DHCR Incorrectly Applied Bridge-the-Gap Formula to Calculate Overcharge

Landlord filed an Article 78 court appeal of a 2018 DHCR decision that tenant's apartment was rent stabilized. The DHCR also calculated a rent overcharge by using its "bridge-the-gap" formula. Landlord had filed a request for an administrative determination (AD) in 2015 and argued that a 2005 non-regulated lease, given to a prior tenant, met the requirements of the former version of Rent Stabilization Code Section 2526.1(a)(3)(iii) then in effect for setting a legal rent after a period of vacancy or temporary exemption of the apartment. Alternatively, landlord argued that the apartment had been legally removed from rent stabilization under high-rent vacancy decontrol provisions and there was no overcharge.

The court ruled against landlord, who appealed and won in part. The appeals court noted that the apartment was temporarily exempt from rent stabilization when the prior owner/operator, a hospital, used the building for staff housing between 1999 and 2004, when it sold the building to current landlord. But once the apartment became occupied by a nonaffiliated tenant, it was subject to rent stabilization, even if landlord properly set the rent in accordance with a prior version of RSC Section 2526.1(a)(3)(iii). And regardless of its age, an apartment's rent history is always subject to review to determine whether the apartment is rent regulated. This doesn't restrict examination of an apartment's rent history to four years prior to the commencement of the action or proceeding where the issue is the apartment's status. 

The appeals court further ruled that the DHCR correctly considered the records relating to the building's ownership and rent history for the apartment to determine its regulated status. But the DHCR erred to the extent that it applied its own policy of bridging the gap to determine the base date rent of the apartment by using the last filed registered rent. Where the apartment was vacant or temporarily exempt for more than one year, RSC Section 2526.1(a)(3)(iii) specified that the legal regulated rent was the prior legal regulated rent, not the last registered rent. 

The overcharge claim, made prior to enactment of HSTPA in June 2019, was subject to a limited four-year lookback to determine the base rent. The absence of contemporaneous DHCR rent registration filings didn't allow for a lookback beyond the four-year period to an earlier legal regulated rent reported to the DHCR. And, in the absence of fraud, for overcharge calculation purposes, the base date rent was the rent actually charged on the base date (four years prior to filing of the overcharge claim) and overcharges are to be calculated by adding subsequent rent increases legally available to landlord. 

Landlord had commenced a nonpayment proceeding against tenant in 2016. The appeals court ruled that the housing court should determine the actual legal rent since that was where the issue of rent overcharge was first raised.

AEJ 534 E. 88th v. DHCR: Index No. 157908/18, App. No. 13030, Case No. 2019-5717, 2021 NY Slip Op 02977 (App. Div. 1 Dept.; 5/11/21; Gische, JP, Moulton, Gonzalez, Scarpulla, JJ)