Escalating Preferential Rent During Lease Term

Q I have a preferential rent lease rider with a rent-stabilized tenant. Are owners allowed to have an escalation clause in a rent-stabilized lease provided the increased escalated rent is below the legal rent? Will the DHCR allow this sort of preferential rent agreement?

A No. In a DHCR decision issued in March 2010, the agency said that a preferential rent in the form of discounted rent for “on time” payments may not be escalated during the term of the lease [Hudson House LLC v. Fitz-Henley, March 2010]. In this particular decision, the owner must wait until the end of the lease term to eliminate or increase the preferential rent.

However, according to attorney William Neville of Mitofsky Shapiro Neville and Hazen LLP, an owner could make a valid argument in favor of such a preferential rent agreement. “There's language in favor of the owner's position in the Missionary Sisters v. DHCR case,” says Neville. In this Appellate Division case, the owner had an agreement with the tenant in which the rent charged could legally be higher, but both parties agreed for a limited period, under a specific set of circumstances, to allow the tenant to pay less. Neville points out that business considerations may warrant such a preferential rent agreement, and the Appellate Division refers to the idea of business considerations in the Missionary Sisters case.

“Due to decisions like Hudson House LLC, owners will be less likely to agree to preferential rents,” says Neville. Though the owner may ultimately win, it may not be worth the cost of going through the DHCR, a Petition for Administrative Review, an Article 78 proceeding, and an appeal. The amount in dispute between the legal and the preferential rent isn't usually worth the cost of the litigation, he notes. Also, the owner should be able to charge the legal rent once the renewal period ends, which, at the longest, is two years. In this case, the owner may want to hold off on requiring such a preferential lease rider that escalates rent during the lease term and let the issue be resolved eventually by another owner.