NY Courts force rents down on 1,270 apartments

15% rent rollbacks were denied by court and are now reinstated by higher court

Property owners beware: a New York State Court of Appeals has just sanctioned a 15% rent rollback on 1,270 apartments. Kingston, New York, officials voted in the fall of 2023 to begin a rent stabilization program and to roll back rents on more than 25% of the city's rental apartment stock. Tenant advocates cheered, and property owners quickly took up arms and filed suit to the local courts, but they have proved unsuccessful today. If NY state courts sanction rent rollbacks in upstate NY, what will stop them from applying similar measures in NYC?

The Mar 21, 2024 decision by the State Supreme Court of NY, Third Department, to roll back rents is the latest chapter in a saga of events regarding Kingston's new rent stabilization policy. The short recap goes as follows. Rents climbed a lot in Kingston during the exodus of residents from high-cost-of-living NYC to the Hudson Valley area that includes Kingston, NY, as the advent of remote work surged during the COVID-19 pandemic (for the long story; see my article on the matter here). This run-up in rents reduced the number of apartment vacancies to below 5%, according to the contentious Ulster County housing survey of local property owners, and that triggered the city to pass an emergency declaration to stabilize rents.

The emergency declaration led to the formation of the Rent Guidelines Board (RGB) that decided not only to freeze rents for properties and cap annual increases but to reset the baseline rent to 116% of the rent charged on Jan 19, 2021. According to the new law, if owners had hiked their rents more than 16% between Jan 1, 2019, and Jul 31, 2022, tenants could "apply [to DCHR] for adjustment of the initial legal, regulated rent" and obtain a refund if "such rent is in excess of the fair market rent." Matter of Hudson Valley Property Owners Association Inc. v City of Kingston New York, CV-23-0327 (NY, March 21, 2024).

When the RGB of Kingston decided to roll back rents last year, landlords and their advocates quickly responded with a legal suit. The legal challenge eventually made its way to the Supreme Court of NY. The judges agreed with Kingston's ability to declare a rental emergency based on the powers granted to it by the Emergency Tenant Protection Act (ETPA)of 1974 and the Housing Stability and Tenant Protection Act (HSTPA) of 2019, but they ruled against the city's ability to reset base rents. The new decision by the appeals court judges changes that and legalizes the city's rent adjustment, forcing roughly ~25% of the housing supply into new compliance.

NYC investors are not directly affected by this ruling, but they should pay attention to two critical consequences this decision may have.

1. This will be a landmark victory for tenants and their advocates across the state. Despite the challenges those groups have faced in getting their Good Cause Eviction bill passed, this represents a pretty striking victory. Now equipped with a case law that sets a precedent that rents can be rolled back on rent-stabilized properties, tenant advocates might become more encouraged in their attempts to control rent growth.

2. Second, this case provides more data and supporting evidence for landlords to make the case to the Supreme Court of the United States (SCOTUS) that the NYS ETPA and HSTPA are overreaches to private property rights. SCOTUS rejected all three of the NY landlord-led legal claims against NY's rent regulation regime, stemming from the 2019 HSTPA law. When Judge Clarence Thomas rejected the last two cases with the stipulation that the cases weren't structured correctly, he explicitly left the door open for new, better-developed appeals to discuss the overreach of NY in its housing regulation.

   "In an appropriate future case, we should grant certiorari to address [how NYC regulations coordinate to completely bar landlords from evicting tenants]" 74 Pinehurst LLC v. New York, No. 22-1130 (US Feb 20, 2024)

Thomas's interest in discussing rent regulations in NYC, combined with the outcome of the Kingston, NY case, provides fertile grounds for landlords to mount another case. The possibility of a stronger appeal against rent stabilization laws is the silver lining owners in New York should keep sight of.

Kingston, NY, is making history by pushing the envelope for how much the state (village, town, or city) controls private businesses like real estate. To understand the magnitude of this decision, readers need to ask themselves the following. If NYC officials decided to reset current wage levels for all workers in NY to 2019 levels + 15%, how would they feel? Further, what if NYC officials could claw back any wages earned over that allowed 15% growth between today and 2019 if they exceeded the median pay for a combination of profession and years of experience? That would be front-page news, protests would erupt, and citizens would be in arms. What's happened in Kingston, NY, is the same, and it raises the question of how far the state's reach goes in regulating properties in NYC.

With all that said, I am bullish on NYC rent-stabilized properties. With every challenge, opportunity presents itself. If you aren't sure about the future of rent-stabilized properties and would like a free evaluation, give me a call at 212 258 1471.

Sources: State of New York, Supreme Court, Appellate Division, Third Judicial Department legal brief