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New DHCR rent overcharge policy unpopular with owners.

A recent policy change by the Division of Housing and Community Renewal requires owners to deposit rent overcharge awards in a state-held escrow account if the tenant disappears. If the former tenant is not located, the funds could become a tidy sum for the state coffers in the future.

The Rent Stabilization Association's acting President, Jack Freund, expects owners to be affected soon. Unfortunately, he and Dan Margulies, executive director of the Community Housing Improvement Program, another owners' group, estimate there are somewhere between 1,600 and 1,800 overcharge orders being held back to coincide with the enforcement of this policy.

A spokesperson for DHCR denied cases were being held back. "[The policy] will apply to any cases from the point of issuance on," said Lou Ganim. "Cases are pending. There aren't any being held back. There has been a backlog for years. A backlog is nothing new."

The number of pending overcharge cases, he said, is 20,600 going back several years. The bulk of cases now being processed are from 1990.

Margulies said the problem "all comes from the agency's inability to process cases timely, because if they can reach the tenant they won't require the escrow. Certainly by the time something is decided by PAR it could be five years," he added, referring to the DHCR appeals procedure.

What the policy does mean is that owners who may have not pursued appeals or vigorously defended actions because the tenants moved out in the interim, could be hit with escrow orders they did not expect. "If the tenant left and there was an overcharge, now you will get killed," said Freund.

Under the policy statement 93-4, dated Oct. 4 and signed by acting commissioner Joseph D'Agosta, this money must be escrowed even if the overcharge was made by a former owner.

Because current Commissioner Donald Halperin was not taking office until Oct. 25, the timing of the policy is also of concern. "The other thing that makes this suspicious was it was issued when no commissioner was in charge," said Freund. "It last came up at an owner's advisory committee six months ago. The next thing we know, it's a done deed with no further opportunity to comment.

Usually, draft policy statements are passed to owners' representatives, who then have an opportunity to make comments before the policy becomes final.

Without doubt, Commissioner Halperin will be cornered at the next owner's meeting with DHCR, probably next week. "We would ask him to review and then retract this," said Freund. "It would be extremely harmful to the industry. It's not only a question of how much money is at stake, but the dampening effect. Now it will have an even greater effect on sales and transfer. "

In order to find missing tenants, the state intends to issue press releases from time to time and take ads in newspapers listing the names of those with money due. After seven years, the money would belong to the state, not revert to building owners.

"It appears on its face to be a fund raiser for New York State," observed Lindsay J. Rosenberg, a partner in Rudd, Rosenberg & Hollender, who handles many cases before DHCR. "Practically, if a tenant leaves they should be required to leave a forwarding address. [DHCR hasn't] addressed that. It smacks of revenue raising."

"Obviously it's going to enrich the state's coffers," concurred Freund. "The issue is whether they have the authority to issue a policy that has no basis in law."

Because most owners do not contest cases after tenants disappear, nor pursue them for back rent or damages to the apartments, if the orders about to be issued require the escrow, the policy will hurt them tremendously.

"Make it fair so you can go back and bring up to snuff files that are open so they do not end up losing out," suggested Rosenberg. "It would be unfair to the owners not to be able use back rent owed or damages to the apartments as an offset to the escrow because of the start-up dates of the policy," he said. As prejudiced as this policy is, grandfathering the 20,600 cases would be some relief to those that could get caught in this legal limbo time period.

Actions for owners

Attorney Martin J. Heistein of Belkin Burden Wenig & Goldman, former in-house counsel to the RSA, said owners should pay particular attention to every overcharge complaint and not ignore them. Contest treble damage awards, he said, because it is not unheard of for the ante to reach $50,000 to $80,000. Also, try to insert into the record and make sure that any overcharges were inadvertent and unintentional.

If tenants are late in paying rent, owners will have to start non-payment proceedings and attempt to collect rent before a tenant vacates. Any judgement can be used against any proposed overcharge, Heistein explained.

"But if they're gone, try to find them," added Rosenberg. "It's going to be a losing proposition. In order to obtain a judgement against a party that has disappeared, an owner will have to get the court's permission to serve by alternate methods, such as by publishing a notice in a newspaper. There might also have to be some investigative work. It will cost an excessive amount of legal fees," Rosenberg warned.

But it might be easier now to obtain a money judgement when a tenant skips out, said Margulies, because the issue will not be eviction.

"It rubs salt into the wound when an owner gets beaten for several months rent and several thousand in damages and then owners end up paying an overcharge award to the state," Heistein complained. "It difficult for all owners, especially small owners, to pursue these tenants."

Rosenberg suggested that owners go through their current legal files to see if there are any overcharge or treble damage complaints pending and immediately begin actions against those tenants for non-payment proceedings or damage judgement, as the case requires.

Additionally, when purchasing a building, Freund said to make sure there are no pending overcharge cases. Where there are unresolved overcharge complaints, make sure the current owner resolves those or escrows funds or indemnifies the purchaser.

Have a test case?

Industry groups and attorneys are eager to hear from owners when they begin to receive these escrow orders, particularly to use as test cases. "If anybody starts to get a decision we would be interested in learning of these people. We'd like to get a live body," said Heistein, whose firm often handles cases for owner organization.

"We are looking for good facts for a test case," echoed Margulies. Freund does not believe the RSA will challenge the policy until they have such a case, either.

Other issues

There are many procedural aspects that Heistein said will pose problems for the administration of this policy. What would happen if the succession regulations are upheld and the tenant takes up a roommate? Who becomes the tenant and which tenant gets the monies? What happens if in a divorce the wife seeks to obtain the money and the husband wants it?

"It seems DHCR's litigation bureau is going to cost the taxpayers money because DHCR will have to hire additional attorneys," Heistein predicts. "Owners are also going to try to keep DHCR from paying out these monies. The administration of the escrow account is going to be extremely complicated."

Margulies views the result of the administrative action as something that will backfire on tenants. "Ironically, what DHCR has done under the guise of helping tenants is that complaining tenants will get special treatment of a negative kind. They are going to be pursued for every dime."
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Title Annotation:New York, New York Division of Housing and Community Renewal implements policy change mandating deposit of rent overcharge awards in state-held escrow account when tenant can't be located
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Dec 1, 1993
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