In this CPLR Article 78 proceeding, petitioner-landlord Newport Partners, LLC (Newport), seeks an order annulling and vacating respondent's findings of two intentional rent overcharges and a determination denying Newport's petition for administrative review issued by respondent the New York State Division of Housing and Community Renewal Office of Rent Administration (DHCR) on the grounds that they are arbitrary, capricious and contrary to law and fact.

In September 2003, Newport purchased the apartment building located at 338 East 61st Street in Manhattan. On March 15, 2005, the tenants of apartments 8 and 10 filed separate, but substantially similar, rent overcharge complaints with DHCR against Newport. They primarily contended in each proceeding that DHCR's registration information was not correct, no rent stabilization rider had been provided to each tenant, no substantial renovation of the particular apartments had occurred and no rent exceeding [*2]$2,000 per month had been charged or collected, although Newport claimed that each apartment qualified for high-rent deregulation.

DHCR subsequently notified Newport separately of each overcharge complaint and advised that it was required by law to submit copies of supporting rent records from March 15, 2001, the base date, calculated as four years prior to the date of the filing of the overcharge complaint (see Rent Stabilization Code [RSC] § 2526.1 [a] [2]). DHCR also notified Newport that, if a rent increase based on apartment improvements were claimed, it must submit copies of supporting records.

In response, Newport requested additional time within which to obtain the demanded documentation and, subsequently, filed substantially similar answers to the two complaints with DHCR in which it stated that each apartment was vacant when it took possession of the building in September 2003.

Apartment 8:

In the answer regarding the apartment 8 overcharge complaint, Newport stated that DHCR's rent registration for 2003 shows a monthly rent of $1,219.92 and asserted that it had renovated the apartment while it was vacant at a cost of $29,911.71. Newport further stated that, therefore, it was entitled to increase the monthly rent by 1/40th of that amount, or, $747.79, as a qualifying individual apartment improvement increase (see RSC § 2522.4 [a] [4]) (even though it chose to increase the last rent by only $572.98). Newport claimed that, as a result, the lawful rent for apartment 8 was $2,012.49. Newport contended that, because the legal regulated rent exceeded $2,000 per month, the apartment was no longer subject to rent regulation and, therefore, qualified for high-rent deregulation (see Rent Stabilization Law [RSL] § 26-504.2). Newport also advised that it had voluntarily reduced the rent to $1,595.00 per month.

Newport did not provide DHCR with leases or rent ledgers for apartment 8 from the March 15, 2001 base date, although it did submit work proposals, purchase orders, receipts, invoices and internal records for work performed and equipment installed in apartment 8 and in other apartments in the building, as well as some proof of payment.

Apartment 10:

Similarly, in the answer regarding the apartment 10 overcharge claim, Newport stated that DHCR's rent registration for 2003 shows a monthly rent of $1,219.92 and asserted that it renovated the apartment while it was vacant at a cost of $29,989.20. It further stated that, therefore, it was entitled to increase the monthly rent by 1/40th of that amount, or, $674.73, as a qualifying individual apartment improvement increase (even though it chose to increase the last rent by only $586.23, plus a vacancy increase of $219.42). Newport claimed that, as a result, the total lawful rent for apartment 10 was $2,024.65. Newport contended that, because the legal regulated rent exceeded $2,000 per month, the apartment qualified for high-rent deregulation. It also advised that it had voluntarily reduced the rent to $1,595.00 per month.

Newport did not provide DHCR with leases or rent ledgers for apartment 10 from [*3]the March 15, 2001 base date, although it did submit work proposals, purchase orders, receipts, invoices and internal records for work performed and equipment installed in apartment 10 and in other apartments in the building, as well as some proof of payment.

DHCR then forwarded the tenants' separate responses to Newport's answers and requested that Newport respond and submit documentation substantiating their responses.By notices dated September 28 and 29, 2005, DHCR notified Newport that the rent administrator proposed to find that there had been a rent overcharge subject to treble damages, with regard to each apartment. In the notices, DHCR also advised Newport that DHCR's default formula would be used to calculate the rent from the March 15, 2001 base date if Newport did not demonstrate that no overcharge existed or that the overcharge, if any, was not willful. DHCR further advised Newport that the proposal was based on Newport's failure to submit leases or rent ledgers from the base date. DHCR also notified Newport that, in applying the default formula, the rent administrator proposed to establish the lawful initial regulated rent by using the lowest stabilized rent for an apartment having the same number of rooms as the subject apartment in the same building, without adjustment for the complaining tenant's vacancy lease. Therefore, an initial regulated rent of $322.04, the stabilized monthly rent of apartment 18, another three-room apartment in the same building, would be used in the rent computations.

Newport responded by advising DHCR that it needed more time to obtain the supporting documentation from the prior owner. Newport also argued that use of the default formula was not proper because it had submitted sufficient documentation in support of its rent calculations and was now submitting additional documentation in the form of copies of negotiated checks. It also argued that the rent administrator's proposed use of the monthly rent of apartment 18 as the base rent of apartments 8 and 10 was improper and unwarranted. It submitted photographs of each apartment, taken before, during and after the renovations.

Specifically with regard to apartment 8, Newport submitted a renewal lease dated September 1, 2001 and executed on August 9, 2001 for the one-year period commencing January 1, 2002. Newport also submitted a renewal lease dated September 1, 2002 and executed on March 3, 2003 for the one-year period commencing January 1, 2003. Neither lease covers the March 15, 2001 base date.

Newport failed to submit any rental documents for apartment 10.

On November 14, 2005, DHCR received a letter from the prior owner's building manager advising it that the building had been sold to Newport in 2003 and that its files were closed and in storage. Apparently, no great efforts were made by anyone to retrieve the files from storage.

The Local Rent Administration Decision:

By determination dated December 21, 2005, the rent administrator issued an order finding that there existed a willful rent overcharge for apartment 10 in the amount of $45,826.56, which sum included treble damages. Similarly, by determination dated [*4]December 29, 2005, the rent administrator found that there existed a willful rent overcharge for apartment 8 in the amount of $44,429.40, which included treble damages.

In each order, the rent administrator noted that, because Newport had failed to submit a documented rental history from the March 15, 2001 base date, the administrator used DHCR's default formula to calculate the base rent by taking the lowest stabilized rent from DHCR's registration information for the same size apartment in the same building. It was also noted that, because Newport had not established that the overcharge was not willful, treble damages on the overcharge beginning two years prior to the filing of the overcharge complaint were imposed. The rent administrator directed Newport to roll back the rent to the legal regulated rent, recompute the current rent and refund to each tenant, or credit each tenant with, an amount equal to the rent paid in excess of the legal regulated rent.

The PARs:

Subsequently, Newport filed substantially similar petitions for administrative review (PAR) of each determination. In each PAR, Newport argued that the rent administrator had improperly failed to consider the proof of individual apartment improvements made while each apartment was vacant and that the proof it submitted satisfied the evidentiary requirements set forth in DHCR's policy statement 90-10. Newport further contended that each apartment was no longer a rent regulated unit because it qualified for high-rent deregulation since Newport was entitled to collect an initial rent of more than $2,000 per month from the commencement of the tenancy. It also argued that the rent administrator's use of DHCR's default formula in calculating the base rent was improper because it had the right to rely in good faith on the prior owner's DHCR registration statements and because it had provided two renewal leases for apartment 8 in effect beginning January 1, 2002 and January 1, 2003.

The tenants of apartments 8 and 10 filed substantially similar individual answers in response to the PARs. In these answers, they requested that the PARs be considered together, and contended that both involve claims of rent increases based on grossly inflated, internally conflicting and poorly documented costs of improvement and rental history.

By determination dated July 12, 2006, DHCR's deputy commissioner consolidated the PARs and then denied each PAR. The commissioner found that the rent administrator had established the legal regulated rent for each apartment by properly applying DHCR's default formula following Newport's failure to submit sufficient evidence of the rent history for each apartment dating back to the March 15, 2001 base date, and had properly imposed treble damages based on Newport's failure to demonstrate a lack of willfulness.

With regard to the rent administrator's application of the default formula in determining the rent of each apartment, the commissioner noted that RSC § 2523.7 (b) requires the owner of a rent regulated building to maintain records relating to the rents of housing accommodations for four years prior to the date of the filing of an overcharge [*5]complaint. The commissioner also noted that it is incumbent upon the purchaser of a rent regulated building to secure such records from the seller and that such records include leases, rent ledgers, invoices, cancelled checks, orders and other documents necessary to establish the rent charged and paid on the base date. The commissioner further noted that, while Newport had submitted two renewal leases for apartment 8, the earlier of the leases was executed three weeks prior to its issuance date and that, therefore, the lease lacked sufficient probative value to be considered a reliable alternative for the purpose of determining the base date rent. Regarding apartment 10, the commissioner found that Newport had provided no evidence of rent history back to the base date, other than that which was reflected in DHCR's registration records.

Based on Newport's failure to provide documentation demonstrating each apartment's rental history beginning March 15, 2001, the commissioner found that the rent administrator properly employed the default formula with regard to each apartment.

Moreover, the commissioner found that the rent administrator properly did not consider evidence of individual apartment improvements on the ground that no increases based upon such improvements or vacancy allowances may be considered in determining the lawful rent of an apartment under DHCR's default formula.

Treble Damages:

With regard to the imposition of treble damages, the commissioner noted that "an owner who is found to have overcharged a tenant is liable for treble damages, unless the owner can establish by a preponderance of the evidence that the overcharge was not willful, in which case interest will be imposed," citing RSC § 2526.1 (a) (1). The commissioner then found that Newport had failed to submit the required documentation to establish the base date rent for either apartment 8 or 10 and that it was not justified in its belief that it could simply rely upon information regarding the base date rent for each apartment found in DHCR's registration statements. The commissioner found that, therefore, the rent administrator's imposition of treble damages in each of the consolidated cases was warranted.

The commissioner also noted that:

[f]or post April 1, 1984 overcharges, DHCR Policy Statement 89-2 [Application of the Treble Damages Penalty] provides certain specified circumstances where the burden of proof in establishing the lack of willfulness shall have been met. None of the circumstances outlined therein [non-availability of rent records of a building purchased at a judicial sale or bankruptcy sale; self adjustment of rent by an owner within the time to interpose an answer to the complaint and a good faith tender of a refund to the tenant of all excess rent plus interest; or hyper-technical computer errors] have been established by [Newport Partners].

The Within Proceeding:

Newport subsequently commenced the instant Article 78 proceeding. Newport [*6]contends that DHCR's determination should be annulled and vacated on a variety of grounds, including that it is arbitrary, capricious and contrary to law and fact.

In opposition, DHCR contends that its final determination is supported by a rational basis in the record and, therefore, must be upheld by the court.

Discussion:

DHCR is the agency charged by the Legislature with responsibility for the administration of the Rent Stabilization Law and the adjudication of rent overcharge claims (see RSL §§ 26-501 to 26-520). Pursuant to the powers granted by the RSL, DHCR promulgated the current RSC, as amended (see RSC §§ 2520.1 to 2531.9).

In pertinent part, the RSC prohibits a landlord from charging "in excess of the established base rent plus applicable guideline increases, except under certain enumerated grounds, among which is the installation of new equipment or improvements" (Matter of Charles Birdoff & Co. v DHCR, 204 AD2d 630, 630 [2d Dept 1994]). The established base rent is the legal regulated rent chargeable on the base date, together with any subsequent lawful increases and adjustments (see RSC §§ 2520.6 [e], 2526.1 [a] [3] [i]). In relevant part, the base date is defined by statute as the date four years prior to the date of the filing of a rent overcharge complaint (Zafra v Pilkes, 245 AD2d 218, 219 [1st Dept, 1997]; RSC §§ 2520.6 [f] [1]; see CPLR 213-a).

The owner of regulated housing accommodations is required to "maintain records relating to the rents of housing accommodations for four years prior to the date the most recent registration for such accommodation was required to have been filed," but will not be required to produce any rent records relating to a period prior to the base date (RSC § 2523.7 [b]). Thus, the burden is on the owner to maintain rent records, such as leases, rent ledgers, invoices or cancelled checks. The owner also bears the burden of proving that the rent charged did not exceed the legal regulated rent from the base date through the date of the filing of the overcharge complaint.

Contrary to Newport's contention, it was not entitled to rely on the prior owner's DHCR rent registration statements from the base date to the date of the filing of the overcharge complaint. Although an "innocent current owner" exception to the rule requiring an owner to maintain rent records exists, it is not applicable in the circumstances presented here, as the commissioner correctly noted. In relevant part, RSC § 2523.7 (c) (1) provides that:

In the absence of collusion or any relationship between a prior owner and an owner who purchases upon a judicial sale, or other such sale effected in connection with, or to resolve, in whole or in part, a bankruptcy proceeding, mortgage foreclosure action or other judicial proceeding, such purchaser shall not be required to provide records for the period prior to such sale.

(RSC § 2523.7 [c] [1] (emphasis added); accord DHCR Policy Statement 89-2, Application of the Treble Damages Penalty.) Here, Newport did not purchase the [*7]building at a judicial sale, or at any other of the listed types of qualifying sales. Therefore, the commissioner properly noted that it was incumbent upon Newport, as the purchaser of a rent regulated building, to secure rent records from the seller.

Similarly, there is no merit to Newport's contention that DHCR should have considered leases in effect prior to the base date. DHCR is prohibited from examining the rental history of housing accommodations prior to the four-year period preceding the filing of an overcharge complaint (Thornton v Baron, 5 NY3d 175, 180 [2005], citing RSL § 26-516 [a], CPLR 213-a; see RSC § 2523.7 [b]).

The commissioner properly found that Newport had failed to maintain the required rent records. Newport failed to produce the base date lease or other rent records showing the March 15, 2001 base date rent for either apartment 8 or 10, despite the rent administrator's repeated requests for this documentation. While Newport did submit two renewal leases for apartment 8, neither was in effect on the base date. Moreover, the earlier of the two leases contained internal discrepancies that rendered it without probative value in determining the rent on the base date.

In view of Newport's failure to submit the required rent documentation, DHCR properly established the base rent by employing the default formula. The Court of Appeals has held that DHCR is justified in employing its default formula to determine the legal regulated rent on the base date where the landlord has failed to produce valid rent records sufficient to establish the legal regulated rent as of that date (Thornton, 5 NY3d at 179-80; see also Matter of Tockwotten Assocs., LLC v DHCR, 7 AD3d 453, 455 [1st Dept 2004]; Matter of Round Hill Mgt. Co. v Higgins, 177 AD2d 256, 258 [1st Dept 1991]). Further, the formula was "designed to give the tenant every benefit of the doubt created by an owner's failure to provide complete records" (Matter of Round Hill Mgt. Co., 177 AD2d at 258).

Pursuant to the default formula, DHCR determines the legal regulated rent by setting the rent at the lowest rent for the same sized apartment in the same building (Thornton, 5 NY3d at 179-80 n 1; Levinson v 390 West End Assocs., L.L.C., 22 AD3d 397, 400-01 [1st Dept 2005]).

Here, the rent administrator established the base monthly rent at $322.04 for each apartment by taking the lowest stabilized rent for an apartment in the same building having the same number of rooms as the subject apartments, as indicated by DHCR's apartment registration information, without adjustment for the complaining tenant's vacancy lease.

Contrary to Newport's contention, DHCR was not required to include vacancy increases, guideline increases and individual apartment improvement increases in the base rent calculation under the default formula (see id.). Its interpretation of the statutes and regulations it administers is entitled to great deference (Matter of Salvati v Eimicke, 72 NY2d 784, 791 [1988]; Matter of Tockwotten Assocs.,7 AD3d at 454) and will be upheld where, as here, the interpretation has a rational basis in law and fact (Matter of Versailles [*8]Realty Co. v DHCR, 76 NY2d 325, 328 [1990]). Thus, the commissioner properly determined that rent increases based upon improvements to either apartment were not permissible.

Having properly utilized the default formula and properly established the legal regulated monthly rent at $322.04 on the base date, the commissioner correctly confirmed the rent administrator's finding that overcharges existed with regard to apartments 8 and 10.

Further, the commissioner properly confirmed the rent administrator's finding that Newport was liable for overcharges occurring on, and after, the March 15, 2001 base date, even though it did not purchase the building until 2003 (see RSC § 2526.1 [f] [2] [i]).

Treble Damages:

The commissioner properly confirmed the rent administrator's determination that the imposition of treble damages on Newport was warranted. Treble damages beginning two years prior to the filing of the overcharge complaint may be imposed upon a finding of a willful rent overcharge (RSC §§ 2526.1 [a] [1], 2526.1 [a] [2] [i]; DHCR Policy Statement 89-2), when the owner fails to produce the required rent history (Matter of Tockwotten Assocs., 7 AD3d at 455). A presumption of willfulness is created upon a finding of a rent overcharge and the burden is on the owner to establish the lack of both willfulness and negligence by a preponderance of the evidence (id.; RSL § 26-516 [a]; RSC § 2526.1 [a] [1]). ^[FN1]

Newport, as the current owner, is liable for penalties imposed on all overcharges, including those collected by the prior owner, which were collected on or after April 1, 1984 (see RSC § 2526.1 [f] [2] [i]). A current owner is shielded from penalties for overcharges collected by a prior owner in certain circumstances, such as when the current owner acquires the property by judicial sale, the owner's own adjustment of the rent within the time to interpose an answer to the overcharge complaint and a good faith tender of a refund, or the existence of hyper-technical computer errors (id.; see DHCR Policy Statement 89-2). However, as the commissioner correctly found, none of these exceptions is alleged to exist here.

For the foregoing reasons, the petition is denied.

Accordingly, it is

ORDERED and ADJUDGED that the petition is denied and the proceeding is dismissed; and it is further

ORDERED that the clerk may enter judgment accordingly.

Dated: March 19, 2007

ENTER: [*9]

__________/s/__________________

J.S.C.