BBG News

Divided Appellate Division Rejects Challenge to Deregulated Status of Apartment and Dismisses Complaint

Jan 13, 2023

In 2000, after the death of a rent controlled tenant, the remaining occupant (who claimed to have had a “familylike” relationship with the tenant), settled a licensee holdover proceeding that the owner had brought to recover the apartment. In consultation with his counsel, the occupant chose to settle rather than litigate the succession claim, where he risked the possibility of failing to satisfy the heavy evidentiary burden of proving his entitlement to succession under the “non-traditional family member” criteria in the Rent Stabilization Code.

The settlement provided the occupant with such favorable terms as a rent stabilized lease in his name, at an agreed upon rent of $1,650/
month (which was registered with DHCR as the initial legal regulated rent), together with a lower preferential rent of $650/month, plus
allowable renewal increases, for the duration of his tenancy. In return, the occupant agreed not to file a Fair Market Rent Appeal (“FMRA”),
which initial rent stabilized tenants generally have the right to file but no obligation to do so if they consider the initial agreed-upon lease rent to be consistent with prevailing market rents. These terms were also memorialized in a rider to the rent stabilized lease.

The settlement was so-ordered by the Housing Court, and the owner filed it and a copy of the lease with DHCR when it filed the initial apartment registration (known as the “RR-1” form).

Years later, the apartment became vacant again. The owner lawfully applied vacancy increases and the high rent vacancy threshold was reached, resulting in the deregulation of the apartment.

Then, in 2022, a new tenant challenged the deregulation. In Liggett v. Lew Realty LLC, the new tenant sued the owner, claiming that the apartment should still be rent stabilized because the 2000 settlement by a predecessor occupant was not valid. In a 3-2 decision, the Appellate Division, First Department rejected the tenant’s claims, found no impropriety with the 2000 settlement, and dismissed the complaint. The decision made clear that the way the initial rent stabilized rent was set was permitted by the Rent Stabilization Law, and
the agreement to not file a FMRA was not an impermissible waiver of a tenant right or an evasion of the rent laws. When the 2000 settlement was negotiated, the occupant was not a tenant. Moreover, there was no showing that the agreed-upon initial legal rent was excessive.

The Appellate Division majority also found no merit in the new tenant’s contention that the $650 preferential rent in the 2000 settlement was the “true” agreed upon rent that should have been registered as the initial legal regulated rent, and based on which all subsequent increases should have been calculated. The majority emphasized that the Rent Stabilization Code defines a preferential rent as “the amount of rent charged and paid by the tenant that is less than the legal regulated rent for the housing accommodation.” The 2000 settlement clearly distinguished the lower preferential rent from the agreed upon “legal rent that was subject to applicable guideline increases and other increases authorized by law.” The Appellate Division noted that although the regulations concerning preferential rents were subsequently amended in the Housing Stability & Tenant Protection Act, that was not the law in effect in 2000 and therefore does not have any impact on the 2000 settlement.

The majority was critical of the new tenant’s attempt to belatedly “step into [the former occupant’s] shoes and assert rights that she claims [the occupant] had when he agreed to the 2000 stipulation.” Essentially, the new tenant sought to relitigate a case that had been settled 22 years earlier in order to contest the process under which the apartment eventually became deregulated. However, while there generally is no statute of limitations for reviewing the regulatory status of an apartment, there must be a factual basis for the challenge distinct from the amount of the initial legal regulated rent, which can no longer be attacked and is binding.

The Liggett case touched on a number of recurring issues that burden rent regulated housing, not the least of which is the panoply of ways that tenants try to question deregulation. The Liggett holding puts to rest a number of those questions, in an effort to provide the certainty that is needed in residential leasing. However, the dual dissents to the opinion may further delay that certainty if the new tenant elects to
appeal to the Court of Appeals.

It is impossible to predict what would occur in any such appeal, but, for now, the majority of the Appellate Division is plainly signaling that attempts to undo the deregulated status of an apartment based on circumstances occurring decades earlier will not succeed.

Sign up for our newsletter, The BBG Update

Subscribe to our mailing list

* indicates required