How to avoid registration penalties.

As more and more distressed properties become available for sale as a result of deed-in-lieu transactions, toreclosures or bankruptcies, Belkin Burden Wenig & Goldman has been called upon with increasing frequency to advise and counsel prospective purchasers prior to the purchase of these properties.

During the period prior to the acquisition of a distressed property, it is likely that the maintenance of the property has been deferred as a result of the unwillingness or inability of either the foreclosed owner, court appointed receiver or lender to commit the resources needed to properly maintain the property.

Similarly, the foreclosed owner and/or the receiver often neglect to properly register all of the apartments with the New York State Division of Housing and Community Renewal.

In determining whether to purchase residential properties that are either in the middle of foreclosure or bankruptcy proceedings, or at the conclusion of either, it is imperative that the prospective purchaser review and analyze the rent registration of each and every apartment. If a prospective purchaser fails to properly analyze the registrations filed (or not filed) with DHCR, believing that there is time to do this analysis after it becomes the title holder of the property, the results can be disastrous.

Just as a prospective purchaser insists on ordering a title report in order to know the exact status of title issues prior to closing, the buyer must also insist on obtaining an analysis of the rent registration history of the property prior to obtaining title to the property.

The types of situations which call for a registration analysis are endless. Here are some of the situations we were recently confronted with:

* A lender is faced with the opportunity of taking back property without the need to undergo a lengthy and costly foreclosure process; however, it discovers that the property owner has never registered any of the apartments;

* A prospective purchaser of a property which is being sold in a bankruptcy auction discovers that the building owner only filed rent registrations during 1985;

* At the conclusion of a foreclosure, a lender seeks to determine what the appropriate rentals will be for a building that was previously a cooperative corporation.

Without first analyzing the ramifications of the rent registration on each of these properties, none of our clients were willing to take title. In order to fully appreciate the danger of purchasing property without a thorough review of the present as well as past rent registrations, it is important to understand the basic statutory framework governing rent registration. With the passage of the Omnibus Housing Act of 1983, an owner's failure to register an apartment with the New York State Division of Housing and Community Renewal could result in dramatic and often draconian penalties. Not only did the Rent Stabilization Code provide that the failure to register (either initially or annually), created a freeze on the rent at the time of non-registration, but the Code also provided that the filing of the missing. piece of paper only served to create a prospective thawing of the previously frozen rent.

Furthermore, DHCR adopted a virtually inflexible policy whereby the failure to register is presumptively deemed to be a willful act. This heinous conduct by the owner (as viewed by DHCR's unforgiving eyes), would generally result in the imposition of treble damages being heaped onto the rent refund and frozen rent caused by a single non-registration.

Because the ramifications of nonregistrations are not only experienced by the present owners of the property, the prospective purchaser must also undertake a pre-transactional analysis of the rent registration history of the building in order to determine the potential liability that the buyer may suffer once title passes.

A buyer's liability rises significantly via the Rent Stabilization Code's mandate that a post April 1, 1984 -- purchase will, in general, make the buyer liable not only for the buyer's prospective overcharges, but also for the seller's past misdeeds. Thus, a buyer could potentially become responsible for refunding overcharges and even treble damages on monies collected by the seller. Certainly, such a potential liability must be factored into the purchase price that a buyer is negotiating on a possible acquisition.

Escaping Rent Registration Penalties

There are several legal vehicles that permit an owner to escape the potential penalties that could otherwise been meted out by DHCR due to non-registration. First, the Rent Stabilization Code provides that an owner acquiring a property via a judicial sale (where records are unavailable to permit the purchaser to determine the legal rents) shall not be liable for making refunds on the seller's overcharges. As a result, there is a significant benefit to a purchaser at a judicial sale resulting from foreclosure or bankruptcy. Simply stated, whereas most owners would inherit the liability for their predecessor's overcharges, a judicial sale purchaser will not.

Two more recent amendments to the law also provide significant assistance to those wishing to escape the potential liability for non-registration. First. if the rent is otherwise legal but for the non-registration, the State Legislature has determined that DHCR may no longer impose treble damages based solely upon such non-registration.

Second, if the rent is otherwise legal, an owner may create both a retroactive and prospective cure of its non-registration problems by filing all the missing registrations. As a result, a prospective purchaser can examine the rent histories and rent registration rolls of the housing accommodations it may be acquiring to determine if the rents are proper and if there are any missing registrations. By belatedly filing such missing registrations, a prospective buyer can eliminate all liability for overcharges.

One caveat; this rent registration amnesty does not apply to overcharge complaints docketed by DHCR on or before June 30, 1991. However, it is a rather simple matter to obtain a print-out from DHCR listing all pending complaints. As a result, both present and prospective owners can now place some parameters on the scope of their potential liability.

Certainly, the ramifications of over-charge orders issued by DHCR via both single and treble damages are significant. However, by gathering information pertaining to the rental and registration history of the building at issue, owners and prospective purchasers should be able to more easily traverse the obstacle course known as Rent Stabilization with fewer stumbles and pratfalls along the way.