City sides with tenants at Stuy Town in case against Blackstone

“Who is ever going to do an agreement with the city again?” one real estate lawyer asks

Blackstone's Jonathan Gray and Mayor Bill de Blasio (Credit: Getty  Images)
Blackstone's Jonathan Gray and Mayor Bill de Blasio (Credit: Getty  Images)

New York City is siding with Stuyvesant Town tenants in their challenge against their landlord, Blackstone, while industry pros are puzzling over the potential consequences.

Yesterday, Stuyvesant Town and Peter Cooper Village tenants sued private equity firm Blackstone to prevent the deregulation of thousands of rent-stabilized units when their leases start expiring in July. The plaintiffs say 6,200 apartments in Stuyvesant Town–Peter Cooper Village could be deregulated, and argue the rent law passed by the state last year should supersede a 2015 deal touted by the de Blasio administration for preserving affordable housing.

Now, the city says it is siding with the plaintiffs — against its own regulatory agreement.

“Rent reforms ushered in a new era for New York City tenants, providing greater security for families and strengthening neighborhoods,” a spokesperson for the administration said in response to the lawsuit, which names the city as a defendant. “The terms of the earlier litigation make clear that these homes are subject to the stricter rent laws and tenant protections and they must remain under those protections.”

The statement — which perplexed real estate professionals — raises questions for all sorts of regulatory agreements that could be affected by unforeseen political changes.

“It seems the city is very wary of taking any position that would … harm tenants’ interest, irrespective of their prior commitments and agreements,” observed Nativ Winiarsky, a partner at Kucker Marino Winiarsky and Bittens, pointing out that in other recent setbacks as a result of court rulings, the city has sided with developers.

Debby Riegel, an attorney at Rosenberg & Estis, said City Hall’s decision is sure to give pause to anyone contemplating such deals, asking, “Who is ever going to do an agreement with the city again?”

While the New York State Supreme Court considers the motion, a spokesperson for Blackstone told The Real Deal it will not raise rents on any renewal lease above the limits set by Rent Guidelines Board. Those limits are currently 1.5 percent for one-year lease renewals and 2.5 percent for two-year renewals.

The potential impact of the litigation is unknown: Interpreting how a complicated one-time regulatory agreement interacts with the state’s new rent law is difficult because “Stuy Town is sort of its own animal,” Riegel said.

The legal community is therefore divided over whether the Stuyvesant Town litigation could trickle down to the rest of the 431,000 New York City units currently receiving the J-51 tax benefits that are at the heart of Monday’s lawsuit. (The case hinges on whether landlords can remove units from rent regulation after those tax breaks expire.)

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But real estate attorneys stopped short of predicting a doomsday scenario for landlords who receive the tax benefit.

“It seems like [the plaintiffs] found a hole in the regulatory agreement, where it didn’t specifically address future changes in the law,” Riegel said. “But I don’t see this having a lot of general spread.”

The 2015 agreement between Blackstone and the city is “unique in that it had the imprimatur of the city,” said Lucas Ferrara, an attorney at Newman Ferrara who teaches at New York Law School. Still, Ferrara, who has represented tenants in numerous J-51 cases, said that for Stuyvesant Town, there is no way the regulatory agreement could take precedent over future changes in the law.

“The rent laws are quite clear that any waiver of rent regulation is unenforceable,” Ferrara said.

Previous J-51 cases have typically involved apartments deregulated under earlier versions of the rent law.

The court’s intervention in a regulatory agreement may be alarming for the real estate industry, who last month watched a judge order developers to lop off 20 floors from their Upper West Side skyscraper. Except in that case, the city appealed the judge’s ruling revoking a permit issued by a city agency.

Whatever the outcome of the litigation, Joshua Stein, a commercial real estate attorney, said the Stuy Town lawsuit is yet another “black swan event” that will deter investors.

“If the legislation took away the benefits of the contract that they negotiated with the government, that’s pretty egregious,” Stein said. “It’s another nail in the coffin for New York residential real estate.”

Recent legislative changes and growing populist anger at real estate professionals have primed many in the industry to expect the unexpected.

Still, Winiarsky agreed that the outcome at Stuy Town would not apply to tenants outside of the sprawling East Side complex, because its regulatory agreement is unique.

But real estate attorneys are keeping a close watch on another court’s consideration of the J-51 program in light of the 2019 rent law. A Court of Appeals decision on several J-51 cases, which sources say is soon to be released, could expose landlords all over the city to new litigation.