Extell Belnord – It Stands for a Second Important Principle

A few days ago the Appellate Division, First Department issued a decision in which it affirmed the long-held principle that a landlord and a tenant cannot enter into an enforceable agreement in which the parties have opted out of rent stabilization. I wrote an extensive blog posting about the decision and about the principle that parties cannot opt out of rent regulation. The case at issue was Extell Belnord v. Uppman, __ A.D.2d ___, ___ N.Y.S.3d ___ (1st Dept. November 19, 2013).

The Extell Belnord case stands for a second principle as well. After the Court of Appeals issued its landmark decision in Roberts v. Tishman-Speyer, many tenants who had been deregulated learned that they should not have been. The Appellate Division’s holding in respect of that class of tenants is entirely different, and one might say inconsistent, with what was held in Extell Belnord.

One of the ways that a landlord can deregulate a rent stabilized apartment is through a concept called luxury deregulation. Prior to a recent change in the law that changed the numbers, if a tenant earned “too much” money for two consecutive years and paid a rent over $2,000/month, the landlord could apply to the State DHCR for an order deregulating an apartment because the tenant had committed the sin of earning too much money. After the Roberts case we learned that any building owner who had accepted J-51 tax benefits was not permitted to deregulate any rent stabilized apartment in that building. Prior to the issuance of the Roberts decision, it was common for tenants to lose their regulatory status because they had earned too much money even though no apartment could be deregulated.

Procedurally, when the landlord successfully applied to DHCR for deregulation, DHCR would issue an Order of Deregulation that the tenant would have 35 days to challenge. If the Order went unchallenged then it became final and non-appealable. The odd regulations associated with luxury deregulation did not permit the landlord to simply evict the formerly rent stabilized tenant. Instead the landlord had to offer the tenant a market-rate lease that the tenant could accept or move out.

Many tenants opted to accept the market lease and went from paying just over $2,000/month to paying many thousands per month more for the same apartment. After the passage of years some of these tenants learned that they never should have been deregulated because the landlord had accepted J51 tax benefits. So, they sued the landlord claiming that their rent should be rolled back to the rent stabilized amount that they had been paying prior to the erroneously issued Order of Deregulation.

The Appellate Division held that the Order of Deregulation was a final order and not subject to challenge despite the fact that the apartments should never have been deregulated in a case called Gersten v. 56 7th Avenue, LLC, 88 A.D.3d 189, 928 N.Y.S.2d 515 (1st Dept. 2011). In Gersten, the DHCR had issued a luxury deregulation order despite the fact that the landlord was receiving J51 benefits at the time. The tenant commenced a lawsuit seeking retroactive application. The Appellate Division dismissed the tenant(s)’ claims because the luxury deregulation order could not be challenged.

Here in Extell Belnord the landlord claimed that the agreement to opt out of rent stabilization had been affirmed by an order from DHCR and that an order of deregulation had been issued and so the landlord claimed that the agreement could not be vacated. The Appellate Division disagreed and held that nowithstanding the order of deregulation that the agreement (and the deregulation order with it) would be vacated.

This is an inconsistent result. The Appellate Division’s reasoning seems to have been that the application to DHCR was merely intended to get the agency’s stamp of approval on an agreement that would never have been approved.

As the law evolves on this important principle it is taking some interesting twists and turns indeed.