Court rules MCI hikes permanent: retroactivity confirmed.

Retroactivity confirmed

A long-awaited court decision has unanimously upheld the right of property owners to receive Major Capital Improvement (MCI) increase in rent as a permanent part of the base rent. If these MCIs had been ruled a surcharge, they could not have been compounded annually.

While all of the judges made a strong case for the necessity of MCIs to induce improvements in rental property and to provide an adequate return on investment, two of the five New York State Appellate Division judges dissented on the provision for a retroactive increase.

This temporary - and uncompounded - increase is permitted to be applied back from the time an application is approved to when it was first made. It often takes the Division of Housing and Community Renewal (DHCR), a one- to three-year period before the determination is official.

MCI increase are actually effective as of the first rent payment occurring 30-days after the filing by the owner. Under Division of Housing and Community Renewal (DHCR) rules, however, the owner does not begin collecting the retroactive portion until the application is approved, at which time the owner also begins collecting the increase for the going forward time period. The collection of two increases at one time is what bothered the dissenting judges, although the majority noted the increase was not over 6 percent per year when spread over the entire time period.

Jack Freund, acting president of the Rent Stabilization Association, said, "It was a long battle and tremendous victory. The decision once and for all confirms that MCIs are part of the permanent base rent and can be compounded. For the first time, the decision also confirms the retroactive collection of the MCI increase is authorized by the statute."

Dan Margulies, executive director of the Community Housing Improvement Program (CHIP) said, "The decision is a victory for owners. The fact that it was made in the first place and has been pending since around 1983 is an inexcusable miscarriage of justice."

Stroock, Stroock & Lavan was lead counsel in the case. Bryant Avenue Tenants Association vs. Edward I. Koch, for the Rent Stabilization Association on behalf of the various owners. DHCR argued on the owner's side to uphold its own practices. "The issue was our computation of the MCI increases," said a spokesperson.

Stroock partner Joseph L. Forstadt, who is also a member of the Rent Guidelines Board, said: "We feel vindicated by this decision. Had the decision been contrary, the potential chaotic effect of landlords having to roll back rents for as much as 10 years would have been disastrous."

The problem came about when Housing Court Judge Elliott Wilk did not follow the lead of the higher court decisions in the Ansonia matters in 1989. He ruled on several cases that ultimately were joined in this matter.

" ... he issued a decision last August in which he determined the MCI rent increase cannot be compounded or collected retroactively," said Forstadt. "Nobody had affirmatively sought relief at that moment."

In effect, Wilk determined that while Ansonia may have decide that MCI's were permanent, they should not be made part of the base rent nor should increases been given retroactively.

Margulies said, "He is a fellow that believes in making his own laws and has a strong tenant bias. Unfortunately, it is not only typical of Judge Wilk but of many judges in New York who bring their bias to the bench."

Attorneys and owners involved with the matter were suitably elated. "We're tremendously excited and think it will be beneficial to all landlords in the city," said Divya Srivastav, a senior associate with Horing & Welikson, a law firm that represented an owner that was enjoined from collecting increases of more than 6 percent by Judge Wilk.

David T. Diamond, president of Rosenberg, Diamond, who was one of two individual owners named in the suit, said he was happy. But he deemed the decision, "a hollow victory because of the travesty we've been living with for the last decade."

Diamond noted that all this time, he still had to pay the bank for the loans to make the improvements. "The community groups don't realize the kind of damage they do," he complained. "I deliver decent, affordable housing to the people nobody else wants to deal with. They should be giving us incentive after incentive."

Andrew Scherer, an adjunct professor at CUNY law school and an attorney with Legal Services for New York City who argued the case on behalf of tenants, said he was disappointed. "It's an important public issue to the degree to which landlords cam make improvements and jack up rents. I think Judge Wilk read the law properly and the Appellate Division is wrong." Scherer believes an appeal is likely and he will be discussing the matter with other plaintiff attorneys.

Forstadt explained that because there were two judges dissenting on the issue of retroactive MCI increases, there would be an as of right appeal on that issue alone.

The two dissenting judges, Richard W. Wallach and Israel Rubin, while confirming the need for MCI increases to induce owners to improve their properties, did not like the fact that the retroactive calculation added to the going forward 6 percent per year, would make the addition to the tenant's rent greater than 6 percent at one point in time. The retroactive portion is not compounded as part of the base rent but is a temporary increase accounting for the time beginning 30 days after the MCI application filing to its approval some years later.

Former RSA President John J. Gilbert III, who is now executive vice president and COO of Rudin Management Co., said, "Their concerns would be taken care of there were expeditious approvals at DHCR [the Division of Housing and Community Renewal where MCI applications are filed.] There isn't a single owner who enjoys billing for retroactive MCI's."

Not only that, Freund noted, if a new tenant has come into the unit, they cannot be billed the retroactive amount for the time they were not a tenant in the apartment. Nor can the former tenant be tracked down and billed. Tenants also complain that they are just beginning to pay for items that are three years old and don't understand why.

"It really underscores the absurdity because on the retroactivity everyone loses," said Gilbert

"The courts are very subtly telling the DHCR that the delay is helping no one," noted Alan D. Kucker, a partner with Kucker, Kraus & Bruh. The tenants wind up with huge retroactive increases, the landlords end up with payments they can't collect from tenants who have moved out of the building. Justice delayed is justice denied."

The RSA has been pushing for "fast track" processing under which DHCR would allow owners to begin collecting the MCI as soon as it is filed. An objection to that from tenants groups is that some owners might not have actually done the work or conformed to the MCI rules, and would be collecting money they were not entitled to. "Under the current administration at DHCR, you are guilty until proven innocent," Gilbert scoffed. "It doesn't make sense and is a system designed to hurt the majority to catch the minority.

Hopefully the decision and the dissent will convince everyone that it's time for DHCR to revisit the fast tracking issue."