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Rent Controlled Tenants Beat Back "Hardship" Rent Increases

Rent Controlled tenants won a big victory recently when Supreme Court Justice Schlomo S. Hagler upheld a DHCR decision denying "hardship" rent increases for 27 elderly tenants living at London Terrace Towers in Chelsea. London Terrace Associates v. DHCR v. Four Corners Tenants Association, Index No. 103341/11 (Sup Ct, NY Co, January 18, 2012). I was the lead attorney on the case that goes back more than ten years. The so-called "hardship" rent increases would have doubled and tripled rents of the few remaining rent controlled tenants in a co-op.

A building owner is entitled to hardship rent increases only if the rents are not sufficient to cover costs plus a "reasonable" profit of 8 ½%. (The "reasonable" profit used to be 6% but was raised in 1970 to 8.5%. Let's hope it doesn't get any more reasonable!)

The Owner (the holder of unsold shares in the remaining rent controlled apartments) who sought the increases had already made millions of dollars selling vacated rent controlled apartments and retaining ownership of valuable rental and commercial space. Millions more could be made if the Sponsor could force the remaining rent controlled tenants to vacate by increasing their rents.

The decision helps protect the 40,000 or so remaining rent controlled tenants from misnamed "hardship" rent increases. The road to victory (for now) was a long and winding one involving arcane matters of tax law and a dispute over how to measure a building's "capital value" which determines an owner's profit. (No surprise that one way that people get and stay rich is by writing the tax laws and interpreting them in a way that favors them!)

The Owner applied for the rent increases in 1996. The DHCR took 10-years to rule on the applications. In 2006 it granted the applications, imposing not only substantial rent increases going forward but 10-years of retroactive rent increases as well. The increases would have forced some tenants from their homes and compelled others to spend their life savings to remain in their apartments and pay off the 10-years of arrears.

The Tenants Association appealed arguing, among other things, that the DHCR was using an outdated measure of capital value, Article 12A of the Real Property Tax Law rather than Article 12. Under the Article 12A measure of capital value, the owner's profit is measured at four times what it would be under the Article 12 measure. (Both Article 12 and Article 12A use an "equalization ratio" which converts the building's assessed value to an estimated market value.)

We argued that the DHCR should look to the Court of Appeals decision City of New York, 97 NY2d 216, 765 NE 829, 739 NYS2d 333 (2001) which, in upholding a 1997 law involving maximum base rent ("MBR") increases, held that Article 12 is a "more accurate" measure of capital value.

That "more accurate" measure, in the case of the tenants at London Terrace Towers, resulted in the Owner being entitled to no hardship rent increase since the rents were sufficient to cover its costs and profit. On the other hand, applying the Article 12A measure resulted in the Sponsor being entitled to substantial rent increases to make its (inflated) profit.

In a decision dated February 10, 2011, the DHCR applied Article 12 and found that the Owner was not entitled to any rent increases. That decision was upheld by Judge Hagler on January 18, 2012. We expect that the Owner will appeal to the Appellate Division.

David Hershey-Webb