Default Formula Can't Be Used in Overcharge Case Involving 78 Tenants in J-51 Building

Building tenants brought a class action against landlord, seeking a declaration that they were subject to rent stabilization and that their legal regulated rents should be calculated according to Rent Stabilization Code (RSC) Section 2522.6(b)(2)'s default formula. Tenants lived in a building that received J-51 tax benefits between 1991 through 2014, and landlord had improperly deregulated 78 rent-stabilized apartments while the building received those benefits.

The court agreed with tenants that their legal regulated rents should be calculated according to the RSC's default formula. Landlord appealed, arguing that the court should have used landlord's good faith calculations of what the base date rents were in October 2007. The appeals court ruled against landlord. After tenants brought the court action, landlord, without court approval, unilaterally registered rents from the base date forward that were not the rents actually paid, and instead registered much higher rents without explanation. This constituted fraud but also called for application of the default formula because the rents charged on the base date couldn't be determined or full rent histories from the base date couldn't be provided. The appeals court agreed that landlord's 2012 retroactive registration of improperly deregulated apartments was an attempt to avoid adjudication of the issues and to impose its own rent calculations rather than face a determination of the legal regulated rent within the lookback period. 

Landlord appealed further, and argued that it was incorrect to apply the default formula to tenants' rent overcharge calculations. New York's highest court agreed and ruled for landlord. In Regina Metro. Co., LLC v. DHCR (2020), this court had ruled that, under the pre-HSTPA law that applied to this case, "review of rental history outside the four-year lookback period [i]s permitted only in the limited category of cases where the tenant produced evidence of a fraudulent scheme to deregulate and, even then, solely to ascertain whether fraud occurred--not to furnish evidence for calculation of the base date rent or permit recovery for years of overcharges barred by the statute of limitations."  The Regina decision also held that deregulation of apartments during receipt of J-51 benefits wasn't based on a fraudulent misstatement of fact but on a misinterpretation of the law. Such overcharges generally weren't subject to a finding of willfulness and therefore couldn't be fraudulent. The fraud exception to the lookback rule's limitation generally didn't apply to these "Roberts" overcharge claims.

In this case, landlord's deregulation of the apartments was based on the same "misinterpretation of the law" involved in the Regina case and therefore couldn't constitute fraud. Landlord's later reregistration of apartment rents with the DHCR occurred after the four-year lookback period, and tenants didn't show that this affected the reliability of the actual rents tenants paid on the base date. While it was unclear whether records made available by either side gave enough information to determine the base date rents, where it was possible to determine the rents actually charged on the Oct. 14, 2007, base date, those amounts should be used and the rent increases permitted during the four-year lookback period should be added. The case was sent back to the lower court for determination of overcharges in each individual case.

Casey v. Whitehouse Estates, Inc.: 2023 NY Slip Op 01351 (Ct. App.; 3/16/23; Cannataro, ACJ, Garcia, Wilson, Singas, Troutman, Gische [dissenting], JJ)