Court of Appeals Reinstates Low-Rent Supplement

On March 24, 2011, the NYS Court of Appeals ruled that the NYC Rent Guidelines Board (RGB) had the power to impose extra increases on long-term tenants of low-rent apartments. The issue dates back to 2008, when the RGB passed a measure in Orders Nos. 40 and 41 to allow owners of rent-stabilized apartments to raise rents by up to 4.5 percent for one-year leases, and 8.5 percent for two-year leases. The measure also allowed landlords to levy steeper proportional increases—of $45 a month for a one-year lease and $85 for a two-year lease—on people living in rent-stabilized apartments for more than six years and paying less than $1,000.

The board had sought the increases to help landlords cover rising operating costs, especially those relating to oil and electricity, and to equalize rents between long-term and short-term tenants.

When the matter first entered the court system, the trial court judge stated that the rent increases in question “penalized” tenants. According to the judge's reasoning, renters paying less than $1,000 a month would be subject to a higher percentage increase than renters paying more than $1,000.

The city's law department appealed, and on June 22, 2010, a mid-level appeals court upheld the lower court's decision to invalidate the minimum increases. The law department then appealed to the Court of Appeals (the state's highest court) to review the case.

The Appeals Court decision was split, five to two. Writing for the majority, Judge Robert S. Smith noted that owners of rent-stabilized apartments can charge larger increases when new tenants move in, and that in apartments with long-term tenants and low rents, “the costs of maintaining an apartment and providing services to its occupant are often not in proportion to historical rents.”

What Ruling Means for Owners

How the ruling reinstating the RGB's 2008 and 2009 minimum increase will affect owners with rent-stabilized tenants may depend on how your leases are written.

Lease includes minimum increase. If you signed a lease with your tenant containing the minimum increase, the tenant has been paying the higher amount all along, and the tenant will have to continue to do so.

Lease includes rider. Many owners offered renewal leases to tenants with rents based on the lower percentage-rate increases, but inserted language to preserve their right to collect the higher minimum increases if courts ruled that they could. Some owners called the percentage-rate increase the “preferential rent” and the minimum increase the “legal rent.” In other cases, owners charged the lower amount, but inserted language saying that they were not waiving the right to collect the higher amount in the future if a court decision permitted it. Each circumstance may play out differently, but if your lease had such a clause, the tenant will have to pay the higher amount.

According to New York attorney Martin Heistein, there isn't a definitive answer yet as to whether owners can collect the difference between the percentage rent and the minimum rent retroactively. “The Court of Appeals, in essence, reinstated the RGB Orders, so I am advising owners to try to recover the retroactive difference in rent. The theory is that had the RGB Orders not been struck down earlier, clearly the owners were entitled to these monies,” says Heistein.

However, he's certain that some tenants won't pay the increase in rent, and the owner may have to commence a nonpayment proceeding. Or the tenant may file a rent overcharge case at the Division of Housing and Community Renewal (DHCR), and it will be fought out at that level.

Prospectively, however, depending on when the owner gives notice about the rent change, the increase will be effective the month following notification, presumably May 1.

Lease lists lower rent amount, no rider. If you signed a renewal lease with your tenant based only on the lower rent amount and you failed to put anything in to protect your future right to collect the minimum amount, your tenant may try to argue that you waived your right to do so. There's a debate as to how the courts would handle such an argument. Some experts don't see the rationale for the courts awarding a rent higher than what's indicated on a lease. Others don't see a problem in seeking an adjustment in the rent or the ability to use the higher amount when calculating the next renewal. It's currently unclear whether the DHCR will issue an opinion on these matters.