With New York’s rent regulations up for renewal in June, there are several bills in the Legislature that claim to be designed to strengthen tenant protections. Two that appear to have garnered favor with the governor are one that would eliminate vacancy decontrol and another that would limit a landlord’s ability to revoke a preferential rent. But might these bills be more trouble than they are worth?
Under applicable law, where an apartment is rent-stabilized its “legal rent” must be registered with the state Division of Housing and Community Renewal (DHCR). Each year, the Rent Guidelines Board (RGB) determines the percentage by which landlords may increase that legal rent for lease renewals. If an apartment becomes vacant, however, it may be removed from rent stabilization altogether if its legal rent exceeds a statutory maximum (currently $2,700). This is vacancy decontrol.
Bill S2591A would eliminate vacancy decontrol. It would also require apartments previously removed from rent stabilization through vacancy decontrol to be re-registered as rent stabilized if they were rented for less than $5,000 per month at any time since Jan. 1, 2013. All such apartments would be subject to RGB limits on rent increases indefinitely, regardless of how high the rent gets.
According to the bill’s sponsor memo, the purpose of this is “to protect the state’s precious supply of affordable housing.” But it raises substantial constitutional concerns that, under Manocherian v. Lenox Hill Hosp., 84 N.Y.2d 385 (1994), it may constitute an impermissible regulatory taking.
In Manocherian, the Court of Appeals struck down a statute that required landlords to offer rent-stabilized renewal leases to not-for-profit hospitals that sublet the subject apartments to their employees. Among the statute’s infirmities was that because it “vest[ed] renewal rights” for a rent-stabilized tenancy “in an entity of unlimited existence,” it essentially subjected the apartments to rent stabilization in perpetuity. 84 N.Y.2d at 399.
This represented an unconstitutional “regulatory taking.” Id. at 398. The statute, held the court, ran “directly contrary to another goal of [the rent stabilization laws]—to free up apartments, fairly and appropriately, as soon as practicable.” Id. at 399 (emphasis added; citations omitted).
The consequences of Manocherian did not stop with the invalidation of the statute—it cost the taxpayers real money. In its aftermath, the state was forced to pay compensation to landlords whose property was temporarily affected by the statute. See 520 East 81st St. Assocs. v. State, 19 A.D.3d 24 (1st Dept. 2005).
The vacancy decontrol bill may be distinguishable from the statute at issue in Manocherian. For one thing, it may not represent as complete a foreclosure of the avenues through which apartments might otherwise revert to non-rent-stabilized status. For example, apartments could still be deregulated pursuant to so-called high income deregulation, which allows deregulation when an apartment whose rent exceeds a certain threshold is occupied by a tenant whose income exceeds a certain level. This, however, might create an incentive for landlords to rent to higher-income tenants, contrary to the stated goal of the bill.
The vacancy decontrol bill may also be more closely tied to the goal of preserving affordable housing than the statute at issue in Manocherian, whose main beneficiary was the hospitals. But it remains highly questionable whether that goal is actually served by perpetually limiting rent increases on high-rent apartments. A strong argument could be made that the goal would be better served by raising the rent level at which vacancy decontrol is triggered.
Such disconnects between the bill’s stated goal and its actual impact may support a finding that, like the statute in Manocherian, it “suffers a fatal defect by not substantially advancing a closely and legitimately connected state interest.” See Manocherian, 84 N.Y.2d at 389 (citations omitted)
The preferential rent bill presents a different set of issues. Occasionally (where, for example, the market rent for an apartment is actually less than what the RGB guidelines would permit) a landlord rents a stabilized apartment for less than its legal rent. This lower rent is called a “preferential rent.” In 2003, the law was amended to provide that a landlord may revoke a preferential rent (and raise the rent to the permissible legal rent) upon any lease renewal. See New York City Admin. Code §26-511(c)(14).
Even prior to that amendment, however, a landlord could preserve the right to revoke a preferential rent through language in the lease. See Missionary Sisters of the Sacred Heart, Ill. v. DHCR, 283 A.D.2d 284, 288-90 (1st Dept. 2001). Although the 2003 amendment ostensibly makes that express reservation of rights unnecessary, many landlords still include it in any lease containing a preferential rent. At a minimum, applicable regulations require that the lease set forth both the legal rent and the preferential rent. See 9 N.Y.C.R.R. §§2501.2 and 2521.2.
Under Bill S2845A, a landlord who has offered a preferential rent could not revert to the higher, legal rent until a vacancy. The bill’s sponsor memo explains that its purpose is to protect tenants from “sudden and unexpected substantial rent increases.” This may be a salutary purpose. But to the extent that it applies to existing leases that specifically reserve the landlord’s right to revoke a preferential rent, the bill may “impair the obligation of contracts” in a manner prohibited by the Article I, §10 of the U.S. Constitution (the Contracts Clause).
A statute challenged under the Contracts Clause is subject to a two-pronged analysis. The first prong asks whether the statute represents a “substantial impairment of a contractual relationship.” Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018) (citation and internal quotations omitted). If it does, the second prong asks whether it “is drawn as an appropriate and reasonable way to advance a significant and legitimate public purpose.” Id. (citation and internal quotations omitted).
“Total destruction of contractual expectations is not necessary for a finding of substantial impairment.” Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400, 411 (1983). Rather, “the primary consideration in determining whether the impairment is substantial is the extent to which reasonable expectations under the contract have been disrupted.” Donohue v. Paterson, 715 F. Supp.2d 306, 318 (N.D.N.Y. 2010) (citations and internal quotations omitted). To the extent that the preferential rent bill would deprive a landlord of a right expressly reserved in the lease, it may constitute a substantial impairment under these principles. See Buffalo Teachers Federation v. Tobe, 464 F.3d 362, 368 (2d Cir. 2006) (wage freeze that would deprive union members of a salary increase to which they would otherwise have been entitled under their collective bargaining agreement constituted a substantial impairment of contract rights).
The question would then become whether the bill represents a reasonable way to advance a significant and legitimate public purpose. In this regard, it bears emphasis that the bill would give tenants substantially greater rights than they had before the 2003 amendment. Prior to that, lease language reserving the right to revoke a preferential rent was fully enforceable. See Missionary Sisters, supra. The Legislature plainly did not view this as an impediment to affordable housing; to the contrary, it was against this legal landscape that state lawmakers amended the statute to expand landlords’ rights. There is no reason to believe that reverting to the pre-amendment system would not fully serve the stated purpose of avoiding “sudden and unexpected substantial rent increases.” To go farther might not be “appropriate and reasonable.”
If either of these bills becomes law, challenges like those outlined above will likely follow. Whether or not they succeed, the battle over them will be expensive, time-consuming, and distracting. To what end?
The sponsor memos for both bills assert that they are necessary to combat a “crisis.” That word implies a situation that is temporary and acute, yet—together with its close cousin “emergency”—it has been used to describe the housing situation in New York City for more than half a century. See Rent Stabilization Ass’n of NYC v. Higgins, 83 N.Y.2d 156, 164-65 and n.1 (1993) (tracing the history of this “[e]mergency” back to 1946). The circumstances seem ripe for an argument that further regulations can no longer be justified by the existence of a “crisis” or “emergency.”
Moreover, long-term data indicates that rent regulation “appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.” (See R. Diamond, “What does economic evidence tell us about rent control?” The Brookings Institution, Oct. 18, 2018). In other words, rent regulations—expensive as they are to promulgate, enforce, and defend—may not be having the effect the legislators intend. Perhaps it is time for a different approach.
Adrienne B. Koch is a litigation partner with Katsky Korins in New York.