A&E Wins Rent Overcharge Case

After nine years in the courts, A&E Real Estate snagged a win for rent-stabilized owners this week when a judge denied the class action status of a rent overcharge case against the firm.

Dozens of current and former tenants of 22 buildings owned by Douglas Eisenberg’s A&E sued the landlord in 2016, claiming it had illegally inflated rents by overstating the cost of renovations.

Together, the renters could have nabbed a monster payout, either in damages or through a settlement. Blackstone, for example, just agreed to pay $15 million to settle a similar suit.

A&E’s tenants now can proceed individually, a more expensive and time-intensive process that figures to interest fewer plaintiffs. Newman Ferrara’s Roger Sachar, who represented the tenants, did not immediately respond to a request for comment,

Zoom out and the decision sets a favorable precedent for other rent-regulated landlords facing or fearing sweeping overcharge suits.

“It sends a message that these things, that certifying the class, is not automatic,” James Bernard, A&E’s attorney and a partner at Hogan Lovells, said.

Back before the 2019 rent law curtailed rent hikes after renovations and nixed vacancy decontrol — the ability to turn regulated units free market if rents hit a certain level — some landlords exploited the routes to higher revenues.

The typical playbook: Overstate the cost of unit fixes, known as individualized apartment improvements or IAIs, to achieve illegal outsized rent hikes.

Oftentimes the complexity of the rent laws would work to landlords advantage; tenants didn’t know the increases were illegal so they wouldn’t challenge them. In other cases, tenants didn’t have the funds, free time or patience to sue.

Then, in 2016, watchdog group Housing Rights Initiative came on the scene, launching investigations into illegal IAIs and helping tenants organize class action complaints. The suit against A&E stemmed from an HRI investigation.

But overwhelmingly, A&E was not the landlord when the overcharges allegedly took place. All but three of the 55 claims applied to a period that predated A&E’s ownership. Still, the 2016 case sought to hold A&E responsible.

The Blackstone settlement, which resulted in payouts as high as $100,000, also applied to overcharges under a previous owner.

The growing threat that tenants might sue over IAIs current landlords had no knowledge of or paperwork for has played a part in killing interest in rent-regulated deals or investment. The rent law’s 2019 devaluation of the asset class is also a big piece of the puzzle.

The decision, then, may reinvigorate investors’ interest in rent-stabilized buildings and owners’ willingness to renovate units, Bernard said.

“This is about lawyers bringing baseless suits that have a real impact on rent-stabilized buildings in terms of the capital that’s invested in them, who’s buying them, and having the resources to take care of these buildings,” Eisenberg said.