Matter of 508 Realty Assoc. LLC v New York State Div. of Hous. & Community Renewal

[*1] Matter of 508 Realty Assoc. LLC v New York State Div. of Hous. & Community Renewal 2007 NY Slip Op 52186(U) [17 Misc 3d 1129(A)] Decided on October 19, 2007 Supreme Court, Kings County Martin, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 19, 2007
Supreme Court, Kings County

In the Matter of the Application of 508 Realty Associates, LLC, Petitioner, For a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules,

against

New York State Division of Housing and Community Renewal, Respondents.



34156/06

Larry D. Martin, J.

Upon the foregoing papers, petitioner 508 Realty Associates, LLC seeks judicial review, under article 78 of the Civil Practice Law and Rules, of an order issued by respondent New York State Division of Housing and Community Renewal (DHCR) which denied petitioner's petition for administrative review (PAR) and affirmed a determination of the Rent Administrator (RA) finding a rent overcharge and assessing treble damages against petitioner.

Petitioner is the owner of an apartment building at 508 Kings Highway in Brooklyn. On August 11, 2004, Douglas Haddad, a tenant occupying an apartment in petitioner's building, filed a rent overcharge complaint with the DHCR. In the complaint, the tenant alleged that he moved into the apartment on February 1, 2003 under a one-year lease at a rent of $1,000 per month and that he believed he had been overcharged based on the information in the DHCR's Registration Rent Roll Report for the subject apartment. In response, petitioner submitted three leases made with the previous tenant who vacated the apartment in November 2002. Petitioner stated that it replaced the floor in the apartment at a cost of $2,200 and set the new rent according to the applicable vacancy and individual apartment improvement increases. The DHCR notified petitioner that it failed to file annual registrations for the years 2000 through 2004 and requested that petitioner submit leases or rent [*2]ledgers for the apartment for the period May 1, 2001 through April 30, 2002. The tenant challenged the authenticity of two leases submitted by petitioner, which appear to be dated "1/99" and "2/01, 1999" which state the same commencement date of May 1, 1999 but with the earlier lease ("1/99") stating a higher rent than the latter lease. Petitioner responded that "serious personal problems" of the managing agent caused her to be "remiss with the registrations," and that the prior tenant was given a preferential rent on account of his services as a building janitor. The DHCR requested that due to the "controversy" of the two leases submitted for the same renewal period, petitioner must submit notarized copies of rent ledgers for the apartment from August 2000 to the present. Petitioner thereafter submitted notarized copies of rent ledgers for January 2000 through April 2005. The tenant challenged the ledgers as having been prepared for the purpose of this proceeding and requested that the RA utilize the "default method" in determining the legal rent.

On June 10, 2005, the RA issued a determination finding an overcharge in the amount of $75.26. Utilizing the notarized rent ledgers and taking into consideration vacancy and individual apartment increases on the prior tenant's rent, the RA found that the tenant's rent was legal, but that he had been overcharged $75.00 due to the fact that the guideline increase on a renewal cannot be charged until 90 days following the tenant's late receipt of the renewal lease. No treble damages were assessed by the RA. The tenant filed a PAR arguing, inter alia, that the rent ledgers were not competent evidence.

On August 25, 2005, the Deputy Commissioner granted the tenant's PAR and remanded the proceeding to the RA, stating:

A review of the documentation in the record reveals discrepancies in the leases submitted by the owner. The owner submitted two different leases for the lease renewal period commencing May 1, 1999, with different lease terms (one for one year, the other for two years), different base rents, different guideline increases and different signing dates. The sole explanation offered by the owner-that the 2000 date of the tenant's signature on the lease dated January 1999 was an error- is not credible and does not explain the existence of the different leases. The lease date and the lease commencement date on the lease dated January 1999 appear to have been altered. The rental information on the lease dated February 1, 1999- the stated base rent and applicable guideline percentage increases, the indicated lawful rent of $884.00 for a one year lease renewal and lower rent to be charged of $850.00- actually applies, according to the owner's rental history, to the lease term commencing May 1, 2001. However, the owner submitted another lease dated January 2001 for the lease term commencing May 1, 2001. . .The rent ledgers do not appear to be legitimate rent ledgers kept by the owner in the ordinary course of business. Rather, the ledgers- with one page for each year, the tenant's name on the top of each page and explanatory notes- appear top have been created for the purposes of this proceeding. Notarization does not serve to establish the validity of the rent ledgers. [*3]

The proceeding was remanded to the RA to determine the rent using the default method.[FN1] [*4]In response to the notice of remand, petitioner reiterated its method of rent calculation, stating that the rent charged on the base date of August 2000 was $850 per month, that the one-year guideline increase of 4% brought the legal rent to $884 for the renewal period May 1, 2001 through April 30, 2002 (though the prior tenant was charged a preferential rent of $850 for this period), that the one-year 4% guideline increase upon $884 brought the rent up to $919.36 for the renewal period May 1, 2002 through April 30, 2003 (though the prior tenant was charged a preferential rent of $900 during this period), and that the complaining tenant's one-year vacancy lease commencing on February 1, 2003, allowing for an 18% vacancy increase on the previous legal rent of $919.36, brought the legal rent to $1084.86, which is higher than the rent of $1000 charged to the tenant in the vacancy lease. Petitioner further submitted the affidavit of the prior tenant summarizing the details of his tenancy and stating that although the legal rent in May 2001 was $884.00, he was paying a preferential rent of $850 in return for services as a janitor. Petitioner, after being served with a final notice of treble damages, argued that the default formula should not be used to calculate the rent and, if so, there should be no finding of willfulness.

On February 1, 2006, the RA issued an order setting the legal rent at $847.46 and finding an overcharge in the amount of $14,712.28 including treble damages and excess security covering the period of February 2003 through April 2005. The RA directed that the legal rent be frozen until the expiration of the tenant's current lease and until a DHCR order is issued restoring the rent which had been reduced pursuant to a previously issued service reduction order.

Petitioner thereafter commenced an article 78 proceeding which was treated by the DHCR as a timely PAR. On September 14, 2006, the Deputy Commissioner issued an order denying the PAR and affirming the order of the RA. The Deputy Commissioner stated, in part:

The Commissioner notes that the owner does not dispute that it introduced into evidence before the Rent Administrator two different renewal leases offered to the prior tenant covering the period from May 1, 1999 to April 2000/2001. The owner explained that the mix up was the result of a "typographical" error. Furthermore, the owner admitted that it had "inadvertently" introduced into evidence in the proceedings below a copy of a "voided" lease resulting from the indecision of the prior tenant as to whether he wanted a one or two-year lease renewal. The owner has maintained throughout these proceedings that the prior tenant had been paying a "preferential" rent, in part because he did janitorial work within the subject building. However, the leases made no mention of a "preferential" rent. Moreover, the record shows that the owner did not begin to register the subject apartment with the Agency for the years 2000 through 2004 before April 1, 2005. Accordingly, the owner has failed to convince the Commissioner on appeal that the rent ledgers introduced by the owner to corroborate the rent history for the subject apartment were "legitimate [*5]rent ledgers kept by the owner in the ordinary course of business." Accordingly, the Commissioner finds no grounds upon which to modify or revoke the Order under appeal herein on the issue of the use of DHCR's default procedure in computing the initial legal regulated rent for the subject apartment.

Turning to the issue of treble damages, the Commissioner notes that for post April 1, 1984 overcharges, DHCR's policy Statement 89-2 [Application of the Treble Damages Penalty] provides certain specified circumstances where the burden of proof in establishing the lack of willfulness shall have been met. None of the circumstances outlined therein (non-availability of rent records of a building purchased at a judicial or bankruptcy sale; self adjustment of rent by an owner within the time to interpose an answer to the complaint and a good fath tender of a refund to the tenant of all excess rent plus interest; or hyper-technical computer errors) have been established by the owner herein.

Petitioner thereafter commenced the instant article 78 proceeding.

It is well settled that in reviewing a judgment of the DHCR the court is limited to a review of the record which was before the DHCR and to the question of whether its determination was arbitrary and capricious and without a rational basis (Flagg Court Realty Co. v Holland, 265 AD2d 327 [1999]). Where a rational basis exists, a court may not substitute its judgment for that of the agency (Tockwotten Assocs. v DHCR, 7 AD3d 453 [2004]); indeed, an agency's determination acting pursuant to legal authority and within its area of expertise, is entitle to deference (see Saluati v Eimicke, 72 NY2d 784 [1988]). Stated simply, this court cannot substitute its judgment for that of the agency, so long as the agency's decision is rationally based in the record (Colton v Berman, 21 NY2d 322 [1967]).

"It is established that the administrative agency charged with enforcing a statutory mandate has broad discretion in evaluating the pertinent factual data and the inferences to be drawn therefrom, and, its interpretation will be upheld so long as it is not irrational or unreasonable" (Wembly Management Co. v DHCR, 205 AD2d 319 [1994] citing Matter of Ansonia Residents Assn. v DHCR, 75 NY2d 206, 213 [1989]). Further, the DHCR is justified in employing its default formula to determine the legal regulated rent on the base date where the landlord has failed to produce reliable rent records sufficient to establish the legal regulated rent as of that date (see Thornton v Baron, 5 NY3d 175, 179-80 [2005]; Matter of Tockwotten Assocs., 7 AD3d at 455). Here, the court does not find the DHCR's use of the default formula to be arbitrary or capricious. Petitioner had not filed required annual registrations for the years 2000 through 2004 until the year 2005, and it was not irrational for the RA to view the duplicate leases and the peculiarly formatted rent ledgers submitted by petitioner with suspicion and doubt as to their validity. Further, despite the contention of petitioner, the DHCR is entitled to disallow any rent increases due to the presence of an outstanding rent reduction order until such rent is restored by a superceding order of the DHCR (see Condo Units, LP v DHCR, 4 AD3d 424 [2004]; Zumo Mgt. Inc. v DHCR, 183 Misc 2d 107 [1999]), and this court does not find irrational the DHCR's application of this rent freeze principle to the new initial rent established for a rent stabilized tenancy following the termination of a rent controlled tenancy.

With respect to the assessment of treble damages however, "[a] finding of willfulness, or, more precisely, a finding that the preponderance of the evidence does not show non-willfulness, and liability for treble damages, should not depend on the mechanical application of formulas designed [*6]to give the tenant every benefit of the doubt created by an owner's failure to provide complete records. It should depend on a finding as to whether the owner had reason to know that the amount it was charging was in excess of the lawful rent" (Matter of Round Hill Mgt. Co. v Higgins, 177 AD2d 256, 258 [1991]). In this matter, the finding of overcharge was the result of the DHCR's application of a default formula based on its conclusion that petitioner's submissions were insufficient to corroborate its determination of the legal rent. There was no finding that the underlying calculations submitted by petitioner were otherwise incorrect notwithstanding the insufficiency of the rent ledger/lease evidence. Under the circumstances, this court finds that there is sufficient evidence to support a finding that petitioner set the tenant's rent in good faith and based on the proper application of guideline, vacancy and individual apartment increases upon a base rent of $850. Further, there was no basis for petitioner to have "reason to know" that a rent reduction order assessed against a rent controlled tenancy, which directed that no rent "increases" may be collected until a restoration order is issued, is applicable to the establishment of a new fair market rent for an initial rent stabilized tenancy, despite the DHCR interpreting the relevant regulations otherwise.

As a result, the instant article 78 petition is granted to the extent that the DHCR's award of treble damages in the amount of $9,655.56 shall be deducted from the overcharge award. The DHCR's final order is otherwise affirmed.

The foregoing constitutes the decision and order of the court.

E N T E R,

J. S. C. Footnotes

Footnote 1:The default method is outlined in section 2522.6 of the Rent Stabilization Code as follows:

§ 2522.6. Orders where the legal regulated rent or other facts are in dispute, in doubt, or not known, or where the legal regulated rent must be fixed

(a) Where the legal regulated rent or any fact necessary to the determination of the legal regulated rent, or the dwelling space, required services or equipment required to be provided with the housing accommodation is in dispute between the owner and the tenant, or is in doubt, or is not known, the DHCR at any time upon written request of either party, or on its own initiative, may issue an order in accordance with the applicable provisions of this Code determining the facts, including the legal regulated rent, the dwelling space, required services, and equipment required to be provided with the housing accommodations.

(b) Such order shall determine such facts or establish the legal regulated rent in accordance with the provisions of this Code. Where such order establishes the legal regulated rent, it shall contain a directive that all rent collected by the owner in excess of the legal regulated rent established under this section for such period as is provided in section 2526.1(a) of this Title, or the date of the commencement of the tenancy, if later, either be refunded to the tenant, or be enforced in the same manner as prescribed in section 2526.1(e) and (f) of this Title. Orders issued pursuant to this section shall be based upon the law and Code provisions in effect on March 31, 1984, if the complaint was filed prior to April 1, 1984. However, in the absence of collusion or any relationship between an owner and any prior owner, where such owner purchases the housing accommodations upon a judicial sale, or such other sale effected in connection with, or to resolve, in whole or in part, a bankruptcy proceeding, mortgage foreclosure action or other judicial proceeding, and no records sufficient to establish the legal regulated rent were made available to such purchaser, such orders shall establish the legal regulated rent on the date of the inception of the complaining tenant's tenancy, or the date four years prior to the date of the filing of an overcharge complaint pursuant to section 2526.1 of this Title, whichever is most recent, based on either:

(1) documented rents for comparable housing accommodations, whether or not subject to regulation pursuant to this Code, submitted by the owner, subject to rebuttal by the tenant; or

(2) if the documentation set forth in paragraph (1) of this subdivision is not available or is inappropriate, data compiled by the DHCR, using sampling methods determined by the DHCR, for regulated housing accommodations; or

(3) in the event that the information described in both paragraphs (1) and (2) of this subdivision is not available, the complaining tenant's rent reduced by the most recent guidelines adjustment.

This subdivision shall also apply where the owner purchases the housing accommodations subsequent to such judicial or other sale. Notwithstanding the foregoing, this subdivision shall not be deemed to impose any greater burden upon owners with regard to record keeping than is provided pursuant to RSL section 26-516(g). In addition, where the amount of rent set forth in the rent registration statement filed four years prior to the date the most recent registration statement was required to have been filed pursuant to Part 2528 of this Title is not challenged within four years of its filing, neither such rent nor service of any registration shall be subject to challenge any time thereafter.