FE 410095 RO

                                STATE OF NEW YORK
                    DIVISION OF HOUSING AND COMMUNITY RENEWAL
                          OFFICE OF RENT ADMINISTRATION
                                   GERTZ PLAZA
                             92-31 UNION HALL STREET
                             JAMAICA, NEW YORK 11433

      ------------------------------------X 
      IN THE MATTER OF THE ADMINISTRATIVE    ADMINISTRATIVE REVIEW
      APPEAL OF                              DOCKET NO.: FE 410095-RO

        339 EAST 12TH STREET, ASSOCIATES,
                                             DRO DOCKET NO.: ZBH-410155-R

                                             TENANT:  MICHELLE MYERS 
                                PETITIONER    
      ------------------------------------X                             

          ORDER AND OPINION GRANTING PETITION FOR ADMINISTRATIVE REVIEW
                                     IN PART


      On May 9, 1991 the above-named petitioner-owner filed a Petition for 
      Administrative Review against an order issued on April 19, 1991 by the 
      Rent Administrator, 92-31 Union Hall Street, Jamaica,  New York 
      concerning the housing accommodations known as 339 East 12th Street, New 
      York, New York, Apartment No. 1 wherein the Rent Administrator 
      determined that the owner had overcharged the tenant.

      The Administrative Appeal is being determined pursuant to the provisions 
      of Sections 2525.1 and 2526.1 of the Rent Stabilization Code.

      The issue herein is whether the Rent Administrator's order was 
      warranted.

      The Commissioner has reviewed all of the evidence in the record and has 
      carefully considered that portion of the record relevant to the issue 
      raised by the administrative appeal.  

      This proceeding was originally commenced in August, 1987 by the filing 
      of a rent overcharge complaint by the tenant, who stated in substance 
      that the owner had set an arbitrary market value of $925.00 for the 
      prior tenant after renovating the apartment, even though the apartment 
      had a registered 1984 stabilization rent of $223.08; that the owner had 
      sent her an RR-1 registration form erroneously stating that the April 1, 
      1984 rent was $925.00; that the owner took a vacancy allowance to which 
      it was not entitled; and that she had not been given a refund for the 
      period between September 15 and September 23, 1985 even though she was 
      not permitted to move into the apartment until the latter date because 
      the owner took that long to complete a credit check.

      In answer to the complaint, the owner stated in substance that it was 
      entitled to a new base rent of $925.00 for the prior tenant because the 
      apartment had been gutted and completely renovated at a cost of 
      $18,125.18; that even if a free market rent were not to be permitted, 
      treble damages should not be imposed, since the owner had believed 
      itself entitled to a first rent based on the renovations, and because it 
      had reduced the tenant's rent to $841.23 on January 26, 1990 and given 
      her a refund of $18,203.88 in the form of a credit.







          FE 410095 RO

           
      In Order Number ZBH-410155-R, the Rent Administrator established the 
      lawful stabilization rent as $716.33 effective September 15, 1985, and 
      determined that the tenant had been overcharged $54,792.08 as of January 
      31, 1990, including treble damages since the owner had not adjusted the 
      rent and tendered to the tenant a full refund of all excess rent plus 
      interest within the time afforded  to interpose an answer.

      In this petition, the owner alleges in substance that the subject 
      apartment was completely renovated at a total cost of over $18,000.00; 
      that the renovation included the demolition and reconstruction of the 
      entire apartment, including the creation of a bathroom where none had 
      previously existed; that the subject apartment was "substantially 
      altered" to the extent that it was not in existence in its present form 
      on the base date; that the owner was therefore entitled to charge a free 
      market rent to the next tenant, who commenced occupancy on December 1, 
      1984 at a rent of $925.00; that the Administrator's order failed to 
      reflect that as of January, 1990 the complainants had received a 
      substantial refund; that to minimize any potential liability, the 
      tenants were informed on January 26, 1990 that their rent would be 
      decreased to $841.23 and that a refund of $18,203.84 would be made based 
      upon the reduced rental amount; that treble damages should not be 
      imposed because the refund was made prior to the Administrator's order; 
      that Policy Statement 89-2 does not require the imposition of treble 
      damages in the present case, since the requirement that the refund be 
      made "within the time afforded to interpose an answer to the proceeding" 
      either does not apply if meant to require a refund immediate after 
      service of the tenants' complaint, since the complaint was filed long 
      before Policy Statement 89-2 was in existence, or else was complied with 
      if intended to mean that the refund could be made within the time 
      allowed to respond to the Division of Housing and Community Renewal's 
      (DHCR's) notices, since the refund was made within the time to answer a 
      January 2, 1990 request for additional information; that treble damages 
      also should not be imposed since any overcharge resulted from the 
      owner's good faith belief that it was entitled to a market rent due to 
      substantial renovation, similar to the situation in Docket No. ARL 
      04966-L, where only $12,500.00 was spent in making improvements; and 
      that the Administrator's order failed to name both tenants.

      In answer, the tenant asserts in substance that no refund had been made 
      as of January, 1990 since the owner's letter of January 26, 1990 
      requested that they credit the rent prospectively against the amount of 
      $18,203.84; that this figure did not include interest as required by 
      Policy Statement 89-2; that the owner did not refund "most of the 
      overcharge" prior to the issuance of the Administrator's order on April 
      19, 1991, since credits of only $13,031.48 had been taken by that date, 
      whereas the total overcharge with interest through February 1, 1990 was 
      approximately $24,000; that the apartment was not entirely demolished 
      and reconstructed; that most walls were merely repaired; that the 
      bedroom door frames and doors were untouched and bear 50 years of paint, 
      which indicates that the bedroom wall was not demolished and 
      reconstructed; that the bathroom was created by simply closing off the 
      end of the kitchen where the toilet was located and installing a shower 
      unit and handbasin; that the outer dimensions and floor plan of the 
      apartment were not changed, and remain identical to every other 
      apartment in the same line; that the pipes in the bathroom were not 
      replaced until several years later, when necessitated by constant 
      flooding; that the apartment was not rewired and is in violation of the 


          FE 410095 RO

      New York City Electrical Code; and that the owner therefore had no 
      reason to believe that the apartment had been "substantially altered" to 
      the extent that would entitle it to a free market rent.

      The tenant also contends in substance that much of the work performed in 
      the subject apartment was in the nature of repairs and should not be 
      allowed to increase the rent; that her first lease commenced on 
      September 23, 1985, during the same Guidelines period that the prior 
      tenant commenced a vacancy lease; that neither a vacancy allowance or 
      Guidelines increase should have applied to her lease; that the owner has 
      refused, despite several letters from her, to refund eight days rent 
      from the time that she commenced her tenancy on September 15, 1985 to 
      the time that the owner allowed her to move into the apartment on 
      September 23, 1985; that the owner provided a fraudulent RR-1 
      registration statement stating that the April 1, 1984 rent was $925.00, 
      with her initial lease; that the legal base rent registered with the 
      DHCR was in fact $223.08; that she later requested an explanation when 
      she learned this and was told by the owner that the apartment had been 
      "reregistered"; that in fact the 1985 annual registration update had 
      already been filed; that the RR-1 provided by the owner was a fake 
      created in late 1985 to convince her that there had been no unlawful 
      rent increase; and that both named tenants join in the proceeding.  With 
      her answer the tenant has enclosed an RR-1 registration form, prepared 
      on September 11, 1985, stating that  the April 1, 1984 rent was $925.00 
      in a lease expiring September 30, 1986, and that the rent was changed 
      after April 1, 1984 to $1,031.37, effective September 15, 1985 due to a 
      new tenant.  [The computerized DHCR rent registrations show a April 1, 
      1984 rent of $223.08 in a lease ending June 30, 1986, and an April 1, 
      1985 rent of $925.00 in a lease ending November 30, 1985 because of 
      "renew 1 year," even though the April 1, 1985 tenant was not the same 
      person as the one listed for 1984.]

      In response, the owner asserts in substance that it offered the tenant 
      a credit against the rent to cover the refund amount, a method approved 
      by the DHCR in other cases; that the tenant agreed to this by ending all 
      rent payments in February, 1990, and had taken a credit of $13,031.48 as 
      of the time of the Administrator's April 19, 1991 order; that this is 
      "most of the overcharge" of $18,138.96 found by the Administrator, since 
      accrued interest does not constitute an overcharge; that Policy 
      Statement 89-2 was not in effect when the tenant filed her complaint and 
      therefore could not have been strictly complied with; that the tenant 
      did not challenge the owner's claims of apartment renovation in the 
      proceeding before the Administrator; that the renovation was extensive 
      enough to warrant a first rent, or was at lease more extensive than in
      ARL 04966-L, where treble damages were not imposed; that the 
      Administrator properly included both vacancy and Guidelines increases in 
      the complaint's vacancy lease; and that the 1985 RR-1 form which the 
      tenant contends is "fake" expressly stated that it reflected rent in 
      effect as of September 15, 1985, and was consistent with the owner's 
      belief in 1985 that a new apartment had been created and a "first rent" 
      established at $925.00.

      In reply, the tenant contends in substance that accrued interest does 
      constitute overcharge; that in any event she had benefited only by 
      $841.23 by the end of the time afforded to interpose an answer to the 
      DHCR's January 2, 1990 notice, since the owner did not attach a check to 
      its January 26, 1990 letter; that the outer walls of an apartment must 
      be moved to justify a "first rent"; that the Administrator did not allow 







          FE 410095 RO

      the unlawful vacancy and Guidelines increases which the owner charged in 
      her lease, allowing those only for the prior tenant's lease, since 
      Guideline 16 expressly stated that only one vacancy allowance could be 
      taken in any Guidelines period; that the RR-1 form attached to her 
      initial lease expressly stated that the rent was $925.00 as of April 1, 
      1984, not September 15, 1985 as contended by the owner in this 
      proceeding; that as a result she believed that the legal rent in 1984 
      was $925.00; and that the blatantly false RR-1 form was carefully 
      prepared to conceal overcharges.

      The Commissioner is of the opinion that this petition should be granted 
      in part.

      Pursuant to Section 2521.1 of the Rent Stabilization Code, an owner is 
      entitled to charge an initial free market rent if a dwelling unit has 
      been substantially altered to the extent that it was not in existence in 
      its present form on the base date.  This requires that the boundary 
      walls of the unit be moved so that the apartment is larger or smaller 
      than previously.  There is no evidence or even contention that this was 
      done in the present case.  The Commissioner finds that the work 
      performed did not constitute a substantial alteration which would 
      warrant an initial free market "first rent."  The present case is 
      similar in that respect to cases cited by the owner (Docket Nos. ARL 
      05480-L and ARL 04966-L / ART 05064-L), in which a first rent was not 
      allowed because there had been no change in the total living space.

      Those cases were actually submitted by the owner on the issue of treble 
      damages.  In Docket Nos. ARL 04966-L / ART 05064-L, the work had 
      consisted of new windows, new fireproof door, repair of ceilings and 
      walls throughout the apartment, new closet walls and doors, rebuilding 
      of walls between bathrooms and kitchen, replacement of crotons and 
      fixtures in bathrooms, retiling of bathrooms, relocation of partitions, 
      and new kitchen equipment, all at a cost of approximately $13,000 in 
      1983.  In Docket No. ARL 05480-L the work had consisted of the removal 
      of the kitchen, the creation of a bedroom in its place, the conversion 
      of a section of the living room to a kitchen with new equipment, some 
      new equipment and tilework in the bathroom, new wiring throughout the 
      apartment, installation of a wall-length closet, new wiring throughout 
      the apartment, floor refinishing, and a new door lock, all done in 1982.  
      In both of these cases the Commissioner found that the overcharges were 
      not willful since the owners had believed themselves entitled to charge 
      a first rent based upon their expenditures for substantial renovations 
      in the units.  In the present case the owner spent $649.39 for a new 
      refrigerator and stove, and $17,475.79 for the following work done 
      beginning November 1984:  "Renovated apartment, including demolition, 
      sheetrock work, all electrical, plumbing, carpentry, painting, floor 
      covering, and tile work.  Constructed new bathroom, with all plumbing 
      and tile.  Furnished and installed new kitchen cabinets for new 
      kitchen."  The Commissioner considers that, similarly to the other cases 
      cited above, the owner's charging of a "first rent" based upon the 
      expenditure of over $18,000 on substantial renovations in the subject 
      apartment should not be considered a willful overcharge, and that treble 
      damages should therefore not be imposed.  Because treble damages are 
      being removed on this ground, it is not necessary to decide whether the 
      owner's granting of a prospective rent credit, without interest, 
      beginning in February, 1990, nearly a year after the issuance of Policy 
      Statement 89-2, and which the tenant would not have obtained the full 
      benefit of for approximately 20 months, would have warranted treble 


          FE 410095 RO

      damages not being imposed.  While the RR-1 registration form given to 
      the tenant by the owner was incorrect in stating that the April 1, 1984 
      rent was $925.00, and while this could have misled the tenant into not 
      challenging the lawfulness of her rent, the Commissioner considers the 
      fact that in the form it was stated that the form was prepared on 
      September 11, 1985 [and which therefore indicated that it was a newly- 
      prepared document and not a copy of the initial registration filed with 
      the DHCR] to be evidence that the form was an attempt by the owner to 
      claim what it believed was its entitlement to a free market "first rent" 
      of $925.00 rather than being an attempt to defraud.

      Because treble damages are being removed, interest is instead being 
      imposed.  Interest on the $4,095.52 of overcharges calculated by the 
      Administrator for the tenant's first lease is $1,873.70 as of April 30, 
      1991, the end of the month of the Administrator's order.  There is 
      interest of $1,487.70 on the overcharges from October 1, 1986 to 
      September 30, 1987; $2,016.48 on the overcharges from October 1, 1987 to 
      September 30, 1989; and $196.98 on the overcharge from October 1, 1989 
      to January 31, 1990, all interest being calculated as of April 30, 1991, 
      for total interest of $5,574.86.  When added to the overcharges of 
      $18,138.96 found by the Administrator the total overcharge, including 
      interest and excess security of $375.20, on rents paid through January 
      31, 1990 is $24,089.02.  

      In her answer to the owner's petition the tenant contended that much of 
      the work performed in the apartment was in the nature of repairs and 
      should not be allowed to increase the rent.  However, an answer is 
      relevant only to the extent that it responds to points raised in the 
      other party's petition.  Because the tenant did not file her own appeal 
      challenging the Administrator's allowance of all the owner's 
      expenditures, her contentions regarding that issue may not be considered 
      in this appeal proceeding.  For the same reason her contention about not 
      being given a refund for the eight days that she was not allowed to move 
      into the apartment is also not being considered.

      The tenant is incorrect in asserting that neither a vacancy allowance 
      nor a Guidelines increase should have been applied to her initial lease.  
      Her lease commenced during Guideline Period 16.  On September 30, 1984, 
      the last day of Guideline Period 15, there was a lease in effect at a 
      rent of $223.08.  Because it was in effect on April 1, 1984, and expired 
      on June 30, 1986, it must have commenced on July 1, 1983, which is 
      during Guideline Period 14.  Because the next tenant commenced occupancy 
      on December 1, 1984, during Guideline Period 16, there was no vacancy, 
      and no vacancy allowance taken, during Guideline Period 15.  Guideline 
      16 allowed a 7 1/2% vacancy allowance unless one was taken during 
      Guideline Periods 15 or 16.  There was no vacancy during Guideline 
      Period 15.  Rather than calculate the tenant's rent as an increase over 
      the $925.00 rent of the prior tenant whose lease commenced December 1, 
      1984, the Administrator calculated it as an increase over the September 
      30, 1984 rent of $223.08, with only one vacancy allowance.  The 
      Administrator was therefore effectively ignoring the lease commencing 
      December 1, 1984 as if it had never existed:  its rent of $925.00 was 
      not used because it was not in effect on September 30, 1984, and this 
      also means that the calculation of the tenant's rent did not include the 
      effect of any other vacancy allowance during Guideline Period 16.

      The owner has expressed concern about the tenant receiving a double 
      refund if she is allowed to file a DHCR order as a judgment.  Because 







          FE 410095 RO

      the tenant acknowledged having received a credit of $13,031.48 as of 
      April 1, 1991, and because such credit against the rent presumably 
      continued for some additional, unknown period of time, this order may 
      not be filed as a judgment.  Instead, the owner is directed to refund 
      any overcharge not previously actually taken by the tenant.  Because of 
      the owner's concern about potential liability to the other tenant named 
      on the leases, and because the tenant has stated that they both join in 
      the complaint, the owner is directed to do one of the following:


           1)   Within thirty days of the issuance of this order, 
                tender to the tenants a check for the unrefunded 
                portion of the overcharge and penalties payable to 
                the order of "Michelle Myers and Anthony Pellicane"; 
                or

           2)   Tender to either tenant (Michelle Myers or Anthony 
                Pellicane) a check for the unrefunded portion of the 
                overcharge and penalties upon presentation by such 
                tenant to the owner of a written instrument in 
                proper form duly executed by the other tenant 
                releasing the owner from any further liability for 
                such refund.

      If the owner does not perform either of these two options, the tenants 
      may credit the unrefunded balance of the refund due in an amount up to 
      their monthly rent until the remaining balance has been taken.

      If the tenants have already taken credits for an amount larger than the 
      overcharge found by this order, and owe money to the owner as a result 
      of this order, the owner is directed to allow the tenants to pay off the 
      arrears in 12 equal monthly installments if the arrears are less than 
      $5,000.00, or in 24 equal monthly installments if they are more than 
      $5,000.00.

      Because this determination concerns lawful rents only through January 
      31, 1990, the owner is cautioned to adjust subsequent rents to an amount 
      no greater than that determined by this order plus any lawful increases, 
      and to register any adjusted rents with this order and opinion being 
      given as the explanation for the adjustment.

      THEREFORE, in accordance with the Rent Stabilization Law and Code, it is




      ORDERED, that this Petition be, and the same hereby is, granted in part 
      and that the Rent Administrator's order be, and the same hereby is, 
      modified in accordance with this order and opinion.  The total 
      overcharge is $24,089.02 as of January 31, 1990.




      ISSUED





          FE 410095 RO

                                                                  
                                      JOSEPH A. D'AGOSTA
                                      Acting Deputy Commissioner





    

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