Fraudulent Rent Registrations

Last month's issue analyzed the Court of Appeals' determination in Thornton v. Baron, invalidating the illusory tenancies. This month, we focus on the court's computation of rent due.

The rent stabilization law and codes have several provisions, some requiring work to reconcile, addressing limitations on overcharge claims and examination of a landlord's rent records. Rent Stabilization Law Sec. 26-516 says that the legal rent for purposes of determining an overcharge shall be the rent in the annual registration statement filed 4 years before the most recent registration statements. Presumably the most recent registration means the one filed right before an overcharge complaint. 26-516(g) says that an owner who has duly registered an apartment only has to keep records for 4 years before the most recent registration. 26-517(f) requires the annual registration to be provided for the tenant then in occupancy. Finally CPLR Sec. 213-a necessitates commencement of an overcharge action within 4 years of the first overcharge alleged and precludes rental examination history beyond 4 years before commencement.

More generally, the Rent Stabilization Code (RSC) has policy provisions that “it shall be construed so as to carry out the intent of the Rent Stabilization Law to ensure that such statute shall not be subverted or rendered ineffective, directly or indirectly … the policy herein expressed shall be implemented with due regard for the preservation of regulated rental housing.” RSC Sec. 2520.3. The Code also prohibits anyone from requiring a tenant to agree as a condition of getting an apartment that it will not be used as a primary residence. Illusory or collusive rental practices which deprive a tenant in possession rights are also barred. RSC Sec.2523.3(b) and (d).

In the Courts

With this array of codes and statutes before it, the lower court found that although the Thorntons had commenced suit against the prime tenant within the 4-year period (summary judgment was awarded against the prime tenant for overcharges), the claim against the landlord only began after the illusory lease was declared void, and that was not within 4 years of when the scheme began. Thus, looking back 4 years against the landlord, the court was faced with a rent of some $2500 per month that was registered under the illusory void lease. “Surely, a registration statement setting forth an unregulated rent based on an illegal illusory tenancy cannot be considered a proper statement and may not therefore be used as the basis on which to calculate the apartment's legal regulated rent,” the Supreme Court held. Thornton v. Baron, Index No. 119776/1996 (2002). Without any reliable rent records, the court used a default formula that had been used by the DHCR in analogous scenarios. It uses the lowest rent for a rent stabilized apartment in the building on the relevant date (ie, 4 years before commencement.)

The Appellate Division agreed that neither the registrations nor rent from the illusory lease could be used to give the landlord a rent over $2000 per month. But the court was divided 3-2 over the methodology, with the majority affirming the lower court's formula. The dissent found that the tenants had promptly enough brought the landlord into the action and the rent should be determined from the inception of the illusory lease so as to “deter landlords from attempting to circumvent” the law and not pervert the 4-year limit as a green light to reap benefits from a fraudulent scheme. Thornton v. Baron, 772 N.Y.S.2d 326, 330 (2004).

The Court of Appeals affirmed 5-2. The court first reiterated the principle that a “lease provision purporting to exempt an apartment from rent regulation in exchange for an agreement not to use the apartment as a primary residence is against public policy and void (see Draper v Georgia Props.,Inc., 94 NY3d 809 (1999) … ” The court then found that while it would only look back against the landlord 4 years from when landlord was added to the case, the rent registration then existing was a nullity as it was based on an illegal rent from a void lease. The majority found that the dissenters “ would ignore defendants' fraudulent conduct and fix the rent at an amount likely soon to result in the apartment's permanent removal from rent stabilization, thereby rewarding the owner's wrongdoing. Under the dissent's rule, a landlord whose fraud remains undetected for 4 years — however willful or egregious the violation — would, simply by virtue of having filed a registration statement, transform an illegal rent into a lawful assessment that would form the basis for all future rent increases. Indeed, an unscrupulous landlord in collusion with a tenant could register a wholly fictitious, exorbitant rent and, as long as the fraud is not discovered for 4 years, render that rent unchallengeable. That surely was not the intention of the Legislature when it enacted the RRRA. Its purpose was to alleviated the burden on honest landlords to retain rent records indefinitely (see Gilman, 99 NY2d at 149), not to immunize dishonest ones from compliance with the law.”

The Dissent

Neither the majority nor dissent reconciled how any of the registrations for an illusory tenant, not sent to the real tenant in occupancy, could be considered duly filed registrations triggering the start of a 4-year limitation period. Also not addressed was why the limitations should apply to this action when it was not an overcharge or fair market rent appeal, and in fact the only overcharge that could be brought against the only party in privity with the Thorntons was commenced within the 4 years.

The dissent argued that cutting off someone's rights is precisely what statutes of limitations do (and for “wrongs greater than the one done in this case”). However, the majority did apply the statute of limitations in spite of arguments against its application (eg, relation back doctrine, equitable estoppel as set out by the Appellate Division dissenters).

Since the majority applied the 4-year limitations, the real quarrel by the dissent was that when looking back 4 years the dissent would use the registration that was based on the void illusory lease. But by this reasoning, a registration statement could list a complete stranger to the apartment (as it did here), and be served upon that stranger and not the occupant. This violates the code section that requires registrations to be given to the occupant. Moreover, a statute of limitations should not start running against an occupant that was never served with a registration. The policy sections of the Code also weigh heavily against the dissent.

Finally, an underlying basis that appears to have driven the dissent was that some unknown person that did not get the Thorntons' apartment at the lawful rent was the real victim. But there was no other person that would have gotten this apartment. Had the Thorntons not taken it, there was likely a long line ready to pay the rent demanded. Thus, the landlord and illusory prime's scheme is not remedied by faulting the tenant that comes along and had nothing to do with creating the plan. The only way to stop it was as done by the majority (and would have been done by the Appellate Division dissenters), which was to not allow the creators of an unlawful rent maximization plan to profit from their wrongdoing.

Conclusion

This decision will not be limited to tenants able to afford higher rents. Rather, part of the relief of this decision for those representing tenants is that it has likely laid to rest arguments that previous appellate cases allow any rent, fraudulent or otherwise, that exists four years before an overcharge is brought. As Judith Goldiner of the Legal Aid Society said (The Daily News 7-1-2005, p. 23), the case will apply to a lot more people than just the tenants in the Apthorp. In the end, this was a case of two tenants protecting rent regulation by being able to withstand some 10 years of tireless litigation.

Last month's issue analyzed the Court of Appeals' determination in Thornton v. Baron, invalidating the illusory tenancies. This month, we focus on the court's computation of rent due.

The rent stabilization law and codes have several provisions, some requiring work to reconcile, addressing limitations on overcharge claims and examination of a landlord's rent records. Rent Stabilization Law Sec. 26-516 says that the legal rent for purposes of determining an overcharge shall be the rent in the annual registration statement filed 4 years before the most recent registration statements. Presumably the most recent registration means the one filed right before an overcharge complaint. 26-516(g) says that an owner who has duly registered an apartment only has to keep records for 4 years before the most recent registration. 26-517(f) requires the annual registration to be provided for the tenant then in occupancy. Finally CPLR Sec. 213-a necessitates commencement of an overcharge action within 4 years of the first overcharge alleged and precludes rental examination history beyond 4 years before commencement.

More generally, the Rent Stabilization Code (RSC) has policy provisions that “it shall be construed so as to carry out the intent of the Rent Stabilization Law to ensure that such statute shall not be subverted or rendered ineffective, directly or indirectly … the policy herein expressed shall be implemented with due regard for the preservation of regulated rental housing.” RSC Sec. 2520.3. The Code also prohibits anyone from requiring a tenant to agree as a condition of getting an apartment that it will not be used as a primary residence. Illusory or collusive rental practices which deprive a tenant in possession rights are also barred. RSC Sec.2523.3(b) and (d).

In the Courts

With this array of codes and statutes before it, the lower court found that although the Thorntons had commenced suit against the prime tenant within the 4-year period (summary judgment was awarded against the prime tenant for overcharges), the claim against the landlord only began after the illusory lease was declared void, and that was not within 4 years of when the scheme began. Thus, looking back 4 years against the landlord, the court was faced with a rent of some $2500 per month that was registered under the illusory void lease. “Surely, a registration statement setting forth an unregulated rent based on an illegal illusory tenancy cannot be considered a proper statement and may not therefore be used as the basis on which to calculate the apartment's legal regulated rent,” the Supreme Court held. Thornton v. Baron, Index No. 119776/1996 (2002). Without any reliable rent records, the court used a default formula that had been used by the DHCR in analogous scenarios. It uses the lowest rent for a rent stabilized apartment in the building on the relevant date (ie, 4 years before commencement.)

The Appellate Division agreed that neither the registrations nor rent from the illusory lease could be used to give the landlord a rent over $2000 per month. But the court was divided 3-2 over the methodology, with the majority affirming the lower court's formula. The dissent found that the tenants had promptly enough brought the landlord into the action and the rent should be determined from the inception of the illusory lease so as to “deter landlords from attempting to circumvent” the law and not pervert the 4-year limit as a green light to reap benefits from a fraudulent scheme. Thornton v. Baron , 772 N.Y.S.2d 326, 330 (2004).

The Court of Appeals affirmed 5-2. The court first reiterated the principle that a “lease provision purporting to exempt an apartment from rent regulation in exchange for an agreement not to use the apartment as a primary residence is against public policy and void (see Draper v Georgia Props.,Inc., 94 NY3d 809 (1999) … ” The court then found that while it would only look back against the landlord 4 years from when landlord was added to the case, the rent registration then existing was a nullity as it was based on an illegal rent from a void lease. The majority found that the dissenters “ would ignore defendants' fraudulent conduct and fix the rent at an amount likely soon to result in the apartment's permanent removal from rent stabilization, thereby rewarding the owner's wrongdoing. Under the dissent's rule, a landlord whose fraud remains undetected for 4 years — however willful or egregious the violation — would, simply by virtue of having filed a registration statement, transform an illegal rent into a lawful assessment that would form the basis for all future rent increases. Indeed, an unscrupulous landlord in collusion with a tenant could register a wholly fictitious, exorbitant rent and, as long as the fraud is not discovered for 4 years, render that rent unchallengeable. That surely was not the intention of the Legislature when it enacted the RRRA. Its purpose was to alleviated the burden on honest landlords to retain rent records indefinitely (see Gilman, 99 NY2d at 149), not to immunize dishonest ones from compliance with the law.”

The Dissent

Neither the majority nor dissent reconciled how any of the registrations for an illusory tenant, not sent to the real tenant in occupancy, could be considered duly filed registrations triggering the start of a 4-year limitation period. Also not addressed was why the limitations should apply to this action when it was not an overcharge or fair market rent appeal, and in fact the only overcharge that could be brought against the only party in privity with the Thorntons was commenced within the 4 years.

The dissent argued that cutting off someone's rights is precisely what statutes of limitations do (and for “wrongs greater than the one done in this case”). However, the majority did apply the statute of limitations in spite of arguments against its application (eg, relation back doctrine, equitable estoppel as set out by the Appellate Division dissenters).

Since the majority applied the 4-year limitations, the real quarrel by the dissent was that when looking back 4 years the dissent would use the registration that was based on the void illusory lease. But by this reasoning, a registration statement could list a complete stranger to the apartment (as it did here), and be served upon that stranger and not the occupant. This violates the code section that requires registrations to be given to the occupant. Moreover, a statute of limitations should not start running against an occupant that was never served with a registration. The policy sections of the Code also weigh heavily against the dissent.

Finally, an underlying basis that appears to have driven the dissent was that some unknown person that did not get the Thorntons' apartment at the lawful rent was the real victim. But there was no other person that would have gotten this apartment. Had the Thorntons not taken it, there was likely a long line ready to pay the rent demanded. Thus, the landlord and illusory prime's scheme is not remedied by faulting the tenant that comes along and had nothing to do with creating the plan. The only way to stop it was as done by the majority (and would have been done by the Appellate Division dissenters), which was to not allow the creators of an unlawful rent maximization plan to profit from their wrongdoing.

Conclusion

This decision will not be limited to tenants able to afford higher rents. Rather, part of the relief of this decision for those representing tenants is that it has likely laid to rest arguments that previous appellate cases allow any rent, fraudulent or otherwise, that exists four years before an overcharge is brought. As Judith Goldiner of the Legal Aid Society said (The Daily News 7-1-2005, p. 23), the case will apply to a lot more people than just the tenants in the Apthorp. In the end, this was a case of two tenants protecting rent regulation by being able to withstand some 10 years of tireless litigation.