Luxury Deregulation: A Boon For Landlords, a Bane for Tenants
New York Law Journal, March 11, 1996
By Samuel J. Himmelstein

RENT REGULATION protects from groundless eviction and excessive rent increases approximately 1.1 million households in New York City, and close to 60,000 households in Westchester, Nassau, Rockland and other upstate counties.

In 1993, the State Legislature passed the Rent Regulation Reform Act of 1993 (RRRA); in 1994, the New York City Council enacted Local Law Number 4. Both of these statutes, for the first time, subjected apartments to deregulation based solely on the monthly rent and the income level of the tenant.

Deregulation takes two forms: (1) vacancy deregulation, whereby apartments renting for $2,000 per month or more became deregulated upon a vacancy; and (2) deregulation of occupied apartments where the rent exceeds $2,000 and the annual income of the tenant exceeds $250,000.

Commonly known as "luxury deregulation," these measures were opposed by tenant advocates as an unnecessary erosion of rent protections, and were hailed by landlord representatives as the beginning of a return to an unregulated rental market. Prior to the enactment of these laws, all regulated apartments, regardless of rental or income level of the tenants, were treated equally for purposes of rent and eviction protection.

Vacancy Deregulation

For housing accommodations outside of New York City and subject to the Emergency Tenant Protection Act (ETPA) or the New York State Rent Control Law (SRCL), an apartment qualifies for deregulation upon a vacancy if the legal registered or maximum rent was $2,000 or more per month at any time between July 7 1993, and Oct. 1, 1993, and was or became vacant on or after July 7 1993.

For housing accommodations in New York City subject to the Rent Stabilization Law (RSL) or the New York City Rent Control Law (CRCL), the statute is much more generous to owners. Under the city law, the July 7, 1993 to Oct. 1, 1993 window is eliminated; the apartment is eligible for deregulation any time that the rent reaches $2,000 per month, provided the apartment was or becomes vacant on or after April 1, 1994 (prior to April 1994, New York City apartments were subject to deregulation pursuant to the state statute).

The lack of a cutoff date in the city law is the crucial distinguishing feature between the two pieces of legislation. Since the apartment is subject to deregulation simply by virtue of a combination of a vacancy and a $2,000 monthly rent, New York City landlords again have tremendous incentive to obtain vacancies, as in the period of the cooperative conversion boom of the 1980s.

The RRRA also added provisions to the statutes which allowed deregulation of housing accommodations occupied by "high income" tenants. Local Law 4 amended the New York City Rent Stabilization and Rent Control Law similarly. Pursuant to the RRRA and Local Law 4, deregulation occurs under the following conditions.

For housing accommodations outside of New York City, the legal regulated or maximum rent of the housing accommodation must have been $2,000 or more per month on Oct. 1, 1993, neither earlier nor later. For New York City housing accommodations, the legal regulated or maximum rent must have been $2,000 or more per month as of Oct. 1, 1993, or be such amount on or after April 1, 1994. In both circumstances, the housing accommodation must be occupied by a tenant who had a total annual income in excess of $250,000 per year In each of the two calendar years preceding the year in which an owner serves the tenant with an Income Certification Form (ICF).

Annual Income is defined as the Federal adjusted gross income, as reported on the New York State Income tax-return, and total annual income is defined as the sum of the annual incomes of all persons named as tenants or co-tenants on the lease who occupy the housing accommodation, plus all other persons who occupy the housing accommodation on an other than temporary. basis.

In 1993, only 1 percent of all regulated apartments rented for more than $2,000 per month. There are no statistics on how many apartments are close to the $2,000 number, but owners now have an added incentive to raise the rent to this level. One method to increase the rent of a vacant apartment is for the landlord to claim that improvements were made in the apartment and to add a part of the costs to the rent. The RRRA legislates that 1/40th of the cost improvements may be added to the base rent.

Groups who monitor rental changes, like the Community Training and Resource Center (CTRC), predict that the combination of apartments now renting in the $1,000-$2,000 range, and the ability to raise rents substantially through such improvement pass-alongs, will, within 10 years, result in statistically significant deregulation.

A housing accommodation found by the Division of Housing and Community Renewal (DHCR) to have become vacant due to an owner's harassment will not be deregulated. In addition where a member of the household has acquired succession rights under DHCR regulations, the housing accommodation will not be considered as having become vacant. Further. the deregulation provisions do not apply to housing accommodations which are subject to rent regulation by virtue of receiving tax benefits pursuant to sections 421-a or 489 of the Real Property Tax Law until the expiration of the tax abatement period.


To commence the process of deregulating an apartment based on the tenant's income, the owner must, on or before May 1 in each calendar year, serve the tenant with DHCR's income certification form (ICF). DHCR will not process an owner's petition for high income rent deregulation under the RRRA unless the ICF has been served on or before May 1. Further, the ICF must be served by at least one of the methods prescribed by the statute.

The ICF requires the tenant to list the names of the tenants and all other persons who occupy the housing accommodation as a primary residence on other than a temporary basis and to identify bona fide employees of the occupants who reside in the housing accommodation in connection with such employment, as well as bona fide subtenants who are in occupancy pursuant to the provisions of section 226-b of the Real Property Law.

The ICF also requires a certification by the tenant as to whether the total annual income of the tenants and occupants exceeded $250,000 in each of the two preceding calendar years. The ICF informs the tenant that there is protection against harassment, that disclosure of the income information is limited to the matters required on the ICF, and that the tenant must complete and return the form only if the monthly rent was $2,000 or more on the applicable dates.

The completed ICF must be returned to the owner within 30 days of service if the tenant concedes that the total annual income exceeded $250,000 in each of the two preceding calendar years, the owner may apply to DHCR for high-income rent deregulation by filing a "petition by owner for high income rent deregulation" (OPD), together with the ICF, by June 30 of the year in which the ICF was served upon the tenant.

The OPD must be filed in person or by mail. An OPD filed by mail must be postmarked no later than June 30. Within 30 days after the filing, DHCR is required to issue a deregulation order, effective at the expiration of the existing lease for rent-stabilized tenants, or effective June 1 of the following year for rent-controlled tenants.

To be eligible for high-rent, high-income deregulation, a New York City housing accommodation must continuously have a legal regulated or maximum rent of $2,000 or more per month from the owner's service of the ICF upon the tenant to the issuance of an order deregulating the housing accommodation.

If the tenant fails to return the completed ICF to the owner, or if the owner disputes the information supplied by the tenant on the ICF, the owner may, by June 30 of the calendar year, request that DHCR verify, through the New York State Department of Taxation and Finance, whether the total annual household income exceeded $250,000 for each of the two preceding calendar years.

DHCR will, within 20 days of receipt of the owner's request, ask for necessary identifying information from the tenant, giving the tenant 60 days to respond and advising the tenant that failure to respond will result in deregulation.

If the tenant fails to provide the requested information, DHCR will issue by Dec. 1 of such year, an order providing that the housing accommodation will be deregulated effective upon the expiration of the existing lease for rent-stabilized tenants, and on March 1 of the following year for rent- controlled tenants.

Approximately 2,000 applications for income verification were sent to tenants by the DHCR in 1995.

If the Department of Taxation and Finance states that the total annual household income exceeded $250,000 in each of the two preceding calendar years, the owner and tenant are notified by the DHCR by Nov. 15 and given 30 days to comment. Within 45 days after the expiration of the comment period, where the facts warrant, DHCR Is required to issue an order of deregulation, effective upon expiration of the existing lease for rent-stabilized tenants and on March 1 of the following year for tenancies subject to rent control.

If the Department of Taxation and Finance determines that the income threshold has not been met or cannot be ascertained; DHCR will deny the owner's petition for deregulation. There are no provisions in the statute for any further proceedings or hearings at the lower level of the agency in such event. Orders granting or denying deregulation are subject to petitions for administrative review (PAR), which must be filed with the DHCR within 35 days after the date of issuance of the order. A PAR is an internal administrative appeal to the DHCR Commissioner. A party aggrieved by a PAR order may seek judicial review by filing a proceeding in the Supreme Court under Article 78 of the Civil Practice Law and Rules.

The only information exchanged in the process of income verification among the owner, tenant, DHCR and the Department of Taxation and Finance is whether the income threshold has been met. Specific income figures will not be disclosed or exchanged. The provisions of the State Freedom of Information Law (FOIL), which might otherwise allow certain information to be disclosed, do not apply to any income information obtained by the DHCR while processing the owner's petition.

Subsequent to the enactment of the RRRA and Local Law 4, DHCR issued Operational Bulletin 94-1, dated Jan. 3, 1994. This bulletin summarizes the substantive provisions and procedural mechanisms of the deregulation statutes, and poses several hypothetical cases and their resolution.

In December 1995, DHCR issued Operational Bulletin 95-3, which replaced Operational Bulletin 94-1. This bulletin contains several controversial, substantive changes. It specifically permits owners to use individual apartment improvements to raise the rent to the threshold level.

The definition of total annual income includes, for rent- stabilized units, all tenants, regardless of whether the apartment is occupied as their primary residence. For rent- controlled units, this definition is restricted to persons who occupy the accommodation as their primary residence.

Finally, this bulletin specifically permits owners of rent- stabilized units, where the lease renewal window period occurs while an OPD is pending, to annex a rider to the renewal offer permitting cancellation of the lease 60 days after issuance of a deregulation order. This provision may violate the Rent Stabilization Law and Code, which strictly limit the grounds for non-renewal of leases, and contradicts at least one court decision in this area (see discussion of court decisions below).

Additionally, on Oct. 13, 1995, the DHCR issued an opinion letter in response to a question submitted by an owner's attorney. In the letter, DHCR stated that when the owner uses individual apartment improvements (1/40th of the cost of qualified improvements) to increase the monthly rent of a vacant apartment above the $2,000 threshold, the apartment would be deregulated upon occupancy by the subsequent tenant.

Apparently unresolved is how DHCR and the courts will react to tenants who challenge the $2,000 rental, claiming that the improvements relied upon by the owner were either not performed or did not qualify as improvements.

Court Decisions

Since this legislation is relatively new and the issues in deregulation are often, though not always, straightforward, few court decisions have been reported.

In Matter of Classic Residences, Inc., NYLJ, July 1, 1994, p. 31, col. 1 (Sup. Ct. N.Y. Co.), the tenant had initially conceded on the ICF that her household income exceeded the $250,000 threshold. She subsequently filed a corrected certification, stating that her income was below $250,000 and contesting the landlord's claim. The DHCR then directed the landlord to file another petition for deregulation. The owner filed an Article 78 proceeding, seeking an order directing the DHCR to deregulate the apartment, and to toll the "window period" of 120-150 days, during which landlord must either renew a tenant's lease or refuse to renew and provide the tenant with a legally cognizable reason for non-renewal.

The court, by Justice Joan B. Lobis denied the landlord's petition, stating that the DHCR had not failed to perform a mandatory duty, and that the landlord had not demonstrated a clear right to relief. The court ruled that the landlord's remedy was to file an Article 78 proceeding after the agency had completed its investigation and had rendered its decision on the landlord's petition for deregulation.

The court further denied the landlord's claim for preliminary injunctive relief, finding that it had failed to demonstrate a likelihood of success on the merits, and that its alleged irreparable harm -- loss of income -- was speculative.

On appeal, the First Department modified and affirmed Justice Lobis's order. In Classic Residences Inc. v. New York State Division of Housing and Community Renewal, --AD2d--, 622 NYS2d 693 (1st Dept. 1995), the court held that since the RRRA neither authorizes nor prohibits a tenant's amendment or correction of the income certification form, no such prohibition would be implied. The court also held that since the tenant had, in her amended ICF, contested that her income exceeded the threshold level, mandamus did not lie and the DHCR was not required to issue an order.

In an unreported decision, Rocky 116 L.L.C. v. Belle Israelite, Sup. Ct. N.Y. Co., Oct. 25, 1995, Index No. 110479/95, Justice Stuart C. Cohen held that where an order of deregulation was issued after the lease renewal period of 120-150 days and beyond the deadline by which the DHCR was required to issue an order, the landlord was nonetheless bound through the end of the term of the renewal lease. The court's reasoning was grounded in sections 2523.5(c) and 2524.4 of the Rent Stabilization Code, which strictly limit the grounds for refusal to renew leases, and ensure that a tenant's rights cannot be abridged where a landlord wrongfully fails to offer a renewal lease.

As more petitions are filed and issues develop, it is likely that more court decisions will follow. Since precedent is scant, practitioners in this area have the opportunity to "create" the law.

Other Issues

Constitutional challenges to the legislation based upon equal protection and privacy arguments have been contemplated by tenant advocates. As the city legislation expands the circumstances in which an apartment can become deregulated, it might be vulnerable to a claim that it is ultra vires more restrictive than the state statute. In addition, tenants now have added incentive to file challenges to their rent level, either in court or at the DHCR (the courts and the agency generally have concurrent jurisdiction over most overcharge claims).

One strategy employed by tenant attorneys is to file a challenge, either a rent overcharge complaint in court or at the DHCR, or a reduction of services complaint with the DHCR, and request a stay of the owner's petition for deregulation pending resolution of the overcharge complaint. Since overcharge complaints often take five years to resolve at the lower level of the DHCR, owners' attorneys will undoubtedly request a denial of the stay or an expeditious resolution of the rent challenge. Since both overcharge and reduction of services complaints could result in a reduction of the legal rent below $2,000, logic dictates that such complaints be resolved prior to processing the deregulation petition. In addition, challenges may be made where rents include individual vacancy improvement rent increases which have brought the monthly rent to the $2,000 level. The rationale for allowing such increases is to permit an owner to recoup, within a regulated system, expenses incurred in making improvements.

Under the RRRA and Local Law No. 4, owners may charge a market rent after reaching the threshold level. Tenants may challenge an owner's use of this benefit, which was intended as a trade-off for continued restrictions, as a means to escape the restrictions entirely.

Non-purchasing rent-regulated tenants who reside in apartments which have been converted to cooperative or condominium ownership pursuant to a non-eviction plan, might, after an order of deregulation is issued, seek protection under section 8352-eee 2(c)(iv) (In Nassau, Westchester and Rockland Counties) or 352-eeee 2(c)(iv) (in New York City), of the General Business Law, which provide:

“The rental of non-purchasing tenants who reside in dwelling units not subject to government regulation as to rentals and continued occupancy and non-purchasing tenants who reside in dwelling units with respect to which government regulation as to rentals and continued occupancy is eliminated or becomes inapplicable after the plan has been accepted for filing by the attorney general shall not be subject to unconscionable increases beyond ordinary rentals for comparable apartments during the period of their occupancy. In determining comparability, consideration shall be given to such factors as building services, level of maintenance and operating expenses.”

Negotiated Settlements

In many cases, particularly those in which the tenant can present no defenses to the owner's petition, leases can often be negotiated which afford the tenants continued occupancy in exchange for a higher rent and an agreement not to contest deregulation. In such instances the tenancy, although no longer protected by rent stabilization or rent control, will continue to be protected by various provisions of the Real Property Law (the warranty of habitability, the right to sublet, the right to a roommate, the prohibition against retaliation) and other statutes and codes relating to housing standards and services.

Samuel J. Himmelstein is a partner at Himmelstein, McConnell & Gribben in Manhattan. The firm represents tenants, tenant associations, cooperative boards and shareholders.