Six Exceptions to the Four-Year Rule for Overcharge Claims
In January 2014, the DHCR adopted amendments to the Rent Stabilization Code (RSC). Among the amendments were more exceptions made to the “four-year rule”—the four-year statute of limitations or time limit to initiate an overcharge complaint. Generally, the statute of limitations when examining an apartment’s rent history to determine an overcharge is four years. However, as a result of the amendments, there are now exceptions for certain situations where the legal rent history can be investigated even further back.
Exception #1: Fraudulent Deregulation Schemes
The DHCR or a court may examine the rent history for more than four years when the tenant alleges that the owner engaged in a fraudulent scheme to deregulate the unit. But the tenant must have some proof of the scheme. The mere increase in the rent isn’t enough.
For example, in one case, a tenant complained of a rent overcharge. The tenant’s position was that by increasing the registered monthly rent from $572 in July 2004 to $1,750 in October 2004, the owner’s conduct was “colorably fraudulent,” requiring the DHCR to look beyond the four-year rule and examine the apartment’s history in search of fraud. Such a sizable rent increase, the tenant argued, could only be justified if the landlord invested approximately $39,000 in individual apartment increases (IAI).
The tenant further argued that based on the condition of the apartment’s hardwood floors, bathtub, doors, fixtures, and kitchen, it was impossible for the owner to prove $39,000 in IAIs. The DHCR disagreed and found that $39,000 was a reasonable amount for a landlord to have spent in IAIs in 2004—especially since the tenant was relying on nothing more than her own opinions and observations, and especially since the 2004 vacancy was the first vacancy in that apartment in 32 years.
The Court of Appeals agreed with the DHCR and ruled that that the tenant failed to meet her initial burden because she failed to “set forth sufficient indicia of fraud to warrant consideration of the rental history beyond the four year statutory period.” In effect, the court held that an owner need not refute the tenant’s “evidence” until such evidence reaches an objective demonstration of fraud to deregulate the apartment. Mere conclusory and speculative evidence is not enough [Boyd v. DHCR, June 2014].
Exception #2: Outstanding Rent Reduction Order
Where an outstanding rent reduction order based on a decrease in services was issued more than four years before the rent overcharge complaint, the DHCR or a court may examine the rent history.
A rent reduction order bars further rent increases for rent-stabilized tenants until the DHCR issues a rent restoration order. The Rent Code Amendments of 2014 further prohibit the collection of vacancy lease rent increases and the collection of the portion of a major capital improvement rent increase that becomes collectible after the effective date of the rent reduction order.
Exception #3: Determining Willful Rent Overcharge
Another exception to the four-year look-back period for overcharges is the look back for determining whether an overcharge was willful. The DHCR is allowed to look back beyond four years to determine if the owner establishes by a preponderance of the evidence that an overcharge is not willful.
Exception #4: Preferential Rent
Preferential rents are required to be disclosed in the lease, and the owner is required to maintain and submit, where required by the DHCR, the rental history immediately preceding a preferential rent to the present, which may be prior to the four-year period preceding the filing of a complaint.
As a result of this amendment, all records and leases establishing a legal rent must be preserved where there is a preferential rent in effect. The amendment allows the DHCR to examine a rent history beyond four years solely because a preferential rent is in effect.
Exception #5: Request for Longevity Increase
The DHCR and the courts can go back beyond the four-year period when an owner has not received a vacancy increase for eight years. The owner can apply a longevity increase to the legal rent amount.
Exception #6: Vacant or Exempt Unit on Base Date
The last exception is where there is a vacant or exempt unit on the four-year base date, in which case the DHCR may also look at the last rent registration. Prior to this amendment, the DHCR took the position that if an apartment was vacant or exempt (usually by owner occupancy) on the base date (four years prior to the filing of an overcharge complaint), the DHCR was precluded from determining whether the present tenant’s rent was legal. Rather than finding the correct rent by calculating what would have been the proper increase for that period, as it would have if the vacancy or exemption was within four years, the DHCR would dismiss the complaint.
Now, where an apartment was vacant or temporarily exempt on the base date—for example, when it’s occupied by a superintendent—the new rent may be increased by raising the rent by successive two-year guideline increases that would’ve been allowed during the period of time that the apartment was vacant or temporarily exempt.
In a challenge to the 2014 amendments, the DHCR ruled that the change did not create hardship for a landlord. When a tenant complained of a rent overcharge, the district rent administrator (DRA) ruled for the tenant and ordered the landlord to refund $35,000, including interest. The landlord appealed and lost. The tenant's apartment was temporarily exempt from rent stabilization due to owner occupancy on the base rent date. The owner claimed that it was therefore entitled to charge a free market rent when the tenant moved in after that. But with the 2014 amendment, the RSC no longer permits setting a free market rent after temporary exemption from rent stabilization. The owner argued that RSC Section 2527.7 barred applying an amended RSC provision that caused undue hardship or prejudice to the landlord. But, although the DRA substantially lowered the tenant's rent and found a substantial rent overcharge, this didn't cause undue hardship or prejudice to the landlord. The DRA did consider the owner’s reliance on the former RSC provision by not assessing triple damages on the overcharge [Tsui: DHCR Adm. Rev. Docket No. FM210058RO, November 2017].