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Landlord Tenant Law Litigation

Luxury Decontrol for Couples Living Apart

The Rent Regulation Reform Act provides for deregulation of rent-stabilized apartments occupied by tenants whose income exceeds the statutory threshold. When a married couple lives in the apartment, the income of both spouses counts in determining whether the threshold is met. But suppose only one spouse occupies the apartment as a primary residence. When, if ever, should the income of the other spouse be counted towards the threshold?

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The Rent Regulation Reform Act of 1993 provides for deregulation of rent-stabilized apartments occupied by tenants whose income exceeds the statutory threshold (originally $175,000, now $250,000). When a married couple lives in the apartment, the income of both spouses counts in determining whether the threshold is met. But suppose only one spouse occupies the apartment as a primary residence. When, if ever, should the income of the other spouse be counted towards the threshold? The Court of Appeals recently addressed that issue in Matter of Brookford, LLC v. New York State Division of Housing and Community Renewal (DHCR), [citation], and held that only the income of the resident spouse should be counted. While resolving one basic issue, the court’s opinion leaves some peripheral issues unresolved.

The Brookford Case

In Brookford, Margaret Friedman and her husband lived in a rent-stabilized apartment on Central Park West until her husband entered a nursing home in March 2005. In April 2006, landlord served Mrs. Friedman and her husband with an income certification form, but they did not respond. Ultimately, however, in response to DHCR’s request, Mrs. Friedman apportioned the income she and her husband reported on their joint tax returns for 2004 and 2005, and listed her total annual income at an amount below the statutory threshold. DHCR then denied landlord’s petition for luxury deregulation, and its subsequent petition for administrative review. Landlord then brought an Article 78 proceeding challenging DHCR’s determination. Both Supreme Court and the Appellate Division rejected the challenge, and landlord appealed to the Court of Appeals.

The Statute

Section 26-403.1[a][2] permits deregulation when the tenant’s “total annual income” exceeds the threshold amount ($175,000 for the years in question). Section 26-403.1[a][a] of the Rent Control Law defines “total annual income” as “the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence other than on a temporary basis.” But the first section of the same section provides that ‘[f]or purposes of this section, annual income shall mean the federal adjusted gross income as reported on the New York State income tax return.”

The Majority Opinion

In affirming the decisions below and holding that landlord was not entitled to deregulate the Friedman apartment, the Court of Appeals majority, in an opinion by Judge Paul Feinman, emphasized that the statute defined total income to mean the sum of annual incomes of “all persons who occupy” the apartment as their primary residence. The majority concluded that a construction that would focus only on the income reporter on the couple’s joint return would effectively nullify the statute’s focus on income of persons “who occupy” the apartment. The majority conceded that segregating the income of spouses who occupy the apartment would involve “a more involved assessment” of adjusted gross income, but indicated that the legislature had anticipated the problem by requiring DHCR to work cooperatively with the Department of Taxation and Finance (DTF) to “verify the total annual income of all persons residing in housing accommodations as their primary residence. The majority noted that DHCR and DTF had, in 1994, agreed to a “memorandum of understanding” developing procedures for segregating the income of residents from those of non-resident spouses.

The Dissent

Judge Michael Garcia, dissenting, concluded that the majority had ignored the clear language of the statute in order to reach what it believed was a fair result. In his view, the plain statutory language counted the total annual income of all persons who used the apartment as their primary residence, but defined that income as federal adjusted gross income as reported on that person’s New York State income tax form — regardless of filing status. Justice Garcia also argued that the statute did not confer authority on DTF to do anything other than verify the total annual income reported on a tenant’s tax return. He noted that the statute explicitly precluded DTF from providing DHCR with any information regarding annual income other than “whether the total annual income exceeds the applicable deregulation income threshold.” He dismissed the memorandum of understanding between DHCR and DTF as in conflict with the statute and therefore invalid. Finally, as a matter of policy, the Justice Garcia highlighted the potential abuse by wealthy tenants seeking to maintain a home outside the city while also maintaining a rent-regulated apartment within the city, despite a combined income in excess of the statutory threshold.

Analysis and Implications

As a matter of statutory construction, Judge Garcia would appear to have the better of the argument. The definition of total annual income to include the annual income of all persons who occupy the accommodation is necessary to insure that when multiple related or unrelated individuals occupy the apartment, all of their incomes are included in assessing whether they meet the luxury threshold; the provision need not be read to require exclusion of income attributable to non-residents. As a result, the provision is not at all inconsistent with the definition of annual income as federal adjusted gross income as reported on the state tax return.

On the other hand, holding that the parties are bound by their income tax filing would not solve the policy concerns raised by the dissent. A wealthy couple seeking to retain a rent stabilized apartment could, even under Judge Garcia’s construction of the statute, simply file separately so that only the resident spouse’s income were counted toward the luxury deregulation threshold. Of course, the couple might pay a tax penalty if they were to file separately, but if the regulated apartment were sufficiently valuable, the penalty might be worth paying.

Going forward, the majority’s decision leaves open an important question: how is income to be apportioned between a resident spouse and a non-resident spouse? Is DTF supposed to recalculate income as if the married couple had filed separately, even though the New York State Tax return may not segregate dividend and interest income by party? Or should DTF simply attribute half of the AGI to each spouse? Perhaps the memorandum of understanding between DTF and DHCR will resolve that issue, but the statute itself certainly provides no basis for resolving it.

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Stewart E. Sterk, Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of New York Real Estate Law Reporter.

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.

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