DHCR Updates Fact Sheet on Preferential Rents

The Division of Housing and Community Renewal (DHCR) recently updated Fact Sheet #40 on preferential rents and rent concessions. Fact sheets provide information to the public on rent regulation. The updated fact sheet reflects changes the Rent Act of 2015 made to vacancy allowances after a preferential lease and addresses whether penalties for failing to qualify for prompt payment discounts are enforceable under preferential rent rules. The update also makes a change to the recommendation that the legal rent be indicated in all subsequent renewal leases. We’ll discuss the basics of preferential rents and the changes made to this fact sheet.

Preferential Rent vs. Legal Rent

A preferential rent is any rent charged to a rent-stabilized tenant that’s lower than the legal rent. Every rent-stabilized apartment has a maximum legal rent based on its unique history. Owners are required to register the legal regulated rent of rent-stabilized apartments with the DHCR every year, but may offer the apartment for a lower amount called a preferential rent.

Not all preferential rents work the same. Sometimes a tenant is entitled to keep the preferential rent as long as the tenant lives in the apartment. But in most cases the preferential rent can be revoked whenever the lease is renewed, and the owner can start charging the higher legal regulated rent plus other allowable increases.

Charging Higher Legal Rent at Renewal

To maintain the right to charge the higher legal rent when the lease is renewed, the initial lease or the first lease that had the preferential rent must have stated that the rent was preferential and must have also stated the amount of the legal regulated rent. If the initial lease stated only the preferential rent, the owner must use the preferential rent for future renewal leases, and must calculate rent increases based on the preferential rent amount.

The update to the fact sheet makes this clear. Prior to the update, it stated, “The legal regulated rent must have been written in the vacancy or renewal lease in which the preferential rent was first charged. In addition, DHCR recommends that the legal rent be indicated in all subsequent renewal leases.” With the update, the DHCR emphasized that legal rents must be shown in all renewals of preferential leases by changing the word “recommends” to “required.” According to the fact sheet, registration with the DHCR of the legal regulated rent by itself won’t establish the legal regulated rent for future usage.

For example, a tenant signs a one-year lease. The lease cites a legal regulated rent of $1,000. The lease doesn’t contain any clauses stating that this is a preferential rent and the lease doesn’t cite the legal regulated rent of $1,200. On April 1, the owner files a registration form with the DHCR that lists a legal regulated rent of $1,200 and a preferential rent of $1,000. In this case, when the tenant’s one-year lease renewal begins, the preferential rent increases by 3 percent to $1,030. The tenant will pay the $1,030 rent. Here, the owner didn’t preserve the legal regulated rent of $1,200 for future use as it wasn’t written in the lease.

The fact sheet also points out that the terms of the lease itself may affect the owner’s right to terminate a preferential rent. If the lease agreement contains a clause stating that the preferential rent shall continue for the term of the tenancy, not just the specific lease term, then the preferential rent can’t be terminated for that tenancy. The preferential rent continues to be the basis for future rent increases. However, if the lease is silent and doesn’t contain a clause that clarifies whether the preferential rent was for the “term of the lease” or “the entire term of the tenancy,” then the owner may terminate the preferential rent at the time of the lease renewal.

For example, a tenant signs a one-year lease. The lease cites a legal regulated rent of $1,500 and a preferential rent of $1,000. And the lease doesn’t contain any clause that clarifies whether the preferential rent is for the “term of the lease” or “the entire term of the tenancy.” At renewal, the legal regulated rent increases by 3 percent to $1,545 and the preferential rent increases by 3 percent to $1,030. The owner can choose to require that the tenant pay the $1,545 rent.

Here, the owner can terminate the collection of the preferential rent at the time of the lease renewal as the lease doesn’t contain a clause stating that the preferential rent is for “the entire term of the tenancy.”

Late Fees, Preferential Rent for On-Time Payment

Suppose a tenant’s legal rent is $1,400 per month. But the lease rider says that the tenant could pay a preferential rent of $1,100 per month if she pays by the 5th of each month. According to the fact sheet, this isn’t allowed.

Since the DHCR has found that an owner may demand a late fee of up to only 5 percent of the rent being charged and paid, and since preferential rents may not be terminated during a lease term, the DHCR won’t permit an owner to enforce a clause in a rent-stabilized lease that provides that the owner may end a preferential or a discounted rent where the tenant fails to pay the preferential or discounted rent by a certain day of the month.

The DHCR also prohibits the use of any other lease clause that conditions the payment of a discounted rent based upon the performance of an act by the tenant, such as the tenant’s payment of the rent electronically. The owner’s collection of higher rents based upon these clauses could be challenged by the tenant in a rent overcharge complaint with the DHCR, and the DHCR can also direct the removal of this type of clause from a lease, if the tenant files a lease complaint.

Vacancy Allowance After a Preferential Lease

The updated fact sheet incorporates the changes brought about by the Rent Act of 2015. The act modified the vacancy allowance that an owner can add to the legal regulated rent when the vacating tenant was paying a preferential rent.

If a vacating tenant was paying a preferential rent, the vacancy lease rent increase that can be applied to the vacating tenant’s legal rent will be limited to 5 percent if the last vacancy lease commenced less than two years ago, 10 percent if less than three years ago, 15 percent if less than four years ago, and 20 percent if four or more years ago.