The Demise of the RRRA's Four-Year Statute

The statute was designed to ease the burden on landlords to keep records indefinitely. A tenant who took possession in 2005, and agreed to pay what the landlord represented to be the legal regulated rent, may not, in 2010, bring an overcharge complaint that relies on the claim that the landlord had set the original rent too high because landlord had claimed to have made capital improvements that it did not, in fact, make. The terms of the four-year statute would appear to preclude such a claim.

Thornton v. Baron

The Court of Appeals placed the first chink in the statute's protective armor in 2005, when it decided Thornton v. Baron, 5 NY3d 175. In 1992, the landlord of the subject apartment leased to an illusory tenant at a rent far in excess of the legal stabilized rent, but on condition that the tenant not use the premises as a primary residence. The goal was to deregulate the apartment. Indeed, after entering into the illusory lease, the landlord brought a declaratory judgment action against the tenant to establish that the apartment was no longer stabilized. The tenant then entered into a stipulation to that effect. Meanwhile, the tenant then sublet the premises. More than four years after the landlord's initial lease to the illusory tenant, the subtenants challenged their rent, contending that the landlord was not entitled to collect the rent specified in the initial lease with the illusory tenant. In a 5-2 decision, the Court of Appeals held that because the lease was void in its inception, the landlord could not rely on the rent specified in that lease, and that the four-year statute did not bar the tenant's challenge to the rent (although it did preclude tenant from asserting that the pre-1992 rent should serve as the basis for setting the tenant's current rent; the court held that DHCR's “default” formula should be used instead).

Thornton involved a landlord who had schemed to escape from the rent regulation laws, and who sought to use the courts as instruments in the illegal scheme. Nothing in Chief Judge Kaye's opinion for the court suggested an intent to gut the statute. Nevertheless, the Thornton opinion set the stage for the two recent cases.

The Cintron Case

In Cintron v. Calogero, the tenant had filed complaints in 1987 and 1989 complaining about building services. Those complaints resulted in rent reduction orders, which the prior landlord ignored, continuing to charge the tenant the unreduced rent (which the tenant paid). The current owner purchased the building in 1991, and continued to collect the unreduced rent. Not until 2003 did the tenant file a rent overcharge complaint. At that point, DHCR determined that it could not examine rent history before 1999, so it took the 1999 rent as the legal regulated rent, and then took into account the rent reduction orders by freezing the 1999 rent until 2004, ordering the landlord to refund increases collected during that period. The tenant challenged that determination, but Supreme Court upheld DHCR's determination, and the Appellate Division affirmed.

The Court of Appeals, however, reversed. In an opinion by Judge Carmen Ciparick, the six-judge majority emphasized that refusing to give effect to a rent reduction order's direction to roll back rents when the order remained in effect during the four-year window period would “countenance the landlord's failure to restore required services.” The majority opinion emphasized that section 26-514 of the Rent Stabilization Law places a continuing obligation on a landlord to reduce rent until required services are restored. The majority then concluded that because the rent-reduction orders were still in effect during the four-year period, they were “part of the rental history that the Rent Stabilization Law permits DHCR to consider.” Judge Robert Smith's dissent acknowledged a tension between the RRRA's four-year statute and section 26-514's provision that rent reduction orders based on failure to provide services remain in effect until the service deficiency is cured. But he concluded that DHCR's solution accommodated the two statutes, while the majority's solution simply nullified the four-year provision.

Grimm v. DHCR

In Grimm, the pre-1999 registered rent for the stabilized apartment was $587.86. When the apartment became vacant in that year, the landlord offered the apartment to the tenants at $2,000 per month, but agreed to reduce the rent to $1,450 a month if the tenants made specified improvements. The tenants agreed to make the improvements, and paid the $1,450 monthly rent. Their lease did not include a rent-stabilized lease rider, and the landlord did not file registrations with DHCR. In 2004, after the old tenants had left, the landlord leased the premises to Grimm for $1,450 a month pursuant to a lease that did not specify that the apartment was rent-stabilized. The following year, Grimm filed an overcharge complaint. DHCR dismissed the complaint, relying on the four-year rule. Grimm then brought an article 78 proceeding, which Supreme Court granted, relying on Thornton v. Baron. A divided Appellate Division affirmed, and DHCR and the landlord appealed.

The Court of Appeals reversed, again in an opinion by Judge Ciparick, but this time by a vote of 4-3. The court declined to interpret Thornton narrowly, holding that “where the overcharge complaint alleges fraud, as here, DHCR has an obligation to ascertain whether the rent on the base date is a lawful rent.” The court indicated that a mere allegation of fraud, without more, would not be enough to require further investigation by DHCR, but that there must be “evidence of a landlord's fraudulent deregulation scheme to remove an apartment from the protections of rent stabilization.” Judge Smith, dissenting for himself and Judges Graffeo and Read, objected that the majority opinion did not indicate what standard DHCR was supposed to use in evaluating an overcharge complaint. The dissent asked whether an allegation of a willful overcharge was enough to overcome the four-year rule, or whether such an allegation, combined with the hope that the overcharge would ultimately result in destabilization, would be enough.

Conclusion

The opinions in Cintron and Grimm leave the scope of the four-year rule very much in doubt. And with the current dysfunction in the state legislature, it is unlikely that landlords and tenants will be able to look to that body for clarification.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

A central feature of the Rent Regulation Reform Act of 1997 (RRRA) was its prohibition, in any rent overcharge complaint, on examination of rental history more than four years old at the time the complaint was filed. In two recent decisions, Cintron v. Calogero, NYLJ 10/20/2010, p. 26., col. 1, and Grimm v. DHCR, NYLJ 10/20/2010, p. 26., col. 4., The Court of Appeals has eviscerated that prohibition, leaving it unclear when, if ever, a landlord may rely on the four-year statute.

The Statutory Provision

The RRRA provides that overcharge complaints shall be filed with DHCR “within four years of the first overcharge alleged and no determination of an overcharge and no award of 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 … ” Administrative Code of the City of New York, Section 26-516(a)(2). The statute goes on to provide explicitly that “ [t]his paragraph shall preclude examination of the rental history of the housing accommodation prior to the four-year period preceding the filing of a complaint … ” Id.

The statute was designed to ease the burden on landlords to keep records indefinitely. A tenant who took possession in 2005, and agreed to pay what the landlord represented to be the legal regulated rent, may not, in 2010, bring an overcharge complaint that relies on the claim that the landlord had set the original rent too high because landlord had claimed to have made capital improvements that it did not, in fact, make. The terms of the four-year statute would appear to preclude such a claim.

Thornton v. Baron

The Court of Appeals placed the first chink in the statute's protective armor in 2005, when it decided Thornton v. Baron , 5 NY3d 175. In 1992, the landlord of the subject apartment leased to an illusory tenant at a rent far in excess of the legal stabilized rent, but on condition that the tenant not use the premises as a primary residence. The goal was to deregulate the apartment. Indeed, after entering into the illusory lease, the landlord brought a declaratory judgment action against the tenant to establish that the apartment was no longer stabilized. The tenant then entered into a stipulation to that effect. Meanwhile, the tenant then sublet the premises. More than four years after the landlord's initial lease to the illusory tenant, the subtenants challenged their rent, contending that the landlord was not entitled to collect the rent specified in the initial lease with the illusory tenant. In a 5-2 decision, the Court of Appeals held that because the lease was void in its inception, the landlord could not rely on the rent specified in that lease, and that the four-year statute did not bar the tenant's challenge to the rent (although it did preclude tenant from asserting that the pre-1992 rent should serve as the basis for setting the tenant's current rent; the court held that DHCR's “default” formula should be used instead).

Thornton involved a landlord who had schemed to escape from the rent regulation laws, and who sought to use the courts as instruments in the illegal scheme. Nothing in Chief Judge Kaye's opinion for the court suggested an intent to gut the statute. Nevertheless, the Thornton opinion set the stage for the two recent cases.

The Cintron Case

In Cintron v. Calogero, the tenant had filed complaints in 1987 and 1989 complaining about building services. Those complaints resulted in rent reduction orders, which the prior landlord ignored, continuing to charge the tenant the unreduced rent (which the tenant paid). The current owner purchased the building in 1991, and continued to collect the unreduced rent. Not until 2003 did the tenant file a rent overcharge complaint. At that point, DHCR determined that it could not examine rent history before 1999, so it took the 1999 rent as the legal regulated rent, and then took into account the rent reduction orders by freezing the 1999 rent until 2004, ordering the landlord to refund increases collected during that period. The tenant challenged that determination, but Supreme Court upheld DHCR's determination, and the Appellate Division affirmed.

The Court of Appeals, however, reversed. In an opinion by Judge Carmen Ciparick, the six-judge majority emphasized that refusing to give effect to a rent reduction order's direction to roll back rents when the order remained in effect during the four-year window period would “countenance the landlord's failure to restore required services.” The majority opinion emphasized that section 26-514 of the Rent Stabilization Law places a continuing obligation on a landlord to reduce rent until required services are restored. The majority then concluded that because the rent-reduction orders were still in effect during the four-year period, they were “part of the rental history that the Rent Stabilization Law permits DHCR to consider.” Judge Robert Smith's dissent acknowledged a tension between the RRRA's four-year statute and section 26-514's provision that rent reduction orders based on failure to provide services remain in effect until the service deficiency is cured. But he concluded that DHCR's solution accommodated the two statutes, while the majority's solution simply nullified the four-year provision.

Grimm v. DHCR

In Grimm, the pre-1999 registered rent for the stabilized apartment was $587.86. When the apartment became vacant in that year, the landlord offered the apartment to the tenants at $2,000 per month, but agreed to reduce the rent to $1,450 a month if the tenants made specified improvements. The tenants agreed to make the improvements, and paid the $1,450 monthly rent. Their lease did not include a rent-stabilized lease rider, and the landlord did not file registrations with DHCR. In 2004, after the old tenants had left, the landlord leased the premises to Grimm for $1,450 a month pursuant to a lease that did not specify that the apartment was rent-stabilized. The following year, Grimm filed an overcharge complaint. DHCR dismissed the complaint, relying on the four-year rule. Grimm then brought an article 78 proceeding, which Supreme Court granted, relying on Thornton v. Baron. A divided Appellate Division affirmed, and DHCR and the landlord appealed.

The Court of Appeals reversed, again in an opinion by Judge Ciparick, but this time by a vote of 4-3. The court declined to interpret Thornton narrowly, holding that “where the overcharge complaint alleges fraud, as here, DHCR has an obligation to ascertain whether the rent on the base date is a lawful rent.” The court indicated that a mere allegation of fraud, without more, would not be enough to require further investigation by DHCR, but that there must be “evidence of a landlord's fraudulent deregulation scheme to remove an apartment from the protections of rent stabilization.” Judge Smith, dissenting for himself and Judges Graffeo and Read, objected that the majority opinion did not indicate what standard DHCR was supposed to use in evaluating an overcharge complaint. The dissent asked whether an allegation of a willful overcharge was enough to overcome the four-year rule, or whether such an allegation, combined with the hope that the overcharge would ultimately result in destabilization, would be enough.

Conclusion

The opinions in Cintron and Grimm leave the scope of the four-year rule very much in doubt. And with the current dysfunction in the state legislature, it is unlikely that landlords and tenants will be able to look to that body for clarification.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.