New rent overcharge bill explained
New rent overcharge bill explained
New bill inadvertently turns many landlords into "frauds"
The Senate’s approval of bill S2980c will do more than just disincentivize the creation of Frankenstein apartments, a topic I wrote about last week. The bill will expose owners to a great deal more liability tied to claims of rent overcharges. The bill that awaits Governor Hochul’s signature will place a heavier burden of proof on rent stabilized (RS) owners to show that there is no illegal rent setting. Let’s discuss what this is, and what it means for the market right now.
A brief history and some context:
ASSUMPTION: There are some RS tenants whose rents are higher than they would otherwise be had all owners everywhere perfectly understood and adhered to nuanced rent laws perfectly.
PRE-2019: Prior to 2019’s Housing Stability and Tenant Protection Act (HSTPA), the Rent Stabilized Law called for a four-year statute of limitations. A tenant looking at their rent in 2015, could call into question any dubious rent-activity dating back to 2011. If there was evidence of “willful” overcharging, the probe into a building owner’s rents could continue further back in time. Source: NY Apartment Law
JUNE 2019: The HSTPA decided that the baseline review period for rents was six years. A tenant looking at their rent in 2025 could call into question any dubious rent-activity dating back to 2019. If there was evidence of fraud, HSTPA asserted that the probe into a building owner’s rents could continue further back in time.
APRIL 2020: Regina Metropolitan v. NY DHCR was a case argued around the merits of tenant overcharges on units that had been illegally destabilized. This was an important case because it limited owner liability from rent overcharges. Two important things came out from the decision:
It was decided that 2019’s HSTPA could not be applied retroactively. That meant reverting back to a rent lookback period of four years, down from six. This put a tighter lid on owner liability for rent overcharges because tenants could only get compensated for four years of damages and could only, initially, investigate four years back.
The burden of proof required to probe further than the allowable look back period was raised. Tenants or other parties who had an interest in investigating rent histories, looking at receipts of renovations performed, or examining calculations of rent would now have to show some evidence of fraud by the landlord, before they got to probe further in time.
What does this new bill do?
S2980c is aimed at eliminating ambiguities that currently exist in the law around rent overcharges – specifically what constitutes fraud and allows for that lookback period to expand. As defined in the new law, landlord DHCR fraud is one of two things:
Not correctly disclosing to tenants the correct rents, lease information, and regulatory status of an apartment.
Not registering property as rent stabilized after receiving either J-51 or 421A benefits, starting in 2011.
These changes would take effect immediately.
From the bill itself:
“With respect to the calculation of legal rents for the period either prior to or subsequent to June 14, 2019, an owner shall be deemed to have committed fraud if the owner shall have committed a material breach of any duty, arising under statutory, administrative or common law, to disclose truthfully to any tenant, government agency or judicial or administrative tribunal, the rent, regulatory status, or lease information, for purposes of claiming an unlawful rent or claiming to have deregulated an apartment, whether or not the owner's conduct would be considered fraud under the common law, and whether or not a complaining tenant specifically relied on untruthful or misleading statements in registrations, leases, or other documents. The following conduct shall be presumed to have been the product of such fraud:
(1)the unlawful deregulation of any apartment, including such deregulation as results from claiming an unlawful increase such as would have brought the rent over the deregulation threshold that existed under prior law, unless the landlord can prove good faith reliance on a directive or ruling by an administrative agency or court; or
(2) beginning October 1, 2011, failing to register, as rent stabilized, any apartment in a building receiving J-51 or 421-a benefits.”
Source: Senate bill 2980c
Why is this a problem?
This new set of guidelines is problematic because it’s all encompassing. Regina offered landlords a reprieve after they were hit hard with the HSTPA, but it left attorneys wondering what fraud meant. This new bill doesn’t answer what fraud actually looks like. Instead, it labels all things short of perfect paperwork as fraud. The political tides of NY have shifted, and this is reminiscent of 2019’s HSTPA when the state legislature punished some bad actor landlords by applying punitive regulations on all landlords.
Not correctly disclosing rents, lease information, or regulatory status of a new building that you have recently developed yourself could be labeled as gross negligence, or maybe even fraud. But this is not representative of the real world. The current owners of rent stabilized properties in NYC are rarely those who built it. Buildings have usually traded hands several times since the June 1974 rent stabilization laws first made their appearance. It is difficult to pinpoint the exact rent apartments should have because so many other owners have had a hand in shaping a building’s rents prior to the current landlord. It is not fraud to take what someone else has said is true about rents and then keep going raising them from there.
Consequences
A few things come to mind in relation to this new rule for owners of multifamily:
Value adjustments: buildings with shaky DHCR histories will lose even more value. There is much talk of office bifurcation (or trifurcation, according to RXR’s Scott Rechler). The same could happen here: RS buildings that have paper trails and receipts, and those that don’t. The buyer pools may be different, and the business plans could differ as well.
Transactions will slow even more: Some buyers will continue to run towards rent stabilized properties with excitement, but some more folks will hang back on the sidelines to wait and see what comes of this new risk. It wouldn’t be surprising if buyers began shaping transactions differently as well: asking for due diligence periods or including clauses that shift liability of rent overcharges back to sellers, if they arise.
More attorney chats: attorneys will need to be consulted more than ever to clearly understand risk exposures on asset purchases. This will mean underwriting weightier legal & miscellaneous categories on building operating expenses. Not ALL parties lose from this ruling 😉.
Legal challenges up ahead: This law will be challenged in courts. Under the current language, it is very hard for landlords to completely comply with the law because they cannot always have knowledge of the prior ways old landlords raised rents.
Compound issues: On top of being exposed to rent overcharge, some properties will have tenants that are not paying rent. Properties like these will become pariahs. Watch out.
The governor has 10 days from the date that a bill is submitting to her desk for signing to approve the legislation or veto it. Members of both NY houses of government have agreed to override the governor if she does veto it.
Sources: Senate bill 2980c, Belkin, Burden, Goldman opinion, and NY Apartment Law