Forgiveness of rent arrears owed

New York Appellate Division Reports

IN RE IG SECOND GENERATION PARTNERS L.P., 8421 [1st Dept
11-30-2006] 2006 NY Slip Op 08885 IN RE IG SECOND
GENERATION PARTNERS L.P., et al., Petitioners-Respondents,
v. NEW YORK STATE DIVISION OF HOUSING AND
COMMUNITY RENEWAL, Office of Rent Administration,
Respondent-Appellant, Dru Arstark,
Respondent-Intervenor-Appellant. 8421. Appellate Division
of the Supreme Court of New York, First Department. Decided
on November 30, 2006.

Judgment, Supreme Court, New York County (Edward H. Lehner,
J.), entered March 15, 2005, annulling a determination of
respondent DHCR that forgave rent arrears owed by
respondent-intervenor Arstark as a result of dismissal of
her fair market rent appeal (FMRA), affirmed, without
costs.

David B. Cabrera, New York (Sheldon D. Melnitsky of
counsel), for NYSDHCR, appellant.

Collins Dobkin & Miller, LLP, New York (Robert A. Katz of
counsel), for Dru Arstark, appellant.

Shaw & Binder, New York (Robert H. Gordon and Stuart F.
Shaw of counsel), for respondents.

TOM, J.P., MAZZARELLI, FRIEDMAN, MARLOW, MALONE, JJ.

DHCR’s determination to cancel rent arrears owed by
Arstark, following dismissal of her FMRA wherein DHCR found
the rent called for in the lease was less than fair market
value, was without rational basis (see Matter of Verbalis v
New York State Div. of Hous. & Community Renewal, 1 AD3d
101, 107 [2003]), or was arbitrary and capricious (see
Matter of Pell v Board of Educ. of Union Free School Dist.
No. 1 of Towns of Scarsdale & Mamaroneck, Westchester
County, 34 NY2d 222, 231 [1974]). Once DHCR found that the
lease rent did not exceed the fair market rent, it had no
authority to waive rent arrears.

There are no specific regulations or guidelines that give
DHCR the power to forgive rent arrears. DHCR’s reliance on
Rent Stabilization Code (9 NYCRR) § 2522.7 is
misplaced because consideration of the equities therein
specifically relates to the issuance of an “order adjusting
or establishing any legal regulated rent,” which DHCR did
here in setting the fair market rent, a determination not
challenged in this article 78 proceeding. Forgiveness of
rent arrears owed as a result of its decisions is not
within the power granted to DHCR by the Legislature.

Rent Stabilization Code § 2527.7 is similarly
inapplicable. Under this section, the Code applies to any
proceeding pending before DHCR “unless undue hardship or
prejudice results therefrom” (see Matter of Cabrini Realty
v New York State Div. of Hous. & Community Renewal, 6 AD3d
280 [2004]). Here, there is no evidence in the record to
justify a finding of hardship and prejudice to forgive
Arstark’s obligation to pay rent arrears. The fact that
Arstark owes petitioners more money after a DHCR ruling
does not, by itself, indicate prejudice or hardship (see
One Three Eight Seven Assoc. v Commissioner of Div. of
Hous. & Community Renewal of Off. of Rent Admin., 269 AD2d
296 [2000]; see generally Loomis v Civetta Corinno Constr.
Corp., 54 NY2d 18, 23 [1981]). By petitioner Wembly’s
letter dated April 14, 1995 and language in renewal leases
signed by Arstark in 1996, 1997, 1999 and 2002, Arstark was
on notice that the Rent Administrator’s order reducing her
collectible rent was an interim, non-binding decision that
could be modified by the pending PAR or any appeals
therefrom. Moreover, Arstark, who could have been escrowing
the disputed rent amount, was given the opportunity to be
heard when DHCR notified her in 2002 that it intended to
apply the amended regulation, Rent Stabilization Code
§ 2522.3, and utilize rent-stabilized payments in
the building as comparable data. However, in affidavits
submitted by Arstark and her fiancE;, neither claimed that
an adverse result would cause hardship or prejudice.
Arstark’s failure to present such evidence or arguments
before DHCR makes remand for this purpose unwarranted
(Matter of Marksue Realty v New York State Div. of Hous. &
Community Renewal, 200 AD2d 393, 394 [1994]).

We further note that DHCR in the past has permitted tenants
to pay the differential between the lease rent and the
interim rent set by the Rent Administrator in monthly
installments (cf. Matter of Atkinson v Division of Hous. &
Community Renewal, 280 AD2d 326 [2001]; Matter of Meyer v
New York State Div. of Hous. & Community Renewal, 192 AD2d
375 [1993]; Matter of Shernon v New York State Div. of Hous.
& Community Renewal, 10 Misc 3d 1051[A], 2005 NY Slip Op
51873[U], *2). We agree with the IAS court that the matter
should be remanded to DHCR for the sole purpose of
determining the exact amount of arrearage and setting terms
for its repayment.

All concur except Mazzarelli, J. who dissents in a
memorandum as follows:

MAZZARELLI, J. (dissenting)

I would reverse the judgment appealed and reinstate the
decision of the State Division of Housing and Community
Renewal (DHCR). Approximately 16 years ago, Dru Arstark,
the tenant in this proceeding, commenced a Fair Market Rent
Appeal (FMRA). She claimed that $830 per month exceeded the
fair market rent for her studio apartment at 166 Second
Avenue. Five years later, in 1995, the then Rent
Administrator (RA) reduced her rent to $556.82 per month.
That rent reduction order required the landlord to refund
$12,877.37 in rent overcharges to the tenant. It also
provided that if the owner did not comply, the tenant could
apply the overcharges to future rent until a full offset was
made. The owner filed a petition for administrative review
(PAR), which automatically stayed that portion of the RA’s
order directing a refund of the prior excess rent.

In 1997, while the PAR was still pending, the Legislature
enacted the Rent Regulation Reform Act (RRRA). This
statute, among other things, established a four-year
statute of limitations for claims of rent overcharge, and
changed the comparability requirements for FMRAs. On
January 27, 2000, applying the 1997 RRRA, DHCR granted the
landlord’s PAR and determined that the legal rent was
$798.07 as of May 1, 1990, not $556.82 as earlier
determined by the RA. The tenant brought an article 78
proceeding to challenge that order, and in July 2000 the
Supreme Court granted the request of DHCR to remit the
matter for further consideration.

Then, in December 2000, the Rent Stabilization Code (9
NYCRR) § 2522.3 was amended. This amendment again
revised the comparability standards for FMRAs, making them
less restrictive than those created by the 1997 RRRA. It
provided that in determining an FMRA, rents for comparable
housing might be considered where such rents are:

(1) unchallenged rents in effect for housing
accommodations subject to this [Rent Stabilization] Code
on the date the tenant filing the appeal took occupancy;
or

(2) at the owner’s option, market rents in effect for
other comparable housing accommodations on the date the
tenant filing the appeal took occupancy, as submitted by
the owner.

(§ 2522.3[e]). The amended statute also provided that
it applied to all pending cases “unless undue hardship or
prejudice” would result (§ 2527.7).

Thereafter, in May 2004, DHCR acted on the then pending
remitted matter and determined that the subject apartment’s
initial “fair market rent” was $1078.30. The agency
dismissed the tenant’s FMRA and granted the owner’s PAR in
part. The DHCR stated:

Section 2527.7 of the Rent Stabilization Code directs
that unless undue hardship or prejudice results therefrom,
where a provision of the Code is amended during the
pendency of a proceeding, the determination shall be made
in accordance with the changed provision. In the instant
matter, [u]ndue hardship to the tenant would result if the
tenant’s initial stabilized rent were established at
$575.00 effective May 1, 1990 in this PAR order which is
being issued in 2004 — many years after the
issuance of the Rent Administrator’s order on January 6,
1995 which set the initial rent at $552.82. Further,
undue hardship would result if the tenant now had to pay
back arrears over a ten year period. Relatedly, Sections
2520.3 and 2522.7 of the Rent Stabilization Code must be
construed, and legal rents must be established, in a
manner [taking] into consideration all factors bearing on
the equities involved, preserv[ing] the regulated
housing stock and provid[ing] for the orderly transition
to market rents.

[G]iven that the initial stabilized rent was set by the
owner at a point in time when the former standards for the
establishment of such rents were still the operative rules
and further that the legal rent established by the Rent
Administrator’s order has been in effect throughout the
pendency of this PAR proceeding, the Commissioner is of
the opinion that the payment of the rents established by
the Rent Administrator’s order shall be deemed full
payment of the legal rent and effective only with the
first rent payment date following 60 days after the
issuance of this order. Only after such 60 day period will
the owner be entitled to collect a rent in an amount that
is based on the re-computed initial stabilized rent
(determined in accordance with Section 2522.3, as
amended) updated by all subsequent lawful increases and
adjustments [emphasis supplied].

The landlord commenced an article 78 proceeding, asserting
that DHCR’s order essentially constituted a forgiveness of
approximately $19,000 in rental arrears, and accordingly
that it was arbitrary and capricious. The tenant intervened
and submitted an answer and cross motion. She argued that
the court should either sustain the agency’s determination,
or remand to the agency so that it could make a record of
the fact that personal financial hardship would result from
retroactive application of the higher fair market rent.

The IAS court held that the DHCR had acted in an arbitrary
and capricious manner when applying the rent increase
prospectively only. It interpreted the amended statute to
apply retroactively, and remanded to the DHCR for the sole
purpose of determining the amount owed and setting a period
for its repayment. I would reverse and reinstate the
agency’s decision. The law is settled that interpretation
of a regulation by the agency that promulgated it and has
the expertise to administer it is entitled to deference if
that interpretation is not irrational or unreasonable
(Matter of Gaines v New York State Div. of Hous. &
Community Renewal, 90 NY2d 545, 548-549 [1997]; Matter of
Versailles Realty Co. v New York State Div. of Hous. &
Community Renewal, 76 NY2d 325 [1990]). Further, there is
nothing in the governing statutes and regulations to
preclude DHCR from applying the increase prospectively,
especially where imposed after protracted administrative
proceedings (see generally Matter of Gilman v New York
State Div. of Hous. & Community Renewal, 99 NY2d 144, 152
[2002] [recognizing that lengthy appeals process could
result in unfair accumulation of rental arrears]). Finally,
even upon a conclusion that it would decide a case in a
manner differently, a court is precluded from substituting
its judgment for that of the agency to which the
Legislature has given specific power to determine the
issues before it, unless there is no rational basis for the
agency’s determination (see Matter of Mid-State Mgt. Corp. v
New York City Conciliation & Appeals Bd., 112 AD2d 72, 76
[1985], affd 66 NY2d 1032 [1985]).

The statutory sections invoked by the agency to reach its
decision here are Rent Stabilization Code § 2522.7
and § 2527.7. Section 2522.7 provides:

In issuing any order adjusting or establishing any legal
regulated rent, or in determining when a higher or lower
legal regulated rent shall be charged . . . the DHCR shall
take into consideration all factors bearing upon the
equities involved, subject to the general limitation that
such adjustment, establishment or determination can be put
into effect with due regard for protecting tenants and the
public interest against unreasonably high rent increases
inconsistent with the purposes of the RSL, for preventing
imposition upon the industry of any industry-wide schedule
of rents or minimum rents, and for preserving the
regulated rental housing stock [emphasis supplied].

Section 2527.7 provides:

Except as otherwise provided herein, unless undue
hardship or prejudice results therefrom, this Code shall
apply to any proceeding pending before the DHCR, which
proceeding commenced on or after April 1, 1984, or where a
provision of this Code is amended, or an applicable
statute is enacted or amended during the pendency of a
proceeding, the determination shall be made in accordance
with the changed provision [emphasis supplied].

Notably, neither of these provisions limits the remedies
available to the DHCR upon a finding that the application
of the amended statute would result in “undue hardship or
prejudice.” Here DHCR applied the amended statute to
establish the tenant’s fair market rent, and it determined
that upon consideration of the equities, the amendment
should be applied prospectively only. Thus, the DHCR was
doing precisely what the statute has empowered it to do
— establish the legal regulated rent and the date
upon which it shall begin to become due.

To create its claim for arrears, the landlord relies upon
four leases it executed with the tenant between 1996 and
2002. In each lease, the landlord stated the rent to be
higher than the rent set in the 1995 RA’s determination,
and consistent with what it had been charging prior to that
order[fn1]. At the same time, however, each lease also
included, without explanation, a provision that only
$660.25 per month was due from the tenant (the sum set
pursuant to the 1995 order and then in effect). To
calculate the amount the landlord characterized as arrears,
it has used the higher amounts it unilaterally created in
the leases. However, these lease contracts between the
landlord and tenant have no legal effect on the calculation
of the fair market rent.

In Rent Stabilization Assn. of N.Y. City v Higgins (83 NY2d
156, 168 [1993], cert denied 512 US 1213 [1994]), the Court
of Appeals observed that the Legislature’s determination to
give DHCR responsibility to promulgate rent regulations
inevitably required some changes in the legal relationship
between landlords and tenants, quoting Versailles (76 NY2d
328-329). This includes setting fair market rents. Although
the agency ultimately determined that the tenant was
required to pay a higher rent, these lease contracts cannot
be used by any party to undermine DHCR’s statutory rights.

Finally, Matter of Cabrini Realty v New York State Div. of
Hous. & Community Renewal (6 AD3d 280 [2004]) does not
require a different result. In Cabrini, DHCR fixed a
tenant’s rent based upon a “default procedure” from a 1994
internal Processing Directive, rather than applying certain
provisions of the Rent Stabilization Code which had been
amended during the pending proceeding and were applicable to
the matter in controversy (id. at 281). The agency argued
that its determination was authorized by the hardship or
prejudice exception in Rent Stabilization Code §
2527.7. The IAS Court confirmed the agency’s decision, and
we reversed, as “neither the DHCR nor the court actually
found that the tenant would suffer prejudice or hardship
from the application of the pertinent Code provisions” (id.
at 282). Thus we remanded for a hearing on hardship.

Here, by contrast to Cabrini, the DHCR specifically made a
finding that undue hardship would result to this tenant if
the amended code were applied retroactively. The majority
mis-characterizes this finding. It erroneously states that
the tenant waived her opportunity to present evidence of
hardship before DHCR or the court because she did not voice
any objection in 2002, when the Agency notified her that it
intended to apply the amended regulation. There is nothing
in the 2002 notice requesting or providing the opportunity
for the tenant’s input. It is to be noted that DHCR has
consistently taken the position that it did not seek or
want any evidence of hardship from individual tenants.
Rather, DHCR made a policy determination not based on
individual facts.

The majority also states that respondent-intervenor Arstark
“could have been escrowing the disputed rent amount.” This
is an unreasonable duty to place on the tenant. The rents
claimed due by the landlord are not even equivalent to that
which was ultimately deemed a fair market rent. That rent,
it should be remembered, was the result of two amendments
to the controlling legislation during the 14-year pendency
of this rental contest. Notably, those amendments allowed
broader consideration of comparable apartments for
determining FMRAs, thus producing a higher rent for
Arstark’s apartment. Clearly, Arstark could not have
predicted — let alone escrowed — the amount
claimed due, as that amount was adjusted only because of
the legislative changes. The majority thus ascribes to
Arstark a prescience not possible.

Arstark clearly had no opportunity to present evidence
regarding hardship because, as a reading of the record
shows, the DHCR did not want such evidence, and provided
her no opportunity to present it. DHCR made its decision,
as it was empowered to do, based upon its appreciation of
the equities of the changed legislative landscape, not the
facts of this or any particular case. That the tenant did
not ask for this specific relief is not a basis for
concluding that the DHCR exceeded the scope of its
authority in rendering its determination (see Matter of
Waverly Assoc. v New York State Div. of Hous. & Community
Renewal, 12 AD3d 272 [2004] [DHCR can consider the equities
in adjusting or establishing rent]). Clearly it acted as it
has a right to do under Court of Appeals precedent (see
Gilman, 99 NY2d 144, supra).

Thus, I find no basis to disturb the determination by DHCR
as it was neither irrational nor arbitrary.

M-1630 In re IG Second Generation Partners L.P.,
et al. v NYSDHCR, etc.

Motion seeking costs and disbursements denied.

THIS CONSTITUTES THE DECISION AND ORDER OF THE SUPREME
COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

[fn1] The 1996 lease is a two-year renewal for $894.15; the
1998 lease is a two-year renewal for $929.92; the 2000
lease is a two-year renewal for $967.12; and the 2002 lease
is a two-year renewal for $1025.12.