By Adam Leitman Bailey and Dov Treiman
May 2, 2018
Adam Leitman Bailey and Dov Treiman discuss the recent landmark Housing Court case ‘Altman v. 285 West Fourth LLC’ where the Court of Appeals reversed the Appellate Division, First Department and deregulated thousands of New York City apartments.
On April 26, 2018, the Court of Appeals in Altman v. 285 West Fourth LLC, unanimously reversed the Appellate Division, First Department and deregulated tens of thousands of New York City apartments whose rents had crossed the monetary deregulation threshold between April 1, 1997 and June 16, 2011.
For apartments involuntarily placed under rent regulation in New York City, those regulations are removed when a vacant apartment crosses a certain rent level. However, previously unresolved in the case law was whether, in order to effect deregulation, that rent level had to be reached during the tenancy of the last tenant prior to vacancy, or could be reached through implementation of various increases allowed to owners between two actual tenancies. Before the Court of Appeals was the question as to the necessary circumstances for these increases to qualify under so-called “luxury decontrol” [Rent Stabilization Law (NYC Administrative Code) §26-504.2(a)] to lift the apartment out of rent regulation.
In the First Department’s decision in Altman, unanimously reversed by the Court of Appeals, the court had ruled that the deregulation only took place if the rent had risen above the then-effective $2,000 threshold during the tenancy of the immediate pre-vacancy tenant. Under the current version of the luxury decontrol law, the Rent Guidelines Board effectively raises and lowers the threshold each October to take effect the ensuing January. While practitioners assume that the threshold can only go up, for reasons beyond the scope of this article, it can actually be reduced.
The First Department ruling gave rise to what practitioners in the industry call a “buffer tenant,” meaning “a tenant whose rent at the inception of the tenancy is at a rental above luxury deregulation, but will remain subject to regulation, with the owner’s intent that the next tenancy will be unregulated.” As “buffer tenants” are an understanding in the industry and not of the statutory or common law, the definition here given is our own.
Thus, conversations in the industry centered on whether a buffer tenant is necessary and how to see to it that the buffer tenant occupies the apartment for as little time as possible. While the immediate critics of the Court of Appeals decision in Altman are focused on the deregulation of a large number of units in New York City, none has thus far paid attention to the removal of buffer tenants as particular targets for landlords’ efforts to unseat tenancies. However, the 2015 amendments do deny deregulation when “The landlord…engaged in any course of conduct…intended to interfere with or disturb the comfort, repose, peace or quiet of the tenant….” For examples of such conduct, see NYC Administrative Code §27-2004(48).
Altman only applies to Rent Stabilization and the Emergency Tenant Protection Act of 1974, a suite of laws only effective in the First and Second Judicial Departments. In the Second Department, Altman was largely ignored and in the First Department, heavily questioned. In 233 East 5th Street v. Smith, 54 Misc.3d 79, 48 N.Y.S.3d 869 (2016), the Appellate Term for the First Department wrote:
In this regard, we do not interpret the contents of a single sentence in the decision in Altman so broadly as to effectuate a sea change in nearly two decades of settled statutory and decisional law — that allowed an owner to deregulate an apartment after a vacancy, if the legal rent plus any lawful increases and adjustments to the rent, such as the vacancy allowance, exceeded $2,000 – particularly given the absence of any expressed intention by the Altman court to do so. (citations omitted.)
Court of Appeals Issues
In its opening sentence, Altman states, “The issue on this appeal is whether the 20 percent vacancy increase should be included when calculating the legal regulated rent for purposes of determining whether the subject apartment has reached the $2,000 deregulation threshold in the Rent Stabilization Law.”
For practitioners, the more burning question was whether or not buffer tenants are necessary. This, the court answered by way of discussing whether the between-tenant increases count toward deregulation.
Other issues, not reached by the court, but still needing decision, include whether owners need buffer tenants for tenancies that arose after June 16, 2011 and whether treble damages for overcharge are appropriately awarded when an owner honestly follows the universal understanding of what it is entitled to under the rent laws, but thereafter judicially determined not to be appropriate. Indeed, numerous law firms in New York City have been making a brisk trade of pursuing treble damages innocently incurred by landlords following established practice, now equally innocently vaporized by Altman.
20 Percent Increase
The Court of Appeals introduces Altman with the statement that it must determine “whether the 20 percent vacancy increase should be included.” By this, the court was determining whether that increase is in time to have the effect of deregulation and indeed it was not only the 20 percent that was in question, but the bundle of various between-tenancies increases the law allows owners. The Court of Appeals specifically cites to the bill jacket speaking of “vacancy bonuses and owner improvements.” (emphasis adjusted from the original).
Limiting the impact of this Altman decision is that it explicitly declined to “address the effect of the 2015 amendments to the statute” (L 2015, ch 20, pt A, §10). We note, however, that such amendments refer to “a legal regulated rent that was two thousand seven hundred dollars or more per month at any time on or after the effective date of the rent act of 2015, which becomes vacant after the effective date of the rent act of 2015.” (emphasis supplied). This would seem to mean that the timing of the rent increase has become irrelevant and that under the 2015 amendments, there is, in fact, no need for a buffer tenant. Under such a reading of the 2015 law taken now with this Altman, there never was a need for a buffer tenant and there is no such need now.
In the Appellate Division ruling on Altman (143 A.D.3d 415, 38 N.Y.S.3d 173), the Appellate Division paid no attention to the universal practice in the industry of applying the rent increases and deregulation both prior to the Appellate Division’s decision and now subsequent to it. The standard for treble damages in rent overcharge cases being “willfulness,” the Appellate Division ignored the fact that the owner before it was following universally accepted industry practice and imposed treble damages.
Because the Court of Appeals found no basis for imposing damages at all, unfortunately, it did not address the propriety of trebling them when the Owner has a good faith belief in the correctness of the rent charge. This left standing as good law, the Appellate Division’s award of trebling of damages in spite of the universal acceptance of the industry’s understanding of the law.
However, in 72A Realty Assocs. v. Lucas, 32 Misc.3d 47, 929 N.Y.S.2d 349 (2011), the Appellate Term for the First Department had set forth the principle that when a landlord acts in conformity with general industry practice and nearly universal understanding of the law, the reversal of that understanding of the law can give rise to single damages for overcharge, but not for treble damages. That court also invited the Legislature to codify a “good faith reliance” exception to treble damages, but the Legislature declined to accept the invitation.
By declining to discuss it, the Court of Appeals left standing the Appellate Division’s failure to make allowance for “good faith” as an exemption from the treble damages. As to the aspect of treble damages, the Appellate Division report of Altman shall remain “reversed for other reasons.” Even dicta either accepting or rejecting 72A Realty’s “good faith reliance” would have provided useful guidance for the approximately one million rent stabilized apartments in New York City any time an owner acts in accord with standard industry practice, but disallowed by a subsequent judicial decision.
Altman, by focusing on the 20 percent increase, answered the question burning through the housing industry as to whether buffer tenants are necessary. Altman however, while applicable to tens of thousands of apartments that crossed such threshold in an approximate 14-year period and to all tenants subsequent to those crossings, does not directly offer guidance as to whether landlords need subsequent to that 14-year period to be using buffer tenants. However, a fair reading of the 2015 Amendments Altman did not address also seems to eliminate the need for buffer tenants.