Governor Signs New Rent-Stabilized Housing Legislation

We highlight the significant changes.

In December 2023, Governor Hochul signed legislation (S2980C/A6216B) that seeks to strengthen rent-stabilized tenant protections. The legislation broadens the definition of fraud in rent overcharge cases, requires owners going forward to get approval from the DHCR before deregulating a unit due to a substantial rehabilitation, increases penalties for failing to register a unit, and codifies methods for calculating rents after units are combined or modified.

Before signing the legislation, Governor Hochul negotiated “chapter amendments” to the bill that would be introduced and voted on by the state legislature in the current legislative session. These chapter amendments were introduced by the legislature on Jan. 4 as Assembly Bill No. A8506 but have not yet become law.

We’ll go over the changes the signed legislation makes to the Rent Stabilization Law (RSL) and highlight the amendments or modifications that will be made once the chapter amendments are passed.

Setting First Rents for Newly Created Units

The signed legislation amends the RSL to eliminate the DHCR’s first rent doctrine. Before Nov. 8, 2023, the first rent doctrine was an administrative method to compute the initial legal rent of a newly created unit. For owners, combining units had been one of the few ways to substantially raise stabilized rents after the 2019 rent reforms.

When an owner substantially reconfigures an apartment—for example, by combining two vacant rent-stabilized units, the reconfiguration entitles an owner to charge a “first rent.” This first rent for the newly created unit would be negotiated between the owner and the tenant, and the first rent charged and paid would serve as the rent going forward, subject to subsequent guidelines and other lawful increases.

This practice of establishing a first rent for a newly created unit had been DHCR policy for decades until the DHCR made regulatory amendments to the Rent Stabilization Code that became effective Nov. 8, 2023. The senate bill signed into law by the governor in December added a new subsection to the RSL that mirrors the DHCR’s new provisions of the Rent Stabilization Code.

The new law codifies the DHCR’s provisions for setting new rents for vacant, rent-stabilized units that are combined with another unit. By codifying the DHCR’s regulatory amendments, the legislators expect this action to deter legal challenges from owners. The law clarifies that the new rent cannot be higher than the combined rents of the individual units that were merged. In addition, 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.

Here are the rules for calculating the first rent of newly created units:

• 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 units;
• 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, minus an amount equal to the percentage decrease of the space, plus other applicable increases.

Redefining Fraud

The original bill approved by the legislature had a broad definition of fraud in the context of rent overcharge cases. And owners would have been liable for fraud in cases where an apartment shouldn’t have been deregulated, even if the owner didn’t realize it was improper.

Under the language of the original bill, the unlawful deregulation of an apartment or the failure to register as rent stabilized, after Oct. 1, 2011, any apartment in a building receiving J-51 or 421-a would be presumed to be fraud. And the presumption would apply whether or not the owner’s conduct would be considered fraud under the common law and whether or not the tenant specifically relied on untruthful or misleading statements in registration, leases, or other documents.

The introduced chapter amendments for the bill require a court to establish that an owner “knowingly” committed fraud. The amendment states that a valid claim of fraud now requires a determination on “whether the owner knowingly engaged in such fraudulent scheme after a consideration of the totality of the circumstances.” By considering the totality of circumstances, the amendment eliminates mistakes or misunderstandings being considered fraud from the original bill.

Deregulating Buildings After Substantial Rehab

Owners can deregulate units if they renovate “substandard or seriously deteriorated” buildings, replacing at least 75 percent of the building-wide and individual apartment systems. This process is called substantial rehabilitation and has been occurring since 1974.

The legislation, as written in June 2023, required owners to apply to the DHCR for an exemption based on substantial rehabilitation for any substantially rehabilitated building after Jan. 1, 1974. The owners of buildings that had qualified for such an exemption between 1974 and 2023 by operation of law would have had to apply to the DHCR for an exemption within six months of the effective date of the law.

With the amendments, the measure no longer applies retroactively, meaning long-ago removals of buildings from rent stabilization through substantial rehabilitation can no longer be undone because the current owner can’t find the paperwork. However, going forward, for substantial rehab work initiated on or after Jan. 1, 2024, owners seeking a substantial rehab exemption must apply to the DHCR for approval.

Late Apartment Registration Penalties

According to the 2023 Annual Report issued by the DHCR’s Office of Rent Administration (ORA), the number of registered rent-stabilized apartments dropped by approximately 46,000 from 2022 to 2023. The decrease could be largely attributed to late filers. Owners are required to register all rent-stabilized apartments with ORA by filing an Annual Apartment Registration Form that lists rents and tenancy information as of April 1 of each year.

In fact, the DHCR’s Tenant Protection Unit (TPU) has a registration initiative that employs data analytics to identify buildings that have failed to file their annual registrations with the DHCR. For example, according to the DHCR’s report, in November of 2023, TPU sent registration demand letters to owners who’ve failed to register their buildings for more than two years. These letters went to more than 1,700 building owners, which impact approximately 20,400 units. To date, the initiative has returned more than 10,867 buildings and 108,047 units to the rent rolls.

Previously, owners who failed to register their apartments could not legally charge higher rent increases approved annually by the Rent Guidelines Board. Now, in addition, under the new law signed by Governor Hochul, there’s another compelling financial reason for owners to file their annual rent registrations on time: Owners of rent-stabilized apartments who fail to register their properties on time could be fined $500 per unregistered unit for each month the registration is delinquent. Under prior law, if a registration wasn’t filed, there was a surcharge of 50 percent above the timely apartment registration fee for each untimely registration. However, there was no other monetary penalty for a late registration.

The DHCR is reviewing the new statute and will be issuing guidance on this issue. Due to the severity of the penalties that could be imposed, the DHCR may provide a cure period to give owners the ability to register and to challenge the allegations in the notice to protect due process rights. Currently, it’s unclear which division of the DHCR will be administering the statute, and it remains to be decided what starting point the DHCR will use when sending out these late registration notices. The DHCR may decide to send notices out for 2024 only or for all prior registration years.