Important 'Four-Year Rule' Decision for Owners in Rent Overcharge Dispute

In August 2018, the Appellate Division for the First Department ruled that, in the absence of fraud, there is a strict four-year lookback limit to calculate damages in rent overcharge cases where an apartment was incorrectly deregulated during the owner’s receipt of J-51 benefits. “This is a major decision for landlords,” says attorney Niles Welikson of Horing Welikson & Rosen, who represented the owner in this case.

According to the facts of the case, Matter of Regina Metro v. DHCR, the apartment building was subject to rent stabilization, and the owner began receiving J-51 benefits during the 1999-2000 tax year until 2013. J-51 benefits are real estate tax breaks granted to owners who make certain improvements to their building. Owners cannot deregulate an apartment and charge market rents while receiving J-51 tax benefits.

In 2003, while receiving J-51 benefits, the owner set the rent for an apartment at the market-rate rent of $4,500 after the prior tenant moved out. The tenants in this lawsuit moved into the apartment on Aug. 1, 2005, with a monthly rent of $5,195.

In 2009, upon learning that the apartment was subject to rent stabilization, the tenants filed a complaint to determine the amount of rent overcharge that they were entitled to receive back from the owner. The DHCR determined that the overcharge should be calculated as the difference between the market rate charged by the owner and the last legal regulated rent charged in the apartment. The DHCR determined that the last legal regulated rent was in 2003 for $2,096.47. Using this amount, the DHCR determined that the base rent for the apartment should have been $3,325.24, and therefore, the landlord overcharged the tenants by approximately $283,000, including interest. The landlord filed a court appeal.

The trial court affirmed the DHCR’s determination that the tenants were overcharged, but found that the owner did not engage in a fraudulent scheme, but rather misunderstood the implications of the J-51 program. Both parties appealed.

With the latest ruling, however, the Appellate Division held that the rent stabilization law has a four-year limitations period from the time the complaint is filed to find the last regulated rent. In order to look back beyond the four-year limitations period, there must be a showing of fraud or intentional wrongdoing by the landlord. The Appellate Division held that because the DHCR determined that there was no fraudulent behavior by the landlord, using the rent amount from 2003 was beyond the four-year limitations period of when the complaint was filed in 2009.

The Appellate Division ruled that the DHCR must recalculate the rent overcharge using the base date rent within the four-year limitation period imposed by the rent stabilization law. In other words, since there was no evidence that the owner used fraud to deregulate units, then the base rent used to calculate the overcharge to a tenant should be based on the rent charged four years prior to when the tenants filed their complaint.

Taylor Decision

Before this ruling, the Appellate Division, in Taylor v. 72A Realty, held that where an apartment was erroneously deregulated during the J-51 period the rent must be calculated from the date of deregulation, taking all allowable rent guidelines increases. At the time, the Taylor decision upended prior Appellate Division decisions that upheld the idea that in the absence of proof of fraud, rent was to be calculated from the base date four years prior to the filing of the complaint.

This latest ruling effectively overrules the Taylor decision and is viewed as binding since it’s the latest ruling on this issue. In addition, the latest decision addressed the Appellate Division's ruling in 72A Realty Assoc. v. Lucas, which held that in a J-51 situation the owner is required to prove that the apartment reached the deregulation threshold prior to being able to rely on the base date rent that was being charged, even if this involved going beyond the four-year period preceding the complaint. The language of this ruling strongly suggests Lucas, like Taylor, is no longer good law.

Upshot

At this time, in the absence of proof of fraud, neither the DHCR nor the courts may review the rental history of an apartment beyond four years from the filing of a complaint of rent overcharge where the apartment was erroneously deregulated or treated as such during the receipt of J-51 benefits. However, if there is evidence of fraud, an inquiry beyond the four-year period is permissible.

• Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal: 2018 NY Slip Op 05797 (App. Div., 8/16/18)