ORDERED that the order is affirmed insofar as appealed and cross-appealed from, without costs or disbursements. In November 2017, the plaintiffs, current and former tenants of a residential apartment building (hereinafter the subject property), commenced this class action for declaratory relief, to recover damages for rent overcharges and violations of the Rent Stabilization Code, including, inter alia, 9 NYCRR 2520.11, and for calculation of the lawful rent. In October 2018, the defendants interposed an answer. In November 2020, the plaintiffs obtained class certification. It is undisputed that the subject property was rent-stabilized from 1984 through 1991. The subject property was subject to a temporary student housing exemption, which ended in 2014 when the defendants acquired the subject property from Brooklyn Law School. The subject property contains 19 units, 17 of which are in controversy. It is uncontroverted that two units, 7 and 17, were always rent stabilized. It is further undisputed that in 2014, when the defendants took possession of the subject property, tenants of the 17 units in controversy were provided with market-rate leases. The plaintiffs moved, inter alia, in effect, for summary judgment on the cause of action for a judgment declaring that Units 3, 4, 5, 6, 10, 12, 13, 14, 15, and 19 are rent stabilized. The defendants cross-moved, among other things, in effect, for summary judgment declaring that Units 1, 2, 3, 16, and 18 are not rent stabilized. The defendants maintained that the units were [*2]properly deregulated in 2014 pursuant to the then-applicable luxury deregulation provisions of the Rent Stabilization Law. In an order dated August 6, 2021, the Supreme Court, inter alia, denied those branches of the plaintiffs' motion, granted those branches of the defendants' cross-motion as to Units 16 and 18, and denied those branches of the defendants' cross-motion as to Units 1, 2, and 3. The plaintiffs appeal, and the defendants cross-appeal. The Rent Stabilization Code (RSC) (hereinafter the Code) delineates certain exemptions to rent-stabilized units. Among these exemptions, as relevant to this action, the Code exempts housing accommodations operated by a college or school dormitory, exclusively for educational purposes, on a nonprofit basis, where the tenant's initial occupancy is contingent upon their affiliation with such institution (see 9 NYCRR 2520.11[f]). Thereafter, when such an accommodation's
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temporary exemption status is terminated, the Code contemplates the legally regulated rent for such accommodation. The Supreme Court properly denied those branches of the plaintiffs' motion which were, in effect, for summary judgment on the cause of action for a judgment declaring that Units 3, 4, 5, 6, 10, 12, 13, 14, 15, and 19 are rent stabilized to the extent it was based upon their argument that the defendants were required to provide the first tenants following expiration of the temporary exemption period with rent-stabilized leases. 9 NYCRR 2526.1(a)(3)(iii) provides that "[w]here a housing accommodation is vacant or temporarily exempt from regulation pursuant to section 2520.11 of this Title on the base date, the legal regulated rent shall be the prior legal regulated rent for the housing accommodation, the appropriate increase under section 2522.8 of this Title, and if vacated or temporarily exempt for more than one year, as further increased by successive two year guideline increases that could have otherwise been offered during the period of such vacancy or exemption and such other rental adjustments that would have been allowed under this Code."
As the parties correctly contend, prior to its amendment in 2014, the Code (9 NYCRR) former § 2526.1(a)(3)(iii) provided that, "[w]here a housing accommodation is vacant or temporarily exempt from regulation pursuant to section 2520.11 of this Title on the base date, the legal regulated rent shall be the rent agreed to by the owner and the first rent stabilized tenant taking occupancy after such vacancy or temporary exemption" ([emphasis added]; see generally Matter of AEJ 534 E. 88th, LLC v New York State Div. of Hous. & Community Renewal, 194 AD3d 464, 470). However, the Legislature's removal of the term "first rent stabilized tenant" from the applicable Code section does not evince legislative intent that newly vacant accommodations are no longer subject to rent stabilization. Expiration of a temporary exemption is not a deregulating event. "Regardless of which version of RSC § 2526.1(a)(3)(iii) is employed, each version contemplates that when a once temporarily exempt apartment . . . returns to the marketplace, it resumes its rent-stabilized status, because it was the status it had before the temporary exemption" (Matter of AEJ 534 E. 88th, LLC v New York State Div. of Hous. & Community Renewal, 194 AD3d at 470).
Although a unit returns to the marketplace and resumes its rent-stabilized status, as the Supreme Court correctly determined, RSC § 2526.1(a)(3)(iii) must be read in conjunction with other applicable laws, including, as relevant here, any applicable legal deregulation provisions. Therefore, upon expiration of an exemption, after a determination of the legal regulated rent, where a unit qualifies for deregulation under another applicable law, a market lease may be provided.
From 1993 until the enactment of the Housing Stability and Tenant Protection Act of 2019 (HSTPA), the Rent Stabilization Law (RSL) "contained luxury deregulation provisions, permitting an owner of a stabilized unit to deregulate if the rent exceeded a statutory threshold and (1) the tenant vacated or (2) the tenants' combined income exceeded a statutory threshold" (Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d 332, 350 [internal quotation marks omitted]). At that time, the RSC (9 NYCRR) former § 2520.11(r)
(5) exempted from rent stabilization housing accommodations which "became or become vacant on or after June 24, 2011, with a legal regulated rent of $2500 or more per month." While this rule has since been repealed by the HSTPA, and effective June 14, 2019, high rent vacancy deregulation is no longer applicable, "[a]ny apartment that was lawfully deregulated pursuant to Rent Stabilization Law section 26-504.2 shall remain deregulated, notwithstanding that such section was repealed" (9 [*3]NYCRR 2520.11[r][1]). Here, the defendants acquired the subject property in 2014 when
"luxury deregulation" was available. Therefore, although the units resumed their rent-stabilized status when the exemption ended, they were subject to other applicable laws and could have been deregulated, allowing the defendants to offer market leases.
Contrary to the plaintiffs' contention, the Supreme Court properly determined that the default formula does not apply.
"'The default formula provides for the base date to be established at the lowest of (1) the lowest registered rent for a comparable apartment in the building at the time the complaining tenant moved in, (2) the complaining tenant's initial rent reduced by a certain percentage, (3) the last registered rent paid by the prior tenant within the lookback period, or
(4) if none of those is appropriate, an amount set by DHCR based on its relevant data'" (Gomes v Vermyck, LLC, 238 AD3d 26, 34-35, quoting Simpson v 16-26 E. 105, LLC, 176 AD3d 418, 419; see 9 NYCRR 2522.6[b][3]; 2526.1[g]). Rent based on the "default formula" is generally reserved for cases where there are no reliable rent records (see Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d at 354-355; Thornton v Baron,
5 NY3d 175, 179-181). However, an exception exists such that the default formula may be used where there is a fraudulent scheme to deregulate an apartment unit (see Gomes v Vermyck, LLC, 238 AD3d at 35; see generally Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d at 355; Conason v Megan Holding, LLC, 25 NY3d
1). This exception allows "the rental history of apartment units beyond the four-year lookback period [to] be examined 'for the limited purpose' of determining whether a fraudulent scheme to deregulate the apartment unit tainted the reliability of the rent on the base date, and if fraud was established, then the default formula could be used to set the base date rent" (Gomes v Vermyck, LLC, 238 AD3d at 35, quoting Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d at 355; see Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358, 367).
Here, the subject units were exempt from rent stabilization on the base date, requiring a determination of the legally regulated rent under RSC § 2526.1(a)(3)(iii). As the last registered rents for the units are known and undisputed, a reliable legal regulated rent could be established from the standard formula outlined in RSC § 2526.1. Here, the plaintiffs' allegation of fraud consists of the defendants offering market-rate leases to the tenants upon acquiring the subject property in 2014. There is no allegation of a fraudulent scheme that tainted the reliability of the prior rents on the base date, such that those rents cannot be used to determine the new legally regulated rent. Contrary to the defendants' contention, the Supreme Court properly denied that branch of their cross-motion which was, in effect, for summary judgment declaring that Unit 3 is not rent stabilized. The owner of the building bears the burden of showing that the subject apartment was legally deregulated (see Nadler v Carmine Ltd., 231 AD3d 485, 486; Hadzovic v Buckley Sch. in the City of N.Y., 238 AD3d 487, 488). Here, the defendants failed to meet their burden
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establishing that Unit 3 was deregulated (see Stafford v A & E Real Estate Holdings, LLC, 240 AD3d 421, 422-423; Nadler v Carmine Ltd., 231 AD3d at 486). Division of Housing and Community Renewal Annual Apartment Registration statements are insufficient to meet the defendants' burden, as they merely report statements made by the owner and do not attest to the truthfulness of those statements (see Nadler v Carmine Ltd., 231 AD3d at 486). Further, the record demonstrates conflicting calculations as to the legal rent for Unit 3.
Similarly, the Supreme Court properly denied those branches of the defendants' cross-motion which were, in effect, for summary judgment declaring that Units 1 and 2 are not rent stabilized. The defendants failed to establish that Units 1 and 2 were "newly created" and entitled to a "first stabilization rate." "A first stabilization rent is 'an administratively created policy implemented by DHCR in its capacity as the administrative agency which regulates residential rents'"
(Matter of Velasquez v New York State Div. of Hous. & Community Renewal, 130 AD3d 1045, 1047, quoting Matter of
300 W. 49th St. Assoc. v New York State Div. of Hous. & Community Renewal, Off. of Rent Admin., 212 AD2d 250, 253). This policy applies "'where an owner [*4]substantially alters the outer dimensions of a vacant housing accommodation'"
(325 Melrose, LLC v Bloemendall, 65 Misc 3d 43, 46 [App Term, 2d Dept, 2d, 11th & 13th Jud Dists], quoting 9 NYCRR 2520.11[r][12]), qualifying it for a first rent equal to or exceeding the applicable monthly rent amount qualifying for deregulation. "The phrase 'substantially alters' has been interpreted to mean 'when the perimeter walls of the apartment have been substantially moved and changed and where the previous apartment, essentially, ceases to exist, thereby rendering its rental history meaningless'" (id., quoting Matter of 300 W. 49th St. Assoc. v New York State Div. of Hous. & Community Renewal, Off. of Rent Admin., 212 AD2d at 253). Here, the defendants failed to provide evidence of the work performed, and therefore failed to establish that the outer dimensions were substantially altered. The defendants' remaining contention is without merit.
GENOVESI, J.P., FORD, VOUTSINAS and GOLIA, JJ., concur.
ENTER:
Darrell M. Joseph Clerk of the Court
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