Scott E. Mollen
Scott E. Mollen ()

Rent Stabilization—Court Rejects Housing Industry’s Challenge to DHCR’s Adoption of the 2014 Amendments to the Rent Stabilization Code, Which, Inter Alia, Codified a Tenant Protection Unit and Set Forth Exceptions to the Four-Year Statute of Limitations for Reviewing Rent Records

Real estate industry plaintiffs filed an action, challenging the NYS Department of Housing and Community Renewal’s (DHCR’s) adoption of 2014 amendments as being unconstitutional. The plaintiffs sought to “eliminate” a Tenant Protection Unit (TPU) and strike the amendments “in their entireties.” The plaintiffs requested, inter alia, “a permanent injunction barring DHCR from enforcing the…amendments and prohibiting TPU from conducting further investigations or issuing further determinations.” The plaintiffs based their claims “on the due process clause of the New York State Constitution and the Separation of Powers Doctrine.”

The plaintiffs argued that the government should “not be burdened by additional procedural safeguards to protect their interests” since the Office of Rent Administration (ORA) previously existed and functioned without TPU. The plaintiffs asserted that the TPU does not have powers that ORA does not have and that the TPU “is only being used to avoid ORA’s existing adjudicatory process.” They contended that “TPU investigators very infrequently speak to potential witnesses, such as contractors,” about the individual apartment improvement (IAI) rent increases, and, “instead, rely upon correspondence with the owner.” They noted that the TPU “does not hold hearings or permit any internal administrative appeal.” In sum, they alleged that TPU audit practices fail to comply with due process requirements.

The court explained that the TPU investigates and prosecutes rent overcharge violations, “by seeking voluntary compliance and by bringing enforcement actions.” The TPU relied upon DHCR’s statutory authority to ‘administer oaths, issue subpoenas, conduct investigations, [and] make inspections’….” The TPU selects its rent-stabilized apartments “by examining information provided in the annual rent registrations filed with DHCR by property owners.” Following such examination, the TPU determines “which rent-stabilized apartments to audit where there has been a significant increase in rent from one year to the next, which has occurred after a vacancy, and which the owner based, in whole or in part, on an asserted” IAI.

The plaintiffs alleged that the amendments are “unconstitutional” and invalid because they:

(1) are inconsistent with the statutes upon which they are based, (2) constitute legislative policy-making and, therefore, violate the constitutional principle of separation of powers, (3) violate property owners’ due process rights, and (4) were not adopted in compliance with the State Administrative Procedure Act (SAPA). Specifically, plaintiffs,…, allege that TPU violates their due process rights under the New York State Constitution and that the creation of TPU violates the separation of powers doctrine. They further allege that the amended rental history review regulations, the amended default rule regulation, the amended regulations governing rent reductions for failing to provide services, the amended regulations governing rent increases for MCIs, the amended regulation governing first rents, the amended regulation requiring landlords to apply to DHCR to amend rent registration statements for prior years, the amended regulation barring rent increases to landlords who fail to properly file an annual registration statement, the amended regulation governing lease riders, and the amended regulation making it unlawful to file false documents with DHCR violate the separation of powers doctrine. They additionally allege that the amended regulations violated SAPA….

The court had previously denied the plaintiffs’ motion for preliminary injunction enjoining the defendants from enforcing and enjoining the TPU from conducting its auditing and prosecution work. The parties had thereafter each moved for summary judgment.

After reviewing pertinent statutory and regulatory provisions, as well as the amendments, the court found that the plaintiffs could not be “deprived of due process based upon the fact that the regulatory safe harbor exception to statutory law does not apply where the overcharge complaint is initiated by TPU since in those cases, the landlords’ conduct remains governed by the underlying statutory scheme of the RSL. Owners of rent-stabilized properties do not have a property right based on this administrative exception to an otherwise applicable statutory remedy. Moreover, if a landlord elects to challenge an overcharge complaint made to ORA referred by TPU and is unsuccessful, the landlord can still ‘demonstrate[e] that the overcharge…was not willful’ and avoid treble damages.”

The “safe harbor” embodied in amended policy statement 89-2

constitutes a regulatory policy exception to this statutory presumption since it provides that in certain circumstances, it will “deem” an overcharge to be “not willful,” even if the overcharge was,…, willful and the landlord was otherwise subject to treble damages by statute. As explained by defendants, the justification for this regulatory exception to the statutory presumption is to encourage landlords to correct a rent overcharge on their own volition soon after a complaint is brought to DHCR’s attention. A landlord who knows that the complaint is valid and that his or her overcharge was willful may avoid statutory treble damages that would otherwise apply by swiftly remedying the violation. Conversely, a landlord who believes the current rent is appropriate may proceed to file an answer and contest the alleged violation. By contesting the violation, the landlord loses the safe harbor, but, even if his or her challenge is unsuccessful, he or she can still avoid treble damages by proving that the violation was not willful.

Thus, amended policy statement 89-2 permits an owner to “rebut the presumption of willfulness by showing non-willfulness of the overcharge by a preponderance of the evidence.” The court reasoned that “even if an owner fails to comply with the TPU process, he or she is still afforded the opportunity to challenge both the overcharge itself and the willfulness of the violation before ORA, and ORA can still consider the landlord’s evidence that an overcharge was not willful.” Moreover, the TPU “does not make willfulness determinations or recommend treble damages in connection with the rent overcharge cases it refers to ORA, but, rather ORA conducts a de novo review of each rent overcharge case referred by TPU.”

Thus, the court held that “the creation of TPU does not deprive plaintiffs of due process since the landlord is given a fair and meaningful opportunity to present evidence on the issue of the willfulness of the overcharge prior to DHCR’s final determination….” The court therefore dismissed plaintiffs’ claims based upon a violation of due process.

The court then held that the creation of TPU and the amendments did not violate the Separation of Powers Doctrine. The plaintiffs had argued, inter alia, that “‘[a]dministrative agencies can only promulgate rules to further the implementation of the law as it exists,’ but ‘they have no authority to create a rule out of harmony with the statute’….” The plaintiffs contended that the amendments are “out of harmony with the rent stabilization statutes,” because they are “inconsistent with the rent stabilization laws with respect to the four-year rule.” The court noted that “the four-year rule is both a four-year statute of limitations applicable to rent overcharge claims and an evidentiary rule which generally prohibits consideration of an apartment’s rental history more than four years prior to the commencement of an overcharge proceeding.”

The plaintiffs alleged, inter alia, that “the…amendments concerning the four-year rule improperly permit DHCR to look beyond four years any time where there is a preferential rent indicated in an apartment’s rental history, even if it were longer than four years ago and from a prior tenancy, for purposes of establishing the validity of the base date rent.” The plaintiffs argued that the amendments which allow “DHCR to do the same where the apartment was vacant or temporarily exempt on the base date is improper.” They asserted that “nothing in the rent stabilization laws or the Rent Act of 2011 permits these exceptions, and that these exceptions are,…, in conflict with the rent stabilization laws.” The court noted, however, that the legislature had “provided DHCR a broad mandate to promulgate regulations in furtherance of the…rent stabilization laws.”

Additionally, the plaintiffs argued that “the Rent Act of 2011 did not expressly authorize these exceptions to the four-year rule since it did not mention them.” However, the court observed that “the Rent Act of 2011 expressly authorized DHCR to issue regulations pursuant to any law renewed or continued by this Act, including the rent stabilization laws.” The court also found that the amendments to the four-year rule were “consistent with well established case law which has created exceptions to the four-year rule.” Accordingly, the court held that the “amendments codify the case law and do not violate the intent of the Legislature.”

Additionally, the plaintiffs argued that the amendments “allow DHCR to consider more than four years of rental history based on a mere allegation of fraud, rather than a ‘colorable claim of fraud,’ as required by” Court of Appeals precedent. The court rejected such argument, explaining that “the…amendments do not allow DHCR to consider more than four years of rent records based on a mere allegation of fraud.” Although the term “allegation” of fraud was used “in a summary published by DHCR,” the term was not used “in the regulation and does not control DHCR’s actions.” A deputy counsel for DHCR testified that “DHCR will consider more than four years of rental history when there is a ‘colorable claim of fraud.’”

The plaintiffs further argued that since owners cannot predict when a future tenant may assert a challenge to the rent, the owners “must now maintain documents forever in order to ensure that every single preferential rent in the rental history of the apartment can be supported so that DHCR is satisfied that the rent charged on the ‘base date’…is legitimate.” The court responded that “[t]he purpose of the four-year rule ‘was to alleviate the burden on honest landlords to retain rent records indefinitely…not to immunize dishonest ones from compliance with the law….”

The plaintiffs also cited inconsistencies between regulation of tenants’ lease riders in the amendments and the Rent Stabilization Law (RSL). The court found that the lease rider was authorized by the RSL and Rent Stabilization Code and the purpose of the regulation “was to give tenants greater access to information showing why their rent was increased.” Although the plaintiffs asserted that the lease rider amendment permits “tenants to withhold rent if they are not satisfied with the documentation that the landlords provide to justify an IAI rent increase,” the court found that the lease rider amendment did “not authorize tenants to withhold rent unilaterally, but contemplates a proceeding in which the landlord is afforded an opportunity to demonstrate that the rent is legal….” Thus, the court found that there was nothing in the regulation “which is contrary to the rent stabilization laws or usurps legislative authority.”

The court also rejected several other arguments advanced by the plaintiffs in support of their Separation of Powers arguments. In so holding, the court reviewed four factors to be considered in determining whether “the ‘difficult-to-demarcate line’ between administrative rule-making and legislative policymaking has been transgressed and if the regulations promulgated by the administrative agency were an invalid exercise of legislative power so as to violate the separation of powers doctrine” that were set forth by the New York Court of Appeals in Boreali v. Axelrod, 71 NY2d 1, 1987). Those factors are:

whether (1) the agency did more than balanc[e] costs and benefits according to preexisting guidelines, but instead made value judgments entail[ing] difficult and complex choices between broad policy goals to resolve social problems; (2) the agency merely filled in details of a broad policy or if it wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance; (3) the legislature has unsuccessfully tried to reach agreement on the issue, which would indicate that the matter is a policy consideration for the elected body to resolve; and (4) the agency used special expertise or competence in the field to develop the challenged regulation[s]….

The court explained that “all of the Boreali factors support DHCR’s claim that it acted within the confines of its delegated powers and did not usurp the authority of the Legislature in promulgating the…amendments.” With respect to DHCR’s decision to establish the TPU, the court noted that “DHCR already had explicit statutory authorization to create the internal administrative structures necessary to carry out its legislative mandate” and “the executive branch has authority to establish new organizational structures to enforce existing law.” Finally, the court rejected the plaintiffs’ arguments that the defendants violated the State Administrative Procedure Act (SAPA).

Disclosure: My firm represented the plaintiffs/petitioners in this litigation and they have appealed the decision.

Portofino Realty. v. N.Y. State Division of Housing, 501554/14, NYLJ 1202792223711, at *1 (Sup., KI, Decided May 31, 2017), Valasquez, J.