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Sponsor Issues: Rent Increases At Risk?

I have heard that the October 22, 2009, Court of Appeals decision in a case entitled Roberts v. Tishman Speyer Properties, L.P., involving tenants at Stuyvesant Town and Peter Cooper Village, a rental complex, is significant for co-ops and condos. Is this true?

Yes. and even though the property is a rental, the decision can have dire consequences for certain cooperative and condominium boards.

The two complexes on the east side of Manhattan, which contain over 11,000 apartments on 80 acres, were built in the 1940s and became rent-stabilized in 1974. In 1992, the owners of the two properties obtained J-51 tax abatements from New York City as a result of work that was done to the properties that qualified for such benefits. The J-51 benefit program is a tax incentive for the rehabilitation of multi-unit residential buildings. However, apartments in rental buildings receiving J-51 benefits must be rent-stabilized while the tax benefits are being received. In 1993, the state legislature enacted the Rent Regulation Reform Act, which provided for the decontrol of apartments (enabling the rents to go to market) if the legal regulated rent was $2,000 per month or more and the apartment was either vacant or the combined income of all occupants of the apartment exceeded $250,000 per year. There was an exception made for apartments that were rent-stabilized because they received J-51 benefits, in which case the apartments could not be “luxury”-decontrolled while the J-51 benefits were being received.

In 1996, the former owners of the two properties obtained an opinion from the Division of Housing and Community Renewal (DHCR), the state agency monitoring the housing law. It indicated that, because the two properties receipt of J-51 benefits was not the sole reason that they were rent-stabilized, the two properties could benefit from luxury decontrol and raise the rents to market levels. DHCR’s position was that, because the two properties were not rent-stabilized solely as a result of getting J-51 benefits, the fact that they received the J-51 benefit did not preclude them from benefiting from luxury decontrol.

In early 2007, nine current and former tenants of the two properties, whose rents were increased to market level because of luxury decontrol, sued the current and former owners of the two properties for rent overcharges claiming that the landlord’s interpretation and DHCR’s interpretation of the law was incorrect and that no landlord benefiting from J-51 could obtain the benefit of luxury decontrol until such time as the landlord ceased to benefit from J-51. The case was dismissed by the Supreme Court, New York County, which decision was reversed by the appellate division, and now the Court of Appeals has affirmed the decision of the appellate division, thereby supporting the tenant’s position.

Therefore, the current law is that a landlord receiving tax abatements under the J-51 law cannot utilize luxury decontrol to raise rents. There is no further appeal in New York and there is no basis to appeal the decision through the federal courts. What has not been decided and will be the subject of years of further litigation are the answers to the following questions:

(1) Do the apartments that were destabilized at the two properties revert back to rent-stabilization?

(2) Do the tenants have their rents reduced to where they would have been if the landlord never took them out of rent stabilization?

(3) What is the effect of the landlord having relied on an opinion from DHCR?

(4) What, if any, rights and damages do the tenants have who moved out of the two properties because their rents went above $2,000?

(5) What, if anything can and will the legislature do to deal with this situation?

(6) If the current owners of the two properties file for bankruptcy, what is the effect of the decision?

However, the issue that must be considered is the likely effect of the Court of Appeal’s decision on cooperatives and condominiums. First, the good news: any co-op or condominium building that does not receive J-51 benefits or does not have rent-controlled or rent-stabilized tenants living in the building will not be affected by the decision. Accordingly, buildings that were built as co-ops or condos and buildings not containing unsold shares or unsold units are not affected.

Unfortunately, although Section 2520.11(l) of the Rent Stabilization Code (RSC) provides that co-ops and condos are not subject to the rent laws, there is a possibility that, notwithstanding the RSC, a cooperative or condominium that owns unsold apartments and obtained the benefit of the J-51 law will be subject to a similar rent overcharge claims by the tenants whose rents went to market.

Another potential problem involves boards of buildings with unsold shares held by a sponsor or an investor. If the board obtained J-51 benefits, would the sponsor or investor have a claim against the board because of the rent overcharge? The answer will depend on the precise terms of the offering plan and the condo bylaws or co-op proprietary lease. If any of these documents makes the co-op or condo responsible when the board takes an action that has an adverse impact on an owner with tenants, then the co-op or condo may have to reimburse the owner for such cost. Theoretically, a holder of unsold shares or units could also make the claim for reimbursement even if the bylaws or proprietary lease are silent, but such a claim would be more difficult to establish.

The most frightening scenario would be a situation where a sponsor obtained J-51 benefits and then used luxury decontrol to vacate apartments, which were then offered for sale. The problem would occur if the courts rule that any tenant who lost his or her apartment because the landlord improperly raised the tenant’s rent would have a right to return to the apartment or the building. Such an event is unlikely, but it is possible.

The decision will have a significant impact on New York housing and could have repercussions that cannot be seen at this time. There is little doubt that cooperative and condominium boards could be affected by it and it is therefore critical that boards of buildings with unsold rental apartments follow it.

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