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Preferential Rent

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Preferential Rent

Postby TenantNet » Sat Feb 16, 2008 9:56 am

Note: this Fact Sheet is from 2008 and has been superceded by a newer varsion dated May 2015. This version is kept here for archival purposes. See the newer version at a post below.

#40 - Preferential Rents
DHCR Fact Sheet #40


A preferential rent is a rent which an owner agrees to charge that is lower than the legal regulated rent that the owner could lawfully collect.

Owners can decide to terminate the preferential rent and charge the higher legal regulated rent upon renewal of the lease or when that tenant permanently vacates the apartment (see Example #1). However, the rent laws impose a condition on an owner's right to charge the claimed legal regulated rent. The legal regulated rent must have been written in the vacancy or renewal lease in which the preferential rent was first charged. Registration with DHCR of the legal regulated rent by itself will not establish the legal regulated rent for future usage (see Example #2).

The legal regulated rent need not be written in any subsequent renewal lease; however, failure to do so within a four (4) year period will effectively result in the preferential rent being established as the legal regulated rent.

In addition, the terms of the lease itself, may affect the owner's right to terminate a preferential rent. If the lease agreement contains a clause that the preferential rent shall continue for the term of the tenancy, not just the specific lease term, then the preferential rent cannot be terminated for that tenancy (see Example #3). The preferential rent continues to be the basis for future rent increases.

Although a complaint of Rent Overcharge is limited to an examination of the apartment's rent history only for the four (4) years preceeding the filing of a complaint, DHCR may look beyond the four (4) year period in proceedings involving the original terms and conditions of a preferential rent offer. A rent that is not challenged by a tenant within four (4) years and modified by a DHCR written order becomes the legal regulated rent.

Examples

Example #1

Mr. Jones signed a one year lease, effective October 1, 2006. The lease cited a legal regulated rent of $1,200 and a preferential rent of $1,000.

1. The lease contained a clause that stated "the preferential rent shall be offered only for the term of this lease."

2. On October 1, 2007, when Mr. Jones' one year lease renewal begins, the legal regulated rent increases by 3% to $1,236 and the preferential rent increases by 3% to $1,030. Mr. Jones will pay the $1,236 rent.

3. In this example, the owner can terminate the collection of the preferential rent at the time of the lease renewal due to the lease clause cited above.

Example #2

Mr. Jones signed a one year lease, effective October 1, 2006. The lease cited a legal regulated rent of $1,000.

1. The lease did not contain any clauses stating that this was a preferential rent and the lease did not cite the legal regulated rent of $1,200. On April 1, 2007, the owner filed a Registration form with DHCR that listed a legal regulated rent of $1,200 and a preferential rent of $1,000.

2. On October 1, 2007, when Mr. Jones' one year lease renewal begins, the preferential rent increases by 3% to $1,030. Mr. Jones will pay the $1,030 rent.

3. In this example, the owner did not preserve the legal regulated rent of $1,200 for future use as it was not written in the lease. The registration the owner filed did not establish the legal regulated rent for future use.

Example #3

Mr. Jones signed a one year lease, effective October 1, 2006. The lease cited a legal regulated rent of $1,200 and a preferential rent of $1,000.

1. The lease contained a clause that stated "the preferential rent shall be offered for the entire term of the tenancy."

2. On October 1, 2007, when Mr. Jones' one year lease renewal begins, the legal regulated rent increases by 3% to $1,236 and the preferential rent increases by 3% to $1,030. Mr. Jones will pay the $1,030 rent.

3. In this example, the owner must continue to base lease renewal rent increases for Mr. Jones on the preferential rent, due to the lease clause cited above.

Preferential Rent and Deregulation

When a tenant who has been paying a preferential rent vacates and a new tenant moves into the apartment, the new tenant will not be under rent stabilization if the legal regulated rent for the prior tenant plus the rent increases that are allowed for a new tenant equals at least $2,000 per month.

Concessions

There are two types of rent concessions. One is a concession for specific months, as for example, where the lease provides that the tenant will not have to pay rent for one or more specified months during the lease term. This type of concession is not considered a preferential rent.

The other type is a prorated concession, where the dollar value of the rent free month(s) is prorated over the entire term of the lease and not tied to a specific month or months. A prorated concession is really the same as a preferential rent and will be treated in the same manner.
Sources:

Chapter 82 of the Laws of 2003
New York City Rent Stabilization Code, Section 2521.2
Tenant Protection Regulations, Section 2501.2
Last updated on 02/15/08
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Law Rapidly Changing Concerning Preferential Rents, Renewal

Postby TenantNet » Wed Mar 25, 2009 12:47 pm

Law Rapidly Changing Concerning Preferential Rents, Renewal Leases
Victor S. Faleck
March 24, 2009
New York Law Journal

When a landlord charges a rent-stabilized tenant less than the maximum legal regulated rent, the rent charged is known as a "preferential rent." [FN1] The law with respect to whether preferential rents carry over into renewal leases has undergone many changes over a relatively short period of time.

A recent departure by the Division of Housing and Community Renewal (DHCR) from its established position on this issue is worthy of note and may entail further change.

Initially, the rule applied by DHCR and its predecessor rent regulatory agency was that whenever an owner charged less than the maximum legal regulated rent, the owner was deemed to have permanently waived the collection of the difference and thus could not add back the difference either upon a subsequent renewal or upon a vacancy.

In other words, as a general rule, having once charged a preferential rent for an apartment, a landlord could never again charge the maximum rent for that apartment. This was known as the Collingwood rule, based on the name of the first court case that approved its use by DHCR's predecessor rent regulatory agency. [FN2]

In 1987, DHCR altered the Collingwood rule to allow owners to include the waived increases in the calculation of the rent upon a vacancy but not upon a renewal. [FN3] As so modified, the rule was more narrowly tailored to the agency's goal of protecting tenants in occupancy against rent increases that exceeded the permissible guideline increases.

The Collingwood rule, as modified, came under attack in the courts on the ground that it violated the principle, which the Court of Appeals had set forth in Matter of Century Operating Corp. v. Popolizio, [FN4] that the intent of the parties is controlling on the issue of whether a rent concession is to continue into renewal leases.

In Matter of Missionary Sisters of Sacred Heart, Ill. v. New York State Div. of Hous. & Community Renewal, [FN5] the Appellate Division, applying Matter of Century Operating Corp., held that where a lease contained an acknowledgement that a rent preference was given because of depressed market conditions and the preference was meant to be temporary only, the landlord was not required to continue the preference when the lease came up for renewal, notwithstanding DHCR's Collingwood rule.

Subsequent to the Missionary Sisters case, the Legislature, in 2003, amended the Rent Stabilization Law and the Emergency Tenant Protection Act to provide that a landlord who had been charging less than the maximum legal regulated rent could, upon either a vacancy or a renewal, increase the rent to the previously established legal regulated rent, plus all guideline increases. [FN6]

The Legislature went further than the Missionary Sisters court had gone toward abolishing the Collingwood rule, in that it did not restrict the right of landlords to discontinue the preferential rent to cases in which the parties had agreed that the preferential rent would be for a limited term.

One of the major issues that arose following the 2003 enactment was whether the enactment gave a landlord the right to discontinue a preferential rent upon a renewal of the lease even if the parties had specifically agreed that the preferential rent would continue into renewal leases or for the life of the tenancy.

DHCR took the position that the amendment did allow a landlord to discontinue a preferential rent in these circumstances. It also claimed that, as a result of the amendment, a preferential rent was purely a matter of private agreement that did not implicate the rent laws, and over which it had no jurisdiction.[FN7]

However, the courts repeatedly rejected DHCR's position, holding instead that the 2003 enactment was not designed to interfere with the parties' agreement with respect to the duration of a preferential rent; that DHCR had jurisdiction to ensure that leases were renewed on the same terms and conditions; and that, under Matter of Century Operating Corp., the intent of the parties must control on the issue of whether a preferential rent continues into renewal leases.[FN8]

In the most recent turn of events, DHCR has departed from its earlier rulings that the 2003 enactment allows a landlord to discontinue a preferential rent even though the parties had agreed otherwise. It now recognizes that its rulings were "incorrect," and has adopted the rule applied by the courts, that where the parties' agreement indicates that the preferential rent was to continue into the renewal leases, that agreement must be given effect. [FN9]

A related issue to which DHCR must now turn its attention, if it has not already done so, concerns the application of the four-year statute of limitations for rent overcharge actions to preferential rent agreements. This statute of limitations precludes the "examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of [a rent overcharge] action." [FN10]

However, the bar to the examination of rental history is only applicable when the examination of the rental history is directly related to the calculation of an overcharge. [FN11]

The issue that DHCR should now reconsider is whether an initial lease, which pre-dates the four-year period, can be examined for the purpose of determining whether the tenant is entitled to a rent preference.

In the past, DHCR has taken the position that an initial lease which pre-dates the four-year period cannot be examined for this purpose. It is as yet unclear whether DCHR has now altered its position on this issue.

Thus far, the courts have rejected DHCR's position on this issue as well, reasoning that a preferential rent is a term and condition of the lease which continues into the renewal leases, so that the initial lease must be examined to determine whether the parties intended that the preferential rent would continue into renewal leases. [FN12]

The proper resolution of this issue appears to be that the statute of limitations precludes examination of leases which pre-date the four-year period only when the purpose of the examination is to ascertain the specific rental amounts set forth therein for the purpose of calculating an overcharge.

It does not preclude examination of such leases when the purpose of the examination is to ascertain the parties' agreement with respect to the duration of the rent preference, just as it does not preclude examination of a lease which pre-dates the four-year period to determine the other terms of the lease such as the tenant's entitlement to a garage space.[FN13]

A simple example, roughly based on the facts in Matter of Sugihara v. State of N.Y. Div. of Hous. & Community Renewal, makes this point clear. Suppose in 1991 the parties entered into a lease which promised the tenant a preferential rent for the duration of her tenancy; that the lease was renewed over the years by the execution of standard renewal forms, which do not recapitulate all the terms of the lease; and that in 2005 the landlord decided that it was entitled to discontinue the preferential rent.

A conclusion that the tenant would be precluded by the four-year statute of limitations from submitting her 1991 lease into evidence to demonstrate that the preferential rent was to continue for the duration of the tenancy is not only "incorrect," it is also unjust.

Since DHCR now recognizes that a rent preference is a term and condition of the lease which must be carried over into renewal leases where the parties have so agreed, it should, if it has not already done so, take the next step and conclude that leases which pre-date the four-year period must be examined to determine the scope of the parties' agreement with respect to this term.

Upon reaching this conclusion, DHCR might be well advised to clarify the preferential rent provisions of the Rent Stabilization Code and Emergency Tenant Protection Regulations or otherwise alert the public to its new understanding.

Victor S. Faleck is deputy chief court attorney at the Appellate Term, Second Department, and lectures on landlord-tenant law at the New York State Judicial Institute.

Endnotes:

1. RSC §2521.2 (a); ETPR §2501.2 (a).

2. Matter of Collingwood Enters. v. Gribetz, Sup. Ct., N.Y. Co., April 18, 1975, Fine, J., Index No. 18192/73 ("nothing prohibits an owner from charging less than the maximum rent . . . . [W]here an owner failed to charge an allowable guideline increase prior to the expiration of the guideline period, the lawful rent upon which the guideline is computed may not be increased to reflect such previous guideline allowance").

3. RSC former §2521.2 (b) (eff. May 1, 1987).

4. 60 N.Y.2d 483, 470 N.Y.S.2d 346 (1983).

5. 283 A.D.2d 284, 724 N.Y.S.2d 742 (1st Dep't 2001).

6. L 2003, ch. 82, §6, enacting RSL §26-511 (c) and ETPA §10 (a-2).

7. Matter of Sugihara v. State of N.Y. Div. of Hous. & Community Renewal, 13 Misc.3d 1239 (A), 831 N.Y.S.2d 356, 2006 N.Y. Slip Op. 52186(U), 2006 WL 3374970 (Sup. Ct., N.Y. Co. 2006).

8. See Matter of Pastreich v. New York State Div. of Hous. & Community Renewal, 50 A.D.3d 384, 856 N.Y.S.2d 61 (1st Dep't 2008); Colonnade Mgt., LLC v. Warner, 11 Misc.3d 52, 812 N.Y.S.2d 209 (App. Term 1st Dep't 2006); Aijaz v. Hillside Place LLC, 8 Misc.3d 73, 798 N.Y.S.2d 840 (App. Term 2d Dep't, 2d & 11th Jud. Dists. 2005), aff'd in part and rev'd in part on other grounds, 37 A.D.3d 501, 830 N.Y.S.2d 283 (2d Dep't 2007); Matter of Sugihara v. State of N.Y. Div. of Hous. & Community Renewal, 13 Misc.3d 1239 (A), 831 N.Y.S.2d 356, 2006 N.Y. Slip Op. 52186(U), 2006 WL 3374970 (Sup. Ct., N.Y. Co. 2006). Much recent litigation has also focused on interpreting the language of the leases, often embodied in a standard preferential rent rider, to determine the parties' intent with respect to the duration of the preferential rent. Roshenshein v. Heyman, 18 Misc.3d 109, 854 N.Y.S.2d 835 (App. Term 2d Dep't, 2d & 11th Jud. Dists. 2007); Von Rosenvinge v. Wellington Fee, LLC, 19 Misc.3d 1118 (A), 862 N.Y.S.2d 818, 2008 N.Y. Slip Op. 50765(U), 2008 WL 1701781 (Sup. Ct., N.Y. Co. 2008); Matter of Romero v. New York State Div. of Hous. & Community Renewal, 16 Misc.3d 484, 842 N.Y.S. 2d 213 (Sup. Ct., N.Y. Co. 2007); Friendship Realty LLC v. Guo Nong Li, 19 Misc. 3d 1111 (A), 862 N.Y.S.2d 814, 2008 N.Y. Slip Op. 50642 (U), 2008 WL 850342 (Civ. Ct., N.Y. Co. 2008); United W. LLC v. Margulies, 12 Misc.3d 1159 (A), 819 N.Y.S.2d 213, 2006 N.Y. Slip Op. 50971 (U), 2006 WL 1417860 (Civ. Ct., N.Y. Co. 2006), aff'd, 16 Misc.3d 132 (A), 847 N.Y.S.2d 899, 2007 N.Y. Slip Op. 51432 (U), 2007 WL 214164 (App. Term 1st Dep't 2007); compare Savoy Park Owner LLC v. West, 19 Misc.3d 1107 (A), 859 N.Y.S.2d 906, 2008 N.Y. Slip Op. 50590 (U), 2008 WL 763789 (Civ. Ct., N.Y. Co. 2008) (finding nothing in the lease to suggest that the parties intended the preferential rent to continue) with East Side Mgrs. Assoc. Inc. v. Goodwin, 18 Misc.3d 1102 (A), 856 N.Y.S.2d 23, 2007 N.Y. Slip Op. 52374 (U), 2007 WL 4372920 (Civ. Ct., N.Y. Co. 2007) (resolving the lease's ambiguities against the drafter).

9. See Matter of 218 E. 85th St. LLC v. Division of Hous. & Community Renewal, Misc.3d , N.Y.S.2d, 2009 N.Y. Slip Op. 29025, *3 (Sup. Ct., N.Y. Co. 2009) (finding that DHCR's change of position had a rational basis).

10. CPLR 213-a.

11. See Matter of H.O. Realty Corp. v. State of New York Div. of Hous. & Community Renewal, 46 A.D.3d 103, 844 N.Y.S.2d 204 (1st Dep't 2007); East W. Renovating Co. v. New York State Div. of Hous. & Community Renewal, 16 A.D.3d 166, 791 N.Y.S.2d 88 (1st Dep't 2005).

12. Matter of Sugihara, 2006 N.Y. Slip Op. 52186 (U), 2006 WL 3374970; cf. Matter of Pastreich, 50 A.D.3d 384, 856 N.Y.S.2d 61.

13. See East W. Renovating Co. v. New York State Div. of Hous. & Community Renewal, 16 A.D.3d 166, 791 N.Y.S.2d 88 (1st Dep't 2005) (consideration of a lease that pre-dates the four-year period is permissible if not done directly for the purpose of calculating a rent overcharge).
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Re: Preferential Rent

Postby TenantNet » Tue Jun 02, 2015 11:35 am

An updated version of DHCR's Fact Sheet on Preferential Rents, dated May 2015 may be obtained at http://www.nyshcr.org/Rent/FactSheets/orafac40.pdf

Tenants should rely on this new Fact Sheet rather than the one listed at the top of this thread.
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Re: Preferential Rent

Postby TenantNet » Tue Jul 21, 2015 1:13 pm

We came across this DHCR decision, Hudson House LLC, PAR Docket No. YA110026RO where DHCR decides "a lease may not lawfully provide for an escalation in the preferential rent before the expiration of the lease term under which it is paid."

See the attached PDF copy of the decision.

However, as one attorney said, Judge Fairgrieve in Nassau County has ruled on this issue three times, all in the affirmative. In these cases, the preferential rent was conditional on timely payment. Upon untimely payment, LL increased rent to regulated amount. Fairgrieve found it proper to increase the rent mid-term.

Clinton Realty, LLC v. Beazer, 195 Misc.2d 786, 762 N.Y.S.2d 229 (N.Y.Dist.Ct. 2003); 190 Washington Ave., Assoc., Inc. v. Velasquez, 10 Misc.3d 1060(A), 809 N.Y.S.2d 482 (Table) (N.Y.Dist.Ct.,2005); New Haven Place v. Beaufort, 9 Misc.3d 1130(A), 862 N.Y.S.2d 809 (Table) (N.Y.Dist.Ct.,2005).
Attachments
Hudson House 3-1-10.pdf
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Re: Preferential Rent

Postby TenantNet » Wed Jun 01, 2016 7:52 pm

The following decision has a good history of the "Collingwood Rule" and subsequent events that led to the Preferential Rent system as it exists in 2015.

Supreme Court, Appellate Term, New York.2nd and 11th Judicial Districts.
Mohammed AIJAZ, Respondent, v. HILLSIDE PLACE, LLC, Appellant.
Decided: April 29, 2005


Present:  PESCE, P.J., GOLIA and RIOS, JJ. Curtis Harger, Jamaica, for appellant. Thomas J. Hillgardner, Jamaica, for respondent.

Appeal by defendant, as limited by its brief, from so much of an order of the Civil Court, Queens County (D. Butler, J.), entered March 31, 2004, as dismissed its first affirmative defense (see 3 Misc.3d 754, 774 N.Y.S.2d 662 [2004] ).

Order insofar as appealed from unanimously modified by providing that the first affirmative defense is stricken only insofar as it alleges a defense to a cause of action for rent overcharge based upon contract and by reinstating said defense insofar as it alleges a defense to a cause of action for rent overcharge based upon statute;  as so modified, affirmed without costs.

Plaintiff rented a rent-stabilized apartment from defendant's predecessor in interest pursuant to a two-year lease commencing October 1,1997.   This lease provided that the legal regulated rent was $810.47 but that, in consideration for his relocating to the subject apartment, plaintiff would receive a preferential rent of $758.21 for the term of the lease and any renewal leases, subject to adjustment in accordance with the Rent Stabilization Law. Despite the language of the preferential rent rider providing for the continuation of the preferential rent in the renewal periods, defendant's predecessor, commencing with the October 1999 renewal, and defendant, after its purchase of the building on March 1, 2000, collected the full legal regulated rent as adjusted by the guidelines increases.   The complaint herein, dated July 29, 2003, demands a refund of the amounts collected by defendant above the preferential rents since it purchased the building as well as treble damages or interest, and costs and attorney's fees.

As a first affirmative defense, defendant asserts that a 2003 amendment (L. 2003, ch. 82, § 6) to the Rent Stabilization Law of 1969 (RSL) permits an owner to discontinue a preferential rent and to resume charging the legal regulated rent upon a renewal lease.   The amendment, which added a new paragraph 14 to subdivision (c) of section 26-511, requires that the Rent Stabilization Code (RSC) provide:

“․ that where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, the amount of rent for such housing accommodation which may be charged upon renewal or upon vacancy thereof may, at the option of the owner, be based upon such previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and any other increases authorized by law.”


The court below dismissed this affirmative defense, holding implicitly that the 2003 amendment provides no defense where, as here, the parties had expressly agreed in the lease that the preferential rent would continue for the life of the tenancy.   Because it is our view that the complaint may be construed as alleging both a common law breach of contract and a breach of the rent overcharge statutes (RSL §§ 26-512[a], 26-516), and that the 2003 amendment supplies a viable defense against the statutory cause of action but not against the contract cause of action, we modify the order by reinstating so much of the defense as is against the statutory cause of action.

The 2003 amendment to the RSL was intended to reject the so-called “Collingwood rule” (Collingwood Enters. v. Gribetz, Sup. Ct., N.Y. County, April 18, 1975, Fine, J., Index No. 18192/73), applied by the Division of Housing and Community Renewal (DHCR) and by DHCR's predecessor, the Conciliation and Appeals Board. This rule, as initially formulated, held that if an owner charged a tenant a rent below the legal regulated rent, the preferential rent could not be revoked even after the tenant who had received the preferential rent had moved out.   In addition, because the preferential rent could not be revoked, it became the legal regulated rent and formed the basis for all future rents (see e.g. Walentas v. Popolizio, 125 Misc.2d 892, 894, 480 N.Y.S.2d 681 [1984], affd. 107 A.D.2d 1094, 486 N.Y.S.2d 585 [1985];  Matter of Clinton Court Investors v. New York State Div. of Hous. & Community Renewal, N.Y.L.J., Aug. 8, 1994 [Sup. Ct., Kings County];  Estis and Turkel, Rent Regulation's Eight-Year Extension, N.Y.L.J., July 2, 2003, at 5, col. 2).   In 1987, DHCR ameliorated the Collingwood rule somewhat by providing that an owner could terminate a preferential rent upon a vacancy, but not upon a renewal (RSC former § 2521.2[b], now substantially § 2521.2).

In the Matter of Missionary Sisters of the Sacred Heart, Ill. v. New York State Div. of Hous. & Community Renewal, 283 A.D.2d 284, 724 N.Y.S.2d 742 [1st Dept. 2001], an owner challenged DHCR's policy of requiring that a preferential rent be continued until a vacancy.   The Appellate Division ruled that where the parties had contracted for a rent preference for only a limited term, the owner was not required to continue the rent preference until a vacancy (see also Matter of Century Operating Corp. v. Popolizio, 60 N.Y.2d 483, 470 N.Y.S.2d 346, 458 N.E.2d 805 [1983] [a two-month rent concession resulting from construction delays had to be carried over into renewal leases but could not be construed as requiring two months' free rent on the occasion of each renewal] ).   Going beyond these cases, the 2003 amendment rejects the Collingwood rule altogether, permitting owners (who have not otherwise agreed) to discontinue a preferential rent not only upon a vacancy but also upon a renewal, even if the lease did not expressly or implicitly limit the duration of the rent preference.   As a necessary corollary thereof, since, by statute, a rent preference is now revocable upon a renewal or upon a vacancy, the preferential rent does not become the legal regulated or authorized rent, so long as a legal regulated rent has been established within the four-year period (cf. DHCR Fact Sheet No. 40).

As the court below implicitly ruled, the 2003 amendment was not intended to preclude the parties to a lease or stipulation from agreeing to a rent preference that would endure beyond the term of the lease into renewal periods (see 448 W. 54th St. Corp. v. Doig-Marx, 5 Misc.3d 405, 784 N.Y.S.2d 292 [2004];  see also Matter of Century Operating Corp. v. Popolizio, 60 N.Y.2d 483, 470 N.Y.S.2d 346, 458 N.E.2d 805, supra;  Matter of Missionary Sisters of the Sacred Heart, Ill. v. New York State Div. of Hous. & Community Renewal, 283 A.D.2d 284, 724 N.Y.S.2d 742, supra ).   Since plaintiff and defendant's predecessor here agreed upon a preferential rent that would last for the life of the tenancy, plaintiff was entitled to have this term of his lease carried over into all the renewal leases (RSC § 2522.5[g];  see Matter of Century Operating Corp. v. Popolizio, 60 N.Y.2d at 488, 470 N.Y.S.2d 346, 458 N.E.2d 805).   Contrary to defendant's contention, the fact that the renewal leases did not include the preferential rent cannot be deemed a waiver of plaintiff's right thereto (Matter of Century Operating Corp. v. Popolizio, 90 A.D.2d 731, 732, 455 N.Y.S.2d 789 [1982], revd. on other grounds 60 N.Y.2d 483, 470 N.Y.S.2d 346, 458 N.E.2d 805 [1983] ).   Plaintiff therefore has a cause of action sounding in contract for the refund of the rents that he paid in excess of the agreed-upon preferential rent.

However, plaintiff does not have a cause of action for breach of the rent overcharge statutes.   Since the Legislature rejected the Collingwood rule and made preferential rents revocable, the preferential rent does not become the legal regulated or authorized rent, and a collection of rent in excess of the preferential rent constitutes only a breach of the agreement of the parties and not an offense against the rent-overcharge statutes.   Because the statutory amendment is applicable to pending proceedings (DHCR Fact Sheet No. 40), it cannot be found that defendant violated the statutory overcharge prescriptions.   Accordingly, we reinstate the first affirmative defense insofar as it alleges a defense to the statutory cause of action.

Since plaintiff is left with his remedy in contract, the loss of the statutory cause of action works no unconstitutional interference with plaintiff's vested rights and no impairment of the obligation of his contract (see generally New Orleans City & Lake R.R. Co. v. Louisiana, 157 U.S. 219, 224, 15 S.Ct. 581, 39 L.Ed. 679 [1895];  16A CJS, Constitutional Law § 365).   It is well settled that a cause of action created by statute may be terminated by repeal even though rights may have accrued under the statute (Battaglia v. General Motors Corp., 169 F.2d 254 [2nd Cir.1948];  Volpe v. Fireman's Fund Ins. Co., 54 Misc.2d 212, 282 N.Y.S.2d 69 [Sup. Ct., Nassau County 1967];  16A CJS, Constitutional Law § 260). Similarly, with respect to plaintiff's loss of a claim for statutory penalties, there is no vested right in such penalties until a judgment therefor has been granted (Davidson v. Witthaus, 106 App.Div. 182, 94 N.Y.S. 428 [1905];  22 Carmody-Wait 2d § 135:8;  16A CJS, Constitutional Law § 261).
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Re: Preferential Rent

Postby TenantNet » Wed Jun 01, 2016 7:56 pm

Another decision that details the history of the "Collingwood Rule" and Preferential Rents.

448 W. 54th St. Corp. v Doig-Marx
2004 NY Slip Op 24328 [5 Misc 3d 405]
June 25, 2004
Civil Court, New York County
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
As corrected through Wednesday, November 24, 2004



448 West 54th Street Corp., Petitioner,
v
Geoffrey Doig-Marx, Respondent.



Civil Court of the City of New York, New York County, June 25, 2004

APPEARANCES OF COUNSEL

Horing, Welikson & Rosen, Williston Park (Christopher J. Duval of counsel), for petitioner. Lynn Armentrout, New York City, for respondent.

OPINION OF THE COURT
Anthony J. Fiorella, Jr., J.

Petitioner moves by notice of motion seeking to strike respondent's second and third affirmative defenses upon the ground that respondent is no longer entitled to a preferential rent. Respondent cross-moves for an order seeking summary judgment as to the second affirmative defense and dismissing the petition on the grounds that it asserts an illegal and improper rent. The motions are consolidated and decided as follows.

Essential Facts
Petitioner contends that it is no longer obligated to continue respondent's preferential rent.

In October 1992 respondent executed a one-year lease with the petitioner. Attached to the original lease is a preferential rent rider which reads in pertinent part, "The parties to this lease agree and acknowledge that the tenant will be charged, during the terms of tenant's occupancy, a preferential rent. The preferential rent is personal to the tenant named in the lease only and will not inure to the benefit of the Tenant's successor or assigns." (Emphasis added.) It is further acknowledged that the October and November 2003 rents were accepted and cashed by the landlord at the preferential rate. From the inception of the lease to the present the preferential rent rider remained in full force and effect.

In September 2003, the landlord offered the tenant a renewal lease which, for the first time in the tenancy, calculated the renewal increase based on the legal regulated rent as opposed to the preferential rent. In doing so, the landlord relied on an amendment to the Rent Stabilization Code (9 NYCRR) regarding preferential rents. The proposed increase would bring the tenant's rent from $946 per month to $1,385 per month. The tenant disputed the applicability of the new law and refused to sign the renewal lease because the rent charged was improper. The landlord then rejected the tenant's tender of rent, purported to "deem" the lease renewed at the higher amount, and brought this nonpayment proceeding.

Applicable Law

Laws of 2003 (ch 82, §§ 3, 6) amended the Emergency Tenant Protection Act (L 1974, ch 576, § 4, as amended [ETPA]) and the Rent Stabilization Law of 1969 (Administrative Code of City of NY § 26-501 et seq.) to provide that

"where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, the amount of rent for such housing accommodation which may be charged upon renewal or upon vacancy thereof may, at the option of the owner, be based upon such previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and other increases authorized by law . . ." (McKinney's Uncons Laws of NY § 8630 [a-2] [ETPA § 10 (a-2)]; Administrative Code § 26-511 [c] [14] [emphasis added]).


This amendment codified the holding of Matter of Missionary Sisters of Sacred Heart, Ill. v New York State Div. of Hous. & Community Renewal (283 AD2d 284 [1st Dept 2001]), in which the Court rejected the Division of Housing and Community Renewal's (DHCR) position that a preferential rent, once granted, becomes the base rent for the entire term of the tenancy, on which all future rent increases are calculated. The DHCR had relied for its position on Rent Stabilization Code (9 NYCRR) § 2521.2 (b), which then provided, "Where the legal regulated rent is established and a rent lower than the legal regulated rent is charged and paid by the tenant, upon vacancy of such tenant, the legal regulated rent previously established plus the most recent applicable guidelines increases . . . may be charged new tenant." (Emphasis added.)

In Missionary Sisters, the lease specifically limited the rent concession to the term of the lease. The Court held (at 286) that the above-cited section of the Code did not "dictate the exclusive point at which the legal regulated rent can be charged if a concession has been granted." Relying on Matter of Century Operating Corp. v Popolizio (60 NY2d 483 [1983]), the Court instead held that the language of the lease, limiting the rent concession to the particular lease term for the specific reason stated, controlled over the agency's interpretation of the regulation.

The DHCR's rigid rule on preferential rents had its genesis in the "Collingwood Rule," which held that if a tenant paid a rent which was lower than the legal rent, that lower rent became the base rent for all future increases. (Collingwood Estates v Gribitz, NYLJ, Apr. 24, 1975, at 17, col 6 [Sup Ct, NY County].) Apparently, the Conciliation and Appeals Board, the predecessor agency to the DHCR, applied the Collingwood Rule rigidly, prohibited the owner from going back to the legal regulated rent even after the tenant vacated. (See, Warren A. Estis and Jeffrey Turkel, Rent Regulations, Eight-Year Extension, NYLJ, July 2, 2003, at 5, col 2.) The above-cited section 2521.2 (b) of the Code, on which the DHCR relied in Missionary Sisters, permitting the restoration of the legal regulated rent upon vacancy, was a 1987 amendment intended to ameliorate the Collingwood Rule.

Chapter 82 of the Laws of 2003 "roughly codifies" Missionary Sisters. (Id.) It did not alter the terms of the lease at issue here. In this case, the lease rider states, unequivocally, that "the tenant will be charged, during the terms of tenant's occupancy, a preferential rent." (Emphasis added.) The terms of the new law do not even purport to apply to this circumstance. (Aijaz v Hillside Place, LLC, 3 Misc 3d 754 [2004].)

In Aijaz, the tenant sued for a rent overcharge based on prior lease renewals that were calculated on the legal rent rather than preferential rent. The court dismissed the landlord's affirmative defense that chapter 82 of the Laws of 2003 permitted the landlord to abandon the preferential rent in a lease renewal, in favor of the legal regulated rent holding that the law did not apply to a preferential rent that was given for consideration and contracted for the entire duration of the tenancy.

Clearly, with the abrogation of the Collingwood Rule in Missionary Sisters and chapter 82 of the Laws of 2003, when a lease specifically limits the rent concession to the term of the lease, the landlord may charge the legal regulated rent, with any increases, upon renewal of the lease. Whether that is the case if the lease is silent on the term of the preference is an issue not addressed here, since here the lease specifically grants the preference for the entire term of the tenant's occupancy.

Here, the application of chapter 82 to the tenant's lease would substantially and severely impair the contract by depriving the tenant of the benefit of the bargain on the most central term of any lease—the amount of rent to be paid. The tenant, in entering the lease, relied on the promise of a preferential rent for the duration of the tenancy, and was entitled to and [*2]did order his personal and business affairs according to his need for an affordable apartment with reasonably stable and predictable rent increases. (See 19th St. Assoc. v State of New York, 79 NY2d 434, 443 [1992].)

Laws regulating landlord-tenant relations, particularly to the extent that they limit the amount of rent a landlord may charge, have long been upheld as valid exercises of the state's police power. (See, generally, Dawson v Higgins, 197 AD2d 127 [1st Dept 1994], appeal dismissed 83 NY2d 996 [1994], cert denied 513 US 1077 [1995].) The Emergency Tenant Protection Act and the Rent Stabilization Law and Code were enacted in response to housing shortages that constituted, and continue to constitute, a serious public emergency. (197 AD2d at 133; Manocherian v Lenox Hill Hosp., 84 NY2d 385, 388 [1994], cert denied 514 US 1109 [1995].) "The regulation of this field has been maintained 'to prevent uncertainty, hardship and dislocation,' and to 'forestall profiteering, speculation and other disruptive practices.' " (Manocherian at 389.)

Permitting landlords to abandon contractual preferential rents, at their sole option, does not in any way advance the underlying purposes of the ETPA and the Rent Stabilization Law and Code, which were designed to prevent uncertainty and hardship, and to forestall profiteering, speculation and other disruptive practices. On the contrary, to permit the landlord to abandon the rent preference mid-tenancy, causing a rent increase 10 times that allowed under the applicable rent guidelines, would defeat the purposes of the ETPA and the Rent Stabilization Law and Code.

Although the tenant's lease provides, at paragraph 4, that "the rent herein shall be adjusted up or down during the Lease term, including retroactively, to conform to the Rent Guidelines increases," the preferential rent rider prevails over this clause. "It is a well-established rule of construction that the written or typewritten portions of an agreement represent an express manifestation of the parties' actual intentions and take precedence over any inconsistent provisions in the printed form." (Matter of Cale Dev. Co. v Conciliation & Appeals Bd., 94 AD2d 229, 234 [1st Dept 1983].)

It is clear from the above discussion that the wording in the preferential rent rider is controlling and must be enforced according to its terms. The wording contained therein is neither restrictive nor conditional. For better than 10 years the parties acknowledged their intent and respective obligations by complying with the rider agreement. Petitioner's unilateral change of position predicted in chapter 82 of the Laws of 2003 (supra) is simply lacking in merit. To conclude otherwise would then allow the petitioner to walk away from its contractual obligation without redress.

Conclusion

Accordingly, petitioner's motion to strike respondent's second and third affirmative defenses is denied. Respondent's cross motion for summary judgment on its second affirmative defense is granted. Petitioner is directed to provide respondent with a stabilized renewal lease based upon the preferential rent rider and applicable rent guidelines increase in effect within 30 days from entry of this order. That portion of respondent's motion seeking dismissal of the instant proceeding is denied without prejudice with leave to renew upon petitioner's failure to comply with the foregoing.
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Re: Preferential Rent

Postby TenantNet » Wed Jun 01, 2016 8:11 pm

Preferential Rent

Court Rejects Agency Interpretation of 2003 Statute
by Warren A. Estis and Jeffrey Turkel
New York Law Journal
January 3, 2007

In the recent case of Sugihara v. New York State Division of Housing and Community Renewal,1 New York County Supreme Court Justice Joan A. Madden ruled that DHCR had too broadly interpreted a 2003 amendment to the Rent Stabilization Law ("RSL") that unilaterally allows landlords to discontinue a preferential rent at the end of a lease term. The case highlights an ongoing controversy surrounding the intersection of preferential rent clauses and the 2003 amendment.

Background

A preferential rent is one that is lower than the legal stabilized rent. Preferential rents are usually given as a tenant inducement, or where the stabilized rent actually exceeds market levels.2

DHCR's predecessor, the New York City Conciliation and Appeals Board, took the draconian position (known as the "Collingwood rule") that a preferential rent is forever. Thus, if a landlord charged a preferential rent, all future rents for that tenant - and for any successor stabilized tenant as well - would be based on the preferential amount. DHCR ameliorated this rule in 1987 when it promulgated Section 2521.2(b) of the Rent Stabilization Code. That section provided that a preferential rent would only carry through the tenancy of the tenant to whom it was initially granted; upon vacancy, the rent could be based on the non-preferential level.

DHCR's regulation came under attack in Missionary Sisters of the Sacred Heart v. DHCR, 283 A.D.2d 284, 724 N.Y.S.2d 742 (1st Dep't 2001), wherein a sharply divided First Department ruled that where a lease expressly provides that a preferential rent shall be limited to a specified period, DHCR cannot override the parties' intent by forcing the landlord to calculate renewal rents over the preferential rent for the entirety tenancy. The Court ruled that the parties' intent should govern, given that public policy would not be offended if the tenant's rent were merely raised to a lawful, stabilized level.

The Legislature codified Missionary Sisters in 2003 when it amended the RSL to add new Section 26-511(c)(14), which states in relevant part:

. . . where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, the amount of rent for such housing accommodation which may be charged upon renewal or upon vacancy thereof may, at the option of the owner, be based upon such previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and any other increases authorized by law.


Second Department Rulings

The earliest reported case addressing the effect of the 2003 amendment was Aijaz v. Hillside Place, LLC, 3 Misc.3d 754, 774 N.Y.S.2d 652 (N.Y.C. Civ. Ct., Queens Co. 2004). In Aijaz, the landlord gave the tenant a preferential rent in consideration for the tenant's agreement to switch apartments in the building. After the initial lease expired, the landlord calculated the renewal rate above the non-preferential rent. Several years later, the tenant sued the landlord for rent overcharge.

Civil Court (Butler, J.) found for the tenant, ruling that the holding in Missionary Sisters, and DHCR's interpretation of that holding in an Aug. 19, 2003 Advisory Opinion, "do not apply where preferential rent was given for consideration and where the parties contracted that the preferential rent would be for the entire duration of the tenancy. The distinguishing issue in the case before the court is that the preferential rent in this matter was given in exchange for the Tenant relocating to a different apartment."3

A year later, the Appellate Term for the 2nd and 11th Judicial Districts affirmed.4 The Court ruled:

This lease provided that the legal regulated rent was $810.47 but that, in consideration for his relocating to the subject apartment, plaintiff would receive a preferential rent of $758.21 for the term of the lease and any renewal leases, subject to adjustment in accordance with the Rent Stabilization Law.


* * *


As the court below implicitly ruled, the 2003 amendment was not intended to preclude the parties to a lease or stipulation from agreeing to a rent preference that would endure beyond the term of the lease into renewals periods. . . Plaintiff therefore has a cause of action sounding in contract for the refund of the rents that he paid in excess of the agreed-upon preferential rent.5


First Department Authority

In 448 West 54th Street Corp. v. Doig-Marx, 5 Misc.3d 405, 784 N.Y.S.2d 292 (N.Y.C. Civ. Ct., N.Y. Co. 2004), the parties' original 1992 stabilized lease contained a preferential rent rider which provided that "the tenant will be charged during the Terms of Tenants' occupancy, a preferential rent."6 In September of 2003 (following the enactment of the 2003 amendment pursuant to L. 2003, Ch. 82), the landlord offered the tenant a renewal lease with a rent based upon the non-preferential rent. The tenant refused to pay the increase, and a non-payment proceeding ensued. Judge Anthony J. Fiorella ruled for the tenant, holding:

Clearly, with the abrogation of the Collingwood Rule in Missionary Sisters and Chapter 82 of the Laws of 2003, when a lease specifically limits the rent concession to the term of the lease, the landlord may charge the legal regulated rent, with any increases, upon renewal of the lease.


* * *


Here, the application of Chapter 82 to the tenant's lease would substantially and severely impair the contract by depriving the tenant of the benefit of the bargain on the most essential term of the lease ¿ the amount of rent to be paid. The tenant, in entering the lease, relied on the promise of a preferential rent for the duration of the tenancy, and was entitled to and did order his personal and business affairs according to his need for an affordable apartment. . . .7



In Colonnade Mgt., LLC v. Warner, 11 Misc.3d 52, 812 N.Y.S.2d 209 (App. T. 1st Dep't 2006), the First Department followed the Second Department's lead in Aijaz, enforcing a preferential rent rider that "unequivocally and explicitly provide[d] for a rent concession for the duration of the tenancy.8 In Cromwell Assocs. v. Ortega, 12 Misc.3d 141(A), 824 N.Y.S.2d 761 (App. T. 1st Dep't 2006), the First Department found for the landlord, holding:

While an express agreement between a landlord and tenant that a preferential rent will continue throughout the tenancy is enforceable [citation omitted], the underlying 1997 stipulation between the parties did not provide for a rent concession for the duration of the tenancy. Rather, the explicit terms of the stipulation limited the rent preference to the then current lease term and one additional renewal term. Thereafter, landlord was permitted to discontinue the preferential rent and resume the legal regulated rent.



'Sugihara'

In Sugihara, a rift between DHCR and the courts as to the proper interpretation of the 2003 amendment came into sharp focus. The 1991 lease rider in Sugihara was clear; the landlord agreed to charge the tenant a preferential rent of $800 per month (the stabilized rent was $1,139.65), with the parties further agreeing that "all lease extensions after the first year will be based on $800.00 and increased in accordance with the guideline increases at the expiration of such lease." The landlord calculated rent increases above the preferential rent in lease renewals from 1992 through 2003. In 2005, possibly emboldened by the 2003 amendment, the landlord offered a renewal lease based on the non-preferential rent.

The tenant filed a complaint with DHCR citing, among other things, the ruling in Aijaz. In a Dec. 1, 2005 order, DHCR's deputy commissioner concluded that the language of the 2003 amendment was clear, and that "an owner may charge the legal regulated rent upon the renewal of a lease of a tenant who was paying a preferential rent," irrespective of what the lease rider might say. For good measure, DHCR added that it was not a party to the Aijaz case, and was thus not bound thereby.

Justice Madden pointedly annulled DHCR's determination. Citing KSLM-Columbus Apartments, Inc. v. New York State Division of Housing and Community Renewal, 5 N.Y.3d 303, 801 N.Y.S.2d 783 (2005), Supreme Court first held that because the matter concerned a pure question of statutory construction, DHCR's interpretation of the RSL was not entitled to deference. Having laid that groundwork, Supreme Court ruled that the 2003 amendment could not override the stated intent of the parties:

DHCR urges that the 2003 amendment to the Rent Stabilization Law gives the owner the right to issue a renewal lease based upon the legal regulated rent, notwithstanding the existence of a preferential rider in the parties' lease. Such interpretation, however, is not a correct reading of the unambiguous statutory language. Although section 26-511(c)(14) provides that on renewal of a lease with a preferential rent, the owner has the option of calculating the rent based upon either the preferential rent or the legal regulated rent, nothing in the plain language of the statute indicates or even suggests that it was intended to have the effect of revoking a landlord's and tenant's clear contractual agreement to continue the preferential rent indefinitely as the basis for calculating the rent for each and every renewal lease.


* * *


Here, the language in the 1991 lease rider clearly and unambiguously provides for a preferential rent during the duration of the tenancy. As the parties' intent is unequivocally and explicitly manifested in the written agreement, the agreement controls, and Sugihara is entitled to the benefit of the preferential rent throughout her tenancy.


Stuart Birbach, counsel for the tenant in Sugihara, reports that DHCR and the landlord therein have filed notices of appeal.

Warren A. Estis is a founding partner at Rosenberg Estis, and Jeffrey Turkel is a partner at the firm.

Endnotes:

1. 13 Misc.3d 1239(A) (Sup. Ct. N.Y. Co. 2006).

2. See, generally, Estis and Turkel, "Rent Regulations, Eight-Year Extension, New Legislation Renews Rent Laws Through 2011," N.Y.L.J., July 22, 2003 at 5, col. 2.

3. 3 Misc.3d at 757.

4. Aijaz v. Hillside Place, LLC, 8 Misc.3d 73, 798 N.Y.S.2d 840 (App. T. 2nd and 11th Jud. Dists. 2005).

5. Id. at 74, 76.

6. 5 Misc.3d at 406 (italics in original).

7. Id. at 408.

8. 11 Misc.3d at 53.
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Re: Preferential Rent

Postby TenantNet » Wed Jun 01, 2016 10:26 pm

A more recent article on Preferential Rents. The author is with Rosenberg & Estis PC, a well-known landlord law firm.


Making The Most Of New York City Preferential Rent Laws
Law360, New York
February 23, 2016
by Nicholas Kamillatos

Are the “preferential rent” rules for rent stabilized apartments settled? The enforceability of discontinuing preferential rents and restoring the legal rent for rent stabilized apartments becomes more important should rent levels temporarily become flat, or even drop in certain neighborhood locations. How do the parties ensure that they both get the benefit of the bargain they make in preferential rent arrangements?

What Happens When Less Than the Maximum Legal Rent is Collected for Rent Stabilized Apartments?

Since first enacted in 1969, the New York City Rent Stabilization Law (RSL) and Code (RSC) have provided for limits on rent increases which can be charged and collected for renewal or vacancy leases. Inasmuch as the rent stabilization system imposes uniform citywide rent increases regardless of local neighborhood market conditions, there has always been the possibility that owners may not be able charge and collect the maximum legal regulated rent for a particular rent stabilized apartment. This could be due to prevailing market conditions or the need to provide concessions in order to convince a tenant to sign a vacancy lease or renew their lease. In those instances where the owner did not charge the maximum legal rent upon a lease renewal or vacancy lease, the New York State Division of Housing and Community Renewal (DHCR)[1] and the courts held that the owner had permanently “waived” the maximum legal rent increase, such that the maximum legal rent was reduced to the amount actually charged and collected, rather than the maximum legal rent which could have been charged. That reduced legal rent then became binding on future lease renewals. In short, the temporary rent reduction or concession became permanent. Collingwood Estates v. Gribitz, NYLJ. April 24, 1975 at 17, col. 6 (S. Ct. N.Y. Co.) (Fine, J.). This waiver process became known as the “Collingwood Rule.”

The effect of the Collingwood Rule could be draconian. The owner could reduce the rent increase as a one-time temporary concession and then, after the concession had burned off and market rents increased, the Collingwood Rule prevented the owner from restoring the higher legal rent which was deemed permanently waived.

Preferential Rents, the Evolution

The Collingwood Rule remained in effect unchanged for over 12 years. During that time owners who collected less than the full legal regulated rent permanently waived the right to collect the legal rent after granting a one-time and/or “temporary” preference. This draconian result was partly addressed in the 1987 Amendment to the Rent Stabilization Code. The 1987 RSC amendments included newly enacted Code Section 2521.2(b) which stated in pertinent part:

Where the legal regulated rent is established and a rent lower than the legal regulated rent is charged and paid by the tenant upon vacancy of such tenant, the legal regulated rent previously established plus the most recent applicable guidelines increase plus such other rent increases as authorized pursuant to Section 2522.4 of this title may be charged a new tenant (emphasis added).


In short, the 1987 RSC amendment modified the Collingwood Rule, such that on a vacancy lease, the previously waived higher legal rent could be restored for the next rent stabilized apartment tenant.

RSC Section 2521.2(b) only remedied property owners’ Collingwood Rule problem for future tenants after a vacancy. It did not address lease provisions granting a temporary preference to a rent stabilized apartment tenant who remains in possession after the preference expires. That issue was addressed by the courts in Missionary Sisters of the Sacred Heart Ill v. DHCR, 283 A.D. 2nd 284 (1st Dept. 2001). In that case, the property owner entered into a lease agreement with a tenant granting a temporary preference which expired on a specific date. The rider executed by the property owner and tenant provided that the preference was the result of market conditions at the time the lease was executed.

In a complaint filed with the DHCR, the tenant contended that the preferential rent was a lease term which was a condition of the tenancy, and therefore, that preference had to be carried forward into all future lease renewals, (as generally required by the RSL and RSC). The property owner contended that the preferential rent applied only to the term of that one lease, and that it was not a term or condition of the tenancy which had to be renewed. DHCR granted the tenant’s complaint, and the Supreme Court, New York County, affirmed DHCR’s determination. The Appellate Division reversed the Supreme Court, and annulled the DHCR’s order. The Appellate Division ruled that RSC §2521.2(b) was not controlling in the case, instead the issue was the enforceability of the temporary preferential rent rider between the owner and tenant. The controlling authority which answered that issue was Century Operating Corp. v. Popolizio, 60 N.Y.2d 483 (1983), where the court considered the context of a preferential rent rider and its effect on future lease renewals.

In Century Operating, the Court of Appeals held that the terms of a lease rider between owner and tenant would control the issue of whether a preference or concession is carried forward into future rent stabilized lease renewals. The court concluded in Century Operating that the two month rent concession given to an initial tenant was not intended by the parties to carry forward into lease renewals, and therefore renewal leases would be based on the full legal regulated rent, not the reduced level of the one-time concession. The Court of Appeals interpreted the language of the concession rider under the circumstances of the tenant moving into a building which was basically still under construction.

Applying the rationale of Century Operating to the preferential rider in Missionary Sisters, the Appellate Division concluded that the parties agreed to a temporary preference which would not apply to future lease renewals, because the future market conditions would determine whether the preference would continue. The Appellate Division concluded that the factual basis for the original preference was no longer in effect, and therefore the preference expired by its own terms and would not be carried forward into lease renewals.

In June, 2003, the state Legislature effectively codified the Missionary Sisters decision by enacting Chapter 82 laws of 2003,[2] which amended the RSL Statute as follows:

Where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, the amount of rent for such housing accommodation which may be charged upon renewal or upon vacancy thereof may at the option of the owner, be based on such previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and any other increases authorized by law (emphasis added).


By this statutory codification, the Legislature recognized that property owners can discontinue a temporary preference in a future lease renewal at the owner’s sole option. The statutory law was now clear and unambiguous; preferential rents could be discontinued at the owner’s option at the end of the lease to which the preference applied. That ought to have ended all litigation over this issue, but did it?

The Current State of the Law and Preferential Rent Rules

The 2003 amendment to the RSL explicitly provides that preferential rent agreements can be temporary and the owner can discontinue the preferential rent at the end of the lease for which the preference was agreed to so long as there was a written lease provision to that effect. Coupled with the RSC then in effect, registering the preferential rent as well as the higher reserved legal rent seemed to end all debate as to the enforceability of temporary preferential rents and the ability to reset the rent to the higher reserved legal rent at the end of the preference. The courts, however, disagreed. In various opinions, the courts ruled that the preference would continue throughout the tenancy if the language of the preferential rent riders was not explicit as to the expiration of the preference. In 448 West 54th Street Corp. v. Doig-Marx, 5 Misc.3d 405, 784 N.Y.S.2d 292 (N.Y.C. Civ. Ct., N.Y. Co. 2004), Colonnade Management LLC v. Warner, 11 Misc.3d 52, 812 N.Y.S.2d 209 (App. T. 1st Dep’t 2006), Matter of Pastreich v. New York State Division of Housing and Community Renewal, N.Y.L.J., April 14, 2008, at 33, col. 4 (App. Div., 1st Dep’t), Von Rosenvinge v. Wellington Fee LLC, N.Y.L.J., April 21, 2008, at 19, col. 1 (Sup. Ct. N.Y. Co.). Failure to specify that the preference was only in effect during the term of the vacancy or renewal lease to which it applied, exposed property owners to the risk that the preference would continue as a term and condition of a rent stabilized apartment tenancy.

The January 2014 amendment to the RSC then further complicated matters. RSC §2521.2(b) was again amended by DHCR to provide as follows:

b) Such legal regulated rent as well as preferential rent shall be rent set forth in the vacancy lease or renewal lease pursuant to which the preferential rent is charged.

c) Where the amount of the legal regulated rent is set forth either in a vacancy lease or renewal lease where a preferential rent is charged, the owner shall be required to maintain, and submit where required to by DHCR, the rent history of the housing accommodation immediately preceding such preferential rent to the present which may be prior to the four-year period preceding the filing of the complaint.

Prior to this amendment, setting forth the preferential rent and legal rent in a written lease provision and reserving the higher legal rent coupled with the annual registration of that information on DHCR’s database, was deemed to conclusively reserve the legal rent, and the owner’s right to terminate the preference at the end of the affected lease term. The January 2014 amendment instead mandates that property owners maintain rent histories of the preferential rent information dating back to the term of the lease prior to the preference being first granted, regardless of the standard “four year” look back rule. DHCR claims that requiring owners to maintain and produce such apartment rental histories dating back more than four years, is required by judicial determinations. While the statutory law remains arguably settled, the practical application of preferential rents is now as complicated as ever, if not more so.

As required by the RSC §2521.2(c), rent stabilized apartment property owners now must maintain all preferential rent information no matter how long the preference is provided, in order to withdraw the preference and restore the rent to the reserved higher legal regulated rent. However, DHCR has no authority to overrule the Appellate Division decision in Missionary Sisters or the Court of Appeals ruling in Century Operating, so does that mean that the preferential rent lease rider requirements of those decisions still apply as requirements beyond the current explicit terms of the RSL/RSC? If so, does that mean complying with the explicit requirements of the RSL and RSC §2521.2(c) alone is not a safe harbor to insure the ability to impose the higher legal rent when a preference expires? In order to safely reserve the higher legal regulated rent and utilize that higher rent for future lease renewals or vacancy leases, current best practice mandates that property owners should:

  • Specify the reason for the preference in a form of written lease rider and specifically provide in that rider that the preference is temporary and shall only apply to the term of that vacancy or renewal lease;

  • In accordance with DHCR instructions, annually register the preference and the higher reserved legal regulated rent on the DHCR rent registration database;

  • Retain indefinitely all lease records relating to the preference and the lease in effect prior to the preference.

Current market conditions also make property owner lease drafting and documentation more important than ever. Market trends indicate in many neighborhood rents could be flat or declining for a period of time. Concessions for vacancy leases are already increasing. (See, the following report from Miller Samuel Inc.). During this period of flat rents and/or increased concessions, property owners will be providing temporary preferences to maintain occupancy levels. Failing to properly draft and document preferential rent agreements could result in a permanent reduction of legal rents based on recent court decisions and the January 2014 amendment to the RSC. Prudent property owners will take steps to insure that their preferential rent riders are properly drafted and their rent records are sufficiently maintained to prevail in nonpayment cases in which they seek rent, and defend against tenant claims of rent overcharge.

—By Nicholas Kamillatos, Rosenberg & Estis PC

Nicholas Kamillatos is a member of New York real estate law firm Rosenberg & Estis.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Its predecessor agency was known as the Conciliation and Appeals Board.

[2] The preferential rent rules, both codified and case law discussed in this article do not apply to situations such as the initial lease for a 421-a apartment or the initial lease for a newly created apartment in a rent stabilized building.
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