A New Lawsuit Says New York's Rent Law Is Forcing Landlords To Keep Apartments Empty

Landlords argue that rent caps on vacant units prevent them from financing the costs of legally mandated renovations.

Landlords are once again suing over New York's rent stabilization law.

On Wednesday, rental property owners filed a lawsuit in U.S District Court for the Southern District of New York against New York City and its Rent Guidelines Board (RGB), alleging that the city's rent caps on vacant units have made it economically impossible for them to put these units back on the market.

By destroying the economic value of their empty units, they say the government's vacancy caps have effectively taken their property without paying just compensation, in violation of the Fourteenth Amendment's Takings Clause.

The plaintiffs include a handful of individual property owners as well as the Small Property Owners of New York, a volunteer trade association representing small landlords.

"The [vacant] units are subjected to an extremely low rent cap. These very same units will often need hundreds of thousands of dollars of renovations so that they may be legally rented," says Robert Johnson, an attorney with the Institute for Justice, a public interest law firm that is litigating the case. "The sum total of all this is there are tens of thousands of units that are sitting vacant."

According to a 2024 survey, some 25,000 rent-stabilized units (around 3 percent of all rent-stabilized units) are vacant and unavailable for rent. That's about double the city's overall vacancy rate. The higher vacancy rate is particularly remarkable, given that rent-stabilized units are priced at below-market rates.

New York's longstanding rent stabilization law regulates annual rent increases on units built before 1974. The RGB enforces the law and sets legal annual rent increases, which are usually around one to two percentage points a year.

For most of its history, the rent stabilization law permitted landlords to raise the rent well above the RGB's annual rent caps when a unit became vacant. They were also able to raise rents to cover the costs of individual apartment improvements, like leveling a floor or installing new appliances.

These features of the law, which are typical of rent control schemes around the country, helped keep New York's rent-stabilized housing stock basically functional and profitable.

But in 2019, the New York Legislature passed a long series of amendments to the rent stabilization law that effectively eliminated these avenues for raising rents.

No longer were landlords allowed to raise rents on vacant units above what the RGB allowed.

The total cost of individual apartment improvements landlords could recover through rent increases was capped at $50,000 by the 2019 law. The timeline over which landlords could recuperate those costs was also lengthened from three years to 15 years.

This has created particular problems for the owners of units that become vacant after a long-term tenancy.

The RGB's rent caps have kept rents at these units well below market rates for years, or even decades. Without any vacancy bonus or real ability to pass on renovation costs, landlords have effectively no ability to bring these units up to code and put them back on the market.

Among the plaintiffs in Wednesday's lawsuit are Pashko and Tony Lulgjuraj, who, through their LLC, own a rent-stabilized building in Manhattan.

On one of their units, the Lulgjurajs are able to charge monthly market-rate rents of $2,600. For an identical unit that became vacant in 2019 after a long-term tenancy, they can only charge $710 per month.

The costs of legally mandated repairs to that unit—which would include replacing the kitchen and bathroom, performing lead abatement, and leveling the floors—exceed $100,000. Yet the 2019 law permits them to reclaim less than half of these costs, let alone raise rents to something approximating market rates.

Without the ability to recover the costs of legally mandated repairs, the unit currently sits empty.

In addition to alleging a taking, the property owners' lawsuit also argues that the wildly different rents allowed on units, dependent solely on how old the unit is and when it became vacant, is arbitrary and irrational.

New York's 2019 rent law has faced several high-profile, ultimately unsuccessful legal challenges since its passage.

These lawsuits have generally challenged rent stabilization as an unconstitutional regulatory taking of property.

That's a very high bar to clear under the U.S. Supreme Court's Penn Central test, which holds that a regulatory taking hasn't occurred so long as the regulated property owner can still earn some economic return and the government's regulation is reasonably related to the common good.

Lawsuits challenging New York's rent stabilization law as a physical taking—by virtue of its limitations on landlords choosing their own tenants or taking their units off the rental market—haven't fared any better.

The U.S. Supreme Court has twice in the past two years declined to hear challenges to the 2019 amendments to New York's rent stabilization law.

Rent control critics were given some cause for optimism in February 2024 after the Supreme Court denied cert to a handful of remaining landlord petitions challenging New York's rent stabilization law.

Justice Clarence Thomas, while agreeing with the court's decision not to take those cases, issued a short statement saying that the "constitutionality of regimes like New York City's is an important and pressing question."

"What the Supreme Court has made clear by denying those other cases is that the court is looking for a more narrow and targeted set of claims," says Johnson. "Because we're focused on vacant apartments, we're not challenging the government's ability to protect tenants from rising rents."

Ilya Somin, a law professor at George Mason University, says that while courts are generally loath to strike down rent control laws under the Supreme Court's Penn Central test, this latest challenge to New York's vacancy caps likely stands a better chance.

He points to the 1992 U.S. Supreme Court decision in Lucas v. South Carolina Coast Council, which says that a "per se" taking has occurred when a regulation destroys all "economically beneficial uses" of a property.

"With these vacant apartments, the allowable rent is so low that it's just not economically viable to refurbish he vacant apartment or use it as a rental property at all," says Somin. "If you can't rent them out at all, then there is no economically valuable use."

Under the Lucas standard, this would be a per se taking, he says.

To overcome that argument, Somin says that the government would likely have to argue that vacant apartments could still be put to some economic use—such as the landlord choosing to live in it themselves.

Striking down New York's vacancy caps would eliminate the most unworkable portion of the current rent stabilization scheme, says Kenny Burgos, CEO of the New York Apartment Association (NYAA), a trade association that is not a party to the lawsuit.

But even if it proved successful, a resolution in the courts is still years away, he notes. Meanwhile, the costs of operating rental housing, from property taxes to insurance premiums to the rising costs of materials, will continue to push buildings into insolvency.

"The vacancy piece is a fundamental piece to try and stabilize this housing, but I wouldn't go so far and say it'd solve every issue that multifamily housing and rent-stabilized housing is facing in New York City," Burgos tells Reason.

Property owners are also facing a trying political environment with the election of Zohran Mamdani as the new mayor.

Mamdani famously ran on a platform of freezing rent increases on rent-stabilized buildings. If implemented, that would eliminate the one avenue landlords have left for raising rents to cover rising operating costs.

The mayor-elect has at times acknowledged the financial plight of landlords, and suggested he'd be open to property tax abatements or other reforms that would help keep rent-stabilized housing solvent.

Burgos says that while Mamdani has shown some interest in listening to rental property owners, his team still does not grasp the brewing crisis in the rent-stabilized housing stock caused by rising costs and the 2019 law.

"The rent-stabilized crisis so severe it has the ability to derail [Mamdani's] administration in the way that the migrant crisis derailed the Eric Adams administration," Brugos says.