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Jun 25, 2019

New York Rental Regulations: Sweeping Rental Regulation Reform Signed Into Law

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New York Rental Regulations: Sweeping Rental Regulation Reform Signed Into Law[1]

On June 14, 2019, New York State Governor Andrew Cuomo signed into law the Housing Stability and Tenant Protection Act of 2019, introducing sweeping tenant protections. Below is a short summary of key changes in the new rental regulations from those formerly in effect:

General Changes

  • Rent regulation laws are extended and made permanent.
  • Rent overcharge lookback period extended to six years from four years.
  • Caps security deposits at one month’s rent and requires return two weeks before scheduled move out.
  • The Division of Housing and Community Renewal (DHCR) must produce a publicly available annual report on rent administration and tenant protection.[2]

Deregulation

Old Rule:

  • A rent-stabilized unit may become deregulated pursuant to the following:
    • High-Rent Vacancy Deregulation. When a tenant leases a vacant unit and the legal regulated rent has reached $2,774.76 or more. 
    • High-Rent High-Income Deregulation. When a unit with legally regulated rent of $2,774.76 or more is occupied by a tenant whose gross income has exceeded $200,000 per annum in each of the previous two calendar years.

New Rule:

  • Neither type of deregulation is permitted.

Rent Increases

Old Rule:

  • If a unit does not fall within one of the deregulation options set forth above, the owner may only increase the rent by the percentage rates established each year by the Rent Guidelines Board (RGB). In addition, New York State law establishes vacancy lease increases for new tenants entering into a Vacancy Lease (defined below).
  • Preferential rent granted to a tenant may be increased to the legal regulated rent upon a renewal.

New Rule:

  • Rent may be increased to the lesser of: (i) 7.5% and (ii) the average of the five most recent RGB rates for one-year renewals.
  • Preferential rent (where an owner agrees to charge rent that is lower than the legal regulated rent) granted to a tenant becomes the base rent upon renewal.

Vacancy Lease Increases

Old Rule:

  • When a person rents a stabilized unit for the first time, the tenant is provided the option to enter into a one-year or two-year lease (a “Vacancy Lease”).
    • For leases commencing on or between October 1, 2018 and September 30, 2019:
      • The owner may increase the rent according to the following vacancy increase limits:
        • One-year vacancy increase – 19%
        • Two-year vacancy increase – 20%
    • The Vacancy Lease increases do not apply if a DHCR order is in effect, which order reduces rent as a result of the owner’s failure to provide or maintain appropriate services.

New Rule:

  • Vacancy Lease increases are no longer permitted.

Longevity Vacancy Allowance 

Old Rule:

  • If the owner did not collect a Vacancy Lease increase within eight years of the new Vacancy Lease, in addition to the Vacancy Lease increase provided above, the owner may collect a vacancy increase equal to 6% multiplied by the number of years since the collection of the last vacancy increase.
    • For example, Tenant A lives in a unit for ten years and vacates in September, 2011. Tenant B moves into the unit and enters into a new Vacancy Lease commencing as of October 1, 2011. Since the owner did not collect a Vacancy Lease increase within the eight years preceding the new Vacancy Lease, the owner would be entitled to 6% multiplied by the ten years since the last vacancy.

New Rule:

  • Longevity vacancy allowances are no longer permitted.

Major Capital Improvements (MCI)

Old Rule:

  • For rent-stabilized units, an owner may apply to increase the rent based on the actual cost of an improvement or installation that improves the overall condition of the building (the “MCI Increase”). The MCI Increase becomes a permanent part of the legal regulated rent for future increases.
  • To qualify as a MCI, the improvement/installation must:
    • be a new installation (as opposed to a repair of old equipment) or an improvement/replacement of one of the building’s major systems;
    • be depreciable pursuant to the Internal Revenue Code and not constitute ordinary repairs; 
    • be for the operation, preservation and maintenance of the building; 
    • directly or indirectly benefit all tenants/the entire building; and
    • fall within the number of years an improvement should last before being replaced (as set forth in the useful life schedule provided by the Rent Stabilization Code).
  • The MCI Increase is calculated as follows:
    • The cost claimed by an owner is (i) audited and verified by DHCR, (ii) reduced by items that do not qualify as MCIs, costs the owner cannot prove, and insurance payments and/or government grants that paid for part of the MCI, and (iii) if the MCI benefited any commercial space at the building, further adjusted by the square footage of the commercial space in relation to the entire building. 
    • The net approved cost is then amortized over nine years for buildings with more than 35 units. This amount is divided by the total number of rooms in the building then multiplied by the number of rooms in the unit subject to the MCI Increase.
  • The MCI rent increase is limited to 6% of the amount that may be collected each year.
  • DHCR may deny the owner’s request for a MCI Increase if the owner fails to maintain all required services or if hazardous legal violations are outstanding.

New Rule:

  • The MCI rent increase is now limited to 2% (from 6%) of the amount that may be collected each year.
    • This applies to rent increases attributable to MCIs that were approved on or after June 16, 2012 and before June 16, 2019. The 2% rent increase limit begins to apply to these MCIs on or after September 1, 2019 for tenants in occupancy on the date the MCI was approved.
    • Increases are fixed to the unit and cease after 30 years from the date the increase took effect.
    • Owners may add any remaining balance of the MCI to the legal regulated rent upon vacancy.
  • Amortization period lengthened to twelve years (from eight years) for buildings with thirty-five or fewer units or twelve and one-half years (from nine years) for buildings with more than thirty-five units.
    • Amortized costs removed from legal regulated rent after thirty years from the date the increase became effective.
  • Work that qualifies for MCIs is restricted:
    • Improvement must be essential for the preservation, energy efficiency, functionality or infrastructure of the entire building (including heating, windows, plumbing and roofing).
    • Operational costs and unnecessary cosmetic improvements do not qualify.
    • “Maintenance of the structure” was removed from the statute but was not included in the list of improvements that do not qualify.
  • Twenty-five percent of all approved MCIs must be audited and inspected. This will include in-person inspection and document review.

Individual Apartment Improvement (IAI)

Old Rule:

  • The rent may be subject to an additional increase when the owner (i) substantially increases the dwelling space, (ii) increases the services it provides, (iii) installs improvements in the housing accommodation, or (iv) provides new furniture or furnishings.
  • After the Vacancy Lease increases are applied, if the owner installs an IAI in a currently vacant unit, the owner may collect a permanent rent increase equal to (i) 1/60th of the cost of the IAI for buildings that contain more than thirty-five units or (ii) 1/40th of the cost of the IAI for buildings that contain thirty-five units or less. 
  • The owner is required to maintain the IAI and certify annually to DHCR that it is being maintained.
  • If the owner receives a rent increase for an IAI, it is not entitled to a further increase for installing a similar improvement within the useful life of such equipment or furniture.

New Rule:

  • IAI expenditures capped at $15,000 per unit over fifteen years. This total is limited to three IAI during that period.
  • Rent increase ratio changed to (i) 1/180th of the cost of the IAI for buildings that contain more than thirty-five units or (ii) 1/168th of the cost of the IAI for buildings that contain thirty-five units or less. The rent increase expires after thirty years.
  • If the maximum IAI expenditure is made, the maximum rent increase would be $89.28.

Duty to Mitigate

Old Rule:

  • If a tenant vacates a unit in violation of the terms of the lease, the owner does not have a duty to mitigate damages.

New Rule:

  • If a tenant vacates a unit in violation of the terms of the lease, the owner shall, in good faith and according to the owner’s resources and abilities, take reasonable and customary actions to rent the unit at the lesser of (i) fair market value and (ii) the rent during the term of the original tenancy. If the owner rents the unit, the new tenant’s lease shall terminate the previous tenant’s lease and mitigate damages otherwise recoverable against the previous tenant.

Cooperative and Condominium Conversion

Old Rule:

  • Non-Eviction Plan. Conversion is not effective until purchase and sale agreements have been executed and delivered with respect to at least 15% of units in the building or group of buildings.
  • Eviction Plan. If purchase and sale agreements have been executed and delivered for 51% of units, all non-purchasing tenants may be evicted.

New Rule:

  • Non-Eviction Plan. Fifty-one percent of tenants must agree to purchase units before conversion can become effective.
  • Eviction Plan. No longer permitted for future filings.

Effect on Affordable New York (421-a) Tax Credit

  • Section 421-a is not expressly mentioned or referenced in the new law.
  • The tax credit provided by Section 421-a should not itself be affected by the new law. However, the treatment of rental units after expiration of the benefit period has been the subject of discussion in light of the repeal of the former statutory deregulation rules. The Section 421-a provisions for decontrol of vacant units after expiration of the benefit period should continue to operate independently.

For more information:

  • John L. Opar
  • Lisa M. Brill
  • Kris Ferranti
  • Horton D. McKinney
  • Cristiana Modesti

The authors would like to thank Eitan Morris, summer associate at Shearman & Sterling LLP, for his research and assistance in preparing this summary.

Footnotes

[1] Changes to the law related to manufactured homes are not included in this summary.

[2] The report must include fourteen different data sets contained in table format, such as the number of rent controlled and rent stabilized housing units; the number of MCI applications submitted and approved; the number of units receiving preferential rent; and the median and mean rents and rent increases.

Authors and Contributors

John L. Opar

Partner

Real Estate

+1 212 848 7697

+1 212 848 7697

New York

Lisa M. Brill

Partner

Real Estate

+1 212 848 4571

+1 212 848 4571

New York

Kris Ferranti

Partner

Real Estate

+1 212 848 7117

+1 212 848 7117

New York

Horton D. McKinney

Associate

Real Estate

+1 212 848 4567

+1 212 848 4567

New York

Practices

Industries

Regional Experience