Casado: The Court of Appeals Reinforces RGB Authority

The Rent Stabilization Law (“RSL”) is a New York City statute, part of the Administrative Code of the City of New York. Notwithstanding, the New York State Legislature has stripped the New York City Council of virtually all authority to amend the statute, such that amendments must come from Albany. The City statute is administered by the New York State Division of Housing and Community Renewal, a State agency. A City agency, the New York City Rent Guidelines Board (“RGB”), determines annual rent stabilization increases.

All this reflects the peculiar politics of rent regulation, and leads to confusion as to the jurisdiction of the City and State to regulate rents. At least some of this confusion has been dispelled by the Court of Appeals' recent decision in Casado v. Markus, 16 N.Y.3d 329 (2011).

Background

RSL ' 26-510(b) directs the RGB to “establish annually guidelines for rent adjustments” for hundreds of thousands of rent-stabilized apartments. The rent increases under annual RGB Orders have not been monolithic. For example, tenants executing two-year renewal leases will invariably pay a higher increase than those executing one-year renewals. Moreover, in many years the RGB, with judicial approval, has authorized higher increases for apartments where the landlord, rather than the tenant, pays the cost of electricity and/or fuel. See Stein v. Rent Guidelines Bd. for City of N.Y., 127 A.D.2d 189 (1st Dep't 1987); Matter of Chessin v. New York City Conciliation & Appeals Bd., 100 A.D.2d 297 (1st Dep't 1984). In other years, the RGB has ordered tenants of low-rent apartments to pay supplemental increases to mitigate the disparity between the stabilized rent and the actual cost of operating the unit.

In two recent RGB Orders, Nos. 40 and 41, the RGB directed tenants in certain low-rent apartments to pay minimum dollar increases. Thus, for example, in Order No. 40, tenants who did not pay electricity would pay an increase of 4.5% for a one-year renewal, and 8.5% for a two-year renewal. But the RGB further provided that where the apartment had not been vacated within the last six years, the one-year renewal increase would be the greater of 4.5% or $45.00, and the two-year renewal increase would be the greater of 8.5% or $85.00. Simple arithmetic tells us that these minimum dollar increases would only apply to apartments renting for less than $1,000 per month.

'A Tax on the Poor'

Tenants and tenant advocates challenged Order Nos. 40 and 41 in declaratory judgment actions, calling the minimum dollar increases a “tax on the poor.” Beyond the rhetoric, the tenants and their supporters argued that ' 3(b) of the Emergency Tenant Protection Act (L. 1974, ch. 576, ' 4) (“ETPA”) authorized the New York City Council to determine which classes of housing accommodations would be subject to rent regulation, while ETPA ' 4(b) merely authorized the RGB to establish rent increases for the classes of housing accommodations the City Council had designated for rent regulation. The tenants thus argued that the RGB ' by distinguishing between low rent apartments and all others ' had usurped the City Council's authority as to the classification of the housing accommodations.

This argument, however, runs directly contrary to the so-called Urstadt law (L. 1971, ch. 372). In 1971, the Legislature, determining that the City Council could not be trusted with rent regulatory authority, amended the enabling statute to provide that the City Council could not amend the rent laws except to remove or diminish existing regulations. After the Legislature perceived that the City was taking liberties with the Urstadt Law, see e.g., City of New York v. New York State Div. of Hous. & Community Renewal, 97 N.Y.2d 216 (2001), the Legislature closed any remaining loopholes by enacting L. 2003, ch. 82. This enactment left the City Council with virtually no rent regulatory authority, including “the classification of housing accommodations.” Thus, the tenants in Casado were arguing that the RGB had usurped a classification authority that the City Council no longer had.

The Courts

Supreme Court, 27 Misc. 3d 340 (Sup. Ct. N.Y. Co. 2010) and the Appellate Division, First Department, 74 A.D.3d 632 (1st Dep't 2010) adopted the tenants' argument, with the Appellate Division holding:

Although the City Council has the power to establish classifications of housing accommodations, and, if deemed necessary, to thereby allow for differentiations of rental treatment, it has not done so. It does not follow, however, that the Rent Guidelines Board may, in effect, step into the breach, without express statutory authority or delegation by the City Council. By imposing minimum dollar rent adjustments based on tenant longevity and rental amounts, the Rent Guidelines Board not only went beyond its authority to set maximum rent rates, but also impermissibly created a new class of rental accommodation, a policy determination exclusively reserved to the City Council.

(Emphasis in original, citations omitted.)

In a 5 to 2 decision, the Court of Appeals reversed, with Judge Robert Smith writing the majority opinion. After observing that “[t]he power given the New York City Council by [ETPA ' 3(b)] was largely revoked by the State Legislature in 2003,” the court wrote:

On its face, the RSL does not prohibit the RGB from distinguishing some kinds of apartments from others. The language that empowers the RGB to establish 'the maximum rate or rates of rent adjustment ' for one or more classes of accommodations' does not, as a simple matter of grammar, say or imply that there must be only one 'maximum rate ' of rent adjustment' for each class. And the ETPA language that petitioners rely on (which has been in any event largely nullified by later legislation) has nothing to do with the issue before us. To say that a 'local legislative body' may determine when a 'public emergency' exists requiring rent regulation for 'all or any class or classes of housing accommodations' is to say nothing at all about whether, or by whom, multiple levels of rent increases may be permitted within each class”

(Internal citations omitted.)

The majority then observed that the RGB had been making distinctions among housing accommodations for decades, without protest:

The RGB has made a number of other distinctions within the apartment 'class.' It has allowed landlords to charge extra when electricity is included in the rent, and to collect 'fuel adjustment surcharges.' Indeed, the order challenged in this case distinguishes between apartments in which heat is provided by the landlord and those in which it is not. Petitioners say that all these distinctions are invalid, and have survived only because the power to create them has never been challenged; they assert that they could, but chose not to, attack the heat-based distinction contained in the order now at issue. To us, however, the fact that such distinctions have long been accepted without question is further confirmation that nothing in the governing legislation can fairly be read to prohibit them.

(Internal citations omitted.)

The Dissenting Opinion

The dissenting opinion, authorized by Justice Carmen B. Ciparick, focused on a different issue. The avowed purpose of the RGB's minimum dollar increase was to reduce rent disparities between apartments, which is largely based on luck, i.e., how often an apartment happens to turn over. The dissent held that this disparity was not an anomaly, but was in fact part of the legislative scheme.

Of course, it is no coincidence that long-term tenants are the greatest beneficiaries of rent stabilization, or that, in the majority's words, 'tenants paying higher rents must subsidize those paying lower rents.' This inequality is due, in large part, to the Rent Regulation Reform Act of 1997, which amended the RSL to provide that a vacancy lease can increase a unit's rent by up to 20 percent, and even more where there has been no vacancy increase over eight years or the rent is particularly low.

Critically, the Legislature did not couple the large rent increases it was authorizing for new tenants with any alteration in how rent increases were calculated for current tenants. Under this scheme, by design, there is a large rent gap between new tenants and those who tenancies predate the amendment, and it will increase as many apartments experience repeated vacancies.

(Internal citations omitted.)

The majority, however, rejected this argument, stating:

There is no conflict between the RGB's dollar minimum increases, which give some benefit to landlords of low-rent, slow-turnover apartments while their tenants remain in possession, and the state legislation, which gives relief regardless of rent level after a slow-turnover apartment has finally become vacant. It is true that some landlords may, eventually, benefit from both provisions, but the two benefits, even where cumulative, are not logically inconsistent. Nor is the state legislation so detailed and comprehensive as to imply that the Legislature has preempted the field.

Conclusion

Policymakers can debate the wisdom of a so-called “poor tax” on low rent apartments. But for now, it is clear that the RGB has the authority to authorize such increases in the future.

Jeffrey Turkel, a member of this newsletter's Board of Editors, is a partner in the Manhattan real estate law firm of Rosenberg & Estis, P.C. He represented amicus curiae Rent Stabilization Association of New York City, Inc., and Community Housing Improvement Program, Inc. in Casado v. Markus.

The Rent Stabilization Law (“RSL”) is a New York City statute, part of the Administrative Code of the City of New York. Notwithstanding, the New York State Legislature has stripped the New York City Council of virtually all authority to amend the statute, such that amendments must come from Albany. The City statute is administered by the New York State Division of Housing and Community Renewal, a State agency. A City agency, the New York City Rent Guidelines Board (“RGB”), determines annual rent stabilization increases.

All this reflects the peculiar politics of rent regulation, and leads to confusion as to the jurisdiction of the City and State to regulate rents. At least some of this confusion has been dispelled by the Court of Appeals' recent decision in Casado v. Markus , 16 N.Y.3d 329 (2011).

Background

RSL ' 26-510(b) directs the RGB to “establish annually guidelines for rent adjustments” for hundreds of thousands of rent-stabilized apartments. The rent increases under annual RGB Orders have not been monolithic. For example, tenants executing two-year renewal leases will invariably pay a higher increase than those executing one-year renewals. Moreover, in many years the RGB, with judicial approval, has authorized higher increases for apartments where the landlord, rather than the tenant, pays the cost of electricity and/or fuel. See Stein v. Rent Guidelines Bd. for City of N.Y. , 127 A.D.2d 189 (1st Dep't 1987); Matter of Chessin v. New York City Conciliation & Appeals Bd. , 100 A.D.2d 297 (1st Dep't 1984). In other years, the RGB has ordered tenants of low-rent apartments to pay supplemental increases to mitigate the disparity between the stabilized rent and the actual cost of operating the unit.

In two recent RGB Orders, Nos. 40 and 41, the RGB directed tenants in certain low-rent apartments to pay minimum dollar increases. Thus, for example, in Order No. 40, tenants who did not pay electricity would pay an increase of 4.5% for a one-year renewal, and 8.5% for a two-year renewal. But the RGB further provided that where the apartment had not been vacated within the last six years, the one-year renewal increase would be the greater of 4.5% or $45.00, and the two-year renewal increase would be the greater of 8.5% or $85.00. Simple arithmetic tells us that these minimum dollar increases would only apply to apartments renting for less than $1,000 per month.

'A Tax on the Poor'

Tenants and tenant advocates challenged Order Nos. 40 and 41 in declaratory judgment actions, calling the minimum dollar increases a “tax on the poor.” Beyond the rhetoric, the tenants and their supporters argued that ' 3(b) of the Emergency Tenant Protection Act (L. 1974, ch. 576, ' 4) (“ETPA”) authorized the New York City Council to determine which classes of housing accommodations would be subject to rent regulation, while ETPA ' 4(b) merely authorized the RGB to establish rent increases for the classes of housing accommodations the City Council had designated for rent regulation. The tenants thus argued that the RGB ' by distinguishing between low rent apartments and all others ' had usurped the City Council's authority as to the classification of the housing accommodations.

This argument, however, runs directly contrary to the so-called Urstadt law (L. 1971, ch. 372). In 1971, the Legislature, determining that the City Council could not be trusted with rent regulatory authority, amended the enabling statute to provide that the City Council could not amend the rent laws except to remove or diminish existing regulations. After the Legislature perceived that the City was taking liberties with the Urstadt Law, see e.g., City of New York v. New York State Div. of Hous. & Community Renewal , 97 N.Y.2d 216 (2001), the Legislature closed any remaining loopholes by enacting L. 2003, ch. 82. This enactment left the City Council with virtually no rent regulatory authority, including “the classification of housing accommodations.” Thus, the tenants in Casado were arguing that the RGB had usurped a classification authority that the City Council no longer had.

The Courts

Supreme Court, 27 Misc. 3d 340 (Sup. Ct. N.Y. Co. 2010) and the Appellate Division, First Department, 74 A.D.3d 632 (1st Dep't 2010) adopted the tenants' argument, with the Appellate Division holding:

Although the City Council has the power to establish classifications of housing accommodations, and, if deemed necessary, to thereby allow for differentiations of rental treatment, it has not done so. It does not follow, however, that the Rent Guidelines Board may, in effect, step into the breach, without express statutory authority or delegation by the City Council. By imposing minimum dollar rent adjustments based on tenant longevity and rental amounts, the Rent Guidelines Board not only went beyond its authority to set maximum rent rates, but also impermissibly created a new class of rental accommodation, a policy determination exclusively reserved to the City Council.

(Emphasis in original, citations omitted.)

In a 5 to 2 decision, the Court of Appeals reversed, with Judge Robert Smith writing the majority opinion. After observing that “[t]he power given the New York City Council by [ETPA ' 3(b)] was largely revoked by the State Legislature in 2003,” the court wrote:

On its face, the RSL does not prohibit the RGB from distinguishing some kinds of apartments from others. The language that empowers the RGB to establish 'the maximum rate or rates of rent adjustment ' for one or more classes of accommodations' does not, as a simple matter of grammar, say or imply that there must be only one 'maximum rate ' of rent adjustment' for each class. And the ETPA language that petitioners rely on (which has been in any event largely nullified by later legislation) has nothing to do with the issue before us. To say that a 'local legislative body' may determine when a 'public emergency' exists requiring rent regulation for 'all or any class or classes of housing accommodations' is to say nothing at all about whether, or by whom, multiple levels of rent increases may be permitted within each class”

(Internal citations omitted.)

The majority then observed that the RGB had been making distinctions among housing accommodations for decades, without protest:

The RGB has made a number of other distinctions within the apartment 'class.' It has allowed landlords to charge extra when electricity is included in the rent, and to collect 'fuel adjustment surcharges.' Indeed, the order challenged in this case distinguishes between apartments in which heat is provided by the landlord and those in which it is not. Petitioners say that all these distinctions are invalid, and have survived only because the power to create them has never been challenged; they assert that they could, but chose not to, attack the heat-based distinction contained in the order now at issue. To us, however, the fact that such distinctions have long been accepted without question is further confirmation that nothing in the governing legislation can fairly be read to prohibit them.

(Internal citations omitted.)

The Dissenting Opinion

The dissenting opinion, authorized by Justice Carmen B. Ciparick, focused on a different issue. The avowed purpose of the RGB's minimum dollar increase was to reduce rent disparities between apartments, which is largely based on luck, i.e., how often an apartment happens to turn over. The dissent held that this disparity was not an anomaly, but was in fact part of the legislative scheme.

Of course, it is no coincidence that long-term tenants are the greatest beneficiaries of rent stabilization, or that, in the majority's words, 'tenants paying higher rents must subsidize those paying lower rents.' This inequality is due, in large part, to the Rent Regulation Reform Act of 1997, which amended the RSL to provide that a vacancy lease can increase a unit's rent by up to 20 percent, and even more where there has been no vacancy increase over eight years or the rent is particularly low.

Critically, the Legislature did not couple the large rent increases it was authorizing for new tenants with any alteration in how rent increases were calculated for current tenants. Under this scheme, by design, there is a large rent gap between new tenants and those who tenancies predate the amendment, and it will increase as many apartments experience repeated vacancies.

(Internal citations omitted.)

The majority, however, rejected this argument, stating:

There is no conflict between the RGB's dollar minimum increases, which give some benefit to landlords of low-rent, slow-turnover apartments while their tenants remain in possession, and the state legislation, which gives relief regardless of rent level after a slow-turnover apartment has finally become vacant. It is true that some landlords may, eventually, benefit from both provisions, but the two benefits, even where cumulative, are not logically inconsistent. Nor is the state legislation so detailed and comprehensive as to imply that the Legislature has preempted the field.

Conclusion

Policymakers can debate the wisdom of a so-called “poor tax” on low rent apartments. But for now, it is clear that the RGB has the authority to authorize such increases in the future.

Jeffrey Turkel, a member of this newsletter's Board of Editors, is a partner in the Manhattan real estate law firm of Rosenberg & Estis, P.C. He represented amicus curiae Rent Stabilization Association of New York City, Inc., and Community Housing Improvement Program, Inc. in Casado v. Markus.