In 2014, RSA, together with CHIP, commenced a lawsuit in State Supreme Court in Brooklyn challenging the creation of DHCR’s Tenant Protection Unit (TPU), along with twenty-six other amendments of the Rent Stabilization Code. The case is formally known as Portofino v. DHCR. After more than three years of litigation, including the taking of depositions of DHCR officials, a ruling has finally been made, with State Supreme Court Justice Richard Velasquez upholding the TPU and all of the regulatory amendments.

The industry’s lawsuit challenged the TPU on two grounds. First, the lawsuit argued that there was no legal authority to create the TPU given the fact that the funding for the TPU, which has been contained in each of the Governor’s Executive Budgets over the past few years, has always been removed from the Budget by the State Senate and no actual appropriations to fund the TPU were ever specifically authorized. In addition, the industry claimed that even if the TPU was lawfully created, the manner in which it operates violates constitutional due process protections to which property owners are entitled.

Separate and apart from the TPU-related issues, several of the specific amendments were challenged. In the 2014 promulgation, DHCR amended the Code to allow for several exceptions to the four-year statute of limitations on overcharge claims and the four-year limitation on record retention; that law was created by the Rent Regulation Reform Act of 1997 without any exceptions.

For example, the 2014 Code Amendments created an exception if the tenant was charged a preferential rent. The Code Amendments also created an exception to the four-year rule if the apartment was vacant or temporarily exempt on the base date. Notwithstanding the fact that the 1997 law creating the four-year rule did not provide for any exceptions, the Court ruled that DHCR “has “expansive authority to carry out its mandate to adopt a [Code] that ‘provides safeguards against unreasonably high rent increases and, in general, protects tenants and the public interest….”

In addition, RSA and CHIP also argued that the 2014 Amendments weakened the four-year rule by allowing DHCR to consider more than four years of rent history based upon a merely allegation of fraud rather than a “colorable claim of fraud” as required by the decision by the Court of Appeals in Grimm v. DHCR in 2010. The Court rejected that claim, holding that the regulations require more than a “mere allegation of fraud” and allows an examination of more than four years of rental history to determine whether a “fraudulent scheme” was in use.

Ultimately, the Court also rejected the industry’s argument that the consequence of these regulations was to require owners to maintain documents forever, notwithstanding the language of the governing statute. The Court said this argument was “unavailing,” stating that the purpose of the four-year rule ‘was to alleviate the burden on honest landlords indefinitely… not to immunize dishonest ones from compliance with the law….”

Unfortunately, the Court did not understand that for all practical purposes, all owners, especially honest ones, must now bear this burden that the 1997 law intended to eliminate. Each and every argument raised by the industry with regard to these amendments was rejected by the Court.

RSA also challenged the new regulations relating to lease riders. In particular, RSA challenged the amendment which, we argued, allows tenants to withhold rent if they are not satisfied with the documentation that owners are required to provide in the lease rider to justify an individual apartment improvement rent increase. According to the Court, the lease rider “does not authorize tenants to withhold rent unilaterally, but contemplates a proceeding in which the landlord is afforded an opportunity to demonstrate that the rent is legal.” Once again, the Court failed to understand how this provision plays out in the real world.

Other provisions were challenged as well, also without success, including Code amendments which (1) allowed DHCR not to grant an MCI rent increase if there are immediately hazardous violations of record, (2) eliminate the requirement that tenants must provide notice to the owner of any disruption of services prior to seeking a rent reduction order from DHCR, (3) codified the default formula for the processing of rent overcharge cases in certain cases, and (4) requires owners to file an application with DHCR in order to amend an apartment registration for a prior year.

The Court ruled that DHCR, when it promulgated all of the various amendments to the Code did not, as RSA alleged, violate the principle of separation of powers and that DHCR’s actions were consistent with the rent laws enacted by the State Legislature over the years. According to the Court, DHCR acted “within the confines of its delegated powers and did not usurp the authority of the legislature in promulgating the 2014 Amendments.

RSA, CHIP and our attorneys are reviewing the decision and considering the next steps. The attorneys representing the two organizations are Sherwin Belkin from Belkin, Burden, Wenig & Goldman, David Feuerstein from Feuerstein & Kulick, and Kevin Fullington from Herrick Feinstein. We will keep you apprised of further developments in this case.