By: Magda L. Cruz
In a much anticipated case involving how to calculate legal rents following an improper deregulation while a building was receiving J-51 tax benefits, the Court of Appeals in Casey v. Whitehouse Estates, filed March 16, 2023, unanimously rejected the application of a punitive default formula for resetting the rents, and reaffirmed its prior holding in Matter of Regina Metro Co., LLC v. NYS Div. of Hous. and Comm. Renewal, 35 N.Y.3d 332 (2020), on these issues.
In Casey, while receiving J-51 tax benefits, apartments were deregulated through 2011 when they became vacant and their rents exceeded the then statutory threshold. The deregulation occurred both before and after the 2009 Roberts v. Tishman Speyer Props., L.P. decision, which had held that deregulation could not legally occur during a J-51 period — contrary to 15 years of administrative and judicial rulings that had formerly allowed such deregulation. The tenant-plaintiffs commenced a rent overcharge class action in 2011. Their individual tenancies commenced between 2002 and 2011. The owner’s attempt to issue refunds and register rents it believed were lawfully recalculated after the class action was commenced was deemed to constitute a “fraudulent scheme” by the lower Courts.
The Court of Appeals has now reversed and pointedly explained why, as follows:
[Owner]’s deregulation of the apartments was based on this same “misinterpretation of the law” involved in Regina and therefore that conduct did not constitute fraud. [Owner]’s subsequent re-registering of the apartments occurred after the four-year lookback period and [tenants] have failed to offer evidence that it somehow affected the reliability of the actual rent [tenants] paid on the base date.
The Court of Appeals made clear that an actual fraudulent scheme to deregulate needed to be proven before resorting to a punitive default formula to recalculate the rents, and the tenants failed to prove any fraudulent conduct. Once again, the Court of Appeals stated that a fraudulent scheme to deregulate requires a finding of willfulness – and that a misinterpretation of deregulation law is not willful conduct. Without establishing the elements of fraud, as defined in Regina, the Court of Appeals reiterated that the proper way to determine the legal rent and any overcharges:
For purposes of calculating overcharges, where it is possible to determine the rent “actually charged on the base date” – here October 14, 2007 – that amount should be used and rent increases legally available to [owner] pursuant to the RSL during the four-year period should be added.
Significantly, the Court of Appeals reinforced “the limited category of cases” where rental history can be examined beyond the applicable rent overcharge statute of limitations. This holding, in combination with Regina, sends a strong message from the State’s highest court that liability for rent overcharges is not limitless. The examination of rent histories beyond the applicable statute of limitations and the punitive default formula may be employed only in the rare case where an actual fraudulent scheme to deregulate is found, a heavy burden of proof for tenants.
Magda L. Cruz is a partner in the Firm’s Litigation Department, specializing in appeals, and can be reached at 212-867-4466 ext. 326 (mcruz@bbgllp.com).