The question in this case is whether the New York City Loft Board rationally refused to allow tenants to withdraw their application for loft conversion of their apartments in favor of an alternate procedure that would make their apartments subject to rent stabilization.
Typically, the owner of a property in New York City cannot rent the property for residential use without a certificate of occupancy allowing residential uses. An owner of a commercial or manufacturing property may, however, apply to convert that non-residential space to a residential space under provisions of the Multiple Dwelling Law commonly referred to as the Loft Law. To convert a property pursuant to the Loft Law, a property owner must bring the building into compliance with residential building codes, and is granted temporary approval to charge residential rents while it does so. The Loft Law is administered by the New York City Loft Board.
In this case, residents of a non-residential building filed a petition with the Loft Board seeking to force the building’s owner, Callen, to convert the building for residential use. The parties settled the conversion proceeding in an agreement by which Callen agreed to register the apartments as rent-stabilized, obtain a new certificate of occupancy for residential use, and freeze rents until he got the residential certificate of occupancy. An ALJ accepted this arrangement, but the Loft Board rejected it and refused to allow the residents to withdraw their conversion proceeding. The Loft Board reasoned that the agreement was against public policy, since it would have required the residents to live in the building without a residential-use certificate of occupancy. After Callen registered the building as rent-stabilized, the parties asked the Loft Board to reconsider its decision, but it declined to do so, and the parties filed separate article 78 proceedings.
Supreme Court granted the article 78 petitions in full, but the First Department modified Supreme Court’s decision. The appellate court agreed that the Loft Board should have permitted the residents to withdraw their conversion proceeding. The court found that the parties’ settlement agreement had identified another valid means to legalize the building, which the parties should have been allowed to pursue. That being said, the First Department found that the Loft Board had rationally rejected the parties’ settlement agreement. Although there may be many potential avenues to legalization, the Loft Board was authorized to oversee only one of those potential avenues–i.e., through Loft Law conversion. And since the parties’ settlement agreement anticipated a legalization process that was outside the Loft Board’s “authority to supervise and approve,” the Loft Board could rationally refuse to endorse that agreement “as a vehicle for conversion to rent stabilization.”
The Court of Appeals granted the Loft Board leave to appeal.