Appellate court raps DHCR for treble damages policy.

Appellate court raps DHCR for treble damages policy

In a recent ruling with broad implications for landlord-tenant proceedings, an Appellate Court characterized as "irrational" a decision by the New York State Division of Housing and Community Renewal (DHCR) to penalize a property owner with treble damages for a rent overcharge.

On Nov. 7, the Appellate Court unanimously ruled that the DHCR had "no rational basis" in applying the penalty against Roundhill Management Company. As a matter of policy, the DHCR typically assesses treble damages for rent overcharges.

Roundhill purchased a three-building apartment complex on the Upper East Side of Manhattan in 1980, but was unable to obtain a complete rental history for one of its three-room rent-stabilized units for a 28-month period between 1975 and 1978. The owner determined that the rent for the apartment in 1975 -- $200 per month -- remained well below market value (as well as equal to, or lower than, rents for 10 identical apartments within the complex).

The tenant occupying the apartment filed a rent overcharge complaint with DHCR in 1984. In response, DHCR applied its standard formula to lower rent for the tenant, a so-called default methodology intended as retribution against the owner for failure to submit a complete rental history. DHCR told Roundhill of its intent to impose treble damages unless the owner demonstrated that the supposed overcharge in question was not "willful."

The owner contended that, given its good faith efforts to acquire the missing leases for the apartment from the previous owner, the $200 rent was not only modest but lawful as well. DHCR rejected this defense, lowered the rent to $176.21 and levied treble damages amounting to $6,000.

Roundhill Management Co. then retained Rosenberg & Estis, P.C., a Manhattan real estate law firm, to challenge the penalty. "The owner had no reason to know that the rent charged by a former owner may have been an overcharge," said Gary Rosenberg, managing partner of Rosenberg & Estis.

As a result of this appeal, the Appellate Division held that the treble damages penalty was "irrational." The court annulled the penalty on grounds that Roundhill had demonstrated that it "made a valid but unsuccessful attempt to obtain the rent history," and held that a treble damages penalty should "depend on a finding as to whether the owner had reason to know that the amount it was charging was in excess of the lawful rent."

The decision in Roundhill Management Co. vs DHCR will have a ripple effect on thousands of rent overcharge cases now pending, predicted Jeffrey Turkel, the Rosenberg & Estis attorney who handled the case. "DHCR cannot simply take every case and treble the overcharge by calling it willful," Turkel said. "This is especially true in cases involving new owners who cannot obtain complete rental histories from a former owner."