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July 21, 2022

No Notice, No Exemption from Rent Control: Appellate Decision Sets Stage For Legal Headaches for Property Owners

Current owners and prospective buyers, developers, and builders of New Jersey residential properties are on high alert following a recent Appellate Court decision that could sweep away their exemptions from local rent control and rent leveling ordinances. 

Earlier this month, the Court ruled that the failure to strictly adhere to the statutory requirements for a rent control or rent leveling exemption claim and the failure to maintain records that the claim was properly sent can result in the loss of the exemption—even if both the owner and municipality acted as if the rent control or rent leveling exemption was in place. 

Under New Jersey’s Newly Constructed Multiple Dwellings Law (the “NJNCMDL”), residential properties built after June 25, 1987 may be exempted from local municipalities’ rent leveling and rent control ordinances for a period lasting up to 30 years from completion of construction. As recently confirmed by a recent Appellate Division ruling, however, this exemption only takes effect if the property’s owner sends proper notice to the construction official in the municipality where the property is located that the exemption is being claimed.

N.J.S.A. 2A:42-84.4 of the NJNCMDL states: 

The owner of any multiple dwelling claiming an exemption from a rent control or rent leveling ordinance pursuant to this act shall file with the municipal construction official, at least 30 days prior to the issuance of a certificate of occupancy for the newly constructed multiple dwelling, a written statement of the owner's claim of exemption from an ordinance under this act, including therein a statement of the date upon which the exemption period so claimed shall commence, such information as may be necessary to effectively locate and identify the multiple dwelling for which the exemption is claimed, and a statement of the number of rental dwelling units in the multiple dwelling for which the exemption is claimed. The owner shall, at least 30 days prior to the date of the termination of the exemption period afforded pursuant to this act, file with the municipal construction official a notice of the date of termination of the exemption period for the affected multiple dwelling.

If the notice preconditions are met, new construction residential properties will be exempt from local rent control or rent leveling ordinances for 30 years following the completion of construction or during the period of amortization of the property’s initial mortgage loan, whichever is less. The NJMCMDL is silent, however, on what occurs if a property qualifies for the exemption, but the owner fails to file this notice of claim within the proscribed time period.

On July 7, 2022, the Appellate Division of the Superior Court of New Jersey, issued its opinion in Willow Ridge Apartments, LLC v. Union City Rent Stabilization Bd. The Court upheld a lower court and local rent leveling board’s decision that a residential apartment building that qualified as a newly constructed multiple dwelling under the NJNCMDL was subject to rent control because the property’s current owner could not prove that the Property’s predecessor owner satisfied this law’s notice requirement. 

In 2015, plaintiff Willow Ridge Apartments (“Willow Ridge”) purchased a 24-unit apartment building located in Union City (the “Property”) that was constructed in 2002. For nearly 17 years Willow Ridge and the Property’s prior owner operated the building as exempt from local rent control ordinances. In 2019, however, the Union City Rent Stabilization Board (the “Board”) notified Willow Ridge that the Property was not exempt from rent control because the Board had no proof that a claim of exemption notice was filed prior to the issuance of the certificate of occupancy as required by N.J.S.A. 2A:42-84.4. 

Willow Ridge objected and argued that the Property was not subject to rent control because the Property was constructed after the NJNCMDL took effect in 1987 and, although the law contained the claim notice requirement, nothing in the NJNCMDL allowed for a property owner to be penalized with loss of an exemption for failure to file a claim of the exemption with a municipal construction official. In addition, Willow Ridge argued that it was impossible for Willow Ridge, the party now being penalized, to have filed the exemption notice within 30 days of the certificate of occupancy because Willow Ridge did not own the Property at that time. Willow Ridge further asserted that imposing rent control obligations on the Property based on the previous owner’s “administrative issue” would be “unduly punitive.” 

As an attempt to establish that the proper notice had been filed, current ownership of Willow Ridge provided the Board with: (1) a letter from a representative of the real estate agent who sold the Property to Willow Ridge stating that he spoke to the Union City Rent Control office and confirmed that the Property was exempt from rent control; (2) a letter from the Property’s previous owner stating that the Property was exempt from rent control as new construction; and (3) testimony that before purchasing the Property, a Building Department representative advised that the Property was exempt from rent control. Willow Ridge also argued that Union City’s inability to locate the notice of the claim of exemption for the Property was potentially due to the City’s own “record keeping issue” and thus not proof that the initial owner of the Property failed to file the requisite notice of claim of exemption with the municipal construction official prior to issuance of the Property’s certificate of occupancy. 

This did not satisfy the Board as it found that the evidence produced was insufficient to sustain Willow Ridge’s claim that the exemption notice had been properly filed. The Board unanimously concluded that because Willow Ridge could not prove that its predecessor complied with N.J.S.A. 2A:42-84.4’s notice provisions, the Property was not exempt from rent control.  The trial court upheld the Board’s ruling and finally on July 7, 2022, the Appellate Division affirmed that decision. The 2022 appellate opinion rejected arguments that Union City bore the burden of demonstrating that notice was filed, imposing an affirmative duty on property owners to be able to prove that the notice requirements in N.J.S.A. 2A:42-84.4 were met when a residential property was built. The appellate decision held that N.J.S.A. 2A:42-84.4's notice requirement is a mandatory condition precedent to receipt of a rent control exemption under N.J.S.A. 2A:42-84.2 and in doing so noted that, in accordance with legislative intent, “[p]roviding the notice required by N.J.S.A. 2A:42-84.4 30 days prior to the issuance of a certificate of occupancy serves a clear purpose — to allow a municipality to inspect the subject property in a timely fashion and ensure that it qualifies for the exemption.” 

In sum, the 2022 Willow Ridge decision confirms and clarifies that: (1) owners of newly constructed residential buildings seeking rent control exemptions must provide written notice to the municipal construction official at least 30 days before a certificate of occupancy for the property is issued; and (2) current owners of properties that have been acting as though they are exempt from local rent control and rent leveling ordinances must be able, if challenged, to prove that the original owners of these properties complied with this notice of claim requirement in order to not lose the property’s exempt status. 

The Willow Ridge decision also highlighted that owners of properties exempt under the NJNCMDL must provide written notice of the exemption to tenants and prospective tenants in the manner detailed in N.J.S.A. 2A:42-84.3. 

The Willow Ridge decision confirms that the notice requirements included in the NJNCMDL are mandatory conditions to receive the exemption. Furthermore, subsequent owners of exempted properties should ensure their predecessors complied with all statutory requirements, as it is now clear that “any lack of diligence” by owners should not be excused by municipalities. 

In light of the Willow Ridge decision, current and future owners of newly constructed residential properties must be meticulous in ensuring that they have complied with NJNCMDL’s notice requirements.  They also must keep appropriate records of the claim to protect themselves from future claims by tenants. Simply having proof that the property is new construction is no longer enough.