Amended Rules on Deemed Leases and Preferential Rents

On Jan. 8, 2014, the DHCR issued the first amendments to the Rent Stabilization Code in some 14 years. While the new amendments—27 in all—do have the virtue of making the applicable law easier to find, gathering it all into one place, for the most part, these amendments will simply increase the cost of doing business, without necessarily providing the tenants a corresponding benefit. In some instances, the amendments are commonplace and sensible. But in others, there is a certain air of seeking to punish landlords for simply being landlords. Here’s a look at two of those amendments.

Deemed Leases

When the tenant fails to renew the lease when offered, the landlord has, under the Rent Stabilization Code, the option to “deem” the lease renewed. The amendments now specifically limit so-called “deemed leases” to “determining the rent in an overcharge proceeding” [Amendment to RSC §2523.5(c)(2)].

With this kind of language, perhaps intended to be more generous to landlords, the provision is open to an interpretation that the “deemed lease” is still not a lease, but is a month-to-month tenancy upon which a nonpayment proceeding cannot be brought.

Thus, if the tenant pays the deemed renewal rent, the landlord is not liable for damages. But if the tenant does not pay the rent, the landlord has only the longer, slower remedy of a holdover proceeding—one in which the tenant can cure the default by renewing the lease eventually. Thus, a landlord will have paid out for such a proceeding only to put itself back to where it should have been, with, at most, the cold comfort that the tenant might be held liable for attorneys’ fees.

Preferential Rent

The amendments crack down on preferential rents. The reason the DHCR gives for this is that “Close to twenty-five percent of the rents in New York City are listed in DHCR’s registration data-base as having preferential rents.” This is a quixotic complaint. In essence, it says that landlords are charging too little for rent, that they are undercharging.

The constitutionality of the Rent Stabilization Law is dependent on the existence of a “housing emergency” and that, in turn, depends upon a shortage of affordable housing, as Adam Leitman Bailey and I pointed out in our NY Real Property Law Journal article “Rent Stabilization Constitutional? Not Now" [Vol. 40, No. 2, pp. 31-37, 2012]. But the only possible interpretation of “preferential rents” is that legally permissible rents under rent stabilization are above actual market rents. And the tenant is not, under the amendment, limited to challenging the preferential rent when the rent goes up to the fully legal rate. No. The tenant can challenge it at any time. The DHCR evidently did not consider that such a provision could discourage landlords from giving the preference.

Further, it should be noted that the new regulation requires the landlord now to have records in its possession that it may not have because it recently bought the building, without giving it an excuse for not having these records. Canny tenants will challenge all preferential rents in buildings that recently changed hands, regardless of their landlords’ evident ethics. After all, there is no penalty for filing a false complaint.

This article was written with the help of Adam Leitman Bailey, Esq., founding partner of Adam Leitman Bailey, P.C.