Widespread confusion over preferential rents opens the door for rent hikes

Landlord attorneys and tenant attorneys disagree on preferential rents under the new law, leaving hundreds of thousands of leases up in the air and tenants caught in the middle
By Georgia Kromrei | July 19, 2019 07:00AM

A new rent law is causing confusion (Credit: iStock)

A new rent law is causing confusion (Credit: iStock)

Conflicting interpretations of a few lines of the new rent law is leading to widespread panic, with some landlords rushing to re-issue leases and others throwing caution to the wind and risking potential overcharge proceedings.

Real estate attorneys and tenant attorneys are at odds over how to interpret a key section of the new rent law: raising preferential rents to legal rents for lease renewal offers provided to tenants before June 14 on leases that are effective after the changes were signed into law.

Landlord attorneys say ambiguity in the law could mean landlords are stuck with the preferential rents on the 270,000 preferential rent leases in NYC in 2018, according to data from HCR provided by the RGB to The Real Deal. In 2017, Department of Homes and Community Renewal reported that the average preferential rent in Queens was $1,611.

Without guidance from the state agency that oversees rent regulated housing, some landlords are rushing to re-issue renewal offers for leases that go into effect after June 14, in light of stricter guidelines for overcharges. Sherwin Belkin, of law firm Belkin, Burden Wenig and Goldman, said that the legislature showed a “lack of understanding” of rental property management by making the law take effect immediately.

“These are very uncertain times. Until some of this shakes out, by either court decision or some guidance from the division of housing, my rule is be safe not sorry. We’re advising owners to re-issue renewal offers if the lease takes effect after June 14. To be safe they should use the preferential rent.”

Other landlords are digging their heels in, saying that since renewal offers provided before June 14 were proper, the new rules should only apply to new renewal offers going forward.

TRD reviewed copies of leases from two tenants who say their landlord, LeFrak, is trying to skate the new rules and jack up their preferential rents. One LeFrak City tenant, who spoke on condition of anonymity, had a preferential rent of $2,296 on their June and July lease statements, and received a lease renewal offer in April for a new legal rent of $2,693 for a two-year lease — a 17% increase— which would go into effect on July 19. Another LeFrak City tenant, who spoke on condition of anonymity, received a renewal offer in July that showed an increase larger than the 1.5% or 2.5% that the Rent Guidelines Board instituted in June.

“In accordance with DHCR regulations, rent-stabilized lease renewal offers are prepared and distributed no less than 90 and no more than 150 days prior to lease expiration. Any June or July renewal offer was prepared as required well in advance of the passage of the new rent laws and followed the regulations in effect at the time the notice of renewal was sent,” a spokesperson for LeFrak said.

The spokesperson also noted that while they cannot comment on specific leases, they would meet with any residents to answer questions about renewal leases.

Even leases with renewal offers made prior to June 14th should adhere to the new framework, a spokesperson from Homes and Community Renewal said in a statement to TRD after this article was published.

“For tenants with preferential rents and who have a renewal lease with an occupancy date on or after June 14th, the new law applies,” said Brian Butry, a spokesperson.

Blaine Schwadel, from real estate law firm Rosenberg & Estis, said that after conversations about the new law, he and his colleagues are still unsure about how to interpret the new rule. That leaves it up to landlords to either raise preferential rents to legal rents and take the risk of potential treble charges down the road, or toe the line to the new rules.

“I know some owners are taking the position that since they were required to send out the offers before the rent laws changed, and it was sent during the appropriate window, under the old law, it was timely, proper, and that’s the position the owner will take. So I don’t know how it’s going to turn out.”

The law says that any tenant who is “subject to a lease on or after the effective date” or “is or was entitled to receive a renewal or vacancy lease on or after such date” must be charged the preferential rent. That language, said Ellen Davidson, a staff attorney at Legal Aid Society, is extremely clear.

“The law is very clear that if you have a renewal lease that goes into effect after June 14, it must be based on the pref[erential] rent and any increases from Rent Guidelines Board have to be on the preferential rent,” Davidson said. “And it’s true that the law rewrote the contracts— just like the change in the law in 2003 completely rewrote every preferential lease retroactively.”

Editor’s note: This article was updated on Friday, July 19 at 2:29 p.m. to include a statement from DHCR.