Landlord Not Entitled to First Rent for Altered Apartment

Tenant complained to the DHCR of rent overcharge. Landlord claimed that it had properly set an unregulated initial rent for a newly created apartment when tenant moved in. Prior tenant had paid $831 per month for a two-bedroom apartment. Prior landlord then added two additional bedrooms to the apartment, but new landlord sealed those rooms off and did not use or rent them. When complaining tenant moved in, landlord unsealed the doorway, performed electrical work to rewire the extra bedrooms, and rented the unit to tenant as a four-bedroom apartment.

The DHCR ruled for tenant and found that landlord had done no more than change the number of bedrooms without changing the outer perimeter of the apartment. Landlord requested reconsideration, and the DHCR modified its ruling to find that landlord was entitled to a $200 rent increase for the increased square footage. Landlord then filed an Article 78 court appeal, claiming that the DHCR’s decision was arbitrary and unreasonable. The court ruled against landlord and went further, finding that the DHCR arbitrarily and unreasonably added the $200 rent increase. 

Landlord appealed and lost. The appeals court pointed out that permitting a first rent for a newly created apartment is a DHCR policy that applies only when the perimeter walls of an apartment have been substantially moved and changed and where the previous apartment essentially ceases to exist. Here, landlord didn’t construct a new apartment by simply unsealing a doorway that led to two additional bedrooms. Instead, landlord was entitled under Rent Stabilization Code (RSC) Section 2522.4(a)(1) to increase tenant’s rent for adding square footage to the apartment. But the DHCR didn’t follow the statutory calculation set forth in RSC Section 2522.4(a)(4), and the case was properly sent back to the DHCR for recalculation of the legal rent. One appeals court judge disagreed with the majority’s decision and argued that, under DHCR policy and case law, landlord was entitled to set a first free-market rent. 

Velasquez v. DHCR: 130 A.D.3d 1045, 2015 NY Slip Op 06353 (App. Div. 2 Dept.; 7/29/15; Skelos, JP [dissenting], Hall, Sgroi, Barros, JJ)