Anyone who has ever contested a rent overcharge complaint with the DHCR, is painfully aware of the considerable battle that it is. The heart of every rent overcharge complaint always boils down to the infamous “Four-Year Rule”.
Until recently, a building owner or purchaser was relatively safe in defending against a tenant’s rent overcharge allegation if they were able to provide a rent history establishing that the rent charged in the last four years was increased legally. The DHCR was pretty rigid with regard to the four-year statute of limitations, and would not go beyond the four years (the base-date) to determine the legal regulated rent in processing a rent overcharge complaint. However, several recent court decisions have now put that rule in jeopardy.
In Grimm v. DHCR (2009), the NYC Court of Appeals ruled that where an overcharge complaint alleges fraud, the DHCR has an obligation to ascertain whether the rent on the base date is lawful, even where it involves an examination of the rental history earlier than four years from the complaint’s filing.
Unfortunately, the courts did not define fraud, opening up a Pandora’s Box and leaving an owner or potential purchaser completely vulnerable to the unknown. To illustrate the possible ramifications, consider the following scenarios that may arise out of this decision:
• Many owners have already destroyed all documents more than four years old, based on the four-year rule. If a tenant now files a rent overcharge complaint claiming fraud going back 10-15 years, owners will be unable to reconstruct that rent history.
• Until now, a prospective purchaser looking to buy a building would need only to review the rent history for the past four years as part of their due diligence. If everything was in order, they could safely assume that the rent roll was legal. Now, the four-year rent analysis will not be adequate.
• A tenant decides, out of curiosity, to obtain a rent history from DHCR and notices a rent increase in 1989 that was higher than the guidelines would allow. The tenant files a complaint with the DHCR claiming that the owner had committed fraud in 1989, making their current rent an overcharge. It is virtually impossible to defend against such an allegation, and the DHCR is compelled to assess an overcharge, with treble damages, based on the Grimm decision.
• DHCR issued a rent overcharge order to a prior tenant in 1995. Based on the current four-year rule, a prospective purchaser would not need to concern themselves with that order. Now, however, a tenant may claim fraud because DHCR set the legal rent in 1995, and the owner would need to calculate the legal regulated rent from 1995 forward, rather than limiting the review to the past four years.
To exacerbate the problem, there are now tenant attorneys that are sending mass-mailings to tenants offering to help tenants fight their landlord. One tenant blog encourages tenants to fight their landlords advising them “How to Protect Yourself against a Ruthless, Greedy Landlord” and warning tenants that, “there’s never been a time when your tenancy rights have been more dangerously threatened with extinction.” If only that were true!
The facts are that the Rent Regulation Laws are set to expire this year. Assembly Democrats have a powerful lever at their disposal to get a better deal for tenants this time around. Even Republicans want to keep the rent laws intact, so as to be able to benefit from such programs as the 421a tax abatements, which spur new apartment building development.
Before leaving office, former Governor David Paterson introduced legislation to amend the Rent Laws. This legislation would include increasing the High Rent Vacancy/High Income threshold from the current $2,000 to $3,000. The governor did not say how that would affect apartments that are already deregulated, but whose monthly rent is less than $3,000.
Another detail of the legislation would be to change the way MCI increases are implemented. Currently, an MCI increase is permanently added to the rent. The legislation seeks to limit the increase to the time it takes for the landlord’s costs to be reimbursed. After that, the MCI increase would be removed from the rent, and the legal rent would decrease.
All in all, rent regulations are not going away anytime soon. Even though Governor Paterson is no longer in office, let’s not forget that it is our current Governor’s father who created the DHCR.
So what’s an owner/prospective purchaser to do?
Although the courts have not yet clarified what would constitute fraud, they have stated that if a tenant does not claim fraud, an owner cannot be required to produce records going back more than four years from the filing of a complaint. A tenant must provide a “compelling reason” to allege fraud. Thus, the tenant simply writing that they think that the current rent was calculated by fraud would not necessarily trigger a fraud investigation. However, there is no clear standard or definition as to what would trigger the DHCR’s obligation to investigate the fraud claim.
Taking everything into account, there is not much that a current owner could – or should – do at this point. If an owner receives a rent overcharge complaint wherein a tenant alleges fraud, an owner would be best advised to contact a competent attorney or consultant proficient in rent stabilization law.
A prospective purchaser would need to be more diligent in reviewing a building’s rent history before purchasing a building. Purchasers need to remember that they are buying a rent roll, not just a structure. Before signing on the dotted line, always make sure your rent roll is legal.
Joseph Lamet is a consultant specializing in Rent Stabilization Law. He can be reached at (718) 854-1096, or at email@example.com.