DHCR Adopts Significant Amendments to Rent Regulations

Here are the highlights that owners of rent-regulated apartments need to be aware of.

 

On Oct. 23, the DHCR announced that it filed the necessary “Notices of Adoption” required by law to enact rent regulatory amendments to the Rent Stabilization Code, the Tenant Protection Regulations, and the New York State and City Rent Control Regulations. Originally proposed last August, the amendments now have been published in the NY State Register and became effective on Nov. 8.

When the DHCR originally proposed the amendments, its stated purpose was to implement changes required by the 2019 Housing Stability and Tenant Protection Act (HSTPA). However, many of the amended provisions spill into areas not addressed by the HSTPA and attempt to address what the DHCR deems as abuses that inhibit the preservation of rent-regulated units. We’ll highlight the notable provisions that owners and managers of rent-regulated apartments need to be aware of.

Substantial Rehab Criteria

The DHCR has made the ability to deregulate a rent-regulated apartment through a process called substantial rehabilitation or “gut rehabs” more difficult. The substantial rehabilitation exemption law says that buildings “substantially rehabilitated” as “family units” on or after Jan. 1, 1974, are exempt from rent stabilization.

Substantial rehabilitation remains the last opportunity for an owner to deregulate a building. To get DHCR approval for this process, the building must be in poor condition and a certain percentage of the building systems must be replaced. With the amendments, the DHCR is now authorized to issue a new operational bulletin, which hasn’t been updated since 1995, modifying the qualification criteria.

Deterioration presumption. As a result of the changes, the longstanding 80 percent vacancy presumption of substandard condition is eliminated. Previously, if the rehab was started in a building that was at least 80 percent vacant of residential tenants, the DHCR had presumed that the building was substandard or seriously deteriorated at that time. With the amendment, this is no longer the presumption.

Systems replacement. In addition, at least 75 percent of listed applicable building-wide and apartment-wide systems need to be replaced. Until recently, the DHCR wasn’t authorized to require more than 75 percent be replaced. And, now, there’s no longer an exception to the criteria regarding “good cause shown” for an individual system to not be replaced. Before, on a case-by-case basis, an exception to replace a component or system could be granted because it didn’t require replacement or it was desirable due to its aesthetic or historic merit.

Harassment determinations. The DHCR also expand which entities can make findings of harassment to potentially derail a substantial rehabilitation project. Findings of harassment to secure a vacancy can be made by HPD, housing court, or other government entity other than the DHCR. Also, a finding of harassment precludes a finding of substantial rehabilitation for three years.

First Rents for Newly Created Units

Since the 1980s, the DHCR has held that if an owner significantly alters the outer dimensions of a vacant apartment, the owner can charge a “first rent” to the first tenant to occupy the apartment after the alteration. In many instances, this meant an owner would combine a vacant rent-stabilized unit with another vacant unit to effectively create a new unit entitling the owner to set a negotiated first rent. This rent would then be subject to increases pursuant to and in accordance with the Rent Stabilization Law and Code.

Now, with the amendments, first rents for new apartments created by combining or dividing rent-stabilized apartments to create new units with rent-regulated or deregulated apartments are limited and must be based on prior rents, square footage calculations, and applicable guideline increases. Owners are required to maintain the “records and rent histories” of all combined apartments, both prior to and post combination, for the purposes of rent setting, overcharge, and all other applicable proceedings. The DHCR has adopted regulations which provide the following:

• Two rent-stabilized units are combined. When two rent-stabilized apartments are combined, the new legal rent is the combined legal rents of the two apartments, plus applicable increases;
• One rent-stabilized unit and one non-regulated unit. When a rent-stabilized apartment is combined with a non-regulated apartment, the combined unit is now rent-regulated. New rent is the combined legal rent for both previous housing accommodations;
• Outer dimension of exempt unit increases. Where the space of a non-regulated apartment is increased by adding space from a regulated apartment, both apartments are rent-regulated;
• Outer dimension of a vacant apartment is increased. When the space of a regulated vacant apartment is increased, the rent for the new space will be the prior legal rent, plus an increase equal to the percentage increase of the space, as well as other applicable increases; and
• Outer dimension of a vacant apartment is decreased. When the space of a regulated vacant apartment is decreased, the rent for the new space will be the prior legal rent, plus a decrease equal to the percentage decrease of the space, as well as other applicable increases.

Succession Rights

The DHCR has expanded the rights of successors to claim succession even if the tenant of record continues to pay rent. Family members remaining in a rent-stabilized unit after the tenant of record leaves have the right to remain in the apartment and continue to receive renewal leases. The regulations require contemporaneous or simultaneous occupancy by the family members with the named tenant on the lease for two years as their primary residence prior to the permanent vacatur of the named tenant [9 NYCRR §2523.5(b)(1)].

Disputes in succession cases typically involve where there was cohabitation between the tenant and person claiming succession or the date the tenant gave up the unit. Previously, for the latter, owners would show that the tenant hadn’t permanently vacated the unit because the tenant continued to pay rent and sign renewal leases.

Now, a subsection has been added that eliminates the second argument. “A tenant shall be considered to have permanently vacated the subject housing accommodation when the tenant has permanently ceased residing in the housing accommodation. The continued payment of rent by the tenant or the signing of renewal leases shall not preclude a claim by a family member as defined in section 2520.6(o) of this Title in seeking tenancy [9 NYCRR §2523.5(b)(2)].”

This means the two-year period is measured from the date the tenant permanently ceased residing in the apartment regardless of whether that tenant or the successors fraudulently concealed that fact by continuing to sign renewal leases or paying rent in the name of the vacated tenant.

Demolition

The DHCR has added a “good faith” requirement to demolition and requires the applicant at the time of the application to submit proof of financial ability to complete the proposed work, along with proof that the Department of Buildings has already approved the plans for demolition.

The adopted amendments define demolition to mean “the removal of the entire building including the foundations.” Before, owners seeking to demolish a building could preserve the building’s exterior.

The amendments also increase the stipends given to residents displaced by demolition, allow the DHCR to revoke a demolition order if the owner fails to act in good faith or fails to undertake construction within a reasonable time, and permit the DHCR to initiate enforcement proceedings for failure to comply and make those penalties applicable to subsequent purchasers.

Calculation of Base Date Rents, Overcharges

The HSTPA made changes with respect to the processing and determination of rent overcharge cases. The DHCR’s amendments incorporate these changes and attempt to take into account the Court of Appeals decision in Matter of Regina Metropolitan Co. LLC v. DHCR, which was decided after the HSTPA was enacted. The Regina ruling limited the “lookback period” of overcharge claims. The Rent Stabilization Code will now bifurcate overcharge complaints and proceedings between those filed pre- and post- adoption of the HSTPA on June 14, 2019.

Before the HSTPA, an overcharge challenge to the legal rent of a rent-stabilized apartment was limited to a four-year lookback period from the date the DHCR or courts received the complaint. The DHCR or courts set a base date of four years prior to the filing and then examined all the rent increases from that date to determine if each increase was proper under the Rent Stabilization Law. If each increase was proper, there was no overcharge in most cases.

When the HSTPA was enacted, it expanded the lookback period beyond four years and substantially expanded the scope of a building owner’s liability in rent in overcharge cases. After the enactment of the HSTPA, an owner had the burden to establish the legal rent beyond four years including increases that occurred before the purchase of the building—even if the building was transferred several times before the overcharge filing. Under the HSTPA, the DHCR and the courts are required to consider “all available rent history which is reasonably necessary” to investigate an overcharge claim. In short, that four-year review period was eliminated in most cases, and the court and the DHCR were both required to look beyond four years.

Regina changed that. The extended review period that was enacted under the HSTPA, requiring the DHCR and the courts to go beyond the four-year lookback period, was eliminated except in a few limited exceptions. One of those exceptions is based on a “colorable claim of fraud.” Before the HSTPA, a common-law exception to the four-year lookback period existed where a tenant was able to make a “colorable claim of fraud.” The Regina decision preserves this common-law exception.

The DHCR’s adopted amendments identify June 14, 2019, the date of the HSTPA’s enactment, as a threshold date for rent overcharge claims. For claims filed before June 14, 2019, the date four years prior to the filing date of the claim is the base date except where the Rent Stabilization Law or other law requires maintenance of records or review for a longer period. And for claims filed on or after June 14, 2019, the base date will be June 14, 2015.

In other words, this means that for an overcharge complaint filed after June 14, 2019, the DHCR may look to the “most recent reliable annual registration statement” filed six or more years prior to the filing of a complaint for overcharge/initiation of a proceeding, but in no event will that date be before June 14, 2015. The default formula now will apply to owners who purchase at judicial sales, and the code now removes the ability of an owner to offer a full rent history to preclude imposition of the default formula.

Adopted Amendments:

DHCR Documents to Be Revised

With the amendments to the rent regulations, the DHCR’s Office of Rent Administration (ORA) is in the process of reviewing all of its forms and documents and will be making needed edits to reflect changes required by the new regulations. Once all documents have been updated and posted to the website, relevant edits will also be made to the NYC Lease Rider and ETPA Standard Lease Addenda. The DHCR says, in the interim, these two documents can continue to be used as currently written.

The DHCR has identified the following documents requiring edits:

• Fact Sheet 5: Vacancy Leases in Rent Stabilized Apartments
• Fact Sheet 11: Demolition
• Fact Sheet 14: Rent Reductions For Decreased Services
• Fact Sheet 30: Succession
• Fact Sheet 35: Collectability of Major Capital Improvement (MCI) and/or Individual Apartment Improvement (IAI) Rent Increases (Where the Rent is Reduced Because of Diminution of Services)
• Fact Sheet 38: Substantial Rehabilitation
• Operational Bulletin 95-2: Substantial Rehabilitation
• Operational Bulletin 2009-1: Procedures Pursuant to the Rent Stabilization Code for the Filing of an Owner's Application to Refuse to Renew Leases on the Grounds of Demolition
• Operational Bulletin 2014-2: Collectability of MCI/IAI Increases Where the Rent is Reduced Because of Diminution of Services