DHCR Proposes Significant Amendments to Rent Stabilization Code
On Aug. 31, the DHCR issued a notice of public hearing on proposed amendments to the Rent Stabilization Code. These proposed amendments have been in the works for two and a half years and would be the first update since 2014 to the Rent Stabilization Code, which governs roughly 1 million rent-stabilized apartments in New York City.
The proposed amendments codify major changes made under the Housing Stability and Tenant Protection Act of 2019 (HSTPA) and attempts to address what the DHCR deems as abuses so that more units are preserved. It’s important to note that the DHCR has only started the formal process to make the regulatory changes. The DHCR’s draft of the proposed amendments will be subject to hearings and public testimony on Nov. 15 in Manhattan and Yonkers, so the amendments are unlikely to be adopted before early next year.
We’ll go over the notable proposals that affect rehabilitation and demolition projects, overcharge calculations, succession rights, and rent increases on combined apartments.
The DHCR is seeking to make the ability to deregulate a rent-regulated apartment through a process called substantial rehabilitation or “gut rehabs” more difficult. The substantial rehabilitation exemption law says that buildings “substantially rehabilitated” as “family units” on or after Jan. 1, 1974, are exempt from rent stabilization.
Currently, to get approval for this process the building must be in poor condition and a certain percentage of building systems must be replaced. There’s a bright line rule that a building is in poor condition if 80 percent of the building is vacant. The DHCR’s proposed amendments change these standards.
Current rule. The current law states that a “specified percentage, not to exceed 75 percent, of listed building-wide and individual housing accommodation systems, must have been replaced” to qualify for a substantial rehabilitation [9 NYCRR §2520.11(e)(1)].
Proposed rule. Now, the DHCR intends to amend this to explicitly require owners to replace at least 75 percent of building-wide and individual housing accommodation systems.
In buildings that don’t contain all 17 of the following systems listed, the owner would be required to replace at least 75 percent of the systems preexisting in the building in order to be eligible for the exemption. The list of building-wide and apartment systems include:
- Gas Supply;
- Electrical Wiring;
- Incinerators or Waste Compactors;
- Fire Escapes;
- Interior Stairways;
- Ceilings and Wall Surfaces;
- Pointing or Exterior Surface Repair as needed; and
- All Doors and Frames, including the replacement of non-fire-rated items with fire-rated ones.
The proposed amendment also eliminates an owner’s ability to demonstrate good cause for replacing a building system that didn’t otherwise need replacement but was desirable due to its aesthetic or historic merit.
Presumption of deterioration eliminated. Currently, a substantial rehabilitation, in addition to replacing a required percentage of building-wide systems, must also have been “commenced in a building that was in a substandard or seriously deteriorated condition.” If the rehab was started in a building that was at least 80 percent vacant of residential tenants, the DHCR had presumed that the building was substandard or seriously deteriorated at that time. With the amendment, this would no longer be the presumption.
Harassment determinations. The DHCR’s changes would also expand which entities can make findings of harassment to potentially derail a substantial rehabilitation project. Findings of harassment to secure a vacancy can be made by HPD, housing court, or other government entity other than the DHCR and “shall be considered in full force for three years from the date the finding was made, unless proof of its being lifted is provided or otherwise obtained” [Proposed 9 NYCRR §2500.9(e)(3)].
Occupants remain stabilized. In addition, the changes state that if there’s a finding that the building has been substantially rehabilitated, an occupied rent-regulated apartment will remain regulated until it’s vacated [Proposed 9 NYCRR §2500.9(e)(5)].
First Rents for Combined Units
The DHCR’s proposed amendments would make big changes to provisions regarding first rents after two or more apartments have been combined. The DHCR has held that if an owner significantly alters the outer dimensions of a vacant apartment, the owner can charge a “first rent” to the first tenant to occupy the apartment after the alteration.
In many instances, this means an owner will combine a vacant rent-stabilized unit with another vacant unit to effectively create a new unit entitling the owner to set a negotiated first rent. This rent is then subject to increases pursuant to and in accordance with the Rent Stabilization Law and Code.
When an owner seeks to combine or reconfigure apartments, the DHCR proposes the following:
Two rent-stabilized units are combined. The new legal rent is the combined legal rents of the two apartments, plus applicable increases. This new unit would have to be registered under the same designation as one of the prior rent-stabilized units.
One rent-stabilized unit is combined with one non-regulated unit. This category also applies when one non-regulated unit is made larger by adding a portion of a rent-stabilized unit. The combined unit is now regulated. The amendment says that this new rent would be the combined legal rent for both previous housing accommodations.
Outer dimension of a vacant apartment is increased. The rent for the new space would be the prior legal rent, plus an increase equal to the percentage increase of the space, as well as other applicable increases.
Outer dimension of a vacant apartment is decreased. The rent for the new space would be the prior legal rent, plus a decrease equal to the percentage decrease of the space, as well as other applicable increases [Proposed 9 NYCRR §2521.1(m)].
Base Date, Overcharge Calculations
The HSTPA made changes with respect to the processing and determination of rent overcharge cases. The proposed amendments incorporate these changes and also attempt to take into account the Court of Appeals decision in Matter of Regina Metropolitan Co. LLC v. DHCR, which was decided after the HSTPA was enacted. The Regina ruling limited the “lookback period” of overcharge claims.
Pre-HSTPA rules. Before the HSTPA, an overcharge challenge to the legal rent of a rent-stabilized apartment was limited to a four-year lookback period from the date the DHCR or courts received the complaint. The DHCR or courts set a base date of four years prior to the filing and then examined all the rent increases from that date to determine if each increase was proper under the Rent Stabilization Law. If each increase was proper, there was no overcharge in most cases.
Initial HSTPA rules. When the HSTPA was enacted, it expanded the lookback period beyond four years and substantially expanded the scope of a building owner’s liability in rent in overcharge cases. After the enactment of the HSTPA, an owner had the burden to establish the legal rent beyond four years including increases that occurred before the purchase of the building—even if the building was transferred several times before the overcharge filing. Under the HSTPA, the DHCR and the courts are required to consider “all available rent history which is reasonably necessary” to investigate an overcharge claim. In short, that four-year review period was eliminated in most cases, and the court and the DHCR were both required to look beyond four years.
Post-Regina rules. However, Regina changed that. The extended review period that was enacted under the HSTPA, requiring the DHCR and the courts to go beyond the four-year lookback period, was eliminated except in a few limited exceptions.
One of those exceptions is based on a “colorable claim of fraud.” Before the HSTPA, a common-law exception to the four-year lookback period existed where a tenant was able to make a “colorable claim of fraud.” The Regina decision preserves this common-law exception. It should also be noted that where the landlord utilized a preferential rent, the courts and the DHCR generally can look beyond the four-year period pursuant to RSC §2521.2.
Proposed amendments clarify rules. The DHCR’s proposed amendments identify June 14, 2019, the date of the HSTPA’s enactment, as a threshold date for rent overcharge claims [Proposed 9 NYCRR §2520.6(f)]. For claims filed before June 14, 2019, the date four years prior to the filing date of the claim is the base date except where the Rent Stabilization Law or other law requires maintenance of records or review for a longer period. And for claims filed on or after June 14, 2019, the base date will be June 14, 2015.
In other words, this means that for an overcharge complaint filed after June 14, 2019, the DHCR may look to the “most recent reliable annual registration statement” filed six or more years prior to the filing of a complaint for overcharge/initiation of a proceeding, but in no event will that date be before June 14, 2015.
Another change would make it easier for tenants to pass a rent-stabilized lease to a relative. Family members remaining in a rent-stabilized unit after the named lease holder leaves have the right to remain in the apartment and continue to receive renewal leases. The regulations require contemporaneous or simultaneous occupancy by the family members with the named tenant on the lease for two years as their primary residence prior to the permanent vacatur of the named tenant [9 NYCRR §2523.5(b)].
Many succession cases are decided in court where owners can dispute whether there was cohabitation between the named tenant and the person claiming succession or dispute the date a named tenant gave up the unit. For the latter, owners typically show that the tenant hadn’t permanently vacated the apartment because the tenant continued to pay rent and sign renewal leases and, therefore, maintained control of the apartment.
Proposed amendment eliminates this second argument. It says, “A tenant shall be considered to have permanently vacated the subject housing accommodation when the tenant has permanently ceased residing in the housing accommodation. The continued payment of rent by the tenant or the signing of renewal leases shall not preclude a claim by a family member” [Proposed 9 NYCRR §2523.5(b)(2)].
In proposing this amendment, the DHCR is attempting to resolve a split between two state appellate courts, the First Department covering Manhattan and the Bronx and the Second Department covering Queens, Brooklyn, and Staten Island. In instances where the primary tenant has moved out but continued to renew their lease, the First Department has held that the two-year lookback is measured from the end of the lease in question. The Second Department, meanwhile, has held that the lookback window starts when the primary tenant physically moves out.
In its impact statement, the DHCR stated that it opted for the Second Department’s approach because “evicting long term family residents because the named leaseholder may have been in the process of moving out during the renewal period or was simply postponing an anticipated difficult and problematic interaction with their landlord over whether remaining family had the right to stay is too harsh a rule.”
The proposed regulations would add a “good faith” requirement to demolition and require the applicant at the time of the application to submit proof of financial ability to complete the proposed work, along with proof that the Department of Buildings has already approved the plans for demolition [Proposed 9 NYCRR §2524.5(a)(2)(i)].
The proposed amendments also define demolition to mean “the removal of the entire building including the foundations” [Proposed 9 NYCRR §2524.5(a)(2)(i)]. Currently, owners seeking to demolish a building could preserve the building's exterior. The ability to maintain the walls may be helpful if a building has a landmark designation, meaning it has to be preserved because of historical significance.
The amendments also increase the stipends given to residents displaced by demolition, allow the DHCR to revoke a demolition order if the owner fails to act in good faith or fails to undertake construction within a reasonable time, and permit the DHCR to initiate enforcement proceedings for failure to comply and make those penalties applicable to subsequent purchasers.
A DHCR statement with regard to the proposed amendments says, “We encourage the public to continue to be part of this process by reviewing these proposed regulations and submitting their comments before the amendments are finalized.” The public has until Nov. 20 to submit comments on the DHCR's proposed amendments, including at public hearings scheduled for Nov. 15 in New York City and Nassau and Westchester counties, which also have rent-regulated apartments. From there, the DHCR can promulgate final rules.
Once finalized, the rules could face a legal challenge. This occurred the last time the code was updated in 2014. The 2014 case, Portofino Realty Corp. v. NYSHCR, challenged the legitimacy of some amendments to the Rent Stabilization Code which included language of a Tenant Protection Unit. Owners argued that the changes violated their due process rights. The plaintiffs were ultimately unsuccessful.