Rizzo v. New York State Division of Housing & Community Renewal

OPINION OF THE COURT

Tom, J.P.

At issue on this appeal is the propriety of an order remanding the matter to respondent Division of Housing and Community Renewal (DHCR) for reconsideration of facts that arose subsequent to the agency’s issuance of a final determination and over five years after the landlord filed her petition for hardship relief under the Sound Housing Act (L 1974, ch 1022, as amended by L 1975, ch 360, codified at NY City Rent and Rehabilitation Law [Administrative Code of City of NY] § 26-408 [b] [5]). Judicial review of an administrative determination is properly limited to the factual record adduced before the agency. Furthermore, DHCR’s assessment of the building’s rate of return for the year in which the landlord’s petition for hardship relief was filed constitutes a reasonable interpretation of the statute it administers. Finally, DHCR’s determination is supported by substantial evidence, and its order should not be disturbed.

The material facts are uncontroverted. In 1981, Rachel Crespin (the landlord) purchased a four-story townhouse located at 323 East 53rd Street in Manhattan, where she occupies an unregulated unit on the second floor. Each of the building’s four apartments contains approximately 1,200 square feet and consists of an entire story. This controversy involves two rent-controlled units, one comprising the third floor, occupied solely by petitioner George Rizzo, and the other comprising the fourth floor, formerly occupied by Elaine Bloedow.^*

In 1996, pursuant to the New York City Rent and Rehabilitation Law, the landlord filed a hardship application (Rent and Rehabilitation Law § 26-408 [b] [5]), seeking to subdivide the third- and fourth-floor apartments, evict the respective tenants from the front portion of their units and combine the vacated front rooms to form a new duplex apartment. Eetitioner Rizzo filed a response challenging his partial eviction from his unit. In order to obtain the necessary certificate authorizing the alterations, the landlord was required to demonstrate the inability of the building to generate a minimal return without the proposed remodeling. In accordance with regulations promulgated by DHCR pursuant to the Sound Housing Act (NY City Rent and Eviction Regulations [9 NYCRR] § 2204.4):

“(g) No application for a certificate of eviction shall be granted under section[ ] 2204.7 ... of this Part, unless the administrator determines, after a hearing, that:

“(1) there is no reasonable possibility that the landlord can make a net annual return of 8V2 percent of the assessed valuation of the subject property without recourse to the eviction sought; and

“(2) neither the landlord nor immediate predecessor in interest has intentionally or willfully managed the property to impair the landlord’s ability to earn such return.”

Following an audit of the building’s income and expenses during the 1996 calendar year, a hearing was conducted before an Administrative Law Judge (ALJ), who concluded, “there is no reasonable possibility that the landlord can make a net annual return of 8.5 percent of the assessed valuation of the subject property without recourse to the eviction sought under Section 2204.7 of the Rent and Eviction Regulations.” The ALJ found that the building had not been willfully managed to impair its operating return. He found assertions that the landlord lacked the financial ability to effectuate the planned alterations and that she merely desired to sell the building to be outside the scope of the hearing. By way of an order dated September 18, 2000, the agency’s Rent Administrator granted the relief sought, rejecting “bare allegations” of the landlord’s bad faith and petitioner’s contention that his apartment lacked the requisite six rooms to qualify for subdivision under the regulations. The order noted that the original certificate of occupancy indicates that the apartment contained six rooms and that a physical inspection of the premises supported the landlord’s assertion that Mr. Rizzo had illegally removed the wall between the living and dining areas. He therefore concluded that the apartment was underoccupied within the meaning of Rent and Eviction Regulations (9 NYCRR) § 2204.7 (a).

Petitioner filed a petition for administrative review (PAR), which was denied by DHCR’s Deputy Commissioner on January 2, 2002. Petitioner commenced this CPLR article 78 proceeding in March 2002, advancing the same arguments rejected by DHCR in the course of its administrative proceedings. In the interim, the tenant of the other unit affected by the creation of the proposed duplex apartment, Elaine Bloedow, died, apparently the day after DHCR issued its final determination of the PAR.

In deciding the article 78 proceeding, Supreme Court did not reach any of the arguments raised by petitioner but sua sponte remanded the matter to the agency for further proceedings. The court reasoned that the vacancy decontrol of Ms. Bloedow’s unit occasioned by her passing “must be considered by the DHCR in determining the owner’s ability to meet the 81/2% return requirements of the Sound Housing Act.” The court’s decision construed Ms. Bloedow’s demise as “new evidence which could not have been offered at the time of the DHCR’s determination” and held that remittitur was warranted because “the validity of the certificate of eviction has not yet been ‘finally determined by the courts’ ” (quoting Matter of McMurray v New York State Div. of Hous. & Community Renewal, 72 NY2d 1022, 1024 [1988] [pendency of judicial proceedings does not impair protected status afforded by tenant’s attainment of 20 years’ occupancy of rent-controlled apartment where certificate of eviction has not yet issued]).

As a general principle, a reviewing court is bound by the record evidence (see Fehlhaber Corp. v State of New York, 65 AD2d 119, 131 [1978], lv denied 48 NY2d 604 [1979]), whether contained in a judicial record or an administrative return. As this Court stated in Matter of 72A Realty Assoc. v New York City Envtl. Control Bd. (275 AD2d 284, 286 [2000]):

“Judicial review of the propriety of an administrative determination is limited to those grounds invoked by the agency in its determination (Matter of Montauk Improvement v Proccacino, 41 NY2d 913; see also, Matter of Scherbyn v Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 NY2d 753, 758-759), and ‘the court may not consider arguments or evidence not contained in the administrative record’ (Brusco v New York State Div. of Hous. & Community Renewal, 170 AD2d 184, 185, appeal dismissed 77 NY2d 939, citing Matter of Rozmae Realty v State Div. of Hous. & Community Renewal, 160 AD2d 343, lv denied 76 NY2d 712; Matter of Fanelli v New York City Conciliation & Appeals Bd., 90 AD2d 756, 757, affd 58 NY2d 952).”

Judicial review of administrative determinations affecting rent-controlled properties is limited by statute. No objection to an administrative determination, “and no evidence in support of any objection thereto, shall be considered by the court, unless such objection shall have been presented to the city rent agency by the petitioner in the proceedings resulting in the determination or unless such evidence shall be contained in the return” (Rent and Rehabilitation Law § 26-411 [a] [2]). The statute provides that either party may make application to the court “for leave to introduce additional evidence which was either offered and not admitted or which could not reasonably have been offered or included in such proceedings before the city rent agency.” Notably, the record before us is devoid of any such application by petitioner. Rather, the issue was raised by the hearing court during oral argument, and DHCR thereafter sent a letter to the court indicating its opposition to remittance on the ground that “the death of Elaine Bloedow occurred after issuance of DHCR’s final PAR order.”

In view of the strict prohibition against judicial consideration of evidence not contained in the administrative record (see Matter of Gilman v New York State Div. of Hous. & Community Renewal, 99 NY2d 144, 150 [2002], revg 290 AD2d 280 [2002]; Matter of Rozmae Realty, 160 AD2d at 343), the explicit statutory procedure must be deemed the exclusive means of bringing further evidence before the agency. In the absence of the necessary application, the court’s sua sponte assessment of extrinsic facts exceeded the scope of permissible judicial review (cf. Matter of McMurray, 72 NY2d at 1024 [statute “expressly authorizes the reviewing court to consider new evidence when requested to do so by the agency”]).

In any event, the court’s reasoning that remand is necessary to permit the agency to reconsider its determination in light of new evidence is flawed. While it is axiomatic that the death of Ms. Bloedow is not a “fact” that could have been presented to the administrative agency at any time prior to the issuance of its final determination, it is equally apparent that her passing, in 2002, has no bearing on DHCR’s evaluation of the profitability of the subject building during the test year of 1996. Thus, it does not constitute newly discovered evidence, that is, factual material which, though extant, was neither known nor reasonably discoverable at the time of the proceedings before the agency. Rather, the court’s order, in effect, directs the agency to render a decision de novo based upon the occurrence of a subsequent, extraneous event. By its language, the order contemplates an assessment of the current rate of return on the building to determine if it will exceed the 8V2% limit of Rent and Rehabilitation Law § 26-408 (b) (5) following the deregulation of Ms. Bloedow’s apartment as the result of her death.

Nothing in the statute suggests that the city rent agency is obliged to redetermine the profit margin of a building every time there is a change in occupancy. Matter of McMurray (72 NY2d 1022, supra), seized upon by the hearing court, does not support this proposition. In that case, involving a proceeding to recover rent-controlled premises for the landlord’s personal use pursuant to Rent and Eviction Regulations (9 NYCRR) § 2204.5, the Court of Appeals merely stated that the pendency of an appeal did not impair the statutory protection against eviction extended to a tenant in one of three protected categories specified in Rent and Rehabilitation Law § 26-408 (b) (1): 62 years of age or older, a tenant of the building for 20 years or more or an occupant afflicted by a documented medical impairment. The Court held (at 1024) that the tenant’s accumulation of 20 years’ occupancy entitled him to statutory protection from eviction, without any toll due to the pendency of judicial proceedings.

The matter at bar is readily distinguishable. This Court has held that the protection extended by the statute to members of the three protected categories is limited to applications seeking eviction for the purpose of recovering rent-controlled apartments for the personal use of the landlord or the landlord’s immediate family (Matter of Ziman v New York State Div. of Hous. & Community Renewal, 153 AD2d 489 [1989], affd 76 NY2d 727 [1990]). In Ziman, we explicitly held (at 490-491) that even where the landlord’s intent to occupy the premises for personal use is apparent, a certificate of eviction is nevertheless available on the independent ground that the premises will not reasonably generate an 81/2% rate of return. Therefore, where, as here, an application for a certificate is predicated on an inadequate return on assessed valuation, the age, health and duration of occupancy of the affected tenant are not material, and Matter of McMurray is inapposite. Finally, there is no intimation, either in McMurray or any other case brought to this Court’s attention, that DHCR is required to perform more than a single assessment of a building’s capacity to generate the specified minimum rate of return.

Although the merits of petitioner’s objections to DHCR’s determination were not reached by Supreme Court, they are contested on appeal. Petitioner contends that the agency’s determination was arbitrary and capricious. DHCR maintains that the methodology employed in assessing the building’s rate of return was proper and that the questions involved—including the number of rooms in petitioner’s apartment, the value of the landlord’s apartment, and the allocation of expenses among the landlord, the landlord’s business and the building—were all matters within the agency’s particular expertise.

As noted, the practical effect of the court’s decision to remit for reconsideration of facts which occurred subsequent to the agency’s final determination is to order a de novo review. This would have to be based on a new test year, since it would be fundamentally unfair to allow Rizzo to present evidence of Bloedow’s death in 2002 without allowing the landlord an opportunity to show the changes in her circumstances in response to the new evidence. Thus, the admission of subsequent events which occurred after the final agency order would defeat finality and could subject an otherwise final order to endless recurring review.

The agency’s determination is supported by substantial evidence. The value assigned to the landlord’s apartment and imputed to her as income took into account the conflicting appraisals of the parties’ expert witnesses, mortgage expenses were properly included in the building’s expenses (Matter of Lopez v New York State Div. of Hous. & Community Renewal, 208 AD2d 842 [1994]) and, in view of the standard 6% management fee prevailing in the industry, the landlord was reasonably credited with a management fee of 5%. The documentary evidence together with the landlord’s unrefuted affidavit convincingly supports the finding that petitioner’s apartment contained at least six rooms prior to his unauthorized removal of a wall. Conversely, the allegations of bad faith asserted against the landlord are unsupported by probative evidence. Even crediting petitioner’s contention that the landlord planned to sell the building, such sale would be subject to the planned alteration upon which the certificate was granted. Nor was the agency required to conduct a separate hearing devoted to this issue.

As to the alleged deprivation of petitioner’s right to use the premises to earn income as a commercial artist, this provision was incorporated into a 1959 lease that expired over 30 years ago. The record contains no evidence that petitioner, who was 74 years old at the time he filed his answer to the landlord’s hardship application, currently earned any income from such endeavors. The agency determined that the proposed alterations to the apartment would leave petitioner with 493 square feet of space, noting that he was granted a substantial rent adjustment, from a previous monthly rental of $673.64 to $301.55. Thus, petitioner has failed to establish the lack of a rational basis for DHCR’s conclusion that the subject apartment was underoccupied.

In the absence of any legislative expression of the time period for which a building’s rate of return is to be assessed, DHCR’s practice of calculating the return on assessed valuation for the year in which a hardship application is filed is within the exercise of its discretion. It is settled that an agency’s interpretation of the operational practices attendant to the statute that it administers is entitled to deference (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459 [1980]; see also Matter of Dworman v New York State Div. of Hous. & Community Renewal, 94 NY2d 359, 371 [1999]). In conclusion, the agency’s factual findings are supported by substantial evidence and are not arbitrary or capricious. Therefore, its determination must be upheld (Matter of Salvati v Eimicke, 72 NY2d 784, 791-792 [1988]).

Accordingly, the judgment (denominated an order) of the Supreme Court, New York County (Marilyn Shafer, J.), entered October 17, 2002, which remanded the matter to respondent to consider new evidence, should be reversed, on the law, without costs, and the petition dismissed.

* The first-floor apartment, which is also an unregulated unit, is not germane to this dispute.