New York State’s highest court ruled that the owner of the massive apartment complexes known as Peter Cooper Village and Stuyvesant Town in Manhattan improperly overcharged rent to thousands of tenants. The court held that the current owner, a partnership of Tishman Speyer Properties and BlackRock Realty, and the former owner, Metropolitan Life, were not entitled to take advantage of the luxury decontrol provisions of the Rent Stabilization Law (RSL) while simultaneously receiving tax incentive benefits under New York City’s J-51 program.

The luxury decontrol provisions of the RSL generally provide that rent-stabilized apartments cease to be subject to rent stabilization if either: (1) in the case of a vacant apartment, the legal regulated rent equals $2,000 per month or more; or (2) in the case of an occupied apartment, the legal regulated rent equals $2,000 per month or more, and the combined annual income of all occupants exceeds $175,000 per year for the two preceding calendar years. The luxury decontrol provisions of the RSL, however, exclude housing accommodations which “became or become subject to [the RSL] by virtue of receiving [J-51] tax benefits….” For the last 13 years, the New York State Division of Housing and Community Renewal (DHCR), which administers the RSL, interpreted the J-51 exclusion to apply to properties that became rent stabilized as a condition of receiving J-51 benefits, not to properties that were already rent stabilized prior to receiving J-51 benefits.

In the instant action, MetLife applied for J-51 benefits in 1992, which was more than twenty years after the property became subject to the RSL. Thereafter, the luxury decontrol provisions of the RSL were enacted and, with DHCR’s approval, MetLife began charging market rents for those rental units that purportedly satisfied the requirements for luxury decontrol. In late 2006, after MetLife sold the properties to the Tishman Speyer partnership, nine residents on behalf of a putative class of current and former tenants sued MetLife and the Tishman Speyer partnership for overcharging rent during the period when the landlord received J-51 tax benefits. Consistent with DHCR’s interpretation, MetLife and the Tishman Speyer partnership argued, among other things, that the properties were not precluded from luxury decontrol because the properties were rent stabilized prior to receiving J-51 benefits. Therefore, the properties did not “become subject to the RSL by virtue of receiving J-51 benefits.”

The court rejected DHCR’s long standing interpretation of the J-51 exclusion to the luxury decontrol provisions of the RSL and found that building owners that receive J-51 benefits forfeit their rights under the luxury decontrol provision even if the properties were already subject to the RSL. Accordingly, the court affirmed the decision of the Appellate Division to reinstating the tenants’ complaint.

The court’s decision leaves many open issues for the lower court to decide including, the retroactive effect of its decision, the statute of limitations and class certification, among other defenses that may be applicable to particular tenants. (Since the decision, the parties have entered into a stipulation which resolves some of the issues with respect to the Peter Cooper Village/Stuyvesant Town complex, and provides for a consultant to calculate permissible rents at that complex, but the impact of the decision on many other apartments in New York remains very unclear.)