Exemption From Rent Stabilization Ended When Mortgage Was Prepaid

Building tenants sued landlord, claiming that they were subject to rent stabilization and had been overcharged. Landlord claimed that the building was exempt from rent stabilization due to other governmental regulation of the building. In connection with proposed rehabilitation of the building, prior landlord signed a regulatory agreement in 1969 under National Housing Act Section 221(d)(3) and received a below-market mortgage for a subsidized low- and moderate-income project. In 1980, prior landlord obtained a Flexible Subsidy Grant from HUD, requiring landlord to maintain the character of the building until April 2011.

In 1999, prior landlord considered prepaying the mortgage and sought the DHCR's opinion about the effect on building regulation. The DHCR issued an opinion letter stating that HUD's position in a Use Agreement with landlord that the building should retain preemption after mortgage prepayment was reasonable and that the building should remain exempt from rent stabilization until HUD relinquished its level of control of the project.

Landlord and HUD signed the Use Agreement in 2000, and landlord prepaid the mortgage. Tenants agreed that the building was subject to federal regulation until that point but not after the mortgage was prepaid. Landlord notified tenants and, in 2002, began charging annual 7.5 percent rent increases authorized by the Use Agreement.

Landlord asked the court to dismiss the case. The court ruled against landlord. The Use Agreement with HUD did not legally extend federal preemption of rent stabilization and therefore was invalid. Federal preemption of rent stabilization for the building ended in December 2000. Also, landlord accepted J-51 tax benefits for the building. Tenants' rent overcharge claims remained open.

435 Central Park West Tenant Association v. Park Front Apartments, LLC: 2017 NY Slip Op 277248, 2017 WL 3160127 (Sup. Ct. NY; 7/24/17; Edmead, J)