ALBANY - Landlords cannot deregulate rents on units under luxury decontrol provisions of the Rent Stabilization Law while accepting public tax incentive benefits, the Court of Appeals decided yesterday.
In a ruling that the dissenters warned would have a significant fallout in the courts and troubled real estate industry, a 4-2 majority held that thousands of units in Manhattan's sprawling Peter Cooper Village and Stuyvesant Town complex were illegally decontrolled by Tishman Speyer Properties and its previous owner.
The majority decided in Roberts v. Tishman Speyer Properties, 131, that a "practical" reading of the Rent Regulation Reform Act of 1993, and of sponsors' statements on the floor of the Legislature when the measure was being debated, indicate the statute "carved out an exception to luxury decontrol" for units that received tax benefits.
The Court of Appeals decision appears on page 25 of the print edition of today's Law Journal.
As noted by the majority yesterday, Senator Kemp Hannon, R-Garden City, told his colleagues during that debate in 1993 that "at no point" would luxury decontrol apply to buildings that have received tax benefits.
The Court also ruled that it does not "owe deference" to a 1996 advisory opinion from the Division of Housing and Community Renewal (DHCR) that determined J-51 units are eligible for luxury decontrol.
The majority ruled in a per curiam decision that it was making an interpretation of what the Legislature meant by the Rent Stabilization Law, §§26-504.1, 26-504.2, and that DHCR had no special technical expertise to which the Court was bound to defer.
Since 1992, Tishman Speyer and the former owner of the Peter Cooper Village/Stuyvesant Town complex, the Metropolitan Insurance and Annuity Company and Metropolitan Tower Life Insurance Company, have received more than $25 million under New York City's J-51 tax incentive program for improvements in housing stock.
The nine plaintiffs, all tenants of the complex, contend in their class action that Tishman Speyer and MetLife owe tenants about $215 million in rent overcharges and other costs on units decontrolled after vacancies or improvements.
The plaintiffs contend that one quarter or more of the 11,200 units in the complex have illegally been subjected to luxury decontrol and that residents in as many as tens of thousands of units in the city have been subject to luxury decontrol following improvements for which landlords accepted tax benefits.
'Unnecessary Upheaval'
The majority and the dissenters jousted yesterday over the effect of the ruling.
In dissent, Judge Susan Phillips Read wrote that while she was not suggesting the Court "shirk from its responsibility" for fear of creating "untoward or uneven consequences" for the parties in a case, it should avoid creating unnecessary upheaval in its decision-making.
"The Court does not, in my view, fulfill its duty to safeguard the stability of the laws when it tosses out a reasonable and longstanding statutory interpretation made by a specialized agency, as it does today," Judge Read wrote in a dissent joined by Judge Victoria A. Graffeo.
Judge Read said many of the landlords who may be affected by the ruling are what she called the "Mom and Pop" owners of single buildings, many of them located outside Manhattan, who cannot afford prolonged summary proceedings.
"It will take years of litigation over many novel questions to deal with the fallout from today's decision," Judge Read wrote. "In the absence of meaningful legislative action, uncertainty will reign in an industry already rocked by the bursting of the great residential real estate bubble."
Noting Judge Read's predictions of the "dire" financial consequences of the ruling, the majority cautioned that "these predictions may not come true."
"They depend, among other things, on issues yet to be decided, including retroactivity, class certification, the statute of limitations, and other defenses that may be applicable to particular tenants," the majority held. "If the statute imposes unacceptable burdens, defendants' remedy is to seek legislative relief."
The case will go back to Supreme Court to resolve the remaining issues.
Tishman Speyer Properties was a defendant along with MetLife and PCV ST Owner L.P., the general partner of Tishman Speyer Properties. Resident Amy L. Roberts was the lead plaintiff.
Tishman Speyer and BlackRock Inc. bought Peter Cooper Village and Stuyvesant Town, which were built as middle-income housing in the 1940s, for $5.4 billion in 2006.
The complex covers some 80 acres and 10 city blocks between First Avenue and Avenue C and 14th and 23rd streets in Manhattan.
It had been rent-regulated since at least the mid-1970s.
Amid the recession and the poor real estate market in New York City, Fitch Ratings, among other analysts, have questioned Tishman Speyer's financial reserves and its long-term ability to meet its obligations.
'Huge' Victory
In a statement yesterday, Tishman Speyer said the Court's decision is an "unfortunate" one for New York.
"The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years," the real estate company said.
Jay B. Kasner of Skadden, Arps, Slate, Meagher & Flom appeared before the Court on behalf of Tishman Speyer.
Alan E. Mansfield of Greenberg Traurig argued for MetLife.
Alexander H. Schmidt of Wolf Haldenstein Adler Freeman & Herz, who represented the tenants, said yesterday's ruling left open several points that will either have to be litigated or resolved through negotiation.
But the decision is a "huge" victory for tenants and for the "democratic process in New York, because the Legislature was circumvented here," Mr. Schmidt said in a telephone interview as he headed to a rally yesterday at Stuyvesant Town to celebrate the ruling.
In a statement, Mayor Michael Bloomberg said the decision "provides some degree of clarity on an issue that has been debated for a long time, although the scope of its impact will take more time to know."
The decision affirmed a 4-0 determination by an Appellate Division, First Department, panel. Those judges determined that acceptance of J-51 tax abatements precluded luxury decontrol of units and that courts were under no obligation to give deference to the DHCR's 13-year-old advisory opinion on the matter. (NYLJ, Mar. 6)
Earlier, Manhattan Supreme Court Justice Richard B. Lowe had dismissed the tenants' suit based largely on the DHCR's reasoning in its 1996 interpretation of the Rent Stabilization Law and the eligibility of units for luxury decontrol (NYLJ, Aug. 24, 2007).
Under state law, landlords can declare units eligible for luxury decontrol when the regulated rent reaches $2,000 a month by legal incremental increases or when the annual household income of occupants has passed $175,000 two years in a row.
The idea behind luxury decontrol is that rent-regulation benefits should be discontinued for tenants who have shown they have the wherewithal to pay market rates.
Among the groups filing a flurry of amicus curiae at the high court were the Legal Aid Society of New York City, the state Tenants & Neighbors Coalition, the Mitchell-Lama Residents Coalition and the Rent Stabilization Association of New York City.
Jeffrey Turkel of Rosenberg & Estis, who wrote the brief for the Rent Stabilization Association, which represents the owners of rent-regulated apartments in New York City, said both residential building owners and lenders who financed their purchases will be harmed by yesterday's ruling because it will change the basic calculation of the value of residential investments.
"Many units will still be within the system and, no matter how high [rents] can get incrementally, they are still legally stabilized and those owners are stuck with those tenants for life," Mr. Turkel said.
He said the decision will also lower the value of some property units, which he said are based on the rents landlords can charge occupants, and ultimately reduce how much New York City can charge in real estate taxes.
Judges Carmen Beauchamp Ciparick, Robert S. Smith, Eugene F. Pigott Jr. and Theodore T. Jones Jr. joined in yesterday's unsigned majority ruling.
Chief Judge Jonathan Lippman, who was presiding justice in the First Department when one of its panels passed judgment in the Roberts matter, took no part in yesterday's determination.
@|Joel Stashenko can be reached atjstashenko@alm.com.
