Thornton v. Baron, 5 N.Y.3d 175 (2005)

When a lease is found to be a fraudulent attempt to circumvent rent stabilization laws, a rent registration statement based on that lease is a nullity, and the legal regulated rent should be determined using the default formula employed by the Division of Housing and Community Renewal (DHCR) for cases where reliable rent records are unavailable.

Summary

This case addresses how to determine the legal regulated rent for an apartment after a landlord fraudulently attempted to remove it from rent stabilization by using a sham “non-primary residence” lease. The owner of the Apthorp apartment building colluded with tenants to lease apartments at inflated rents, falsely claiming they would not be used as primary residences, then subleasing them at even higher rates. When subtenants sued for rent overcharges, the court found the initial lease void as against public policy. The court held that because the initial rent was fraudulent, it must use the DHCR default formula to determine the legal rent, rather than relying on the rent listed in a registration statement filed four years prior to the lawsuit.

Facts

390 West End Associates, owner of the Apthorp, leased an apartment to Baron at a rent of $2,400 per month, stipulating it would not be Baron’s primary residence. The prior stabilized rent was $507.85. Baron immediately subleased the apartment to the Thorntons for $3,250 per month. The Webers acted as agents for Baron and other tenants in similar schemes. The owner obtained declaratory judgments stating the apartments were exempt from rent stabilization. The Thorntons, despite initially signing documents to the contrary, used the apartment as their primary residence.

Procedural History

1. 390 West End Associates obtained declaratory judgments that the apartments were exempt from rent stabilization.
2. In 1996, the Thorntons sued Baron and the Webers for rent overcharges in Supreme Court.
3. In 1999, the owner moved to vacate the Baron consent judgment, which was granted by the Appellate Division in 2000.
4. In November 2000, the Thorntons amended their complaint to include the owner, seeking a rent-stabilized lease at $507.85 per month.
5. Supreme Court determined that the legal rent must be fixed based on the DHCR default formula.
6. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

Issue(s)

Whether the legal regulated rent of an apartment, improperly removed from rent stabilization through a fraudulent lease agreement, should be determined based on (1) the rent in effect prior to the fraudulent lease, (2) the rent listed in a registration statement filed four years before the lawsuit, or (3) the DHCR’s default formula for cases with unreliable rent records.

Holding

No, and no. The legal regulated rent should be determined using the DHCR’s default formula because the fraudulent lease and subsequent rent registration were nullities.

Court’s Reasoning

The Court of Appeals held that the Rent Regulation Reform Act of 1997 (RRRA) limits examination of rental history to the four years preceding the filing of an overcharge complaint. However, the court found that the annual registration statement listing the rent charged to Baron was a nullity because the underlying lease was a fraudulent attempt to circumvent rent stabilization laws, violating New York public policy. The court emphasized that the RRRA’s purpose was to ease the burden on honest landlords, not to shield dishonest ones from the law. The court stated, “Reflecting an attempt to circumvent the Rent Stabilization Law in violation of the public policy of New York, the Baron lease was void at its inception.” The court reasoned that adopting the dissent’s rule would “transform an illegal rent into a lawful assessment that would form the basis for all future rent increases,” rewarding fraudulent behavior. Although the Thorntons had “unclean hands” by making false statements, the ruling’s principle would apply to innocent renters. The court chose the DHCR default formula to prevent wrongdoers from benefiting at the public’s expense and to preserve affordable housing, upholding the statute’s purpose. The DHCR’s default formula uses the lowest rent charged for a rent-stabilized apartment with the same number of rooms in the same building on the relevant base date.