Terrace Court, LLC v. N.Y. State Div. of Hous. and Cmty. Renewal

• Decision Date: 28 December 2010
• Parties: In re TERRACE COURT, LLC, Petitioner-Appellant, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Respondent-Respondent. Robert Katel, et al., Intervenors-Respondents.
• Court: New York Supreme Court — Appellate Division

914 N.Y.S.2d 43
79 A.D.3d 630

In re TERRACE COURT, LLC, Petitioner-Appellant,
v.
NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Respondent-Respondent.
Robert Katel, et al., Intervenors-Respondents.

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

Dec. 28, 2010.

914 N.Y.S.2d 44

Wenig Saltiel LLP, Brooklyn (Meryl L. Wenig of counsel), for appellant.

Gary R. Connor, New York (Christina S. Ossi of counsel), for DHCR, respondent.

Collins, Dobkin & Miller, LLP, New York (Seth A. Miller of counsel), for intervenors-respondents.

MAZZARELLI, J.P., FRIEDMAN, NARDELLI, RENWICK, ROMÁN, JJ.

79 A.D.3d 630

Judgment, Supreme Court, New York County (Jane S. Solomon, J.), entered August 7, 2008, denying the petition to annul respondent's determination, dated November 15, 2007, which denied a major capital improvement (MCI) rent increase for five apartments in petitioner's building, and dismissing the proceeding brought pursuant to CPLR article 78, affirmed, without costs.

In May 2004, petitioner applied to the Division of Housing and Community Renewal (DHCR) for an MCI increase after performing work on the outside of the building that included pointing, waterproofing and masonry. Petitioner sought a monthly increase of $42.58 per room based on a claimed project cost of $1,207,853. Shortly after petitioner filed the application, three tenants objected to it, claiming that water continued to infiltrate into their apartments. The Tenants' Association also opposed the application. It submitted to DHCR the affidavits of several tenants who claimed that they continued to experience

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leaks in their apartments in the areas where petitioner had performed pointing work. The Association's submission focused on apartments 6F, 7F, 8F, 9F, 5B and 8A.

The Association also proffered the affidavit of an architect who had inspected the work on the Association's behalf. The architect opined that petitioner's contractor had actually done less work than petitioner claimed it had done in the rent increase application. In a supplemental affidavit, the architect averred that the leaks inside the apartments to which he was given access were consistent with water infiltrating from the outside of the building, as opposed to from the building's plumbing. The Association submitted additional statements from the architect in which he noted that water continued to infiltrate the building as late as February 2005. Finally, the Association submitted a violation report from the Department of Buildings, dated December 2004, which cited petitioner for allowing interior water damage in apartments 6F, 7F, 8F, and 9F, and for incomplete pointing of the building's facade.

Petitioner attempted to rebut the Association's submissions by stating that it had addressed any leaks inside the complaining tenants' apartments. However, it adhered to its position that its contractor had performed the pointing work properly. Petitioner offered its own architect's reports, which disputed the tenants' architect's findings. Petitioner also pointed out that the Buildings Department violation had been dismissed, and stated the problem was because one of the "F"-line tenants had caused a leak.

In September 2005, DHCR sent an inspector to the building. A representative of petitioner accompanied the inspector as he examined the conditions of apartments 6F, 7F, 8F, 5B and 8A (access to apartment 9F was not available). According to his report, in each of the apartments the inspector observed walls in some state of disrepair, including staining, discoloration, blistering or cracking, or some combination of those conditions. Only in apartments 8A and 8F did the inspector detect actual wetness with his moisture meter. DHCR did not share its inspector's report with petitioner.

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On December 19, 2005, DHCR issued an order granting petitioner's application to the extent of increasing the monthly rent by $40.20 per room. However, the order permanently exempted apartments 8A, 5B, 6F, 7F and 8F from the increase, based on the complaints of those tenants that leaks persisted in the apartments, as confirmed by the DHCR inspector's report. Petitioner filed a petition for administrative review (PAR) which challenged DHCR's conclusion that a moisture problem

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persisted in the subject apartments after the pointing work was completed. Petitioner also contended in the PAR that DHCR exceeded its authority by permanently exempting apartments 8A, 5B, 6F, 7F and 8F from the rent increase, rather than giving petitioner an opportunity to cure whatever defects persisted.

DHCR denied the PAR, finding that "the state of the apartments at the time of the inspection warranted the exemption ordered by the Rent Administrator." DHCR further found that the permanent exemption was appropriate, considering that the conditions found in the apartments "existed in the apartments when work was completed just prior to the owner's filing of the application for an MCI rent increase for pointing, masonry, etc. ..."

Petitioner commenced this article 78 proceeding. It asserted in its petition that DHCR's permanent exemption of the five apartments exceeded the agency's regulatory authority and was arbitrary and capricious. It also argued that its due process rights were violated by DHCR's failure to serve it with a copy of the inspector's report. After granting a motion by the tenants of the five apartments to intervene, Supreme Court denied the petition and dismissed the proceeding. The court held that, because the inspector's report merely confirmed the tenants' allegations that water continued to infiltrate the building after the completion of the work, no due process violation occurred as a result of DHCR's failure to provide petitioner with a copy of it. The court further held that DHCR did not abuse its discretion in ruling that an exemption was appropriate for the five apartments. That conclusion was based on the existence of the inspection report, as well as the other submissions of the parties. In addition, the court held that granting a permanent exemption was proper and did not constitute an unwarranted penalty, since petitioner was not precluded from seeking rent increases for other MCI work performed on the subject apartments.

Supreme Court did not abuse its discretion. The record before it and the agency contained much more than just the DHCR inspection report to which petitioner objects. Well before the inspection was conducted, the tenants submitted complaints indicating the pointing work was not performed properly, as well as multiple reports from an expert who stated that the damage in the tenants' apartments was directly related to inadequate waterproofing of the building facade. Thus, even without the inspection report, the record contained sufficient evidence warranting the disallowance of a rent increase for the five apartments ( see Matter of Cenpark Realty Co. v. New York State Div. of Hous. & Community Renewal, 257 A.D.2d 543, 685 N.Y.S.2d 26 [1999] ).

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In any event, the inspection report was properly considered, despite the fact that it was based on an inspection performed 16 months after the work was completed ( see Matter of Whitehouse Estates v. New York State Div. of Hous. & Community Renewal, 5 A.D.3d 190, 190, 772 N.Y.S.2d 807 [2004] [holding that DHCR determination was "rationally supported" by an inspection performed six years after

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work was performed] ). Moreover, the inspection report merely confirmed the allegations previously made. Accordingly, no due process violation resulted from DHCR's failure to provide a copy of the report to petitioner prior to making its initial determination ( see Matter of Empress Manor Apts. v. New York State Div. of Hous. & Community Renewal, 147 A.D.2d 642, 538 N.Y.S.2d 49 [1989] ).

Further, DHCR did not abuse its discretion in permanently exempting the five apartments. Indeed, the agency is entitled to the same deference on that issue as it is on the issue of whether it properly ruled that some of the subject work was defective in the first place. Petitioner argues that the agency only had two options, to deny the rent increase completely, or to grant it completely, after giving petitioner an opportunity to cure the problem that was permitting water to infiltrate the five apartments. However, petitioner fails to cite any relevant case law for that proposition. The recent case of Matter of Langham Mansions, LLC v. New York State Div. of Hous. & Community Renewal, 76 A.D.3d 855, 908 N.Y.S.2d 10 [2010], on which the dissent primarily relies to support its argument that petitioner here was entitled to an opportunity to cure, is inapposite. There, the majority held that DHCR acted irrationally by ignoring its own policy of "suspend[ing] a[MCI] rent increase for individual apartments until repairs of defects are completed (rather than revoking the increase)" id. at 858, 908 N.Y.S.2d 10 [internal quotation marks and citations omitted]. However, that policy is irrelevant here, where DHCR did not revoke a rent increase already in place but rather declined to grant an increase in the first instance. The distinction is more than a "nuance," as it is characterized by the dissent. In the PAR discussed in Langham Mansions, and in Langham Mansions itself, the agency revoked a rent increase that had been granted years earlier. While the record contains no evidence of why DHCR adopted the policy against revocation, one can surmise that the policy was implemented to avoid the prejudice which would be visited on a landlord which relied in good faith, and for a lengthy period of time, on a rent increase, only to later lose it. Such a concern would not exist in this case, where petitioner never enjoyed a rent increase. Accordingly, there was no reason for DHCR to consider the policy that applied in Langham Mansions.

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In any event, the dissent's emphasis on the policy recognized by...