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What happens when an apartment owner lowers rent?

Many New York City apartment rents have legally risen so high under stabilization that they are above what the market will bear. So owners are finding they must lower the rent to keep good renewing tenants in place, and find new ones for vacant apartments.

Owners should be cautious when doing so, according to industry experts, as there is no formal policy under the Rent Stabilization Code that is guaranteed to protect the higher legal rent. Owners could find themselves out of luck and stuck with lower rents when the rental market turns around.

Lawrence S. Borah, a partner with Finkelstein, Borah, Schwartz, Altschuler, & Goldstein P.C. said, "You really can't protect yourself with regard to the base. The real question is whether you can recapture the base for the subsequent tenants." Some owners, Borah said, are giving some concessions and then hoping to raise back the same tenants in a subsequent lease. "That will only work if the tenant doesn't fight you," he noted.

Dan Margulies, executive director of the Community Housing Improvement Program said there has been a long standing procedure at the Division of Housing and Community Renewal (DHCR) for registering a "preferential" rent when apartments cannot be rented for a legal rent. He said there is some question, however, about who can receive preferential rent, since in the past, these concessions were used for someone such as a relative and not the tenant off the street.

To try to protect legal rights, Margulies said, the owner would indicate the legal rent and the lower rent on the registration form, and also check off the box for "other" and write in "preferential." He said the owner should also show the legal rent on the lease together with an attached agreement or notation that for the terms of that lease a preferential rent will be charged.

"If you do that on the lease and on the registration. [DHCR] permits you to move the preferential and the legal rent up by guidelines," he said, "so if the

market changes you can probably charge the increases to a new tenant, but you cannot raise the preferred tenant over the guidelines."

Under the Rent Guidelines Board order, and the interpretations of Rent Guidelines Board staff in the past, Margulies cautioned, once you lower it, the owner can only take the guidelines increases on the rent charged and paid.

"Therefore there is a legal interpretation that no matter what you say on the lease or registration you cannot jump back up", he said.

DHCR has stated at RSA hearings and in other public forums that owners can maintain the legal rents, but they have circulated a draft policy which would change that. Margulies said the draft seems, however, to have granfathered it in if an owner has already done this. But he said, the draft also says owners cannot preserve the legal rent if the only reason for the preferential rent is market conditions.

"It's still in draft and it's such a mishmash," said Margulies. "It is in legal limbo. The policy of DHCR has been one which they have told people, but to my knowledge no cases have been decided. The issue may never come up until the market turns around and a vacancy lease is signed which bumps it back up."

Joseph L. Forstadt, a public member of the Rent Guidelines Board, and a partner with Stroock Stroock and Lavan, agreed that there are legal questions about the policy. In a recent case in the New York Law Journal, he said, the court held that an owner who negotiated a lower rent would be obligated to maintain it for the tenant in occupancy.

When that tenant leaves, there will be problems, Forstadt foresees. "It is an upredictable and unhappy place for owners and I suspect there will be difficulties for owners to resume the old higher rents", he said.

Adrienne Kivelson, special assistant to the Acting Deputy Commissioner at DHCR said the policy is in flux and there is a question as to what is a preferential rent. "We do not have a preferential rent policy," she admitted. "There is only one reference in the Rent Stabilization Code and that's what we're going with." She said the code language, however, is open to interpretation. "There is talk of looking at it as a code amendment," she added.

Kivelson said (the most recent guidelines) has been interpreted to mean the most recent guideline and the vacancy allowance. She said there have been some interpretations which say it includes all the intervening guidelines. "It's something we've been wrestling with and is not fully evolved," she added.

While the owners are calling it a preferential rent, she said traditionally, preferential meant somebody you had a relationship with. "So what is preferential and what can you charge when a tenant leaves?"

The Rent Stabilization Code, section 2521.2b says where the legal rent is established and a rent lower than the legal rent is charged and paid by the tenant, upon vacancy of such tenant, the legal regulated rent will be that previously established plus the most recent applicable guidelines increases, plus such other increases as are authorized by the adjustment of legal regulated rent charged to new tenants under Section 2522.4. That section refers to new equipment under the Major Capital Improvement (MCI) program for new tenants.

Martin Heistein, counsel to the RSA, said the beginning of the code is crystal clear and everybody understands that you set up a two tier system. The problem comes up, he agreed, upon the vacancy of that preferential tenant. "We say you can charge the old rent plus all the intervening guidelines while DHCR is stressing the most recent guideline and says you cannot take the intervening ones", Heistein explained. "We've discussed this for over two years." But when they change the code they may clarify it the wrong way, he added.

Forstadt suspects the court will resolve the issue of preferential rent in favor of tenants at least in the lower court levels but that this could change when the case goes to a higher appellate court. "The case should turn on notice", Forstadt explained. "As long as an owner has registered the higher rent level and maintained it on file, the fact that he accords a lower rent level to another tenant should not prevent him from charging another tenant a higher rent. It shouldn't turn on the individual. A reasonable interpretation would be that the owner could obtain the higher rent from another tenant."

Rent Control cases have been decided in favor of the higher rent, Forstadt said, after owners rented to family members at a discounted rent and sought to bring up a new tenant Forstadt said the new legal rent was found to be dependent on "what was the legal rent."
COPYRIGHT 1992 Hagedorn Publication
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Apr 8, 1992
Words:1141
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