Ig Second Generation v. New York State Dhcr

• Decision Date: 06 May 2008
• Docket Number: 67.
• Citation: 889 N.E.2d 475,10 N.Y.3d 474
• Parties: In the Matter of IG SECOND GENERATION PARTNERS L.P. et al., Respondents, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Office of Rent Administration, Appellant, and Dru Arstark, Intervenor-Appellant.
• Court: New York Court of Appeals Court of Appeals

889 N.E.2d 475

10 N.Y.3d 474

In the Matter of IG SECOND GENERATION PARTNERS L.P. et al., Respondents, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Office of Rent Administration, Appellant, and Dru Arstark, Intervenor-Appellant.

67.

Court of Appeals of New York.

May 6, 2008.

Gary R. Connor, General Counsel, New York State Division of Housing and Community Renewal, New York City (Sheldon Melnitsky and Mary Elizabeth Lacerenza of counsel), for appellant.

Shaw & Binder, New York City (Robert H. Gordon of counsel), for respondents, in opposition to appellant.

Shaw & Binder, New York City (Robert H. Gordon of counsel), for respondents, in opposition to intervenor-appellant.

Robert A, Katz, New York City, for intervenor-appellant.

OPINION OF THE COURT

PIGOTT, J.

The issue on this appeal is whether the Division of Housing and Community Renewal (DHCR) has the authority to cancel rent arrears owed by a rent-stabilized tenant as a result of DHCR's resolution of an unusually protracted fair market rent appeal. Under the circumstances of this case, we hold that it does not.

In 1990, the tenant leased an apartment in a Manhattan building, owned by IG Second Generation Partners L.P. (the owner). She was the first rent-stabilized tenant after the preceding rent-controlled tenant vacated the apartment. The initial lease set the monthly rent at $830, commencing May 1, 1990. The tenant then filed a fair market rent appeal with the agency, seeking an adjustment of the $830 rent on the ground that it exceeded the apartment's fair market rent. Five years later, in 1995, the agency's Rent Administrator issued an order establishing the fair market rent for the subject apartment at $556.82 per month, based upon its applicable rent guidelines.^* The order directed the owner to adjust the tenant's monthly rent to that amount prospectively and to refund the overcharged rent, totaling $12,877.37.

In response, the owner filed a petition for administrative review. That portion of the administrator's order directing a refund of overcharged rent was automatically stayed pending resolution of the petition (see Rent Stabilization Code [9 NYCRR] § 2529.12). The agency denied the owner's request for a stay of the remainder of the administrator's order, i.e., the prospective rent adjustment.

While the landlord's petition for review was pending, the owner notified the tenant that it would accept the rent set by the Rent Administrator's order without prejudice to collecting the full lease rent in the event that the order is overturned. The tenant also signed several renewal leases during the pendency of the review. All of the leases stated that the "collectible rent"—i.e., the lower rent set by the Rent Administrator—"may be modified pursuant to the DHCR's decision" on administrative review.

Another five years passed when, in January 2000, the agency partially granted the owner's petition and established the fair market rent at $798.07 per month, not $556.82 as determined by the Rent Administrator.

The tenant then brought a CPLR article 78 proceeding to annul the agency's January 2000 determination. In July 2000, Supreme Court granted the agency's request to remit the matter for further consideration. At issue on this appeal is DHCR's determination on remand.

Four years later, in 2004, DHCR, once again, partially granted the owner's petition and this time established the fair market rent at $1,078.30 per month. In making this determination, the agency utilized a broader comparability standard enacted by a 2000 amendment to Rent Stabilization Code § 2522.3.

However, relying on several of its regulations, the agency determined that the tenant's payment of the rent set by the previous order of the Rent Administrator would "be deemed full payment of the legal rent" until the first payment due 60 days after the agency's new order. Only then would the owner be permitted to collect the initial lease rent plus applicable increases. The agency reasoned that, on the one hand, its amended regulations resulted in a more accurate assessment of the fair market rent; but on the other hand, "undue hardship" to the tenant would result if the agency allowed the owner to collect the $830 rent retroactive to May 1, 1990 because the tenant would have to repay the substantial rent arrears that accumulated during the decade between the Rent Administrator's order and the agency's ultimate resolution of the petition for administrative review. As a result, DHCR effectively cancelled approximately $19,000 of rent arrears owed by the tenant.

The owner then commenced this article 78 proceeding, challenging the agency's determination to the extent that it cancelled the tenant's rent arrears. The tenant intervened in the proceeding, arguing that the court should either sustain the determination or remand the matter to DHCR to allow her to submit evidence of hardship.

Supreme Court granted the owner's petition, holding that the agency's determination cancelling the rent arrears was arbitrary and capricious. The court remanded the matter to DHCR to calculate the exact amount owed and to establish a repayment schedule.

The Appellate Division, with one Justice dissenting, affirmed, concluding that, "[o]nce DHCR found that the lease rent did not exceed the fair market rent, it had no authority to waive rent arrears" (34 A.D.3d 379, 379, 825 N.Y.S.2d 452 [2006]). That court granted DHCR and the tenant leave to appeal and certified the following question: "Was the order of this Court, which affirmed the order of the Supreme Court, properly made?" We answer the certified question in the affirmative.

DHCR contends that it rationally exercised its equitable authority pursuant to Rent Stabilization Code (RSC) § 2522.7 in deciding to apply amended RSC § 2522.3 prospectively. DHCR also relies on RSC § 2527.7, which requires amended code provisions to apply to all proceedings pending before the agency "unless undue hardship or prejudice results therefrom." DHCR argues that, even without consideration of the tenant's personal financial circumstances, the record supports its finding of undue hardship based on the difference between the initial lease rent and the lower rent set by the Rent Administrator, the length of time between the administrator's order and the agency's resolution of the petition for administrative review, and the substantial rent arrears owed by the tenant. We disagree.

An agency's interpretation of its own regulations "is entitled to deference if that interpretation is not irrational or unreasonable" (Matter of Gaines v. New York State Div. of Hous. & Community Renewal, 90 N.Y.2d 545, 549, 664 N.Y.S.2d 249, 686 N.E.2d 1343 [1997]; see Samiento v. World Yacht Inc., 10 N.Y.3d 70, 79, 854 N.Y.S.2d 83, 883 N.E.2d 990 [2008]). Put another way, the courts will not disturb an administrative agency's determination unless it lacks any rational basis (see Matter of Gilman v. New York State Div. of Hous. & Community Renewal, 99 N.Y.2d 144 149, 753 N.Y.S.2d 1, 782 N.E.2d 1137 [2002]).

Here, no statute or regulation permits the Division of Housing and Community Renewal to forgive rent arrears owed by a tenant as a consequence of its determination in a fair market rent appeal. The procedure is clear. Where a rental unit moves from rent control to rent stabilization, the owner establishes "the initial legal regulated rent" in the lease or rental agreement at any amount (RSC § 2521.1[a][1]). That rent is subject to the tenant's right to seek a rent adjustment in a fair market rent appeal (see id.). In resolving such an appeal in the tenant's favor, RSC § 2522.3(d)(1) requires the agency to "direct the affected owner to make the refund of any excess rent to the tenant." However, the agency, upon a finding that the initial lease rent does not exceed the fair market rent, lacks authority to modify the lease terms by forgiving rent arrears.

DHCR's reliance on RSC § 2522.7 is misplaced. That provision states: "In issuing any order adjusting or establishing any legal regulated rent, ... the DHCR shall take into consideration all factors bearing upon the equities involved." In dismissing the tenant's appeal, the agency refused to adjust the legal regulated rent established in the lease, finding it to be a fair rent. Thus, DHCR's equitable authority pursuant to RSC § 2522.7 was not implicated.

Nor does the record support DHCR's finding of undue hard-ship to the tenant. The fact that a tenant owes substantial back rent as a result of a DHCR determination alone is insufficient to support a finding of undue hardship (see generally One Three Eight Seven Assoc. v. Commissioner of Div. of Hous. & Community Renewal of Off. of Rent Admin., 269 A.D.2d 296, 296, 703 N.Y.S.2d 44 [1st Dept. 2000]). A rent administrator's order allowing a tenant to pay a lower rent is not a final determination, but an interim order subject to review by DHCR, which has the authority to issue a final determination (see RSC § 2529.8).

Here, the record contains no information with respect to the tenant's personal financial circumstances to permit a finding that payment of the rent arrears would cause her undue hardship. Several renewal leases put the tenant on notice that the owner intended to collect the rent stated in the lease in the event that its petition for administrative review was successful. There is no evidence in the record that the tenant is unable to pay the rent arrears without hardship. The tenant's claim that she never had a meaningful opportunity to submit evidence of personal hardship at the agency level is not supported by the record. DHCR's 2002 notice on remand informed the tenant that the fair market rent would be...