New York City's Rent Stabilization Laws Update
New York City rent stabilization laws (“RSLs”) directly impact the amount of rental income a landlord can collect and, therefore, the landlord’s ability to remain current with any mortgage loan payments especially in the present interest rate environment. Approximately one million apartments, or almost half of all rentable apartments, are rent stabilized in New York City. With certain exceptions, RSLs apply to buildings containing six or more units that were built before 1974. New York City’s RSLs, among other things, limit how much a landlord can charge for rent and how much the rent can be raised each year. See generally Chapter 4 of Title 26 of the Administrative Code of the City of New York.
On December 22, 2023, Governor Hochul signed into law Legislation S2980-CA6216-B, which made various changes to avoid improper deregulations and rent increases, and improved enforcement of New York City’s RSLs. The New York State Legislature developed this law to address purported fraudulent tactics employed by landlords to exploit loopholes in the RSLs that resulted in landlords overcharging tenants and displacing them from their homes, thereby exacerbating the housing crisis. The legislation was intended to strengthen tenant protections by:
- Clarifying the standards of determining whether a landlord has engaged in a fraudulent scheme to deregulate a unit;
- Requiring landlords to obtain approval from New York State Homes and Community Renewal (“HCR”) prior to deregulating a unit due to a substantial rehabilitation;
- Enforcing penalties for failing to register a unit;
- Codifying methods for calculating rents after units are combined or modified; and
- Reinforcing HCR’s authority to enforce New York City’s RSLs.
Part B of the original bill was problematic on its face because it would have included a lookback period extending to the 1970s for owners claiming exemption from RSLs due to substantial rehabilitation. This retroactive application would have created an undue burden on property owners to locate decades’ old paperwork, likely in the possession of prior owners, if anyone, to prove that the buildings were exempt from the RSLs due to a substantial rehabilitation. The original bill required owners to retroactively obtain this approval for an exemption from the Division of Housing and Community Renewal (“DHCR”) within six months of the effective date of the law. Part B has since been amended to apply to buildings that were substantially rehabilitated on or after January 1, 2024, whose owners will need to receive DHCR approval within one year of completion.
The original bill also maintained that fraud could be established through mere mistake or error but the chapter amendments to Part B created a new standard. Now a court shall review “the totality of the circumstances” when determining whether an owner “knowingly engaged” in a fraudulent scheme to deregulate a unit. The amended version does not require a finding that all the elements of common law fraud (material misrepresentation; made with knowledge of its falsity; intent to defraud; reasonable reliance; and resulting damages) exists in order to make a determination that a fraudulent scheme to deregulate a unit was committed if the totality of the circumstances indicate otherwise. Owners are likely to challenge the “totality of the circumstances” standard given its breadth and lower threshold for adjudicating fraud than required by the common law.
Two groups of owners of small and midsize apartment buildings in New York City recently challenged the rent stabilization system as a violation of their constitutional property rights. The petitioners argued that they suffered a per se taking as a result of New York City’s RSLs. The United States District Courts for the Southern and Eastern District dismissed these claims, holding that no taking occurred and the RSLs did not violate Due Process. See 335-7 LLC v. City of New York, 524 F. Supp.3d 316 (S.D.N.Y 2021); Community Housing Improvement Program v. City of New York, 492 F. Supp.3d 33 (E.D.N.Y. 2020). The owners’ groups separately appealed the respective District Courts’ decisions to the United States Court of Appeals for the Second Circuit, which affirmed the District Courts’ determination that the RSLs did not amount to an unconstitutional taking in either action. See 335-7 LLC v. City of New York, 2023 WL 2291511 (2d Cir. 2023); 74 Pinehurst LLC v. New York, 59 F.4th 557 (2d Cir. 2023). On February 20, 2024, the Supreme Court of the United States denied the owners’ groups’ petitions for writs of certiorari. Justice Thomas stated that the Supreme Court denied certiorari because the petitions contained generalized allegations about the petitioners’ circumstances and injuries. However, Justice Thomas continued that “in an appropriate future case, we should grant certiorari to address th[e] important question [of ‘whether specific New York City regulations prevent petitioners from evicting actual tenants for particular reasons’].” 74 Pinehurst LLC v. New York, 2024 WL 674658 (2024).
Although Justice Thomas left open the door for future challenges, property owners in New York City will need to continue ensuring compliance with the applicable RSLs, which include some of the country’s most tenant-friendly laws and, in turn, expose lenders to a heightened risk of loan defaults by owners. On March 25, 2024, Mayor Adams signed legislation to extend the New York City Rent Stabilization Law of 1969 for another three years to ensure that current rent regulations remain available to confront the ongoing housing crisis. Absent a successful legal challenge, owners and lenders alike will need to contend with New York City’s RSLs for years to come which when coupled with an uncertain interest rate environment makes for an ongoing uneasy economic feeling around these commercial real estate assets.
The situation could be further impacted by the Good Cause Eviction standards being discussed by the New York Legislature which “would establish a de facto cap on rent increases in what are now market-rate apartments.” Op-ed, How to Kill New York’s Rental Market, Wall Street Journal, April 2, 2024.
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