LEGAL CORNER: The Court of Appeals Decision in Regina Metropolitan Co., LLC: A Challenge to New York’s Rental Laws

John Dolgetta, Esq., Dolgetta Law, PLLC.

On April 2, in the midst of the COVID-19 Pandemic, the New York State Court of Appeals issued a decision in Regina Metropolitan Co., LLC v. New York State Division of Housing and Community Preservation (“Regina Metropolitan”) [see https://bit.ly/38I4y79] barring the retroactive application of certain provisions of the Housing Stability and Tenant Protection Act of 2019 (the “2019 Tenant Protection Act” or “2019 Act”) [see https://bit.ly/3e9zHkQ]. The decision did not receive much attention, but it is certainly an important one that could ultimately provide a basis for a challenge regarding the constitutionality of parts of the 2019 Tenant Protection Act.

It has been just over a year since the 2019 Tenant Protection Act was signed into law by Gov. Andrew Cuomo. From a landlord’s perspective, it has been met with anger and confusion. Many lawsuits challenging the new law soon followed. Regina Metropolitan is one of the first decisions, which actually involves multiple lawsuits that were consolidated, issued by highest court in New York, and in a lengthy decision, the court was sharply split, 4 to 3.

Certain Highlights of the 2019 Act

The 2019 Act was the subject of Legal Corner articles in July, 2019 [see https://bit.ly/3iCfms2] and August, 2019 [see https://bit.ly/3fau9Ie]. It changed the entire landlord-tenant landscape overnight. While the 2019 Act was passed to protect tenants, it has forced landlords to make critical, and often detrimental, decisions relating to the operation of their rental properties, often having the opposite effect. Many landlords and landlord groups have commenced lawsuits to have the act invalidated.

Under the 2019 Act, the New York Rent Regulation laws were extended in perpetuity. The rent regulation laws were passed many years ago to address housing shortages that existed immediately following World War II. In 1974, New York State also passed the Emergency Tenant Protection Act (ETPA) to address housing shortages and issues that existed at the time. In New York City, the Rent Stabilization Law of 1969 (RSL) [see https://bit.ly/3iCns3U] was also enacted to afford tenants similar protections. However, none of the previous laws were passed in perpetuity, and in fact, they were passed with the requirement there be a periodic reassessment of whether these rent regulation laws were still necessary. The ETPA was set to expire on June 15, 2019, and was extended for good with the passage of the 2019 Act.

The 2019 Act’s main focus was to make affordable housing available to all who needed such housing and could not afford it. However, two major changes introduced by the 2019 Act are the repeal of the “High-Rent Vacancy Deregulation” and the “High-Income Deregulation.” Previously, the law allowed apartments to become completely decontrolled upon vacancy if the rent for a particular apartment reached certain levels set by the Rent Guidelines Board. The 2019 Act also repealed provisions, which allowed for decontrol based on income levels (i.e., where tenants earn more than $200,000 per year for more than two years). These changes now keep apartments under rent control indefinitely, significantly limiting a landlord’s ability to operate the properties at a profit, while benefitting those tenants who are able to pay higher rents. These changes directly conflict with the original intent of the rental laws, to make housing available to those who cannot afford it.

Claims Made by Tenants in Regina Metropolitan

In Regina Metropolitan, the Court of Appeals pointed out that while appeals were pending, the 2019 Act was enacted amending “…the statute of limitations, alter[ing] the method for determining legal regulated rent for overcharge purposes and substantially expand[ing] the nature and scope of owner liability in rent overcharge cases.” The tenants urged the Court of Appeals to apply the new overcharge calculation provisions to their cases, which were pending at the time of the 2019 Act’s enactment. The court pointed out that some tenants were “seek[ing] recovery of overcharges incurred more than a decade before the new legislation.” The tenants argued the amendments effectuated by the 2019 Act should be applied to these appeals based on language in the 2019 Act, which provides that Part F “…shall take effect immediately and shall apply to any claims pending or filed on and after such date.”

Part F of the 2019 Act

The court focuses on the major changes effectuated under Part F of the 2019 Act and points out that “Part F extended the four-year limitations period for overcharge claims to six years, provided that an overcharge complaint ‘may be filed…at any time’ and eliminated the provision —present, in substance, since 1983—stating that ‘no determination of an overcharge and no award or calculation of an award of the amount of an overcharge may be based upon an overcharge having occurred more than four years before the complaint is filed’.”

The court further explained that Part F completely removed the previous lookback rule, and now requires the New York State Division of Housing and Community Renewal (DHCR) and courts to ‘“…consider all available rent history which is reasonably necessary’ to investigate overcharge claims and determine legal regulated rent, regardless of the vintage of that history and including records kept by owners, tenants and agencies.” And, while Part F increased the four-year record retention period to six years, it provides that where a landlord does not keep records beyond the six-year period, the courts and DHCR can still review the entire rental history of the unit (which could predate the six-year period by many years, even decades). The 2019 Act also increased the period of time for which treble damages could be sought for willful overcharges by landlords from two to six years.

Court of Appeals Decision in Favor of the Landlords

The landlords, however, the court points out, “argue[d] that the effective date language does not evince a clear legislative intent to apply the new overcharge calculation provisions retroactively, particularly to cases no longer pending in DHCR or the trial court and further contend, in any event, that retroactive application of the new overcharge calculation methodology to these appeals would violate due process protections in the State and Federal Constitutions.” The court pointed out that this change in the law has a “…destabilizing effect [and] is especially severe.”

It determined that the provisions of the 2019 Act could only be applied prospectively and not retroactively, nor to pending cases. The Court of Appeals highlighted the drastic and unfair effect that the retroactive application of the new law to pending claims would have on the landlord. It explained that “…under the former rule” the overcharge calculation for one of the tenants totaled $10,271.40. However, applying the new rule, the DHCR came up with damages of $285,390.39.

The court further stated, “Critically for purposes of calculating the amount owed for any overcharge, Part F now renders reviewable rent increases that were shielded by the prior lookback rule, permitting reconstruction of the legal-regulated rent based on any relevant records in the apartment’s entire rental history. Although the tenant can directly recover only for overcharges occurring during the six years preceding the complaint, the damages calculations for those years may now effectively incorporate conduct—illegal increases—preceding that period and occurring at any point in the rental history.” The court was also critical of the permissibility of the courts and DHCR to use an entire unit’s rental history when the record-keeping requirement of the landlord was only for a finite period of time (i.e., previously four years, but extended to six years under the new law).

Potential Constitutional Concerns Beyond The Retroactive Effect of the 2019 Act

In its decision, the Court of Appeals referenced various issues relating to the deliberative process utilized by the legislature in passing the 2019 Act and general principles of fairness and constitutionality. While the decision mainly focused on the “retroactive” application of the 2019 Act to pending claims, it did point out on several occasions that the legislature, in passing the new rental laws, and particularly Part F, did not provide any legislative intent or justification for passing this “retroactive” section of the law. The court, more importantly, also made reference to general constitutional concerns that could potentially be utilized in other cases brought by landlords to invalidate additional parts of the 2019 Act.

The court sternly stated that “…there is no indication here that the legislature considered the harsh and destabilizing effect on owners’ settled expectations, much less had a rational justification for that result.” It goes on to point out that “While prospective application of Part F to overcharges occurring after the effective date may serve legitimate and laudable policy goals, no explanation has been offered, much less a rational one, for retroactive application of the amendments to increase or create liability for rent overcharges that occurred years—even decades—in the past.” The Court of Appeals made clear what its role is and explains that “[i]n this regard, the rational basis test — although extremely deferential — must be meaningfully applied to ensure basic principles of fairness and substantial justice, lest we abdicate our responsibility to the citizens of this state.”

The court further points out that the passage of such a basically unfair provision of the law “…impairs real property rights by diminishing or possibly eliminating the constitutionally protected return on investment owners realized in the past related to the use of their properties.” The court’s reference here could be useful in future constitutional challenges to the 2019 Act.

The court highlighted due process concerns and explained that “…an unfair retroactive assessment of liability upsets settled expectations, and it thereby undermines a basic objective of law itself. To find that the Due Process Clause protects against this kind of fundamental unfairness—that it protects against an unfair allocation of public burdens through this kind of specially arbitrary retroactive means—is to read the clause in light of a basic purpose: the fair application of law, which purpose hearkens back to the Magna Carta.” The court explains that our system of “checks and balances” is critical and that “It is the responsibility of the judiciary to safeguard the rights afforded under our State [and Federal] Constitution[s].” While the court states that its ruling is narrow, the decision does seem to lay the groundwork for future challenges to the 2019 Act; only time will tell.