DHCR Reverses Position on Retroactive Application of Bridge-the-Gap Rule

Following a 2018 court ruling that Rent Stabilization Code (RSC) §2526.1(a)(3)(iii), as amended in 2014, does not have retroactive effect, the DHCR has reversed its prior position that the amended RSC provision applied retroactively to determine legal rents after owners had followed the prior RSC provision to set negotiated first rents after an extended vacancy or temporary exemption from rent regulation. Until recently, under the DHCR’s prior position, unexpected rent overcharge determinations resulted in some cases where owners simply followed the previous rule while it was in effect to set lawful rents.

Old Rule and New Rule

Prior to Jan. 8, 2014, RSC §2526.1(a)(3)(iii) (the Old Rule) provided that:

Where a housing accommodation is vacant or temporarily exempt from regulation pursuant to section 2520.11 of this Title on the base date, the legal regulated rent shall be the rent agreed to by the owner and the first rent stabilized tenant taking occupancy after such vacancy or temporary exemption, and reserved in a lease or rental agreement; or, in the event a lesser amount is shown in the first registration for a year commencing after such tenant takes occupancy, the amount shown in such registrations, as adjusted pursuant to this Code.

Effective Jan. 8, 2014, RSC §2526.1(a)(3)(iii) was amended (the New Rule) and states that:

Where a housing accommodation is vacant or temporarily exempt from regulation pursuant to section 2520.11 of this Title on the base date, the legal regulated rent shall be the prior legal regulated rent for the housing accommodation, the appropriate increase under section 2522.8 of this Title, and if vacated or temporarily exempt for more than one year, as further increased by successive two year guideline increases that could have otherwise been offered during the period of such vacancy or exemption and such other rental adjustments that would have been allowed under this code.”

While the Old Rule permitted owners to set a “first” rent-stabilized rent following a base date vacancy or temporary exemption, the New Rule requires owners instead to “bridge the gap” to set a next stabilized rent. In other words, provided the apartment had been vacant or temporarily exempt for at least a year, an owner must apply two-year rent guideline increases to every two-year period that an apartment remained vacant or temporarily exempt after prior rent regulation, followed by application of lawful increases permitted for a vacancy lease to a new rent-stabilized tenant. In some cases where there was no prior legal regulated rent, the DHCR has utilized comparable rents as an alternative to set the legal rent.

DHCR Applied New Rule Retroactively

After the 2014 RSC amendment, the DHCR issued decisions applying the New Rule retroactively to rent overcharge complaints, even if an owner appropriately followed the Old Rule. For example, in Matter of Tsui, DHCR Adm. Rev. Docket No. FM210058RO, LVT #28165 (11/10/17), the DHCR applied the New Rule to a tenant’s rent overcharge complaint after the owner set the tenant’s vacancy rent in accordance with the Old Rule while the Old Rule was still in effect. In Tsui, the DHCR ordered the owner to refund a $35,000 rent overcharge, including interest, finding that this didn’t cause “undue hardship or prejudice” to the owner. The DHCR reasoned that it considered the owner’s reliance on the Old Rule by not assessing triple damages. 

Court Finds Retroactive Application of New Rule Arbitrary and Unreasonable

The DHCR recently reversed its position on retroactive application of the New Rule. In Matter of Goldmont Realty Corp. (DHCR Adm. Rev. Docket No. GP210013RO, LVT #30120 (3/18/19)), the DHCR revoked a Rent Administrator’s overcharge where the Rent Administrator applied the New Rule “and used the apartment’s legal regulated rent prior to the vacancy plus appropriate increases to set the base date rent.” Citing AEJ 534 East 88th LLC v. DHCR (Index No. 100476/2017, LVT #30121 (Sup. Ct. N.Y. Co. 2018)), where the Court held that, “it was not the intent of the legislature to apply the amendment retroactively,” the DHCR now applied the Old Rule to a case where the rent was set while the Old Rule was in effect.

In the Goldmont case, the complaining tenant was the first rent-stabilized tenant in the apartment after it was vacant for six months in 2012. The apartment was vacant and therefore temporarily exempt from rent stabilization on the base date of July 7, 2012 (four years prior to the complaint filing on July 7, 2016). The DHCR found that, under the Old Rule, “the owner was entitled to charge the complaining tenant an agreed upon first stabilized rent when she took occupancy in October 2012.”

In AEJ 534 East 88th LLC v. DHCR, now relied on by the DHCR, the Court had revoked the DHCR’s decision applying the New Rule to a rent set in accordance with the Old Rule. As the Court noted:

There is no wording in the revised provision that states that it will apply retroactively. And petitioner will face undue hardship and prejudice under RSC §2527.7 as a result of its application to the instant proceeding. Petitioner will be forced to pay over $20,000 . . . even though it purportedly complied with the law at the time it entered into a lease with [tenant]. And under [DHCR’s] reasoning, there was no way for petitioner to avoid overcharging [tenant]. That constitutes undue hardship or prejudice. . . . And it just is not fair.

Old Rule Requires First Rent After Vacancy or Temporary Exemption to Be Rent Stabilized

The language of the Old Rule “necessarily presumes” that the first tenant after the base date vacancy or temporary exemption “is offered a rent-stabilized lease.” See, e.g., Thompson Assets, LLC v. Raffelo (61 Misc.3d 130(A), LVT #29729 (App. T. 1 Dept. 2018)). The DHCR pointed this out in another recent PAR decision, Matter of Healy (DHCR Adm. Rev. Docket No. GX410004RK, LVT #30135 (3/18/19)). In Healy, the DHCR didn’t apply the Old Rule, as it did in Goldmont, because the owner didn’t give the first tenant after vacancy or temporary exemption a rent-stabilized lease. Instead, the DHCR calculated the legal rent by bridging the gap between the last legal regulated rent and the base date rent.

Going Forward

Significant amendments to the Rent Stabilization Law are anticipated in June 2019 and may affect any rules currently in effect. Owners should review the amended law to determine which amendments are made retroactive and whether retroactive application of any new provision causes hardship to those who acted in reliance on prior law.