[NYtenants-online] Sticker Shock: RS Tenants could face huge rent increases

[Tenant]

NYtenants Online/TenantNet                                2/11/04
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IN THIS ISSUE ...

1. Sticker Shock
2. DHCR Fact Sheet #40: Preferential Rents (Rent Law 2003)
3. DHCR Processing Directive: Issues Raised By 2003 Rent Law

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STICKER SHOCK
by Robert Katz, Esq.

Rent Stabilized tenants with "preferential rents" may soon be in for a
shocking surprise at the end of their current lease term. With
modifications enacted when the rent laws were renewed in June 2003, some
rent stabilized tenants -- even if years into their tenancies -- can now be
required to pay a higher "legal rent" if their landlord voids an existing
preferential rent at the end of the current lease.

WHAT ARE PREFERENTIAL RENTS?

Unknown or forgotten, many rent stabilized tenants have been under a
Preferential Rent system for many years.

Some landlords are occasionally willing to charge a tenant less than the
permissible "legal regulated rent" established by rent stabilization. The
reasons for this is varied, but in many cases the legal regulated rent was
actually higher than prevailing market rents.

In such cases a landlord would often continue to register the rent at the
higher legal regulated rent, but charge a tenant the lower rent.

Before the 2003 law was passed, the Rent Stabilization Code (RSC)
recognized tenants' rights to a permanent preferential rent. Periodic rent
increases, from the Rent Guidelines Board (RGB) renewal increases or orders
from the Division of Housing and Community Renewal (DHCR), were based on
the preferential rent, not the higher "legal rent.".

Known as the "Collingwood Policy," a tenant paying less than the legal rent
would continue to pay the lower amount, plus applicable guideline increase
based on the lower rent, for the life of the tenancy.

A 1992 DHCR Draft Policy Statement remarked:

"Where the actual rent charged and collected by an owner is less than the
maximum legal regulated rent, the owner is generally deemed to have
permanently waived the collection of the difference, and the legal
regulated rent is thereafter limited to the rent actually charged and paid.
Furthermore, subsequent rent increases are based on the actual rent charged
and paid rather than the higher rent which could have been charged, and an
owner may not add back the foregoing increase during a subsequent lease
renewal term. The same result occurs whether the rent actually charged and
collected was pursuant to the lease or by modification between the parties.
This waiver rule is known as the Collingwood rule based upon the name of
the first court case that approved its use by the rent regulatory agency
(Collingwood Enterprises v. Gribetz)."

And several DHCR decisions have inserted boilerplate language:

"In Matter of Collingwood Enterprise v. Gribetz, N.Y.L.J., April 24, 1975,
p. 17, col. 6 (Sup. Ct. N.Y. Co., Fine, J), it was found that "nothing ...
prohibits an owner from charging less  than the maximum rent; and ... where
an owner failed to charge an allowable guideline increase  prior to the
expiration of the guideline period, the lawful rent upon which the rent
guideline is  computed may not be increased to reflect such previous
guideline allowance." An owner is required to compute the new rent above
the rent actually charged and paid on the applicable base rent date."

However, when the tenant departed, the owner could at that time jack the
rent back up to what the Legal Rent would have been (including RGB
increases) if it had been charged all along. In  a sense, there existed two
parallel rent histories: the Legal Rent and the Collectible Rent.

The 1987 version of the Rent Stabilization Code provided for the jump back
to the Legal Rent on vacancy in section 2521.2(b):

"Where the legal regulated rent is established and a rent lower than the
legal regulated rent is charged and paid by the tenant, upon vacancy of
such tenant, the legal regulated rent previously established plus the most
recent applicable guidelines increases, plus such other rent increases as
are authorized pursuant to section 2522.4 of this Title, may be charged a
new tenant."

The 2000 version of the RSC stated essentially the same thing with a few
wrinkles:

"§2521.2  Preferential Rents -- Where the legal regulated rent is
established and documented in a manner prescribed by the DHCR, and a rent
lower than such rent is charged and paid by the tenant, such lower rent
shall be a preferential rent, which shall be subject to all adjustments
provided by law and this Code. Upon vacancy of the tenant who pays a
preferential rent, the legal regulated rent shall be the legal regulated
rent previously established by record within four years prior thereto, plus
all intervening guidelines increases, plus such other rent increases as are
authorized by law and this Code."


So over the years, many rent stabilized tenants have been living under the
preferential rent system. Some might not even be aware of this. Reports
suggest that up to 10% of all rent stabilized tenants, perhaps 100,000,
might be paying a preferential rent. They could easily be under the
illusion that this is the legal rent upon which all guideline increases
have been based over the years.

When the rent laws were renewed in June 2003, one of several damaging
amendments wiped away this policy. While owners may still charge less than
the legal rent, they are no longer required to wait until the end of the
tenancy, should they choose, before they jack the rent up to the Legal Rent.

The only requirement is that the owner must have memorialized the two rents
in the tenants' leases.

Even if the tenant had a prior agreement, or even if there was a court
stipulation providing for the continuation of the preferential rent for the
life of the tenancy, owners are now free to void and abandon the lower
preferential rent on the grounds that the new statutory provision controls
the issue.

In a July 30, 2003 Opinion Letter, DHCR stated:

"Where a current lease, pursuant to which a preferential rent is charged,
recites both the higher and lower rents, the owner is at liberty to end the
preferential rent upon the expiration of such lease."

Many tenants will be subject to huge rent increases, or be forced to move.
As far as can be determined, there is no notice requirement of the
landlord's abandoning the lower rent other than that required in offering
lease renewals.

One tenant attorney offered the following example as to what a rent
stabilized tenant under the new law could confront:

"If you moved into your apartment in 1990 and the regulated rent registered
by your landlord was $1,200 but he only charged a "preferential rent" of
$200 (which must have been recorded in your lease), Since then, with
ensuing RGB increases and in some cases MCI increases the preferential rent
on the last renewal lease might have grown to be $600.

"But at the same time, the "legal regulated rent" (which must have been
referenced in all subsequent renewal leases) had also gone up -- maybe to
$1,700 -- by the same RGB and MCI increases. Under the new law, if the
landlord voids the preferential rent, the new rent could be that $1,700
plus a guideline increase based on that amount.

"Upon the expiration of the present one or two-year lease, the landlord is
now able to void the lease term allowing for a preferential rent and start
to demand and collect a higher "legal regulated rent." And with higher RGB
increases and MCI increases, many tenants are discovering sticker shock
without even shopping."

Another tenant attorney observed:

"The preferential rent amendment is especially insidious, a real
rope-a-dope tactic, because those whose initial registrations had an
"information" sheet attached to the RR2A [DHCR form] were officially
deceived. The "information" sheet states that "If you are paying the Legal
Regulated Rent (item 8) and believe that the amount is not correct, you
should immediately discuss this information with the building owner. If it
cannot be resolved with the owner, you may file an overcharge complaint
with the DHCR."  The "information" sheet contains not a word of an
opportunity or right to challenge the Legal Regulated Rent if you were
paying less, the amount entered on line 9a of the RR2A form.

"Prior to the June 2003 extender a tenant would not be moved to challenge
the Legal Regulated Rent as the rule was that the preferential rent would
be the basis for all future increases and it would have an impact only upon
a vacancy tenancy. If any tenant were to consider challenging an outsized
Legal Rent, doubtless he or she would be dissuaded from bothering at all
because of DHCR's instructions in its mis-"information" sheet."

Of course, those who failed to challenge a Legal rent may now be precluded
from doing so if the four-year statute of limitations has passed.

The tenant attorney advised:

"But if the statute of limitations still permits, tenants whose initial
registrations or
subsequent registrations wrongfully created an inflated Legal Rent should
challenge the Legal Rent forthwith, even if they continue to enjoy a
preferential rent."

DHCR has now issued Fact Sheet #40 and a Processing Directive dealing with
the new preferential rent system. See both below.

For some historical perspective as to why this changed occurred, see:
http://www.tenant.net/pipermail/nytenants-online/2001-May/000071.html
LANDLORDS MAY CUT RENT TEMPORARILY
New York Law Journal, May 23, 2001


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PREFERENTIAL RENTS AND RENT CONCESSIONS FOR RENT STABILIZED APARTMENTS
in New York City and “ETPA Localities” in Westchester,
Nassau and Rockland Counties;
Rent Law of 2003

New York State Division of Housing and Community Renewal
Office of Rent Administration
Fact Sheet #40

On June 20, 2003, Governor Pataki signed a new Rent Law passed by the New
York State Legislature, Chapter 82 of the Laws of 2003. This law applies to
all proceedings pending before DHCR on and after June 15, 2003. Chapter 82
amended both the New York City Rent Stabilization Law (RSL), which
regulates all rent stabilized apartments in New York City, as well as the
Emergency Tenant Protection Act (ETPA), which regulates rent stabilized
apartments in localities in Westchester, Nassau and Rockland Counties that
have adopted the ETPA.

I. Preferential Rents

A preferential rent is a rent which an owner agrees to charge that is lower
than the legal regulated rent that the owner could otherwise lawfully
collect. Chapter 82 provides that where the amount of rent charged to and
paid by the tenant:

"Is less than the legal regulated rent for the housing accommodation, the
amount of rent for such housing accommodation which may be charged upon
renewal or vacancy thereof may, at the option of the owner, be based upon
such previously established legal regulated rent, as adjusted by the most
recent applicable guidelines increases and other increases authorized by
law. Where, subsequent to vacancy, such legal regulated rent, as adjusted
by the most recent applicable guidelines increases and any other increases
authorized by law is two thousand dollars or more per month, such housing
accommodation shall be excluded from the provisions of this act [the RSL or
ETPA]."

Prior to June 15, 2003, provisions in both the New York City Rent
Stabilization Code and the Emergency Tenant Protection Regulations
generally permitted an owner to charge the higher legal regulated rent only
if the tenant who was paying a preferential rent permanently vacated the
apartment. Those provisions were repealed by Chapter 82. Owners now have
the option of charging the higher legal regulated rent upon renewal of the
lease of a tenant who was paying a preferential rent as well as when that
tenant permanently vacates the apartment. There is no requirement that the
expiring lease contain a provision allowing the owner to terminate the
preferential rent upon the occurrence of any event. In fact, if there is
such a provision, it is no longer binding.

However, Chapter 82 does impose a condition on an owner’s right to
terminate a preferential rent. Both the legal regulated rent and the
preferential rent must have been established, that is, specifically
provided for in the lease agreement/lease renewals, subject to DHCR’s
review (i.e. within four years from time a complaint is filed with DHCR).
Registration with DHCR of the preferential rent by itself will not result
in establishing the higher legal regulated rent for future usage.

Chapter 82 also requires deregulation of the apartment where at the time of
its vacancy or subsequently, the legal regulated rent for the vacant
apartment reached at least $2,000 per month. This means that if the
previously established monthly legal regulated rent was $2,000 or more
despite the charging of a monthly preferential rent of less than $2,000, or
if the owner would be entitled to charge at least that amount based on
lawful increases after vacancy, the apartment will no longer be rent
stabilized. However, the next tenant taking occupancy of the newly
deregulated apartment may challenge the $2,000 rent through a DHCR
overcharge proceeding.

There are two other matters that should be noted where there is an
established monthly legal regulated rent of at least $2,000 and the tenant
pays a lower preferential rent:

1. Owners may apply to DHCR for an order of decontrol based on high
income/high rent (if the established legal regulated rent is $2,000 or more
at the time that the Income Certification form is served on the tenant by
the owner); and

2. Owners are advised to file exit registrations when the apartment has
become vacant. However, the failure to file and serve such registration
will not invalidate deregulation where the legal regulated rent reaches $2,000.

II. Concessions

There are two types of rent concessions. One is a concession for specific
months, as for example, where the lease provides that the tenant will not
have to pay rent for one or more specified months during the lease term.
This type of concession is not considered a preference conditioned on an
occurrence, and will still be given effect for the term of that concession
despite Chapter 82.

The other type is a prorated concession, where the dollar value of the rent
free month(s) is prorated over the entire term of the lease and not tied to
a specific month or months. A prorated concession is really the same as a
preferential rent and will be treated in the same manner.

For more information or assistance, call the DHCR Rent InfoLine
(718-739-6400) or visit your Borough or County Rent Office.

Issued 10/03

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PROCESSING DIRECTIVE IN RESPONSE TO ISSUES RAISED BY NEW RENT LAW

FROM: Paul Roldan, DHCR Deputy Commissioner
DATE: July 22, 2003
SUBJECT: Processing Directive In Response To Issues Raised By New Rent Law

This Processing Directive is intended to implement the new state law that
enacted several changes to certain procedures under rent control and rent
stabilization, and which was signed on June 20, 2003 (Chapter 82, Laws of
2003). The new procedures outlined below should be implemented immediately
and apply to all pending proceedings. Where they vary from prior Policy
Statements, Operational Bulletins or Advisory Opinions, this Processing
Directive controls. Forms and notices which cite prior policy should be
revised to ensure that they are fully consistent with these new procedures.

Preferential Rents:

1. RSC Section 2521.2, and the corresponding TPR Section 2501.2, both of
which permit the restoration of the legal regulated rent only upon the
preferred tenant's vacancy, have been repealed. The exception to these
provisions, originally established by opinion letter, in response to the
decision in MISSIONARY SISTERS, requiring owners to include lease riders
reciting the conditions of preferential rents, their possible termination
prior to vacancy, and requiring registration has been substantially
modified by the new law. To establish the full legal regulated rent despite
the preference, the rents must be recited in the lease or renewal lease
pursuant to which the preference is charged. However, as owners now have
the statutory option of charging the higher rent upon renewal or vacancy,
there no longer need be any lease rider conditioning the continuation of
the lower rent upon any basis or event. The new law is an obvious exception
to the same terms and conditions rule. Therefore, renewal of current leases
containing such provisions would no longer be bound by the condition. WHERE
A CURRENT LEASE PROVIDES FOR A PREFERENTIAL RENT, AN OWNER IS NOW AT
LIBERTY TO END THAT PREFERENCE AFTER LEASE EXPIRATION.

High Income/High Rent Deregulation:

2. For the purposes of high income/high rent luxury decontrol, an owner may
proceed to seek a decontrol order despite payment by the tenant of a
preferential rent lower than $2000, if the established legal regulated rent
is $2000 or more at the time that the Income Certification Form is served.

Vacancy Deregulation:

3. The next tenant taking occupancy of a newly deregulated apartment
decontrolled upon vacancy because of an established legal regulated rent of
$2000, despite the charging of a lower preferential rent to the last
tenant, may challenge such legal regulated rent through an overcharge
proceeding subject to the four-year statute of limitations.

4. Where there is a lease clause that provides for the end of the
preference during the term of a lease upon the occurrence of some
condition, that clause is no longer operative. The preference may only end
upon renewal or vacancy. However, a rent concession for a specified term
set forth in the lease (e.g. three months of free rent), is not considered
a preference, conditioned on an occurrence, and will still be given effect
for the term of that concession.

Registration:

5. The new law requires that the legal regulated rent and preferential rent
be established in the lease agreement. Registration of the preferential
rent without appropriate inclusion in the lease and/or renewals will not
result in establishing the higher legal regulated rent for future usage.

6. Owners should be advised to file an exit registration when the legal
regulated rent reaches $2,000. However, the failure to file and serve an
exit registration does not nullify deregulation where the legal regulated
rent is in excess of $2000.