Rent Overcharge Occurring After Temporary Exemption Wasn't Willful

Tenant complained of rent overcharge and improper apartment deregulation. The unit had been temporarily exempt from rent stabilization before tenant moved in, and landlord then set the next rent as deregulated, at an amount above the vacancy deregulation threshold. The DRA found that this was incorrect, ruled for tenant, and ordered landlord to refund $165,185, including triple damages.

Landlord appealed and won in part. There was no dispute that the apartment was temporarily exempt on the May 2010 base date and that tenant was the first tenant in occupancy on April 1, 2012, after temporary exemption. So, under Rent Stabilization Code (RSC) Section 2526.1(a)(3)(iii) as it existed both before and after 2014 RSC amendments, the first tenant after temporary exemption had to be a rent-stabilized tenant. Because landlord didn't treat the first tenant after the base date temporary exemption as a rent-stabilized tenant, RSC Section 2526.1(a)(3)(iii) as it existed on the base date applied. This provision stated that "where the rent charged on the base date cannot be established, the rent shall be determined by DHCR in accordance with section 2522.6 of this Title." This, in turn, required that the base date rent be set by using the average rent of comparable stabilized apartments, and the DRA used this method.

But the DHCR found that the overcharge wasn't willful in light of confusion over the applicability of RSC Section 2526.1(a)(3)(iii) and whether the first post-temporary exemption rent had to be rent stabilized. Case law on that issue wasn't decided by an appeals court until 2021. So, landlord's mistake in deregulating the apartment wasn't willful. The total overcharge, including interest but not triple damages, was $35,126.

1159 Dean LLC: DHCR Adm. Rev. Docket No. JU210007RP (3/22/22)[5-pg. document]