RENT REGULATION WHICH EITHER LIMITS THE AMOUNT THE OWNER CAN CHARGE FOR RENT OR COMPELS OWNER TO RENEW THIS LEASE."

AEJ argues that the apartment was no longer subject to rent-stabilization as of 2005 because the temporary exemption ended and the rent exceeded $2,000. Alternatively, AEJ argues that if, notwithstanding the contrary language in the lease, Teixeira was a rent-stabilized tenant, the parties agreed to a legal "first rent" that complied with the requirements of former RSC 2526.1(a)(3)(iii). AEJ further argues that former RSC 2526.1(a)(d)(iii) permitted owners to charge an agreed to "first rent" as the lawful rent following more than four years of a temporary exemption and the 2014 amended version of RSC 2526.1(a)(3)(iii) (which set forth a different methodology for calculating rents after a temporary exemption) should not be applied retroactively.

In December 2015, AEJ filed its request for an administrative determination (AD request), citing RSC 2522.6 and seeking a determination by DHCR confirming the "deregulated status" of the apartment. The provision relied upon was to have the DHCR establish the legal rent for the apartment.² In February 2016, AEJ commenced a nonpayment proceeding against Hayes in the Housing Part of Civil Court.³ In her answer to each of these proceedings, Hayes asserted defenses related to illegal deregulation of the apartment and rent overcharge. Since this is the first time the issue of whether Hayes was being overcharged for rent was raised, the base date for overcharge purposes under rent-stabilization is December 23, 2011.

By order dated July 14, 2017 the rent administrator (RA), applying RSC 2526.1(a)(3)(iii), as amended in 2014, determined that the apartment was rent-stabilized and that Hayes was a rent-stabilized tenant. The RA set the base date rent at $1,800. Finding that rent registrations had not been filed between 2011 and 2017, the RA froze the rent and also determined that there had been an overcharge of $9,458.35, including treble damages. AEJ filed a petition for administrative review (PAR)⁴ . AEJ relied on many of the same arguments that it now makes on appeal. It also challenged the RA's overcharge determination on the basis that the RA had usurped the Housing Court's authority to make that determination, and that imposition of treble damages was unwarranted.

By order dated June 27, 2018, DHCR's Deputy Commissioner granted AEJ's PAR in part. The Deputy Commissioner affirmed the RA's determination that apartment 4C was rent-stabilized, noting that even under the pre-amendment version of the statute, the "first rent" charged to Teixeira did not qualify, because she was not offered a rent-stabilized lease. The Deputy Commissioner determined, however, that the base date rent was incorrectly calculated by the RA. Using the last registered rent prior to the temporary exemption (the 1990 monthly rent of $398.15), and adding subsequent rent-stabilized increases through 2005, the Deputy Commissioner determined that the legal rent for the apartment in 2005 was $711.12 a month. He then added further rent-stabilization increases to set Hayes’ monthly rent finding it was $928.28, effective March 1, 2010. The Deputy Commissioner did not determine the overcharge, agreeing with AEJ that it should be decided by the court in the nonpayment proceeding. The method employed by the Deputy Commissioner,...