In this proceeding challenging the determination by respondent Division of Housing and Community Renewal (DHCR) of petitioner tenants' rent overcharge claim, petitioners and DHCR both seek a remand to the state agency for a redetermination of petitioners' claim in light of Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358 (2010). DHCR's order dated January 13, 2010, denied petitioner tenants' petition for administrative review and affirmed a finding that petitioners were not overcharged rent. [*2]

Petitioners urge, particularly given this proceeding's protracted history, that under Grimm sufficient indicia of fraud by respondent landlord's predecessor are already in the record for DHCR, on remand, simply to apply the default formula to calculate petitioners' base rent and on that basis calculate the overcharge. Id. at 366. The default formula comprises "the lowest rent charged for a rent-stabilized apartment with the same number of rooms in the same building" as petitioners' apartment on the base date, four years before petitioners filed their claim. Thornton v. Baron, 5 NY3d 175, 180 n.1 (2005). DHCR maintains, and petitioners alternatively propose, that it first must assess whether the record supports the requisite factors set forth in Grimm to trigger its duty then to ascertain whether the "allegations of fraud warrant the use of the default formula when calculating any rent overcharge." Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d at 367.

Respondent landlord opposes a remand or any disturbance of DHCR's prior determination, on the ground that that order, DHCR's second order denying the tenants' petition for administrative review, already took account of Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 68 AD3d 29 (1st Dep't 2009), which the Court of Appeals affirmed, holding that:

the Appellate Division correctly applied Thornton [v. Baron, 5 NY3d 175 (2005),] to this rent overcharge proceeding and properly concluded that DHCR has an obligation to ascertain whether petitioner's allegations of fraud warrant the use of the default formula when calculating any rent overcharge

. . . .

Even Grimm, however, did not go so far as to conclude in that proceeding "that fraud exists, or that the default formula should be used." Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d at 366. Therefore, and for the reasons more fully explained below, the court adopts a middle ground between petitioner's and DHCR's positions. The court finds that the current record supports the requisite factors set forth in Grimm to trigger DHCR's duty to ascertain whether those allegations of fraud in the record, in turn, warrant the use of the default formula in calculating any rent overcharge and, if so, to apply the default formula. Id. at 366. Consequently, the court remands this proceeding to DHCR to carry out that duty.

II.THE EVIDENCE IN THE RECORD ESTABLISHES A COLORABLE CLAIM OF THE LANDLORD'S FRAUD SUFFICIENT FOR DHCR TO INVESTIGATE THE LEGALITY OF THE BASE DATE RENT.

Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d at 366-67, sets out three categories of factors that warrant DHCR's investigation regarding the legality of the base date rent. (1) The tenant alleges circumstances that indicate the landlord's violation of the Rent Stabilization Law (RSL) and Rent Stabilization Code (RSC) in addition to charging an illegal rent. (2) The evidence indicates a fraudulent scheme to remove the rental unit from rent regulation. (3) The rent registration history is inconsistent with the lease history.

A.Potential RSL or RSC Violations

In the original lease for petitioners' apartment, the tenants agreed not to use it as their primary residence. For an apartment to retain rent stabilized status, the tenants must use it as [*3]their primary residence. N.Y.C. Admin. Code § 26-504(a)(1)(f). Agreements not to use a rent stabilized apartment as the tenants' primary residence, even if the tenants agree to the deregulation, and even if it benefits them, are illegal. 9 N.Y.C.R.R. § 2525.3(b); Riverside Syndicate Inc. v. Munroe, 10 NY3d 18, 23 (2008). Despite such an agreement here, the landlord has listed the apartment as rent stabilized since 1994.

The lease also increases the rent if the tenants exercise their right to a review of the rent level. Assuming the leased unit is rent stabilized, this provision is illegal on its face, since 9 N.Y.C.R.R. § 2520.13 prohibits and voids rent stabilized tenants' agreements to waive any benefit of the Rent Stabilization Law or Code. Riverside Syndicate Inc. v. Munroe, 10 NY3d at 22.

B.Removal from Rent Stabilization

As just set forth above, the tenants' failure to use an apartment as their primary residence exempts the apartment from rent stabilization. N.Y.C. Admin. Code § 26-504(a)(1)(f). The Rent Stabilization Law also allows a landlord to remove an apartment from rent stabilization and charge market rent when the rent stabilized rent, after increases allowed under rent stabilization, exceeds $2,000.00 per month. N.Y.C. Admin. Code §§ 26-504.3, 26-511(c)(5a). Once a landlord removes an apartment from rent regulation and charges market rent, the landlord no longer: must renew the tenants' leases or renew them for any prescribed period, is limited to the original lease terms or limited in negotiable rent increases, must provide the same services, or is subject to prohibitions against harassment of tenants.

Here the lease provides that the rent upon vacancy, as of the commencement of petitioners' tenancy, is $1,947.47 per month. While this rent is below the threshold for removing the apartment from rent regulation, it is so close to that level that the next vacancy inevitably will allow an increase triggering deregulation. N.Y.C. Admin. Code § 26-511(c)(5a). This inevitability suggests a scheme to achieve deregulation through the next unknowing tenant, by fixing the current rent artificially close to $2,000.00 per month, but just below that level so as to keep the current tenants content that their rent still is stabilized and not prompt them to file a complaint that might expose the scheme. Thornton v. Baron, 5 NY3d at 181.

C.The Rent Registration History Compared to the Lease History

As also set forth above, the landlord has registered petitioners' apartment as rent stabilized since 1994. Yet the original lease for the apartment, in agreeing that the tenants will not to use it as their primary residence and thus exempting the apartment from rent stabilization, provides otherwise.

If the rent history is limited to four years before petitioners' complaint to DHCR, that history would show simply a predecessor tenant who found no reason to challenge the stabilized rent level that would lead to deregulation when that tenant vacated and the landlord applied the allowable increase upon vacancy. That history would not show the original lease's illegal provisions that the tenants would not use the apartment as their primary residence and that the rent would increase if they exercised their right to a review of the rent level.

D.Conclusion

The record here thus indicates all three categories of factors identified by Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d at 366-67, that obligate DHCR to investigate the legality of the base date rent: (1) the landlord's possible violations of the Rent Stabilization Law and Code besides charging an illegal rent, (2) a fraudulent deregulation scheme, and (3) an inconsistency between DHCR's rent registration history and the lease history.

III.DHCR"S PRIOR INVESTIGATION VERSUS ITS PROSPECTIVE INVESTIGATION REGARDING THE LEGALITY OF THE BASE DATE RENT

DHCR previously either (1) concluded that it was not obligated to ascertain or (2) simply [*4]failed to ascertain whether petitioners' allegations of fraud ultimately warranted use of the default formula. Any such conclusion was incorrect, whether it flowed from DHCR's incorrect application of Thornton v. Baron, 5 NY3d 175, to this rent overcharge proceeding or otherwise. Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d at 366. If DHCR simply failed to undertake any review to ascertain whether petitioners' fraud allegations warranted the default formula, such an omission was equally incorrect. Id.

DHCR itself admits that Grimm v. State of NY Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358, changed DHCR's position. Its prior position, pointed out in Grimm and until now applied here, limited use of the default formula to proceedings where the rental history was incomplete or where the prime tenancy was illusory. Id. at 366. See Peckham v. Calogero, 12 NY3d 424, 431-32 (2009).

DHCR now recognizes its obligation in this proceeding, at minimum to review it further based on the Grimm factors and make further factual findings. Porter v. New York State Div. of Hous. & Community Renewal, 51 AD3d 417, 418 (1st Dep't 2008); Sherwood 34 Assoc. v. New York State Div. of Hous. & Community Renewal, 309 AD2d 529, 532 (1st Dep't 2003); Hakim v. Division of Hous. & Community Renewal, 273 AD2d 3, 4 (1st Dep't 2000); 47 Clinton St. Co. v. New York State Div. of Hous. & Community Renewal, 161 AD2d 402, 403 (1st Dep't 1990). Because indications of those factors already manifest themselves, however, this proceeding already meets Grimm's standard for investigation. DHCR need not undertake a review and fact finding simply to determine whether Grimm warrants further investigation. DHCR shall proceed directly to that full investigation, to make the ultimate findings whether the indicated factors are in fact true so as to dictate use of the default formula. Porter v. New York State Div. of Hous. & Community Renewal, 51 AD3d at 418; Sherwood 34 Assoc. v. New York State Div. of Hous. & Community Renewal, 309 AD2d at 532; Hakim v. Division of Hous. & Community Renewal, 273 AD2d at 3-4; 47 Clinton St. Co. v. New York State Div. of Hous. & Community Renewal, 161 AD2d at 403.

At that point respondent landlord may present any further evidence controverting the evidence of fraud or showing that it is too unreliable, insubstantial, or weak to warrant the default formula; or that the base rent charged is a sufficiently reliable and a legal basis on which to calculate petitioners' base rent; or any other relevant evidence or argument. Grimm v. State of NY Div. of Hous. & Community Renewal Off, of Rent Admin., 15 NY3d at 367. DHCR shall provide petitioners as well as respondent landlord the opportunity to present further evidence on whether the landlord violated the Rent Stabilization Law or Code other than charging an illegal rent or engaged in a fraudulent deregulation scheme and whether the rent registration and lease histories are inconsistent. As respondent landlord maintains here, DHCR still may find no intent by the landlord to circumvent the Rent Stabilization Law or Code, no actual fraud, and consistency between the registered rent and the rent collected. 425 Third Ave. Realty Co. v. Greenfield, 78 AD3d 542, 543-44 (1st Dep't 2010); Gomez v. New York State Div. of Hous. & Community Renewal, 79 AD3d 878, 879 (2d Dep't 2010).

IV.DISPOSITION

The court grants the petition and respondent DHCR's motion to remit the proceeding to DHCR to the extent of vacating DHCR's order dated January 13, 2010, and remanding petitioners' overcharge claim to DHCR for further proceedings according to the framework outlined above. C.P.L.R. § 7806. DHCR's order dated January 13, 2010, fails to ascertain and to recognize its obligation to ascertain whether evidence of fraud, indicated by violations of the Rent Stabilization Law and Code in addition to an illegal rent, by a deregulation scheme, and by inconsistent rent registration and lease histories, warrant the default formula to calculate petitioners' base rent and overcharge. C.P.L.R. § 7803(3) and (4). The court otherwise denies the petition.

This decision constitutes the court's order and judgment on the petition. The court will mail copies to the parties' attorneys. [*5]

DATED: November 15, 2011

_____________________________

LUCY BILLINGS, J.S.C.