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Ruling could limit MCI's.

Ruling could limit MCI's

A New York State Supreme Court judge, in allowing a tenant to intervene in a suit, seems to have ruled that major capital improvement increases may not be compounded into the base rent nor exceed 6 percent per year.

While real estate industry leaders denounced Judge Elliott Wilk's decision saying it was contrary to current case law and DHCR regulations, Assemblyman Steven Sanders called it a "tremendous victory for tenants." An attorney, however, did not believe the ruling made any law but merely allowed a tenant to intervene and resolved other motions.

Attorney Cullen S. McVoy, chief of litigation for the New York State Division of Housing and Community Renewal (DHCR), said they are attempting to sort out the decision before deciding to appeal. "We're looking over the papers," he said. "There's a question of what was decided." McVoy believes the judge only allowed a tenant to become a party in the case and not on the entire case, which challenged the computation of MCI increases in excess of 6 percent. Since it is an intermin order, he continued, any appeal will have to take the form of a |motion for leave to appeal', rather than a |leave of right.' McVoy believes the particular owners will appeal.

"It is our interpretation that this is not a ruling on the merits of the case and is an interim ruling in granting a tenant's leave to intervene and denying an owner's motion to vacate a stay," McVoy concluded.

McVoy said in the 50-page memorandum, the judge is "certainly making some rulings of law in the context of those motions, and in all likelihood the Appellate Division will be ruling on those issues. We certainly disagree but there is a question as to how we proceed."

The case, Bryant Avenue Tenants Association vs. Koch, was filed in 1983, McVoy said, and other tenants in other buildings intervened or joined in the suit which was ultimately certified a class action for both tenants and landlords. It is beneficial for tenants to intervene because they would be able to stay and MCI increase until the case was decide. Notices to the class were never sent out, however, leaving a question as to who is affected by Judge Wilk's current decision.

McVoy said the original case purported to apply to all tenants who protested MCI orders to the Conciliation and Appeals Board, whose functions were later taken over by DHCR. On motions, the Court of Appeals ruled in 1986 that the class action was appropriate and there was not a statutory limit. "Once a class action was certified there has to be provision for notice," McVoy noted. "This was the plaintiff's obligation to arrange," he added. For many years afterward, nothing happened in the case except that stays of MCI's were granted to other tenants.

"Judge Wilk has been sitting on this case and refused to sign orders or issues decisions for years," said Dan Margulies, executive director of CHIP, the Community Housing Improvement Program.

In the interim, Margulies said, a similar Article 78 case, Ansonia Residents vs. DHCR, went up to the Court of Appeals which subsequently ruled in favor of DHCR and the existing policy of permanent MCI increases as part of the base rent. "Judge Wilk has tortured the subject in one of the longest decisions I've ever seen," said Margulies, referring to the lengthy written decision as well as to the time it took for a decision to come down, "to try and justify disagreeing with the Court of Appeals, and described the MCI as a |permanent surcharge' which would not be subject to guideline increased as part of the base rent."

Joseph L. Forstadt, a partner in Strook, Strook & Lavan, who filed an amicus brief for the Rent Stabilization Association, said a motion was made for summary judgment in this case several years ago. "Judge Wilk has never decided that motion but waited for an opportunity to issue this opinion, attempting to carve out a modification of the Ansonia opinion, which we believe says the MCI is part of the permanent increases which form a part of the base rent."

Sources indicated that Judge Wilk also decided two landlord motions, to vacate stays of MCI increases based on the Ansonia decision, on July 8. The owners wanted a decision as soon as possible since granting the motions would have lifted the stays put on their tenant's MCI increases. Judge Wilk denied the motions and referred them to the memorandum in the Bryant Avenue case, which was not yet prepared but was subsequently published on Aug. 1 in the New York Law Journal. Those two motions have already been brought to the Appellate Division by the property owners.

McVoy said the judge was merely ruling on the motions, which thereby gives a tenant permission to intervene, and upholds the stays against Regent Park and Hyde Park, the two properties which made motions to vacate the stays against their tenants' MCI increases upon the Ansonia ruling.

"It's a very, very limited ruling," McVoy said. "The only way the division has been affected by this is that another tenant has been added into the litigation and there are already many in. We haven't appealed previous motions in which other tenants have been given leave to intervene. And as far as the stay, it affects the owners and not the Division. It only affects those owners whose tenants intervene. It certainly sets the precedent of what the decision is going to be in this court if other owners try to get out from a stay," he added.

The Ansonia case called for major capital improvement increases to become a part of the base rent, said John J. Gilbert II, president of the Rent Stabilization Association. "For a State Supreme Court justice to rule otherwise doesn't make a heck of a lot of sense," Gilbert said. "We will appeal and fight this matter back up to the Court of Appeals, if necessary." Wilk's philosophical leanings, Gilbert noted, are illustrated by the fact the Judge keeps a picture of Che Guevera, the Argentinean freedom fighter, in his office.

The holding of the Ansonia case had to do with the fact that MCI's can be collected indefinitely, explained Stephen Kaufman, an assistant to Assemblyman Steven Sanders (D) who represents part of the lower East Side which includes Stuyvesant Town. The Ansonia case does not discuss a 6 percent annual cap or if MCI's should be compounded or added to the base rent, he said. The Ansonia only holds the increase does not expire when costs are recovered, Kaufman noted. "If they are appealing, I hope they lose," Kaufman said. "They shouldn't appeal."

In June, the New York State Assembly passed a Sanders bill which would prevente tenants from having to pay permanent and compounded MCI rental increases. The Senate never acted on the measure before it recessed for summer.

Judge Wilk's memorandum cites the facts of a motion to intervene in Bryant Avenue, with regard to the tenant, Mulgheta Sultan, at 69 Tlemann Place. In this situation, DHCR granted an 18.15 percent increase, which was divided into three years of 6 percent increases and one of .15 percent, which were subsequently compounded into the base rent, and also granted arrearage of 6 percent. Judge Wilk said the increase should have only been 6 percent.

His decision states: By combining MCI charges with lease rents, thereby condoning consecutive annual six percent increases and rent increases calculated on the basis of the combination, the agency (DHCR) is increasing lease rents which it has not power to do (except in "hardship" cases) and thus conferring on the landlord an impermissible windfall for the improvement.

"There has been no ruling on the merits of the (original) case that would directly affect other tenants," McVoy said. Since there has been no notice to the classes, he added, there can be no decision binding on the classes, either.

Although, in principal, the decision was limited to the parties in the action Forstadt said, it may be read to apply to all owners who have obtained MCI increases historically.

Margulies said the Judge's earlier decisions in this case were "clearly contraindicated" by the Court of Appeals in Ansonia. "This is the case of the judge who wants to kill MCI's and damn the consequences," he added.

"The judge is out in left field," said Forstadt, "maybe he's out of the ballpark with this decision."

Margulies said the MCI, or Major Capital Improvement increases, do not begin to cover the actual costs of the work done to the building. MCI increases are permitted for building-wide renovations such as boiler, roof or window replacements. "It doesn't cover the cost of financing improvements or the soft costs of architecture and engineering fees, or anything else," Margulies noted. Because it often takes years to receive the increase, Margulies said, it is important for the MCI to be subject to the general rental guidelines which reflect inflation over time.

Forstadt, who is also an owner-member of the Rent Guidelines Board, said the stature governing MCI's talks in terms of a seven-year amortization of the MCI (which was five years until 1990). From that, he said, DHCR computes the amount the owner can increase the rent. This is the cost of the work, divided by the seven-year formula, which becomes the increase for the first year. In the second year, Forstadt said, the owner is entitled to continue that and it becomes part of the base rent, so if there is a renewal lease, the percentage of the guideline increase would also incorporate the MCI.

Judge Wilk said the MCI is just a fixed amount and should not be applied to the base rent, Forstadt added. "If the judge prevails it would be very disruptive," he said. "To make this computation and for owners to go back to their books and records to undo what was the accepted practice from the beginning, would be impossible and create turmoil in the orderly collection of rent."

"This decision is so absurd," Margulies agreed, "because it would require the recalculation of rents for perhaps tens or hundreds or thousands of tenants in stabilized apartments which have had MCI's. Far from being a windfall for tenants, it would create a chaotic situation in which no one knew precisely what the rent is any more."

Forstadt believes the farthest back the decision could affect would be six years which would be a contract statute of limitations, however, he said, it could also be considered a part of government actions. He said he was currently researching the question. Forstadt will also file a motion of appeal.

"Wilk has never been a friend of the landlord," Forstadt said. "It doesn't surprise me that he reached this conclusion--that's his philosophy."

PHOTO : NEW TENANT AT 500 MAMARONECK AVE. CB Commercial Associate Glenn Walsh has negotiated a 7,914 square foot lease for American International Publishing at 500 Mamaroneck Avenue, Harrison, New York. The building is owned by Schulman Realty.
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Title Annotation:major capital improvement increases may not be compounded into base rent or exceed 6% per year
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Aug 14, 1991
Words:1844
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