MBR Update: Four Lawsuits on Formula

On October 13, attorneys representing landlords, tenants and the city presented their views on how the state should set increases for rent-controlled tenants before a five-judge panel of the Appellate Division, 3rd department in Albany.

The argument was just the latest event in a series of lawsuits over the formula used to determine the Maximum Base Rent factor. While tenants await the decision in this case—an appeal of an earlier decision by State Supreme Court Justice Efrain Torraca, which dismissed the landlords’ suit against the state Division of Housing and Community Renewal—three other lawsuits over the issue are percolating through courts in Manhattan and Queens. If the judges decide to affirm the lower court’s decision, then the issue over which formula to use will go back to the Supreme Courts in Manhattan and Queens.

The fight began in early 1996 when the landlords sued the state for setting the MBR factor at 3%, claiming that it was too low and that the DHCR had not used the formula mandated by the MBR law. On appeal, the landlords won, and the DHCR, in 1997, reset the 1996/1997 MBR at 32.4%. This action was followed by the New York City Council passing Local Law 73 in September 1997, which mandated the use of the formula that the DHCR had used to get the 3% factor.

The landlords immediately sued the DHCR, again in Albany as they had in 1996, to prevent the DHCR from following the new city law. Judge Torraca dismissed that suit, and the landlords appealed his decision. That appeal was the setting for the argument on October 13.

The MBR formula, first established by the City Council in the early ’70s, is used to set a factor which is used to raise the ceiling rents for all qualifying rent-controlled apartments in New York City (despite the misleading name, the formula does not set a base rent but a ceiling rent). The rent actually paid by tenants is called the Maximum Collectible Rent, or MCR. Landlords can raise the MCR by 7.5% every year, but it cannot go over the MBR.

Hence the huge fight over the MBR formula. Landlords get large increases as long as the MBR increases are high—7.5% every year, which is much higher than the increases awarded by the Rent Guidelines Board for rent-stabilized tenants. With low MBR increases, only those tenants who have MCRs far below the MBR get increases. According to the DHCR, almost half of rent-controlled tenants have MCRs close or at their MBR.

After the passage of Local Law 73 in 1997, the City of New York sued the DHCR in New York County Supreme Court, demanding that the agency follow the new city law. This case has not yet been decided. This year, the when the DHCR promulgated the MBR factor for 1998/1999 at 3.8%, the landlords filed suit in Queens County Supreme Court, claiming that the city law of 1997 violated the state’s Urstadt Law (a 1971 state law which prohibits the city from passing rent laws more restrictive than the state’s laws), an argument it had used in its suits in Albany. That case awaits a decision as well. If the landlords win in the end on the overriding issue, rent-controlled tenants whose MCR was close to or at the MBR in the beginning of 1996 (and so have not had to pay increases) will have very large retroactive increases. William Gribben (of Himmelstein, Gribben, McConnel, Donoghue), who is representing Met Council and rent-controlled tenants, believes that tenants will win because the landlords’ main argument, that Local Law 73 violates the Urstadt Law, cannot be applied to the Maximum Base Rent formula.

He and other legal observers argue that changes in the tax-assessment procedures, completely unrelated to the state or city rent laws, allowed for the use of a more accurate MBR formula. The formula used by the DHCR that set off the landlords’ suit in 1996 is not more restrictive or less restrictive than the earlier formula, it simply reflects the original laws’ purpose of giving an owner an 8.5% return on assessed value.

Gribben and others were not able to tell Tenant when a decision might be reached in the Albany case.