Getting Relief After Unwittingly Buying Building That's Rent Stabilized

Q My management company took over the management of a five-unit apartment building. Two prior owners ago, the former owner converted the building from a six-unit building to a five-unit one. And the current owner bought the building believing that it was deregulated. However, while at the DHCR office on an unrelated issue recently, we were told that the building was still rent stabilized and the last rent registrations were filed in 1985. Is there any recourse for the current owner? Is there any grandfathering relief that might apply in this situation?

A The law is clear that the building is indeed subject to rent stabilization, says attorney Dov Treiman. An Appellate Division case that is still good law upheld the DHCR's ruling that combining apartments to make it a five-unit building doesn't result in an exemption from stabilization [Shubert v. DHCR, June 1990]. Treiman points out that it's usually a one-way street for owners contemplating changing the number of units in a building to alter the building's rent-stabilized status. Reducing the number of units in a building typically doesn't take a building out of rent stabilization, but increasing the number of units in a five-unit building will put it into rent stabilization.

In a few circumstances, if the criteria of Section 2520.11(e) for substantial rehabilitation is met, the building could be eligible for deregulation, says attorney Niles Welikson. The DHCR may find that a building has been substantially rehabilitated and is therefore exempt from coverage under the Emergency Tenant Protection Act or the Rent Stabilization Law, if the owner can demonstrate, based on all the circumstances, that the following criteria have been met:

• At least 75 percent of building-wide and individual housing accommodation systems have been replaced;

• The rehabilitation occurred in a building that was in a substandard or seriously deteriorated condition. The extent to which the building was vacant of residential tenants when the rehabilitation began constitutes evidence of whether the building was in fact in such condition. Where the rehabilitation began in a building in which at least 80 percent of the housing accommodations were vacant of residential tenants, the DHCR presumes that the building was substandard or seriously deteriorated at that time. Space converted from nonresidential use to residential isn't required to have been in substandard or seriously deteriorated condition; and

• All building systems comply with all applicable building codes and requirements, and the owner submits copies of the building's Certificate of Occupancy.

To prove that there was a substantial rehabilitation, cooperation from the prior owner would be helpful, as well as cooperation from any architect or engineer who had been involved in any such project for the building, says Welikson.

Aside from this possibility, the only other recourse for the owner might be against the seller if representations made in the contract confirming that the building was deregulated survived closing, or against the transactional attorney who might not have properly researched the building.

“One cannot overemphasize the importance of using the ‘due diligence’ period in a building purchase to be duly diligent in ascertaining the risk levels of everything that can have an effect on the building,” says Treiman. This includes not only questions of rent regulation, but also things like tax status and compliance with housing and building codes. According to Treiman, there are many items that can be researched from the public record that can prevent this kind of problem.