New York's Highest Court Weakens Four-Year Look-Back Rule

On Oct. 19, 2010, the Court of Appeals, New York's highest court, issued two decisions substantially weakening the “four-year rule” on overcharge cases. The rule prevents the Division of Housing and Community Renewal (DHCR) from investigating rent overcharge complaints by looking at what the apartment's rent was more than four years before the date the complaint was filed.

Four-Year Rule's History

The state legislature first enacted the four-year statute of limitations in the Omnibus Housing Act of 1983. According to New York attorney Alan Kucker, the legislature's intent was to allow owners’ to dispose of rent records that they were required to retain back to the “base date” on which the unit became stabilized, often as far back as 1968.

As litigation ensued on the meaning of the four-year rule, the Rent Regulation Reform Act of 1993, and then the Rent Regulation Reform Act of 1997, each attempted to shore up the rule, which court decisions had eroded, says Kucker.

The Court of Appeals had previously addressed the four-year rule in 2005 in Thornton v. Baron. In that case, the court ruled that the rent history more than four years prior could be examined in order to detect fraud. In that case, the owner had tried to deregulate an apartment by drawing up an illegal lease with a phony “primary tenant” and then subletting it to a couple who agreed that it would not be their primary residence.

Latest Decisions

Although the latest decisions are not the first cases to pierce the four-year rule, they seem to have put the four-year rule at, or near, death's door, believes Kucker.

The first of the recently decided cases was Grimm v. DHCR. Here, the court found that a credible allegation of fraud is a sufficient basis for the DHCR to pierce the four-year rule to determine if fraud had been committed and to set the rent accordingly. In this case, a rent-stabilized tenant complained of a rent overcharge. She moved into the apartment in 2005 at a monthly rent of $1,450. This was the same rent charged to prior tenants when they moved into the apartment in 2000. But the tenant learned that until 1999, the apartment's rent was $588. And she learned that the owner had failed to register the apartment between 2001 and 2005.

The tenant claimed fraud. She said that prior tenants were initially told that the rent would be $2,000 per month, but the owner reduced it to $1,450 on condition that the tenants make repairs and paint. She also claimed that there was a relationship between the prior and current landlords.

The DHCR ruled against the tenant. Applying the four-year rule, the agency found no overcharge. The tenant then filed a court petition, claiming that the DHCR's decision was arbitrary and unreasonable. The lower court ruled for the tenant and said that the DHCR should investigate the tenant's fraud claim.

The DHCR and the owner then appealed and lost. The appeals court found that where a tenant claims fraud, the DHCR can investigate beyond the four-year period before the tenant's complaint was filed, and the four-year rule is void. In addition, if there was fraud in setting the rent, the tenant's rent should be set at the lowest amount charged for a rent-stabilized apartment with the same number of rooms.

The DHCR and the owner then appealed to New York's highest court and lost.

The second decision was Cintron v. Calogero. In this case, a rent-stabilized tenant complained of a rent overcharge. The DHCR ruled for the tenant in part. On Dec. 11, 1999, the base rent date, a prior rent reduction order was in effect. This froze the rent charged to the tenant on the base date until Feb. 1, 2004, when the rent was restored based on the restoration of required services.

The tenant appealed, claiming that the base date rent itself was an overcharge due to the prior rent reduction order that the landlord violated by continuing to collect rent increases. The tenant claimed that the four-year rule should not apply.

The court and appeals court ruled against the tenant. They found that, although the rent reduction order was issued more than four years before the tenant filed his overcharge complaint, the DHCR properly froze the rent at the amount collected on the base date until such time as services were restored. The tenant then appealed to New York's highest court.

The highest court ruled that the DHCR must apply rent reduction orders that were issued prior to the four-year limitations period when calculating overcharges during the four-year limitations period.

Decisions’ Impact

It is unclear how far the expanded mandate to examine illegal rent increases more than four years old will extend. According to Justice Robert Smith, who dissented in both cases, both decisions support the view that any illegal rent increase will make the base date rent unreliable and allow for a closer look.

“The majority opinion can be read to mean either that the four-year limitation has largely ceased to exist,” Smith wrote, “or that any case to which the limit applies on its face must lead to a mini-litigation, in which the DHCR tries to figure out whether the overcharge was ‘fraudulent’ enough to escape the time limit.”

Kucker agrees. “In short, any system to calculate rents that allows the DHCR or a court to determine the ‘legal’ rent by working from the past to a point four years back from the date of the complaint is unworkable and virtually destroys the statute of limitations,” he says. Practically speaking, owners now will have to keep records beyond the four-year look-back period, particularly where there has been a significant bump up in the rent that the owner may be called upon to explain, says Kucker.

Hopefully, for owners, when the legislature considers extensions of the Rent Stabilization Law next year, another attempt will be made to resurrect the four-year rule and once again allow owners to feel confident that they will not have to maintain records going back decades.

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