File Proper Forms, Avoid Missteps When Rerenting Decontrolled Apartment
When a rent-controlled tenant dies leaving behind no legal successors, voluntarily moves out, or is lawfully evicted, his apartment automatically becomes “vacancy decontrolled.” When any of these situations occur, it is important to file all the necessary forms with the Division of Housing and Community Renewal (DHCR) when rerenting the decontrolled apartment.
If you do not give the right form to the new tenant or file the forms correctly with the DHCR, the new tenant or a future tenant might file a fair market rent appeal, claiming that her initial rent-stabilized rent was greater than the fair market rent, and you might also face rent overcharge challenges.
Automatic Rent Stabilization Coverage
If your building has six or more units, a decontrolled apartment automatically falls under rent stabilization when the new tenant signs a lease. The DHCR will continue to regulate the apartment's rent and the services you must provide.
If your building has fewer than six apartments, the decontrolled unit escapes rent stabilization. This means that you are free to rent the apartment on whatever terms you see fit. However, this rule does not apply if you are receiving benefits under the city's J-51 program or other government program, such as the 421-a new construction program. If you are receiving these benefits, the apartments in your building will remain rent stabilized until the building stops getting benefits.
Form #1: Report Vacancy Decontrol to DHCR (RA-42V)
When a rent-controlled apartment becomes vacant, you must report the vacancy to the DHCR. You do this by filing an “Owner's Report of Vacancy Decontrol” [RA-42V-NYC] within 30 days following the date of first rental. Remember that this form needs to be filed only if the apartment was subject to rent control—and not rent stabilization—prior to the vacancy.
Conveniently, the DHCR now allows owners to fill out the form online at https://www1.dhcr.state.ny.us/StatutoryDecontrol. It asks you about the new rent-stabilized tenant, rent, date of occupancy, and lease length. You should keep a copy for your file; you don't have to give a copy of this form to the new, rent-stabilized tenant.
Form #2: Initial Apartment Registration (RR-1)
During the transition to a rent-stabilized apartment, you may negotiate the initial rent with the first rent-stabilized tenant. After this, you must fill out an “Initial Apartment Registration” form [RR-1(i) 12/07]. This is commonly known as the RR-1 form. You have 90 days after the first rent-stabilized tenant moves in to complete the RR-1 form, mail a copy to the tenant by certified mail, and file it with the DHCR.
Although there is no outright penalty for missing the 90-day deadline for sending the tenant a copy of the RR-1 form and filing it with the DHCR, it is in your best interests to comply with the deadline. Until you take these steps, you will face these major drawbacks:
You will not be able to legally collect any rent increases on the apartment. This includes increases for major capital improvements and individual apartment improvements.
The tenant and all future tenants will be able to file a fair market appeal, challenging the legality of the first rent you charged for the newly rent-stabilized apartment; and
The tenant and all future tenants can file a rent overcharge complaint and argue that you never filled an initial apartment registration form. This can result in a rent freeze, and a court might go so far as to freeze the rent and the amount for the old rent-controlled unit until you file the RR-1 form.
For this initial registration form, acceptable proofs of service are a date-stamped Post Office receipt for the certified mailing or the tenant's signed receipt acknowledging hand delivery of the form. See our Model Form: Have Tenant Acknowledge Initial Registration Receipt.
Determining Fair Market Rent, Appeals Process
It is important to note that the rent you negotiate for the apartment is subject to the tenant's right to file a “Fair Market Rent Appeal.” The tenant has 90 days from the mailing date of the tenant's copy of the RR-1 form to challenge the first rent you charged for the newly stabilized apartment. According to Manhattan attorney Peter Schwartz of Graubard Miller, if a tenant does not challenge the rent in that time, neither that tenant nor any subsequent tenant can challenge it in the future. The negotiated rent becomes the lawful regulated rent for the apartment.
“To determine an apartment's fair market rent, the DHCR considers special guidelines for rent increases issued annually by the Rent Guidelines Board, rents for comparable rent-stabilized apartments or unregulated apartments in the same building or area, and the cost of any improvements added to the apartment while it was vacant,” says Schwartz. An owner should always try to exceed or get as close as possible to the high-rent vacancy deregulation threshold of $2,000.
Schwartz points out that if the DHCR determines that the rent you set exceeds the fair market rent, it will adjust the legal rent for the apartment downward and will order you to reimburse the tenant for any excess rent collected. However, unlike typical “overcharge” cases where an owner must pay additional interest, triple damages, or attorney's fees to the tenant, an owner who loses a fair market rent appeal can't be hit with these penalties. Therefore, in the worst-case scenario, an owner will enjoy an interest-free loan while the DHCR determines if the rent was above fair market for the decontrolled apartment.
Pay Special Attention to These Line Items
Make sure you enter the correct information on the form, such as the apartment's previous rent or rent regulation status. A future tenant may file a fair market rent appeal on the basis that the initial rent registration was not valid because it was incorrect. If the DHCR agrees, it can freeze the rent. Give special attention to the following line items:
Item 1. Enter the date the rent-controlled apartment first becomes subject to rent stabilization—that is, the date that the first rent-stabilized tenant's lease began.
Item 12. In this space be sure to indicate all the new equipment you installed in the apartment while it was vacant that entitles you to a rent increase. For example, if you installed a washer and a dryer in the apartment, check the “other” box and write in “washer and dryer.” This information will help justify any rent increases you are taking for new equipment items and improves your chance of winning a fair market rent appeal or overcharge complaint filed by a tenant. When filling out this item double check to make sure you have kept copies of paid invoices and cancelled checks for the improvement you have made or new equipment you have installed in the vacant apartment. You'll need these documents as proof if a tenant challenges the rent.
Item 16a. Since your unit was rent controlled and is now moving to rent stabilization, you should fill out this box and check where it states “Apartment Previously Rent Controlled.” And on the three lines below, fill in the apartment's most recent rent-controlled rent, maximum collectible rent, and maximum base rent.
Form #3: File Initial Registration Summary (RR-2)
You must also fill out an “Initial Registration Summary” form [RR-2(i) 12/07]. This is a form you have filed with the DHCR in the past. In it, you provide building-wide information, including the total number of rent-stabilized and rent-controlled apartments in your building. In item 20 of the form, under the heading “Types of Units in Building,” indicate that the number of rent-stabilized apartments in the building has increased by one, while the number of rent-controlled apartments has decreased by one. You do not need to send a copy of this form to the tenant.
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