On January 6, 2016, New York Governor Andrew Cuomo announced that he is ordering more than 4,000 building owners that receive J-51 tax abatements to comply with rent regulation laws. This action is expected to return 50,000 illegally deregulated apartments back to rent regulated status.

On January 7, 2016, in Altschuler v. Jobman 478/480 LLC, a New York appellate court upheld a decision ordering a landlord who willfully violated rent regulation laws to pay $900,000 in damages to a tenant that was overcharged in an illegally deregulated apartment (, 1st Dept.).

The J-51 tax abatement program was established to encourage landlords to make improvements to rent regulated residential apartments.

Under the program, landlords can recover 75 percent of the cost of significant improvements by reducing the taxable assessed value of the property or the actual tax charged. Landlords that receive J-51 tax benefits are prohibited from increasing rent using luxury decontrol provisions under Roberts v. Tishman Speyer Properties, LP (62 A.D.3d 71, 1st Dept., March 5, 2009).

Although the J-51 program expired on December 31, 2011, many property owners that renovated apartments before that time who are receiving tax benefits are still subject to its provisions.

Following the Governor's announcement, the state's Tenant Protection Unit mailed notifications to landlords suspected of deregulating apartments while receiving J-51 benefits.

In Altschuler, a landlord increased a stabilized tenant's rent to market rates over several years while continuing to receive J-51 benefits. The landlord also failed to file annual rent stabilization rates with the city, effectively hiding from authorities that the apartment was deregulated.

The court held that the landlord concealed the deregulation from state authorities, and these actions indicated a willful violation of the law. This intentional violation allowed the tenant to collect a refund of the overcharges and treble damages totaling nearly $900,000. The court also ordered that the tenant be allowed to remain in the apartment at a permanently rent stabilized rate.

The Altschuler case provides a cautionary tale for landlords attempting to deregulate apartments while receiving tax benefits, particularly in light of the Governor's recent enforcement action.

Real estate attorneys representing landlords should review records of all rent stabilized apartment units, and recently deregulated units, to ensure that the process complies with rent regulations. If a client is considering purchasing a property that has apartments that have recently been deregulated, counsel should review records as part of its due diligence to ensure that the deregulation was conducted properly.