Real estate lawyers: Proposed rent regs lack legal basis

Last week, the Hochul administration dropped a bomb on owners of rent-stabilized apartments, proposing four tenant-friendly regulations fill gaps in a three-year-old law.

The headline change would cinch a loophole that allowed landlords to set new first rents on combined apartments. Merging units, coined “Frankenstein-ing” by The Real Deal, was — short of tearing down their buildings — the last route for owners to jack up stabilized rents since passage of the Housing Stability and Tenant Protection Act, or HSTPA.

HCR obviously went haywire here.
Zachary Rothken, Rosenberg & Estis

The proposals by the Division of Homes and Community Renewal would limit the rent to the sum of the separate apartments’ rents.

But can the agency even do that? Landlord attorneys are leaning toward no.

As detailed on its website, HCR is acting under New York state’s Administrative Procedure Act, which allows agencies to propose regulations of state law.

Landlords’ lawyers claim the proposals would not implement state law but rather create it out of whole cloth.

“HCR obviously went haywire here,” said Zachary Rothken, head of the administrative law unit at Rosenberg & Estis, a law firm that represents landlords.

Although the agency justified its proposals as the legislature’s intent in passing the 2019 rent law, they cover elements not mentioned in it, Rothken said.

And about those tear-downs: In addition to changing the Frankenstein rule, HCR would nix provisions that allow an owner to set market-rate rents after rehabilitating a building that is 80 percent vacant and would require landlords to complete a total demolition — no shell, no foundation — to charge market price for new units.

“Nowhere in the HSTPA does it even talk about substantial rehabilitation or newly created apartments or making these changes to demolition,” Rothken said.

“To say that limiting first rents in newly created apartments is in the spirit of the HSTPA is just wrong,” he added.

The spirit of the law, however, was clearly to permanently and significantly limit rent increases, as owners of rent-stabilized apartments have been lamenting ever since. Although it did not specifically address the initial rent of a newly combined unit, the state agency reasons that the legislature did not intend to give landlords carte blanche in setting it.

Rothken, though, said a bill introduced last year shows otherwise. The legislation, which did not gain traction in Albany, would have capped first rents on combined vacant apartments at the sum of the separate units’ rents — just as HCR is proposing.

“So if there was a separate bill that sought to do this that never made its way anywhere in the legislature, [that proposal], number one, obviously had nothing to do with the HSTPA and number two, obviously was not the legislature’s intent” in the 2019 law, Rothken said. In other words, if legislators intended to limit the first rent in 2019, it would have passed the 2021 bill to do that.

It is not uncommon, though, for lawmakers to introduce bills to clarify ambiguities in the law and remove the risk of a court doing so in a way they don’t like. At the November hearings on the proposed regulations, supporters will surely say the existence of the 2021 bill does not mean the 2019 law deliberately ignored combined apartments.

The 2019 law was debated for months but hashed out largely behind closed doors as legislators rushed to pass it before its predecessor expired June 15. Then-Gov. Andrew Cuomo threw the process into some disarray by withdrawing from negotiations and daring the legislature to pass something without him, which it did in a frantic final weekend.

Should the courts eventually rule on HCR’s proposal, they could consider whether lawmakers accidentally or deliberately failed to address combined apartments, demolition and other issues now up for debate. If the omission were intentional, as one industry source involved in the negotiations said was the case, judges might reject the agency’s claim that its regulations reflect lawmakers’ intent.

But even if lawmakers meant to specify what should happen with combined apartments and demolitions and simply failed to include those provisions in the 2019 bill, the courts could rule that regulators cannot simply fill in the blanks.

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Landlord attorney Sherwin Belkin characterized HCR’s proposals as an overreach.

Administrative agencies such as HCR are part of the executive branch, which implements the law, he said. They are not a legislature, which writes and passes laws.

“It’s often said that administrative agencies’ regulations cannot be out of harmony with the statute,” Belkin said. “HCR opted to compose its own song here.”

The real estate industry has been down this road before. Just last year, it notched a win when an Albany judge struck down a ban on broker fees. The Department of State had interpreted the HSTPA to mean landlords must pay the fees but the state Supreme Court called its ban “an unlawful intrusion upon the power of the Legislature” and “an abuse of discretion.”

HCR’s proposed regulations must pass through a public review process before they are amended or adopted. Given the uncertainty of that, Joseph Strasburg, president of the Rent Stabilization Association, a landlord group, said “it is too soon to discuss a potential challenge to the proposed amendments.”

Still, attorneys say there’s no question that should the regulations go through, a lawsuit will follow.

The Hochul administration says it is confident in its position. Prior to announcing the proposals, HCR conducted an extensive legal review to ensure compliance with state rent laws, a spokesperson for the agency said.

Agency actions to enforce the rent law have survived court cases before.

In 2014 it created a Tenant Protection Unit to investigate landlord fraud and harassment. Property owners and trade groups sued, claiming in part that HCR lacked a statutory basis for creating the unit.

HCR won that suit, but its victory was aided by the 2019 rent law. Late last year, the courts found the law acted as a backbone for the 2014 amendments.

That is, by the time a judge ruled on the agency’s changes, legislation existed to back them up.

“I don’t think that decision sets a precedent as to whether HCR is now acting ultra vires,” Rothken said, referring to the legal term for government action that exceeds the scope of its powers.