Appeals Court Finds Tenants' Claim of Fraud Insufficient

Tenants in a J-51 building sued landlord in a class action, claiming rent overcharges and improper deregulation. The court ruled for tenants without trial and found that the legal regulated rents for their apartments would be established using the Rent Stabilization Code's default formula. The court also held in abeyance a determination of other portions of tenants' request for summary judgment pending submission of additional documents.  Landlord appealed and won, in part.

The appeals court found that tenants didn't provide sufficient proof to establish, as a matter of law, a fraudulent scheme to deregulate their apartments. So, the portion of their motion seeking summary judgment on various claims should've been denied rather than held in abeyance. The proof that tenants submitted consisted solely of documents including DHCR rent rolls as well as free market leases and renewal leases. There were no tenant affidavits concerning reliance and damages or clearly set out proof of leasing history. 

The appeals court explained that, under RSC Section 2522.6(b)(2)(iii), the default formula for establishing the legal regulated rent may be applied where "the base rent is the product of a fraudulent scheme to deregulate the apartment." Because deregulation of apartments often involves misinterpretations of the law rather than willfulness, the fraud exception to the four-year lookback rule is generally inapplicable in the context of J-51 overcharge claims. An increase in rent combined with registration failures, without more, is insufficient to establish a fraudulent scheme to deregulate an apartment as a matter of law.

Thomas v. 560-566 Hudson LLC: Index No. 158854/19, App. No. 590, Case No. 2022-04907 (App. Div. 1 Dept.; 9/14/2023; Kern, JP, Moulton, Mendez, Shulman, Rodriguez, JJ)