Judge reopens tenants’ 421a rent overcharge suit against Muss

A Supreme Court judge has reversed a dismissal of a 421a rent overcharge case, prompting tenants to claim the high ground in their war with city landlords over a murky area of the law.

Landlords scored three favorable rulings last year that established owners did not need to report rent concessions to the state and could base future increases on a nondiscounted figure. But tenants organized by the nonprofit Housing Rights Initiative claimed they still had a card to play.

Apartments are subject to rent stabilization while their buildings are receiving the 421a tax break. The issue is whether the legal rent — the basis for decades of future rent — should reflect initial concessions, which developers often grant if construction is not quite finished.

Renters who brought a case against Spruce Capital Partners alleged the landlord had flouted 421a’s requirements by offering a one-time construction concession well after work had wrapped up.

Spruce Capital wanted the complaint dismissed but a little over a year ago the Appellate Division denied the landlord’s request, kicking the case back to a lower court.

“If the court assumes that the allegations set forth by plaintiffs are true … then they evidence a scheme to evade the requirements of the 421a program in order to charge higher rents,” the judge wrote.

Now, a Supreme Court judge has applied the findings in the Spruce Capital suit to a similar case against Muss Development that had been tossed out in October 2021. Landlords had touted the Muss dismissal as validation of their position on 421a concessions.

Justice Ingrid Joseph vacated her previous decision to dismiss the suit and reinstated the complaint to allow for discovery “to determine whether concessions were functionally equivalent to preferential rents,” legal documents show.

Under the 2019 rent law, landlords must treat preferential rents — a price below the regulated rent — as the legal base rent for a unit when registering it with the state.

Housing Rights Initiative founder Aaron Carr, who launched the investigation that spurred the suit, views the judge’s reversal of her own decision as significant.

“This is extremely problematic for the landlords who hung their hat on the [Muss] decision and now find their hat on the floor,” Carr said.

“This landlord’s skirting of its statutory obligations will now be subject to more formal scrutiny,” the tenants’ lawyers, Lucas Ferrara and Roger Sachar of Newman Ferrara, said in a joint statement.

But Sherwin Belkin of Belkin Burden Goldman, the firm representing Muss Development and many other landlords in overcharge suits, said the reinstated complaint is small potatoes at most.

“This merely allows discovery, but is not a decision on the merits,” Belkin said, comparing it to an outright win by landlords in late 2021 when a judge dismissed tenants’ overcharge claims against John Catsimatidis’ Red Apple Development.

There is, though, an important difference between the Red Apple and Spruce Capital cases. In the former, a tenant received a free month construction rider while the building was still under a temporary certificate of occupancy, indicating that minor construction may have been ongoing. In Spruce, tenants claim construction was finished when concessions were offered.

In reopening the Muss Development case, the judge noted that the Red Apple decision “taken together” with the Spruce ruling highlights “unless the landlord can present a justifiable reason for rent concessions, a tenant’s complaint should survive dismissal, and discovery should be allowed.”

Still, the status of the Muss case may complicate matters for the tenants. Newman Ferrara had already appealed the Supreme Court’s decision to dismiss when the judge reversed that decision.

As a result, Belkin’s team is appealing the decision to reinstate the complaint, arguing that the lower court judge abused her discretion by renewing an order pending review by a higher court that had already been briefed on the arguments.