Expiration of a Temporary Exemption Restores Rent Stabilization but Does Not Defeat Lawful Pre-2019 Deregulation

1. Introduction

In Connors v Kushner Cos., LLC, the Second Department addressed how rent stabilization applies when apartments return to the ordinary rental market after a temporary educational-housing exemption. The decision distinguishes two legally separate events: an apartment’s return to rent stabilization when its temporary exemption ends, and its possible deregulation under another law applicable at that time.

The plaintiffs, current and former tenants, brought a class action against Kushner Companies, LLC, and other defendants seeking declarations of rent-stabilized status, damages for rent overcharges and Rent Stabilization Code violations, and calculation of lawful rents. The building had been rent stabilized from 1984 through 1991 and later benefited from a temporary student-housing exemption. That exemption ended in 2014, when the defendants acquired the property from Brooklyn Law School.

The building contained 19 apartments. Units 7 and 17 were undisputedly always rent stabilized; the remaining 17 units were in controversy. When the defendants took possession in 2014, tenants of those disputed units received market-rate leases.

The central question was whether the defendants necessarily had to issue rent-stabilized leases to the first tenants following the exemption, or whether the then-existing high-rent vacancy deregulation rules could permit market-rate leases. Related issues concerned the proper rent-calculation method, the evidentiary burden for proving deregulation, and whether substantial alterations justified treating certain apartments as newly created units.

2. Summary of the Opinion

The Appellate Division unanimously affirmed the Supreme Court’s order insofar as appealed and cross-appealed from, without costs or disbursements.

The court’s principal conclusions were:

1. Expiration of the temporary exemption did not itself deregulate the apartments. They resumed their previous rent-stabilized status.
2. Restoration of stabilization did not foreclose an independent, lawful deregulation. Because the exemption ended in 2014, the high-rent vacancy deregulation provisions then in force could apply after the legal regulated rent was determined.
3. The default rent formula was unavailable on this record. The historical registered rents were known and undisputed, and the alleged misconduct did not establish a fraudulent scheme that made those rents unreliable.
4. The owners had not established deregulation of Units 1, 2, and 3. Unit 3 involved inadequate proof and conflicting rent calculations. For Units 1 and 2, the defendants failed to substantiate the alterations necessary to establish newly created apartments entitled to a first stabilization rent.

These were rulings on summary judgment, not a comprehensive adjudication of every apartment or every overcharge claim. In particular, denying the plaintiffs’ motion did not establish that all affected units were deregulated, while denying the defendants’ motion concerning Units 1, 2, and 3 did not itself finally resolve those units’ status.

3. Governing Legal Framework

A. Temporary educational-housing exemptions

Under 9 NYCRR 2520.11(f), qualifying housing operated by a college or school as a dormitory, exclusively for educational purposes and on a nonprofit basis, may be exempt from rent stabilization where initial occupancy depends on affiliation with the institution. The exemption suspends the application of regulation while its conditions exist; it does not necessarily extinguish an apartment’s underlying regulated status.

B. Calculating rent when the exemption ends

The court applied 9 NYCRR 2526.1(a)(3)(iii), which addresses apartments vacant or temporarily exempt on the base date. The quoted provision reconstructs the legal regulated rent using:

• The prior legal regulated rent;
• The appropriate increase under 9 NYCRR 2522.8;
• Successive two-year guideline increases where the vacancy or exemption exceeded one year; and
• Other adjustments permitted by the Code.

Before its 2014 amendment, the provision instead referred to the rent agreed upon by the owner and the “first rent stabilized tenant” after the vacancy or temporary exemption. The court held that removal of those words did not mean that apartments returning from temporary exemption ceased to be rent stabilized.

C. Historical high-rent vacancy deregulation

In 2014, former 9 NYCRR 2520.11(r)(5) exempted qualifying apartments that became vacant on or after June 24, 2011, with a legal regulated rent of at least $2,500 per month. The court therefore required the restoration and deregulation provisions to be read together: an apartment could return to stabilization and then qualify for deregulation under the independently applicable law.

The Housing Stability and Tenant Protection Act of 2019 eliminated high-rent vacancy deregulation effective June 14, 2019. Nevertheless, 9 NYCRR 2520.11(r)(1) preserves apartments lawfully deregulated under the former Rent Stabilization Law § 26-504.2. The decision accordingly concerns the validity of historical deregulation, not a continuing ability to deregulate apartments merely because their rents reach the former threshold.

4. Precedents Cited and Their Influence

A. Restoration of stabilization after temporary exemption

Matter of AEJ 534 E. 88th, LLC v New York State Div. of Hous. & Community Renewal, 194 AD3d 464, 470. This decision supplied the central restoration principle. As quoted in the opinion, both versions of 9 NYCRR 2526.1(a)(3)(iii) contemplate that a formerly stabilized apartment resumes that status when its temporary exemption ends. The Second Department used this authority to reject the suggestion that deleting “first rent stabilized tenant” independently removed returning apartments from regulation. Importantly, restoration remained distinct from the further question whether another statute permitted deregulation.

B. Historical deregulation and the limits of rent reconstruction

Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d 332, 350, 354–355. The court relied on this Court of Appeals decision for several propositions. First, it described the former luxury deregulation system, which depended on a rent threshold together with vacancy or qualifying tenant income. Second, it supported the ordinary association between the default formula and unreliable rent records. Third, it explained the limited examination of older rental history where fraud may have corrupted the base-date rent. These principles connected the historical deregulation framework with the evidentiary limits governing rent calculation.

Gomes v Vermyck, LLC, 238 AD3d 26, 34–35. This authority provided the opinion’s explanation of the default formula and its fraud exception. The court used it to distinguish a claim that market-rate leases were improper from a showing that a fraudulent deregulation scheme rendered the relevant historical rents unreliable. Only the latter would justify the particular fraud-based departure discussed in the opinion.

Simpson v 16-26 E. 105, LLC, 176 AD3d 418, 419. Quoted through Gomes v Vermyck, LLC, this case supplied the description of the default formula’s alternative benchmarks: a comparable apartment’s registered rent, a reduced initial rent, a qualifying prior tenant’s registered rent, or an amount determined by the housing agency where the other measures are inappropriate. Its significance was to identify the substitute calculation the plaintiffs sought.

Thornton v Baron, 5 NY3d 175, 179–181. The court cited this decision alongside Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal for the proposition that default-formula calculations generally address situations lacking reliable rent records. It helped frame why an alternative formula was unnecessary when usable historical rents existed.

Conason v Megan Holding, LLC, 25 NY3d 1. This decision supported the exception permitting use of the default formula in connection with a fraudulent deregulation scheme. Its role was to confirm that fraud can justify departing from ordinary rent reconstruction, without suggesting that every allegedly incorrect market-rate lease establishes such fraud.

Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358, 367. This authority supported examining rental history beyond the ordinary four-year lookback period for the limited purpose of determining whether fraud undermined the base-date rent. The opinion did not treat that exception as an unrestricted license to reopen historical rents whenever deregulation is disputed.

C. The owner’s burden to prove deregulation

Nadler v Carmine Ltd., 231 AD3d 485, 486. This case was central to the ruling on Unit 3. It established both that the owner bears the burden of proving lawful deregulation and that annual apartment registrations do not, by themselves, establish the truth of the owner’s reported information. Those propositions prevented the defendants from converting their own administrative filings into conclusive proof.

Hadzovic v Buckley Sch. in the City of N.Y., 238 AD3d 487, 488. Cited with Nadler v Carmine Ltd., this decision reinforced the allocation of the burden of proof to the owner. The historical availability of deregulation did not require tenants to disprove it in the first instance.

Stafford v A & E Real Estate Holdings, LLC, 240 AD3d 421, 422–423. The court cited this authority in concluding that the defendants had not established Unit 3’s deregulation. Its stated role was to support the evidentiary insufficiency determination, rather than to supply a separate rule about temporary exemptions.

D. Substantial alterations and first stabilization rents

Matter of Velasquez v New York State Div. of Hous. & Community Renewal, 130 AD3d 1045, 1047. This decision explained that a first stabilization rent derives from an administratively created policy implemented by the Division of Housing and Community Renewal. It supplied the doctrinal foundation for evaluating the defendants’ contention that Units 1 and 2 were newly created apartments.

Matter of 300 W. 49th St. Assoc. v New York State Div. of Hous. & Community Renewal, Off. of Rent Admin., 212 AD2d 250, 253. Quoted through the other alteration authorities, this case supplied both the policy’s administrative origin and the demanding standard for substantial alteration. The apartment’s perimeter walls must have been substantially moved and changed so that the former apartment essentially ceases to exist and its rental history becomes meaningless. Ordinary renovation is not the stated test.

325 Melrose, LLC v Bloemendall, 65 Misc 3d 43, 46. This case connected the first-rent policy to substantial alteration of a vacant apartment’s outer dimensions and the applicable deregulation threshold. Applying that framework, the court found the defendants’ lack of evidence about the work performed fatal to their summary judgment request for Units 1 and 2.

5. Analysis of the Court’s Legal Reasoning

A. Restoration and deregulation are separate inquiries

The court rejected an all-or-nothing approach. The defendants could not treat expiration of the educational exemption as an automatic deregulating event. Equally, the plaintiffs could not treat the restoration of stabilization as categorically preventing application of the deregulation laws in force in 2014.

The resulting sequence is important: determine the apartment’s restored regulatory status, establish its legal regulated rent, and then assess whether an independent deregulation provision applied. A market-rate lease could follow if that independent route was lawfully satisfied. The court therefore rejected the plaintiffs’ categorical claim that a rent-stabilized lease necessarily had to be issued to the first post-exemption tenant.

This reasoning harmonizes the Code’s restoration provision with the former deregulation provisions. Neither provision displaces the other merely because both become relevant when an apartment returns to the market.

B. Reliable historical rents defeated the requested default formula

The units were temporarily exempt on the base date, making the specific reconstruction rule in 9 NYCRR 2526.1(a)(3)(iii) applicable. Their last registered rents were known and undisputed. The court therefore found a reliable starting point for calculating lawful rents under the ordinary statutory method.

The plaintiffs’ fraud allegation rested on the issuance of market-rate leases in 2014. But those leases could have been lawful if the former deregulation requirements were met. More specifically, the plaintiffs did not allege a fraudulent scheme that corrupted the historical rents used for reconstruction.

The holding is consequently narrower than a general rejection of fraud allegations. It establishes that the alleged issuance of market leases, without the identified connection to unreliable historical rents, did not justify the requested default calculation here.

C. A possible route to deregulation is not proof of actual deregulation

Although the defendants prevailed on the legal availability of historical deregulation, they still had to prove that individual apartments qualified. Unit 3 illustrates that distinction. Annual registration statements merely recorded the owner’s representations, and the record contained conflicting calculations of its legal rent.

There is no inconsistency between accepting the historical registered rents as reliable inputs and finding disagreement over Unit 3’s ultimate lawful rent. A reliable starting figure does not resolve every question about subsequent calculations and permissible adjustments.

D. Newly created apartments require proof of substantial physical change

For Units 1 and 2, the defendants relied on a different theory: substantial alterations had created new apartments eligible for first stabilization rents. The court required evidence showing that the apartments’ outer dimensions had been substantially changed. Without proof of the work performed, the defendants could not establish that the former apartments had effectively ceased to exist.

The ruling concerns failure of proof. It does not establish a categorical prohibition on first stabilization rents following qualifying historical alterations; it confirms that an owner must substantiate the physical changes necessary for that treatment.

E. The affirmance remains apartment-specific

The court affirmed declarations that Units 16 and 18 were not rent stabilized, but did not separately detail their rent calculations. Its result should not be expanded into a finding that every disputed apartment was lawfully deregulated. Nor did the opinion calculate damages or finally determine all overcharge claims.

6. Potential Impact

• Historical exemption cases: Courts evaluating apartments that returned from temporary exemptions before June 14, 2019, must consider both restoration of stabilization and any independently applicable historical deregulation provision.
• Post-2019 limits: The decision does not revive high-rent vacancy deregulation. Its protection extends to deregulations that were lawful under the former law, not merely asserted to have occurred.
• Evidence of lawful rent: Owners relying on historical deregulation need evidence supporting the relevant rent calculations. Registration filings alone do not conclusively establish entitlement to deregulation.
• Fraud-based rent reconstruction: Tenants seeking the default formula must address the reliability of the pertinent rent history. A disputed market-rate lease does not automatically establish the fraud-related basis discussed in this opinion.
• Alteration claims: Assertions that an apartment was newly created require evidence of substantial changes to its outer dimensions, not simply an assertion that renovation occurred.
• Class actions: Common legal questions may be resolved across a building while rent calculations, alteration histories, and ultimate regulatory status remain apartment-specific.

7. Complex Concepts Simplified

Temporary exemption

A pause in rent regulation while specified conditions exist, rather than a permanent removal from regulation.

Legal regulated rent

The rent authorized by rent-stabilization law, which may differ from the rent stated in a lease.

Base date

The reference date used to establish the starting rent for an overcharge calculation under the applicable rules.

Default formula

An alternative method for establishing the base-date rent when the ordinary rent history cannot reliably be used, including qualifying fraud situations.

High-rent vacancy deregulation

A former route out of rent stabilization involving vacancy and a qualifying legal rent. It was abolished in 2019, subject to preservation of lawful earlier deregulations.

First stabilization rent

A rent established under an administrative policy for qualifying newly created accommodations whose substantial physical alteration makes the former apartment’s rental history no longer meaningful.

Summary judgment

A decision without trial where the moving party establishes entitlement to judgment and no material factual dispute prevents it. Denial ordinarily leaves the issue unresolved rather than awarding victory to the opposing party.

8. Conclusion

Connors v Kushner Cos., LLC establishes a sequential approach: temporary exemption ends, rent stabilization resumes, and any independently applicable historical deregulation rule must then be tested against the apartment’s lawful rent and supporting evidence.

Its broader significance lies in pairing that legal flexibility with evidentiary discipline. Historical deregulation remained possible, but owners still had to prove it; reliable rent records remained usable, but unsupported registrations and unsubstantiated alteration claims could not secure summary judgment.