Avoid Rent Overcharge Finding If No Rent Was Charged on Base Date
When you defend against a tenant’s rent overcharge complaint, you must prove that you didn’t illegally increase the rent after the apartment’s base date. Section 2520.6(f) of the revised Rent Stabilization Code defines the base date as the date four years before the tenant filed the complaint, or the date the apartment first became subject to rent stabilization, whichever is later.
But what if the apartment was vacant or occupied by an employee who didn’t pay rent on the base date? Most likely, the DHCR will move the base date forward to the date the first rent-paying tenant occupied the apartment. The owners in those cases would only have to prove there was no overcharge from that later date until the present.
Apartment Vacant on Base Date
If an apartment was vacant on the base date, the DHCR has used the rent of the next tenant to occupy the apartment as the base date rent. For example, in one case a rent-stabilized tenant complained of a rent overcharge. The district rent administrator (DRA) ruled against the tenant, finding no rent overcharge. The tenant claimed that the DRA failed to calculate the legal rent from the Aug. 16, 2007, based date and, instead, calculated from Oct. 1, 2007, which was the second month into the term of her vacancy lease. The DHCR noted that the tenant’s apartment was vacant on the base date. Since the tenant’s lease was the first lease entered into after the base date, her initial rent became the base rent for purposes of calculating any subsequent rent overcharge. And although the tenant moved into the apartment in September 2007, Oct. 1 was listed in the DRA’s order since that was the first date of tenant’s first full month in occupancy. And since the owner had collected lawful rent increases after that date, there was no rent overcharge [Garrett: DHCR Adm. Rev. Docket No. AN710030RT, January 2013].
Claims of Fraud
To get the DHCR to look beyond four years, complaining tenants will often claim there was fraudulent behavior on the part of the owner. If a tenant submits a “colorable claim of fraud” in connection with an overcharge complaint, the four-year rule will be ignored, and the DHCR will examine the apartment’s rent history to establish a base date. This has been the case since the 2010 Court of Appeals decision in Grimm v. DHCR, and this is why it’s important to keep your old lease files in order. As long as you can defeat a claim of fraud, the DHCR generally won’t look back more than four years.
In one case, the DHCR ruled there was no evidence of fraud where the tenant paid the same rent since the base date. The tenant paid $1,150 per month on the base rent date, and the owner never collected more than that amount since the base date. The tenant appealed, arguing that the DHCR should look back more than four years due to fraud by the landlord. The DHCR ruled against the tenant. The DRA correctly found that the base rent was a legal regulated rent and that the tenant had at all times been treated as rent stabilized. There was no reason to consider fraud since the tenant made no claims of a fraudulent scheme to deregulate tenant’s apartment before the DRA. The tenant also presented no reasonable excuse for failing to raise the issue of fraud before the DRA. And there was no proof of fraud in any event. A pre-base date rent increase in rent alone is insufficient to prove fraud. And inconsistencies in rent registrations also wasn’t enough to prove fraud, since there was no proof that the prior or current landlord had attempted to deregulate the apartment based on the rent level. The tenant was at all times registered as rent stabilized, had been offered rent-stabilized renewal leases, and had paid the same rent since 2008 [Castro: DHCR Adm. Rev. Docket No. FP210062RT, January 2018].
Preferential Rent Before Base Date
Another way complaining tenants try to get the DHCR to look beyond four years and prior to the base date is to claim some sort of preferential rent. Rent Stabilization Code Section 2521.2(c) permits the DHCR to seek the rental history immediately preceding the base date preferential rent in order to prove the preferential rent.
In one case, after a rent-stabilized tenant complained of rent overcharge, the DRA asked the owner to submit a copy of the tenant’s lease predating the February 2012 base rent date because the tenant paid a preferential rent rather than the higher legal regulated rent. The owner didn’t respond to that request. The DRA ruled for the tenant in part, finding no rent overcharge but reducing the legal rent to the amount of the preferential rent. The owner and tenant both appealed and lost. The tenant sought to challenge rents charged before the base rent date, but there was no proof of fraud and the base date rent was properly set at $972. The owner argued that the legal regulated rent set forth in the tenant’s base date lease was the proper base date rent. But the owner didn’t submit the requested rent history record; therefore, it didn’t establish the legality of the higher legal regulated rent of $1,228 [Herrera/2472 Valentine Realty LLC: DHCR Adm. Rev. Docket Nos. FR610024RT, FR610054RO, January 2018].
Apartment Occupied Rent-Free by Employee on Base Date
The DHCR has treated apartments occupied by employees not paying any rent on the base date similarly to apartments that were vacant on the base date and used the rent of the next tenant to occupy the apartment as the base date rent.
For example, on the base date four years before a tenant filed a rent overcharge complaint, an employee of the owner had occupied the apartment rent-free. The complaining tenant was the first tenant to move into the apartment after that. So the DHCR used the date the complaining tenant moved in as the base date [Reisner: DHCR Adm. Rev. Docket No. MC410052RT, January 2001].
In these situations, it’s important to have adequate proof the apartment was vacant or occupied by nonpaying tenants on the base date. In one case where a rent-stabilized tenant complained of a rent overcharge, the owner claimed that the apartment was vacant on the base date four years before the tenant filed her complaint, and that there was no overcharge. The DRA ruled against the owner and ordered her to refund $30,000, including triple damages. The owner appealed and lost. The owner submitted sworn statements from her mother and sister stating that they had lived in or occasionally used the apartment without paying rent. The DHCR ruled that this was insufficient proof that the apartment was vacant on the base date. So the DRA correctly applied the DHCR’s default method to calculate tenant’s legal rent since there was no adequate rental history information provided by the owner [Tran: DHCR Adm. Rev. Docket No. YL210041RO, October 2011].
Editor’s Note: The DHCR default formula is to be used when the rent on the base date under the four-year look-back period can’t be determined or when the rent set on the base date was determined to be part of a fraudulent scheme to deregulate the apartment. Under the default formula, the rent is established at the lowest rent for a comparable unit in the building. Under the formula, the rent will be set forth at the lowest of:
- The lowest rent registered for a comparable apartment in the building;
- The complaining tenant’s initial rent reduced by a guideline;
- The last registered rent paid by the prior tenant (if within the four-year period of review); or
- If the above documentation isn’t available or appropriate, an amount will be determined by the DHCR using sampling methods from regulated apartments in the area.
If one of your tenants files a rent overcharge complaint with the DHCR and you weren’t charging any rent for the apartment on the date four years before the complaint was filed, point this out in your answer to the tenant’s complaint. Explain why you weren’t charging any rent (for example, the apartment was vacant, an employee was living there rent-free). And ask the DHCR to use the rent paid by the next tenant to occupy the apartment as the base date rent.
Be sure to submit proof that you weren’t charging rent for the apartment on the base date. The best proof to submit is the rent ledger that covers the months when the apartment was vacant or occupied by the employee. This will show that you didn’t get rent payments for the apartment in question during those months. To bolster your claim, also submit proof to show why you weren’t charging any rent.
If apartment vacant on date. You can submit the rent registration for the year of the base date. That registration should reflect the fact that the apartment was vacant. Or, if the departing tenant sent you a letter stating that he wouldn’t be renewing his lease, you can submit a copy of this letter. If you evicted the prior tenant, you can submit a copy of the eviction warrant.
If apartment occupied by employee. If the apartment was occupied by an employee who didn’t pay any rent, you can submit a written agreement you signed with the employee when he started working for you. That agreement should state that the employee will occupy the apartment during the term of his employment for no rent. If you don’t have such an agreement, try to get the employee to sign a sworn statement that he lived in the apartment on the base date and didn’t pay any rent.