Gersten v. 56 7th Ave. Llc

• Citation: 2011 N.Y. Slip Op. 06300,928 N.Y.S.2d 515,88 A.D.3d 189
• Parties: Cora Cahan GERSTEN, et al., Plaintiffs–Appellants,v.56 7TH AVENUE LLC, et al., Defendants–Respondents,56 Seventh Avenue Corporation, et al., Defendants.
• Decision Date: 18 August 2011
• Court: New York Supreme Court Appellate Division

88 A.D.3d 189

928 N.Y.S.2d 515

2011 N.Y. Slip Op. 06300

Cora Cahan GERSTEN, et al., Plaintiffs–Appellants,

v.56 7TH AVENUE LLC, et al., Defendants–Respondents,56 Seventh Avenue Corporation, et al., Defendants.

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

Aug. 18, 2011.

Himmelstein, McConnell, Gribben, Donoghue & Joseph, New York (William J. Gribben and Ronald S. Languedoc of counsel), for appellants.Belkin Burden Wenig & Goldman, LLP, New York (Magda L. Cruz of counsel), for respondents.PETER TOM, J.P., JOHN W. SWEENY, JR., ROLANDO T. ACOSTA, DIANNE T. RENWICK, SALLIE MANZANET–DANIELS, JJ.RENWICK, J.

The Court of Appeals recently rendered a decision with significant ramifications for the real estate industry in New York City. In affirming this court's decision in Roberts v. Tishman Speyer Prop. L.P., 13 N.Y.3d 270, 890 N.Y.S.2d 388, 918 N.E.2d 900 [2009], affg. 62 A.D.3d 71, 874 N.Y.S.2d 97 [2009], revg. 2007 N.Y. Slip Op. 32639[U], 2007 WL 2815093 [2007], the Court held that thousands of unregulated “market” apartments, at two Manhattan building complexes (Stuyvesant Town and Peter Cooper Village), were improperly removed from rent stabilization while the owners, Tishman Speyer and MetLife, received benefits under the City's J–51 Tax Abatement and Exemption Program.¹ The Court agreed with our statutory interpretation, thereby rejecting the Division of Housing and Community Renewal's (DHCR) regulation, which interpreted the Luxury Decontrol Statute ² AS PERMITTING DEREGUlation of rent stabilized apartments in buildings receiving J–51 benefits provided the building was already subject to rent regulation before the receipt of such benefits.

The ramifications of Roberts, however, remain uncertain; the case left unresolved a number of issues, including those explicitly noted by the Court: “retroactivity, class classification, the statute of limitations and other defenses that may be applicable to particular tenants” (13 N.Y.3d at 287, 890 N.Y.S.2d 388, 918 N.E.2d 900). In this unrelated case, we are faced with some of these issues. They arise in a dispute between cotenants and a building owner. The owner took over the subject property in 2009, a decade after the former owner had deregulated the apartment pursuant to a 1999 DHCR luxury decontrol order. Plaintiffs, who are not the typical tenants intended to be protected by rent regulation, commenced this action seeking a declaration that the 1999 DHCR luxury decontrol order is void ab initio pursuant to Roberts. The answer depends on whether Roberts should be applied retroactively, and if so, whether the defense of statute of limitations or administrative finality may be invoked to give preclusive effect to the 1999 DHCR luxury decontrol order.

Factual and Procedural Background

The pertinent facts are essentially undisputed. Plaintiffs have lived on the 20th floor of a West Village apartment building since 1968. The first apartment they rented, # 20H, was then rent controlled. Eleven years later, in 1979, plaintiffs rented an adjacent apartment, # 20J, under a rent-stabilized lease. For 16 years, from 1979 to 1995, they occupied both apartments, and, in the 1980s, they combined the two apartments into one unit. In 1995, plaintiffs rented a third apartment, 20A, under another rent-stabilized lease. With the owner's consent, they combined all three apartments into one, creating an apartment that took up the building's entire 20th floor. The 20th floor apartment is 3,259 square feet in size, and contains four bedrooms, five bathrooms, an office, an eat-in kitchen, separate dining room, and a 20 foot by 34 foot living room. The combined rent for the apartment, under all three leases, was more than $2,000 per month.

In 1990, the building's prior owner began to receive J–51 tax benefits, which were to last 20 years. Such benefits officially remained in effect until June 30, 2009. In 1998, the building's prior owner filed a luxury deregulation petition with DHCR with respect to the combined 20th floor apartment. On the Income Certification Form that the predecessor owner sent plaintiffs, plaintiffs acknowledged that the collective rent for the combined 20th floor apartment was more than $2,000 per month, and that their annual household income was more than $175,000 for each of the two years preceding the petition. As noted above, at the time of the filing of the petition, the prior owner was receiving J–51 tax benefits.

In September 1999, DHCR issued an order deregulating the combined 20th floor apartment. Accordingly, once the rent-regulation terms of each of the three leases and the rental agreement expired, the 20th floor apartment became deregulated based on the DHCR decontrol order finding that the collective legal regulated rent exceeded $2,000 per month, and that the tenants' income exceeded the statutory threshold (RSL [Administrative Code of City of New York] 26–504.3 [c][2] ). Notably, plaintiffs never appealed the DHCR decontrol order through an administrative appeal; nor did they commence an article 78 proceeding.

On September 30, 1999, plaintiffs and the predecessor owner entered into a four-year lease for the 20th floor apartment. The initial rent was $5,000 per month, for a term ending on November 30, 2003. In September 2002, near the expiration of the four-year lease, plaintiffs and the predecessor owner negotiated terms for an extension of the lease; this next lease was for a nine-year term, beginning on December 1, 2003 and ending on November 30, 2012, with an initial rent of $6,000 per month.

In January 2008, defendant 56 7th Avenue LLC acquired the building, and defendant Northbrook Management LLC became the new managing agent (hereinafter defendants). When the new owner bought the building, no tax benefits under the J–51 program were in effect, and the new owner has never applied for any J–51 tax benefits.

In December 2009, after the Court of Appeals issued Roberts, plaintiffs commenced this action, seeking a declaration that the 1999 DHCR luxury deregulation order was invalid and demanding reimbursement for alleged rent overcharges for the past eleven years. Plaintiffs claimed that their lease should be rescinded, and that in its place, defendants should give them a new rent-stabilized lease. Plaintiffs claimed that because the building was receiving J–51 tax benefits in 1999, the predecessor owner was not entitled to deregulate the 20th floor apartment.

On July 15, 2010, Supreme Court granted defendants' motion to dismiss the action. The court held that DHCR's deregulation order was binding and that the court had no jurisdiction to set it aside 11 years after its issuance. The court stated, “Despite the decision in Roberts this court is without jurisdiction to grant [the] declaratory relief as the statute of limitations for Article 78 proceedings has expired and the court must respect the decision of DHCR in this type of proceeding.” This appeal ensued.

Interplay of J–51 Benefits and RSL

To place this matter within its proper context, we must first examine the interplay of J–51 benefits and RSL. The City's J–51 tax incentive program allows property owners who complete qualifying multiple dwelling improvements to receive tax exemptions and abatements for a period of years. In exchange for receiving such benefits, the landlords subject their properties to the RSL (Administrative Code § 11–243). Accordingly, units not otherwise subject to rent stabilization become rent stabilized.

For example, section 5(a)(5) of the Emergency Tenant Protection Act of 1974 (as added by L. 1974, ch. 576, § 4) exempts from stabilization “housing accommodations in buildings completed or buildings substantially rehabilitated as family units on or after” January 1, 1974. A building that has been completely renovated for residential use after December 31, 1973, is therefore exempt from stabilization coverage ( see e.g. Wilson v. One Ten Duane St. Realty Co., 123 A.D.2d 198, 201, 510 N.Y.S.2d 603 [1987] ). Where an owner, however, receives J–51 benefits in connection with such a renovation, the building will indeed be rent stabilized, for a period of time, by virtue of RSL (Administrative Code) § 26–504(c), which covers “[d]welling units in a building or structure receiving the benefits of section 11–243.” ( see e.g. Matter of Eastern Pork Prods. Co. v. New York State Div. of Hous. & Community Renewal, 187 A.D.2d 320, 590 N.Y.S.2d 77 [1992] ).

Where the building only became subject to rent regulation due to its participation in the J–51 program, RSL [Administrative Code] § 26–504(c) expressly provides that once the tax benefits terminate, the units may be deregulated in one of two ways. One way is for the owner to include a J–51 rider in the lease informing the occupant that the apartment will be deregulated upon the termination of the benefit ( id.); Rent Stabilization Code (RSC) [9 NYCRR § 2520.11[ o ] ]. If the lease does not contain the requisite notice, occupied units remain subject to rent stabilization until a vacancy occurs after the expiration of the J–51 benefits ( see East Renovating Co. v. New York State Div. of Hous. & Community Renewal, 16 A.D.3d 166, 791 N.Y.S.2d 88 [2005]; Matter of Lomagno v. Division of Hous. & Community Renewal, 38 A.D.3d 897, 831 N.Y.S.2d 330 [2007] ).

Owners of rent regulated buildings also frequently apply for and receive J–51 benefits for such routine work as boiler installations, new windows, elevator upgrades and the like. The receipt of J–51 benefits under such circumstances has no effect on the building's rent-regulated status. That is, a rent stabilized building will be rent stabilized before, during and after the receipt of J–51 benefits. This much was clear before Roberts.

What was unclear before Roberts was whether individual rent-stabilized units may be subject to high-rent/high-income deregulation in buildings receiving J–51 benefits. In 1993, the legislature enacted the Rent...