Terrace Court, LLC v. New York State Division of Housing & Community Renewal

Judgment, Supreme Court, New York County (Jane S. Solomon, J.), entered August 7, 2008, denying the petition to annul respondent’s determination, dated November 15, 2007, which denied a major capital improvement (MCI) rent increase for five apartments in petitioner’s building, and dismissing the proceeding brought pursuant to CPLR article 78, affirmed, without costs.

In May 2004, petitioner applied to the Division of Housing and Community Renewal (DHCR) for an MCI increase after performing work on the outside of the building that included pointing, waterproofing and masonry. Fetitioner sought a monthly increase of $42.58 per room based on a claimed project cost of $1,207,853. Shortly after petitioner filed the application, three tenants objected to it, claiming that water continued to infiltrate into their apartments. The tenants’ association also opposed the application. It submitted to DHCR the affidavits of several tenants who claimed that they continued to experience leaks in their apartments in the areas where petitioner had performed pointing work. The association’s submission focused on apartments 6F, 7F, 8F, 9F, 5B and 8A.

The association also proffered the affidavit of an architect who had inspected the work on the association’s behalf. The architect opined that petitioner’s contractor had actually done less work than petitioner claimed it had done in the rent increase application. In a supplemental affidavit, the architect averred that the leaks inside the apartments to which he was given access were consistent with water infiltrating from the outside of the building, as opposed to from the building’s plumbing. The association submitted additional statements from the architect in which he noted that water continued to infiltrate the building as late as February 2005. Finally, the association submitted a violation report from the Department of Buildings, dated December 2004, which cited petitioner for allowing interior water damage in apartments 6F, 7F, 8F, and 9F, and for incomplete pointing of the building’s facade.

Petitioner attempted to rebut the association’s submissions by stating that it had addressed any leaks inside the complaining tenants’ apartments. However, it adhered to its position that its contractor had performed the pointing work properly. Petitioner offered its own architect’s reports, which disputed the tenants’ architect’s findings. Petitioner also pointed out that the Buildings Department violation had been dismissed, and stated the problem was because one of the “F”-line tenants had caused a leak.

In September 2005, DHCR sent an inspector to the building. A representative of petitioner accompanied the inspector as he examined the conditions of apartments 6F, 7F, 8F, 5B and 8A (access to apartment 9F was not available). According to his report, in each of the apartments the inspector observed walls in some state of disrepair, including staining, discoloration, blistering or cracking, or some combination of those conditions. Only in apartments 8A and 8F did the inspector detect actual wetness with his moisture meter. DHCR did not share its inspector’s report with petitioner.

On December 19, 2005, DHCR issued an order granting petitioner’s application to the extent of increasing the monthly rent by $40.20 per room. However, the order permanently exempted apartments 8A, 5B, 6F, 7F and 8F from the increase, based on the complaints of those tenants that leaks persisted in the apartments, as confirmed by the DHCR inspector’s report. Petitioner filed a petition for administrative review (PAR) which challenged DHCR’s conclusion that a moisture problem persisted in the subject apartments after the pointing work was completed. Petitioner also contended in the PAR that DHCR exceeded its authority by permanently exempting apartments 8A, 5B, 6F, 7F and 8F from the rent increase, rather than giving petitioner an opportunity to cure whatever defects persisted.

DHCR denied the PAR, finding that “the state of the apartments at the time of the inspection warranted the exemption ordered by the Rent Administrator.” DHCR further found that the permanent exemption was appropriate, considering that the conditions found in the apartments “existed in the apartments when work was completed just prior to the owner’s filing of the application for an MCI rent increase for pointing, masonry, etc.”

Petitioner commenced this article 78 proceeding. It asserted in its petition that DHCR’s permanent exemption of the five apartments exceeded the agency’s regulatory authority and was arbitrary and capricious. It also argued that its due process rights were violated by DHCR’s failure to serve it with a copy of the inspector’s report. After granting a motion by the tenants of the five apartments to intervene, Supreme Court denied the petition and dismissed the proceeding. The court held that, because the inspector’s report merely confirmed the tenants’ allegations that water continued to infiltrate the building after the completion of the work, no due process violation occurred as a result of DHCR’s failure to provide petitioner with a copy of it. The court further held that DHCR did not abuse its discretion in ruling that an exemption was appropriate for the five apartments. That conclusion was based on the existence of the inspection report, as well as the other submissions of the parties. In addition, the court held that granting a permanent exemption was proper and did not constitute an unwarranted penalty, since petitioner was not precluded from seeking rent increases for other MCI work performed on the subject apartments.

Supreme Court did not abuse its discretion. The record before it and the agency contained much more than just the DHCR inspection report to which petitioner objects. Well before the inspection was conducted, the tenants submitted complaints indicating the pointing work was not performed properly, as well as multiple reports from an expert who stated that the damage in the tenants’ apartments was directly related to inadequate waterproofing of the building facade. Thus, even without the inspection report, the record contained sufficient evidence warranting the disallowance of a rent increase for the five apartments (see Matter of Cenpark Realty Co. v New York State Div. of Hous. & Community Renewal, 257 AD2d 543 [1999]).

In any event, the inspection report was properly considered, despite the fact that it was based on an inspection performed 16 months after the work was completed (see Matter of Whitehouse Estates v New York State Div. of Hous. & Community Renewal, 5 AD3d 190 [2004] [holding that DHCR determination was “rationally supported” by an inspection performed six years after work was performed]). Moreover, the inspection report merely confirmed the allegations previously made. Accordingly, no due process violation resulted from DHCR’s failure to provide a copy of the report to petitioner prior to making its initial determination (see Matter of Empress Manor Apts. v New York State Div. of Hous. & Community Renewal, 147 AD2d 642 [1989]).

Further, DHCR did not abuse its discretion in permanently exempting the five apartments. Indeed, the agency is entitled to the same deference on that issue as it is on the issue of whether it properly ruled that some of the subject work was defective in the first place. Petitioner argues that the agency only had two options, to deny the rent increase completely, or to grant it completely, after giving petitioner an opportunity to cure the problem that was permitting water to infiltrate the five apartments. However, petitioner fails to cite any relevant case law for that proposition. The recent case of Matter of Langham Mansions, LLC v New York State Div. of Hous. & Community Renewal (76 AD3d 855 [2010]), on which the dissent primarily relies to support its argument that petitioner here was entitled to an opportunity to cure, is inapposite. There, the majority held that DHCR acted irrationally by ignoring its own policy of “suspending] [a MCI] rent increase for individual apartments until repairs of defects are completed (rather than revoking the increase . . . )” (id. at 858 [internal quotation marks and emphasis omitted]). However, that policy is irrelevant here, where DHCR did not revoke a rent increase already in place but rather declined to grant an increase in the first instance. The distinction is more than a “nuance,” as it is characterized by the dissent. In the PAR discussed in Langham Mansions, and in Langham Mansions itself, the agency revoked a rent increase that had been granted years earlier. While the record contains no evidence of why DHCR adopted the policy against revocation, one can surmise that the policy was implemented to avoid the prejudice which would be visited on a landlord which relied in good faith, and for a lengthy period of time, on a rent increase, only to later lose it. Such a concern would not exist in this case, where petitioner never enjoyed a rent increase. Accordingly, there was no reason for DHCR to consider the policy that applied in Langham Mansions.

In any event, the dissent’s emphasis on the policy recognized by this Court in Langham Mansions bespeaks its fundamental misunderstanding of our position here. Langham Mansions does not compel us to reverse the decision in this case, because Langham Mansions cannot possibly be read to stand for the proposition that a landlord should be given an opportunity to cure defects regardless of the circumstances. In Langham Mansions itself, this Court specifically noted that any necessary repairs would be “minor,” and that the inspection report noting defects in the new windows “fails to conclude that any of the windows inspected were installed defectively or in an unworkmanlike manner” (76 AD3d at 859). Here, in contrast, and contrary to the dissent’s reading of the record, there is no evidence that only minor work would be called for if the landlord were granted an opportunity to cure the defects. Indeed, there is no reason to believe that DHCR did not have enough evidence to conclude that significant repointing was necessary, especially because, as the dissent points out, the issue was “hotly contested.” Moreover, unlike that in Langham Mansions, the inspection report upon which DHCR relied in this case characterized at least one of the apartments as containing a water-damaged wall that was repaired “in an unworkmanlike manner.” In any event, it is not this Court’s role to revisit the facts that were before DHCR. To do so would be an improper encroachment on the agency’s role in adjudicating MCI applications and would exceed the well-accepted standard of review of administrative determinations (see Matter of Heintz v Brown, 80 NY2d 998, 1001 [1992]).

The statutory and regulatory authority on which petitioner relies, Rent Stabilization Code (9 NYCRR) § 2522.4, and DHCR’s Policy Statement 90-8, which interprets the Code section, are inapplicable. Section 2522.4 (a) (13) states: “The DHCR shall no[t] grant an owner’s application for a rental adjustment pursuant to this subdivision, in whole or in part, if it is determined by the DHCR prior to the granting of approval to collect such adjustment that the owner is not maintaining all required services, or that there are current immediately hazardous violations of any municipal, county, State or Federal law which relate to the maintenance of such services. However, as determined by the DHCR, such application may be granted upon condition that such services will be restored within a reasonable time, and certain tenant-caused violations may be excepted.”

By its plain language, that section applies only to the situation where the owner is unquestionably entitled to a full MCI rent increase, but for the fact that the owner continues, after the improvements are made, to allow an unrelated condition to persist which constitutes a deprivation of services or for which a violation remains open. Under those circumstances, the owner must be granted an opportunity to cure the unrelated condition before the otherwise fully-earned rent increase can be granted. Here, as the dissent acknowledges, there is no violation or deprivation of services that is unrelated to the work for which the rent increase is sought. Rather, the problem condition is related to the very work for which petitioner seeks a rent increase. Accordingly, section 2522.4 (a) (13) does not apply. Moreover, we decline to extend the reach of the section to cover the situation here, as that would usurp the power of DHCR, which is charged by the Legislature to promulgate the Code.

There is no evidence that DHCR has a specific policy never to deny a rent increase outright in the first instance, nor does petitioner present any evidence of such a policy. Petitioner does not even make this argument on this appeal, nor does it appear to have made it below. Indeed, the April 8, 2003 administrative order mentioned by the dissent appears to be one of two administrative orders in the record in which DHCR fashioned the remedy espoused by petitioner here. Two decisions do not reflect a “policy,” but rather specific exercises of discretion by DHCR in particular cases that on their own do not mandate similar action by the agency in this case. Further, the dissent does not allow for the possibility that whereas in those cases DHCR may have had ample reason to believe that the landlord would make (or had made) the necessary repairs in a diligent fashion, the agency in this case, based on the record before it, did not believe that petitioner intended in good faith to address the situation, especially after it vociferously denied the existence of a problem and then engaged in unsuccessful efforts to fix it.

Without any support for its position, the dissent states that the “proper relief” would be to grant a rent increase for the entire building on a conditional basis and that DHCR’s determination to permanently exempt the five apartments was “irrational.” However, again, it is not the role of the Judiciary to create new policies or craft new remedies in a particular area, especially where the Legislature has already delegated that task to an administrative agency. Moreover, where the agency acts rationally, it is entitled to great deference, even if a court would have come to a difference conclusion (see Matter of Tolliver v Kelly, 41 AD3d 156, 158 [2007], Iv denied 9 NY3d 809 [2007]). Indeed, a court’s opinion that a particular outcome is not fair or is not in the interests of justice is not sufficient to overcome the deference to be afforded an agency acting rationally within its area of expertise (see Matter of West Vil. Assoc. v Division of Hous. & Community Renewal, 277 AD2d 111, 112 [2000]).

Here, contrary to the dissent’s position, it was eminently reasonable for DHCR not to permit a rent increase for that portion of the work that was defective and so did not constitute “ ‘an improvement to the building or to the building stock’ ” (Matter of Garden Bay Manor Assoc. v New York State Div. of Hous. & Community Renewal, 150 AD2d 378 [1989], quoting Rasch, New York Landlord and Tenant — Rent Control and Rent Stabilization, Operational Bulletin No. 84-4, at 547, 549). The landlord has failed to carry its burden of establishing that DHCR acted irrationally when, after considering all of the facts before it, including the facts that most of the work was performed properly, but a distinct portion was not, it refused to give petitioner a “do-over” for that portion of the work which was defective. Accordingly, the agency’s determination is entitled to our deference.

Contrary to the dissent’s assertion, nowhere do we express the view that “where this Court has found DHCR to have acted properly in denying a rent increase for work which it deemed defective, it has not required DHCR to afford a petitioner an opportunity to go back and address the problems that led to the denial.” Our determination in this case is based on our view that there is no evidence that, on this record, DHCR abused its discretion in permanently exempting the subject apartments. This is not in contravention of Matter of Weinreb Mgt. v New York State Div. of Hous. & Community Renewal (305 AD2d 207, 208 [2003]), which was determined on its own facts and does not support the dissent’s advocacy for a one-size-fits-all solution in cases of deficient MCI work.

Finally, the dissent sees the agency’s determination as conferring a windfall on the exempted apartment owners and working a forfeiture on the landlord. That might have been the case if DHCR had no rational basis for ruling the way it did. But it had such a basis, and so it is simply not for this Court to pass judgment on the fairness of the result. Concur — Mazzarelli, J.P., Renwick and Román, JJ.