Landlords Can’t Duck J-51 Law by Repaying Tax Credits

This story, in slightly different form, originally appeared in the New York Law Journal.

NEW YORK CITY-A landlord will not be able to escape the requirements of New York City’s rent stabilization program by simply paying back the J-51 tax credits it received, a state judge has ruled in a decision that real estate lawyers call an important step in clarifying the effects of the Court of Appeals’ 2009 landmark ruling in Roberts vs. Tishman Speyer. Justice Judith J. Gische in Manhattan ruled in London Terrace Gardens vs. New York City that London Terrace, owner of a 1,000-apartment complex in Chelsea, could not rescind its role in the J-51 program because participation did not create a contractual relationship.

The J-51 program, under which landlords receive tax breaks if they abide by rent stabilization rules, became a source of contention after the Roberts decision, which held that landlords could not receive J-51 credit for buildings that included market rate apartments. Until then, some landlords, including London Terrace, had begun charging market rent for some apartments under the luxury decontrol provision of the city’s rent stabilization law, while still receiving J-51 benefits for the buildings containing rent-stabilized apartments. Luxury decontrol allows landlords to charge market rates once an apartment reaches a high rent and is occupied by high- income tenants.

After Roberts, which in 2009 found that the owners of the Peter Cooper Village/Stuyvesant Town complex had illegally deregulated apartments while receiving J-51 benefits, London Terrace sued the city in 2010 under Article 78, saying that it had relied on representations by the Department of Housing Preservation and Development that its tiered rent arrangements were legal and that it would not have participated in J-51 had it known the practice was illegal. The landlord argued that its participation in J-51 created a contract between it and the city, and that because of this misrepresentation, it should be allowed to pay back its tax credits and rescind the contract.

But Justice Gische on May 5 ruled that rescission was not an available remedy because the J-51 program did not create a contract. “There is no language in the State enabling legislation that supports a finding that the permitted tax exemption programs were intended to operate on a contractual basis,” she wrote. “Nor has London Terrace referenced any legislative history indicating any such intention. The J-51 program is just that, a program, and no contractual rights are created as a result of a landlord’s voluntary participation therein.”

The judge further ruled that, even if there were a contract and both the city and the landlord agreed to undo it, the J-51 statute would not allow them to. “Indeed, there is authority that even had the parties agreed to retroactively rescind London Terrace’s participation in the J-51 program, it would have been of no force and effect,” the judge wrote, referring to a 2010 state Supreme Court decision in which tenants prevailed in challenging de-control in a J-51 property, Independence Plaza North Tenant’s Association vs. Independence Plaza.

“The J-51 program is an important component of the city’s affordable housing policy,” says Joshua Wolf, city assistant corporation counsel, in a e-mailed statement. “We are pleased that the court found the program is just that—a program—and does not constitute a contract with individual landlords. Although the consequences of the Roberts decision have yet to be finally determined, the London Terrace decision confirms that rescission of a non-existent J-51 contract is not a viable option.” Richard M. Goldstein of Proskauer Rose, who represented London Terrace, did not return a call for comment.

Real estate attorneys say that the decision is an early step in resolving a number of issues raised by Roberts. William J. Gribben of Himmelstein McConnell Gribben Donoghue & Joseph says that a still-unresolved issue is what rent J-51 landlords should be able to charge for apartments that had been deregulated before Roberts and, by extension, how much they should have to refund to tenants.

Landlords argue that they should be allowed all the increases they could have obtained under the rent stabilization rules, had the apartments remained stabilized, Gribben says, while tenant advocates argue that landlords should be allowed no increases, because they never actually applied for them. Various compromise positions, such as allowing only the increases that follow automatically from material improvements, have also been suggested, he said. That issue is still being debated in various trial courts, according to Gribben.

Another issue is whether the Roberts ruling applies retroactively. The Court of Appeals remanded that issue to the Supreme Court, which ruled that it does; the issue is now on appeal in the First Department.

Scott E. Mollen of Herrick, Feinstein, who represents mostly landlords, agreed that Judge Gische’s ruling was part of a larger process of sorting out the implications of Roberts. “The trial courts are now grappling with their sense of how the Court of Appeals would rule” on the issues that follow from Roberts, he says. Mollen says Justice Gische’s decision was “fundamentally unfair” from a landlords’ point of view because they participated in J-51 with the assurance that luxury decontrol would not be affected.

Attorneys agreed that the London Terrace decision put to rest the question of whether landlords could retroactively untangle themselves from J-51. “It’s a reaffirmation of the basic principle that the J-51 program only works when participants are held to their commitment,” says Seth Miller of Collins, Dobkin & Miller, a tenants’ attorney.

Brendan Pierson can be reached at bpierson@alm.com.