Rent stabilization 'Rent First' issues.

One of the primary features of rent stabilization is that the current rent for a given apartment is a function of the rent previously charged.

Thus, a tenant renewing his or her lease is charged a guideline increase over the existing rent. An incoming tenant, similarly, will pay a statutory vacancy increase above the rent paid by the last tenant.

But what happens when the owner, between tenancies, alters the apartment in some fundamental way? For example, an owner might combine two apartments into one, or split one apartment into two. Under such circumstances, the current and former apartments are so fundamentally distinct that the existing rent no longer serves as a logical antecedent for calculating the present rent.

The various rent agencies have ruled for many years that where the outer dimensions of a rent stabilized apartment have been substantially changed, the owner may charge the incoming tenant a first, market rent. However, in Devlin v. New York State Division of Housing and Community Renewal, the Appellate Division, First Department held that subtracting 86 square feet from an apartment did not allow the owner to charge a first rent, and that to hold otherwise would undermine the very purpose of the Rent Stabilization Law.

DHCR's predecessor, the New York City Conciliation and Appeals Board ("CAB") developed the "first rent rule" to govern such instances. CAB held that where the outer configurations of an apartment have been substantially altered, the owner is entitled to a first, market rent that the tenant cannot challenge. For example, in CAB Op. No. 9,358, the agency allowed the owner to charge a first rent where he consolidated three apartments on two different floors into a single duplex. In CAB Op. No. 16,172, CAB allowed a first rent to be charged where the dwelling unit had been altered so extensively that it did not previously exist in its present form.

The agency's un-codified first rent rule was judicially endorsed by the Appellate Division, First Department in the 1995 case of 300 West 49th Street Assocs. v. New York State Division of Housing and Community Renewal, authored by Justice Peter Tom.

Notably, the owner in 300 W. 49th Street did not purport to change the dimensions of the apartment, but instead claimed that the interior of the apartment had been so substantially renovated that a new dwelling unit had been created. The First Department rejected this claim, as had DHCR.

The tenants in Devlin moved into apartment 5D at 302 East 3rd Street in 1996. The former tenant was one Teresa Clayton. Clayton's apartment consisted of one bedroom, one bathroom, one kitchen and one living room.

Between tenancies, the owner removed 86 square feet from Clayton's bedroom and added it to an adjacent apartment. This change required the owner to extend the existing fire escape and move electrical service from an old adjoining wall into the newly enlarged apartment next door.

Clayton had been paying $673.33 per month; the incoming tenants, whose apartment was smaller than Clayton's, paid a monthly rent of $1,200. The incoming tenants filed an overcharge complaint with DHCR in March of 1999. The owner, in response, asserted that it was allowed to charge a "first rent" because Clayton's apartment no longer existed. DHCR agreed. In a July 24, 2001 determination, DHCR's Commissioner ruled that based on the owner's architectural plans, the renovation satisfied the agency's criteria for finding that the apartment had been significantly changed. Supreme Court affirmed DHCR's determination in a subsequent Article 78 proceeding.

The Appellate Division reversed. Justice Tom--who had also authored the decision in 300 W. 49th St. Assocs.--first held that DHCR's ruling permitted the owner to receive a double windfall. Justice Tom acknowledged that the Court had previously endorsed the first rent rule where "'the perimeter walls of the apartment have been substantially moved and changed and where the previous apartment, essentially, ceases to exist, thereby rendering its rental history meaningless.'" The Court concluded, however, that such was not the case at 302 East 3rd Street.

It is difficult to disagree with the Court's conclusion that the first rent rule should not apply where an owner, by moving a wall or two, arbitrarily shifts an insignificant amount of space from one apartment to another. But the Court's focus on whether the work was "necessary" is perplexing. "Necessity" rarely causes an owner to combine two apartments into one, or to split a single apartment into two studios. In most instances, the owner performs this work to obtain a first rent. Because a first rent of $2,000 or more per month will now permanently exempt an apartment from rent stabilization (see, Rent Stabilization Law [section] 26-504.2), this kind of alteration is more popular than ever.

The best way to read Devlin, is this: if an owner wants to collect a first rent, he or she will have to work for it. Combining or splitting apartments will qualify, but merely shrinking or growing apartments will not. Based on Devlin, DHCR and lower Courts will closely scrutinize owner claims of newly created apartments. Owners seeking a first rent are advised to do something beyond moving a few panels of sheetrock.

WARREN A. ESTIS

AND JEFFREY TURKEL

ROSENBERG & ESTIS, P.C.