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Apts. v. City of Bayonne

Decided: May 7, 1982.


Bilder, J.s.c.


This is an appeal by a landlord from so much of an order of a rent control board as limits a rent increase to 40% and from a separate rent abatement order. Plaintiff contends the failure to grant a greater rent increase has unconstitutionally denied it a fair return; that the board's actions both in the imposition of a 40% rent increase limitation and the rent abatement are not authorized by the rent control ordinance; that the board's actions are unsupported by the evidence and, thus, arbitrary and capricious; and, finally, that the failure to provide a prompt administrative remedy has rendered the ordinance unconstitutional in its operation as to plaintiff.

Plaintiff is the owner of a 46-unit residential apartment house in Bayonne. On June 12, 1980 plaintiff filed an application for a fair net operating income (FNOI) increase with the Bayonne Rent Leveling Board (board). The filing of this application was apparently the denouement of a jurisdictional controversy which had been going on between plaintiff and the board for over two years. Apparently, the mortgage on plaintiff's property was insured by the U.S. Department of Housing and Urban Development (HUD) and, therefore, the control of rents by Bayonne was subject to preemption.*fn1 In April 1978 HUD preempted the board and granted a rent increase. Thereafter, there followed a good deal of argument as to whether HUD preemption required some sort of board approval in concert with the HUD order and as to the effect of preemption on future jurisdiction of the board. This led to litigation in the Chancery Division which lasted from the summer of 1978 until at least the fall of 1979, when an order was entered for the prompt filing of an application [185 NJSuper Page 216] by plaintiff and expeditious action by the board -- all of this to be completed by the end of January 1980. The application was not filed as ordered.*fn2 Each side lays the blame for the delay on the other. Plaintiff contends it lacked the funds to compile and present required information and that a board requirement that information cover a fiscal period ending one month prior to the application was impossible of achievement. The board simply contends that no application was filed and suggests this is attributable to attempts by plaintiff to obtain additional HUD preemption relief. In any event, as noted, in June 1980 an application for a rent increase was filed which apparently initially was not acted upon because of a failure to comply with a requirement on the FNOI application form that the operating statement be for a 12-month period ending one month before filing. In October 1980 the board agreed to use plaintiff's last fiscal year (December 1, 1978 to November 30, 1979) and, at last, on November 5, 1980 a hearing was held on the rent increase. At that meeting the board required additional information from the landlord and, rather than adjourning the matter, voted to "table" the application, thus leading to an appeal to the city council which resulted in another two months' delay during which the appeal was heard and the matter remanded to the board because no appealable final determination had been made. On January 22, 1981 a further hearing was held by the board, at which time final action was taken on plaintiff's application granting a 40% rent increase over the April 1, 1978 rents. It is the board's contention*fn3 that this

increase, i.e., 40%, is the maximum permitted under the ordinance. Indeed, at the January 22, 1981 hearing the chairman not only noted this limitation but also the fact that even with this increase "the building is still showing a deficit." At the same hearing, the board, seemingly on its own motion, considered an apparent invalid increase in rents made in 1978 and ordered plaintiff to rebate to each tenant one month's rent for failure to comply with the requirements that all rent increases must receive prior approval of the board.

I. The Rent Increase

The Ordinance

The Bayonne rent control ordinance provides two alternative methods whereby a landlord may obtain a rent increase. The first is an increase tied to the consumer price index (CPI) but not to exceed 5.5%. The second is an increase based on an FNOI formula which permits the landlord to achieve a net operating income equal to 40% of his gross annual income.

The applicable provisions read as follows:

23-6.2 Lease Expiration or Annual Rent Increases. At the expiration of a lease or at the termination of the lease term of a periodic tenant, the landlord may apply to the board for an increase in rent based on the "consumer price index" (CPI) formula or a "fair net operating income" formula if the landlord believes he is not receiving a fair return on his investment. The landlord shall specify which formula is to be used.

23-6.2.1 CPI Formula. A landlord may apply for a percentage increase in rent not to exceed 5.5 percent of the monthly rent, or the percentage difference between the consumer price index 60 days prior to the expiration or termination of the lease and the consumer price index at the date the lease was entered into with the tenant, whichever of the two is lower. For a periodic tenant whose lease term shall be less than one year, that tenant shall not suffer or be caused to pay any rent increase in any 12-month period which exceeds the percentage stated herein.

23-6.2.2 Fair Net Operating Income [FNOI] Formula. In the event a landlord elects to apply for a rent increase based on an FNOI formula, along with an affidavit attesting to the detailed information required, the landlord shall supply proof of the operating expenses required by the board in the form of receipts or vouchers. Any operating expense claimed by the landlord but for which proof is not available may be denied by the board. In the event the information submitted by landlord indicates that the landlord is not receiving a net operating income of at least 40 percent of the gross annual income, the board may approve

a rent increase which enables the landlord to achieve a net operating income equivalent to 40 percent of the gross annual income. Such increase shall be equally apportioned among each housing space of the dwelling eligible for a rent increase as set forth herein.

Any operating expenses submitted by the landlord shall be received by the board to determine if such operating expenses are to be classified as capital improvements as defined in Section 23-1. All capital improvement increases shall be allocated in accordance with subsection 23-6.3.

23-1 Definitions.

e. "Fair net operating income" shall mean the gross annual income derived from the dwelling, less the operating expenses incurred by the landlord during each calendar year from the date of the last valid increase approved by the board.

g. "Operating expenses" shall mean annual expenses incurred by the landlord of the dwelling for the following items: heating fuel; utilities; real estate taxes; insurance; payroll; janitorial materials; painting and decorating; repairs and replacements; and miscellaneous administrative and operating expenses (itemized). Operating expenses for purposes of this chapter shall not include depreciation or mortgage interest and amortization. Capital improvement surcharges duly authorized by the board shall either be included in gross annual income and included as an operating expense or be totally disregarded so that they are excluded from gross annual income and excluded from operating expenses. All items of expense and the amount of gross annual income shall be ...

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