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

NEW YORK CITY-Faulting a Manhattan judge’s interpretation of the rent-stabilization laws, a state appeals court has reinstated a $200-million class action brought by a group of tenants who claim the landlord of Stuyvesant Town and Peter Cooper Village illegally deregulated their rent-stabilized apartments.

The suit, filed on behalf of Amy L. Roberts and other tenants, alleged thedefendants–including Tishman Speyer Properties, L.P., whose generalpartner, PCV ST Owner L.P. bought the housing complex for approximately $5.4 billion in 2006–charged rents above the rent-stabilization levels whilereceiving tax breaks for improving the buildings in violation of the luxurydecontrol provisions of New York rent-stabilization laws.

Reversing Manhattan Supreme Court Justice Richard B. Lowe’s dismissal of the suit, the Appellate Division, First Department, unanimously held in Roberts v. Tishman Speyer Properties, L.P., 4165, that Tishman Speyer could not deregulate the units while receiving J-51 tax abatements, regardless of whether the apartments became subject to rent stabilization solely as a result of the tax breaks or for one or more reasons in addition to the landlord’s participation in the J-51 program.

Justice Eugene Nardelli wrote for the panel. Built in the 1940s to provide affordable housing for middle-income families, the 110-building, 11,200 unit complex spans 10 city blocks between First Avenue and Avenue C, and 14th and 23rd streets.

In January 2007, the plaintiffs sued Tishman Speyer, and PCV ST, whichpurchased the complex from Metropolitan Tower Life Insurance Co., acodefendant in the suit and the successor by merger to defendantMetropolitan Insurance and Annuity Company.

They claimed that more than 25%, or approximately 3,000 units, which have been subject to the Rent Stabilization Law since 1974, have beenillegally deregulated. In addition to seeking rent overcharges for fouryears, the tenants sought a declaration that their apartments would besubject to rent stabilization, so long as the defendants receive J-51benefits.

Under the Rent Regulation Reform Act, units are excluded from rentregulation in certain circumstances, including when the legal regulated rentis $2,000 or more and the household income exceeds $175,000 for two years in a row. However, the decontrol exclusions do not apply to housing that became rent regulated “by virtue of receiving” tax benefits, such as abatements under the J-51 program.

Since 1992, Metropolitan Life and the successor owners of Stuyvesant Townand Peter Cooper Village have received approximately $24.5 million in J-51tax breaks.

On Aug. 24, 2007, Justice Lowe dismissed the tenants’ suit (NYLJ, Aug. 24,2007). He relied on a 1996 letter issued by the New York State Division of Housing and Community Renewal (DHCR), which concluded that the phrase “by virtue of” in the luxury decontrol provisions means that an owner “is precluded from seeking Luxury Decontrol of a housing accommodation receiving ‘J-51′ tax abatement benefits only where the receipt of such benefits is the sole reason for the accommodations being subject to rent regulation.”

“Having become subject to rent stabilization in 1974…18 years beforeapplying for J-51 tax benefits, defendants did not become subject to rentstabilization by virtue of receiving tax benefits,” Justice Lowe said.Unlimited Exception The First Department disagreed with Justice Lowe’s construction of the rent-stabilization law.

The amount of deference afforded to the interpretation of a statute offeredby the administrative agency charged with implementing a statute depends on the degree to which the interpretation relies on the agency’s specialcompetence or expertise, Justice Nardelli wrote. “Since, in this matter, the interpretation of the provisions in question requires no special competence, or understanding of underlying practices on the part of the DHCR, we find unavailing defendants’ reliance on the DHCR’s regulations and opinion letter and conclude that the agency’s construction of the statute is not entitled to deference.”

Noting that the parties agreed that “by virtue of” means “because of” or “byreason of,” Justice Nardelli concluded, “it is clear to us that such phrasedoes not, in ordinary language mean that only a single cause or reasonexists. Indeed, the Legislature, in numerous instances, has not hesitated to use the phrases ‘only by virtue of’ or ‘solely by virtue of’ when it intended to restrict a provision to a single cause,” he wrote.

Justice Nardelli pointed out it would “invite absurd and irrational results”to limit the scope of high-rent exception–in effect, treating ownersdifferently based on the timing of a tenant’s departure.

“Since there is no basis for limiting the scope of the exemption, the motioncourt’s insertion of the word ‘solely’ into the regulations implementing thestatute was impermissible,” he wrote.

Justices Luis A. Gonzalez, Rolando T. Acosta, and Leland G. DeGrasse joined the panel, which heard arguments on Sept. 11, 2008. Alexander H. Schmidt of Wolf Haldenstein Adler Freeman & Herz represented Ms. Roberts and the other plaintiffs, except for Margaret Carroll, who was represented by Robert J. Berg, Ronald J. Aranoff, and Hanna R. Neier of Bernstein Liebhard & Lifshitz.

Mr. Schmidt called the ruling “an important victory” not only for “ourindividual clients and the thousands of other tenants” at Stuyvesant Townand Peter Cooper Village, but for “tenants throughout the city.”

Jay B. Kasner, Scott D. Musoff and Christopher R. Gette of Skadden, Arps,Slate, Meagher & Flom and Sherwin Belkin and Magda Cruz of Belkin Burden Wenig & Goldman represented Tishman Speyer and PCV ST.In a statement, Tishman said, “We remain firmly convinced that JusticeLowe’s decision to dismiss was the correct one. We intend to continue topursue all potential appeals and defenses.”

Daniel J. Ansell and Steven Kirkpatrick of Greenberg Traurig representedMetropolitan Insurance and Annuity Co. and Metropolitan Tower LifeInsurance Co. Mr. Ansell did not return a call for comment.

The Community Housing Improvement Program Inc., Small Property Owners of New York Inc., Rent Stabilization Association of NYC Inc. represented the landlords. The Legal Aid Society and Office of the Manhattan Borough President served as amici curiae to the tenants.

In a statement, Manhattan Borough President Scott M. Stringer wrote, “It istime for the owners of Stuyvesant Town and Peter Cooper Village to sit down with residents of the complex to resolve this dispute over rent overcharges in a fair and equitable manner.”

Noeleen Walder can be reached at [email protected].

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