How to Settle Tenant's Overcharge Complaint

If you are hit with a rent overcharge complaint from a rent-stabilized tenant and think the tenant may have a good case, consider trying to settle the case with the tenant before the Division of Housing and Community Renewal (DHCR) decides it. Settling the complaint has certain advantages—you can save time and money, and avoid worrying over an uncertain result.

But you must be very careful about how you settle the complaint. The Rent Stabilization Code sets strict rules on what you must do to make your settlement valid. You can get badly hurt if you do not follow those rules. The tenant has the legal right to later turn around and renounce the settlement—even if you've paid the tenant money as part of the settlement.

We'll tell you the steps you must take to settle a rent overcharge complaint properly. We'll also give you a Model Agreement: Have Tenant Sign Written Settlement Agreement, which you can adapt for your own use. In a subsequent issue of the Insider, we'll cover how to get the DHCR to approve the withdrawal and tell you when you will know the settlement becomes final.

Why Settle?

There are many reasons why you may want to settle a rent overcharge complaint rather than leave it to the DHCR to decide. There's always the possibility that after you've invested a lot of time and money (legal fees can add up quickly) the DHCR will rule against you on the complaint and order you to pay triple damages. This is especially true if issues in the case aren't clear-cut, says attorney Jeffrey Turkel. For example, he says, you may have collected a 1/40th rent increase for improvements, but for some reason you have only sketchy proof of the cost of those improvements.

Also, says Turkel, you may want to settle to avoid getting an unfavorable decision that may affect other tenants in the building. For example, say you've made similar improvements in a number of apartments and have the same type of proof for all of them. If one tenant complains of a rent overcharge and wins based on your lack of proof, word might get around to the other tenants. And they might then file complaints against you.

By settling a complaint before the DHCR issues an order with its decision on the complaint, you can:

• Exercise control over what would otherwise be an uncertain result;

• Save time;

• Reduce or avoid legal fees for defending against the complaint or appealing an unfavorable decision; and

• Avoid paying triple damages if the DHCR rules that you willfully overcharged the tenant.

Follow Code's Settlement Rules

Section 2520.13 of the Rent Stabilization Code says that ordinarily a tenant can never agree to give up any of the rights it or the rent stabilization laws give the tenant—including the right to complain about a rent overcharge. That would seem to make it impossible to settle a rent overcharge complaint, since the tenant could always turn around months, or even years, later and challenge the rent you both agreed to in the settlement.

But fortunately, the same code section also includes an exception that can make a settlement work. If you follow the rules set out in the exception, the tenant will have only a very limited right to repudiate the settlement. If you fail to comply with the rules, your settlement will be valueless. The tenant will be free to repudiate the settlement at any time.

What must you do? First, you must reach a “negotiated” settlement with the tenant. Then, based on the settlement, the tenant must withdraw his DHCR complaint “with prejudice—this means the tenant is permanently giving up his right to dispute the issue he complained about. Finally, the DHCR must approve the tenant's withdrawal of the complaint by issuing an order dismissing the complaint. After the DHCR issues its order, the tenant gets 35 days to change his mind about the settlement. To do this, he must appeal the DHCR's dismissal order. If the tenant does nothing by the end of the 35 days, the settlement becomes final.

Negotiating a Settlement

Your first step is to reach a settlement with the tenant. Your settlement may include reducing the tenant's rent to an agreed-upon figure. And it may involve giving the tenant a refund of rent overpayments. While the code says that the settlement must be “negotiated,” it does not say what negotiated means. But presumably it means that there was “give and take” between you and the tenant, and that you didn't threaten the tenant to get the settlement.

What Should Settlement Agreement Say?

You'll want the settlement agreement in writing. This should help prevent future disputes between the tenant and you over the settlement's terms. And you'll have something to show the DHCR if it asks to see the settlement agreement.

Your settlement agreement should include the following:

A statement that tenant has filed a complaint. Be sure to include the correct docket number of the complaint. Also, check your files to make sure that the tenant has no other overcharge complaints pending against you. Sometimes tenants will file multiple rent overcharge complaints with the DHCR. If the tenant has filed more than one overcharge complaint, make sure the settlement agreement lists the docket number of each complaint.

Current and reduced rents. If as part of the negotiated settlement, you are reducing the tenant's current rent, the agreement should indicate the amount of the current rent and what the new reduced rent will be. If you are refunding money to the tenant, provide a statement giving the size of the refund. The agreement should also include the tenant's agreement to withdraw the rent overcharge complaint “with prejudice” and to sign a letter to the DHCR to that effect.

Copy of tenant's signed complaint withdrawal letter. Attach a copy of the letter to the agreement. We've given you a Model Letter: Have Tenant Sign Letter Withdrawing Complaint. Make sure the tenant signs the withdrawal letter at the same time he signs the settlement agreement. If you wait until later, you may have a tough time getting the tenant to sign the letter. Since he already has his money and/or his rent cut, you won't have any leverage. Without the tenant's withdrawal letter, the DHCR probably won't approve the settlement and won't dismiss the complaint.

EDITOR'S NOTE: If more than one tenant is named on the lease, make sure every named tenant signs the settlement agreement. You don't want to settle a rent overcharge complaint with a tenant only to have a co-tenant turn around and file a similar complaint against you.

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