Due diligence is usually associated with a building analysis undertaken in conjunction with a potential sale or purchase. When rent regulated apartments are involved, this will also involve a careful analysis of present and past rents to determine if apartments have been properly deregulated and if there is any potential liability for rent overcharge. The recent June 14th enactment of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) creates an urgency to an internal due diligence; that is, an audit of rents, security deposits, application and lease forms and general management to ensure that previously lawful practices, which the HSTPA makes unlawful, have or will be discontinued.
A significant change created by the HSTPA is the elimination of the “safe harbor” – this was the DHCR rule that allowed an owner confronted with an overcharge complaint by a rent regulated tenant to examine records, determine if there was an overcharge and – if there was an overcharge – make a refund to the tenant prior to the time that an answer to the complaint was due. By making such timely refund, the owner avoided treble damages being imposed. The HSTPSA provides that the safe harbor no longer exists. This means that determining the presence of an overcharge and making the refund after a rent overcharge complaint is received is too late to automatically avoid treble damages.
Once the complaint is received, an overcharge is presumed willful, with the burden on the owner to rebut the willfulness. That evidentiary burden is far more difficult to sustain than simply making the safe harbor refund. In the absence of the safe harbor, short of proving non-willfulness in the event of a complaint, the way to avoid treble damages is to undertake an internal rent audit and adjust rents, if warranted, before any complaint is filed.
The absence of the safe harbor and need for internal analysis is made even more stark by the increase in the treble damage period from two to six years by the HSTPA. In addition, the expansion of the “look-back” period to determine the legality of regulated rents has been dramatically expanded. Thus, the potential for overcharge liability has significantly grown.
The time to determine if you have the leases, the riders, the proof of improvements, etc. to address the legality of rents is, again, before a complaint is filed. Internal practices and forms also need to be examined in light of the HSTPA. For example:
- Are you asking for inappropriate information on your lease application?
- Are you asking for or holding more than one month’s security deposit?
- Have you agreed to a tenant’s request to pre-pay rent due to poor credit or lack of local contacts?
- Does your application fee exceed the new limits?
- Does your lease comply with the new rules and regarding:
- tenant inspection of the apartment?
- mitigation of damages?
- prompt return of security deposit?
- late fees?
All of these basic issues, and many more, are impacted by the HSTPA. Moreover, the queries posed above do not apply only to rent regulated apartments. These issues apply to free market units, to condominium leases, cooperative proprietary leases and subleases.
The HSTPA represents a major overhaul over rights, obligations, liabilities and methods of operation and management. The penalties for non-compliance are severe. A pro-active internal audit and analysis of rents, documents and practices can help to avoid the new pitfalls and pains.
By Sherwin Belkin