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The Substantial Rehabilitation Exception to Rent Stabilization Coverage - an Excerpt from Michelle Itkowitz's Lawline CLE on Landlord and Tenant Litigation in New York

On October 17, 2017, Michelle Maratto Itkowitz taught Session 6 of a seven-part continuing legal education program for Lawline on Landlord and Tenant Litigation in New York Session 6 was "Introduction to Rent Stabilization".

Rent Stabilization is one of the most misunderstood areas of real property law. In this session we begin by answering the fundamental question of – How do I know if a tenant is Rent Stabilized (or not)? This is a very important question in this era of rampant illegal deregulation. If the tenant is Rent Stabilized, we explain what that means for the landlord and for the tenant. 

A clip from Session 6 is not available yet, but here is a clip from an earlier session in the program - Motions the Should Never Happen in Housing Court, But Often Do.

And below is an excerpt from the 22-page, 29-footnote materials, which accompanied this program:


THE SUBSTANTIAL REHABILITATION EXCEPTION TO RENT STABILIZATION COVERAGE

Moreover, there is an exemption from Rent Stabilization based upon Substantial Rehabilitation of a building, governed by Rent Stabilization Code § 2527.11 and § 2520.11(e). 

The best place to start a review of the law in this area is to study the exact text of the DHCR Operational Bulletin 95-2 [in magenta below], which sets forth the position of the DHCR regarding the circumstances under which the agency will find that a building has been substantially rehabilitated. DHCR tells you exactly what it wants. 

I. Criteria

DHCR will find that a building has been substantially rehabilitated within the meaning of TPR section 2500.9(e) and RSC section 2520.1l(e), and is therefore exempt from coverage under the ETPA or the RSL, for rent stabilized properties where the owner demonstrates, based upon the totality of the circumstances, that the following criteria have been met:

A. At least 75% of the building-wide and apartment systems contained on the following list must each have been completely replaced with new systems. 

Additionally, all ceilings, flooring and plasterboard or wall surfaces in common areas must have been replaced; and ceiling, wall, and floor surfaces in apartments, if not replaced, must have been made as new as determined by DHCR.

List of Building-wide and Apartment Systems:

1. Plumbing
2. Heating
3. Gas supply
4. Electrical wiring
5. Intercoms
6. Windows
7. Roof
8. Elevators
9. Incinerators or waste compactors
10. Fire escapes
11. Interior stairways
12. Kitchens
13. Bathrooms
14. Floors
15. Ceilings and wall surfaces
16. Pointing or exterior surface repair as needed
17. All doors and frames including the replacement of non-fire-rated items with fire-rated ones.

However, for good cause shown, on a case-by-case basis, limited exceptions to the stated criteria regarding the extent of the rehabilitation work to be effectuated building-wide or as to individual housing accommodations may be granted where the owner demonstrates that a particular component of the building or system has recently been installed or upgraded so that it is structurally sound and does not require replacement, or that the preservation of a particular component is desirable or required by law due to its aesthetic or historic merit.

B. The rehabilitation was commenced in a building that was in a substandard or seriously deteriorated condition. The extent to which the building was vacant of residential tenants when the rehabilitation was commenced shall, in addition to the items described in III “Documentation", constitute evidence of whether the building was in fact in such condition. Where the rehabilitation was commenced in a building that was at least 80% vacant of residential tenants, there shall be a presumption that the building was substandard or seriously deteriorated at that time.

***

D. All building systems comply with all applicable building codes and requirements, and the owner has submitted copies of the building's certificate of occupancy before and after the rehabilitation.

E. The Substantial Rehabilitation provision is intended to encourage the creation of new or rehabilitated housing. Accordingly, in making a determination as to the eligibility of a building for this exemption, DHCR will consider all facts that support this policy.

F. Where occupied, rent regulated units have not been rehabilitated, such units shall remain regulated for the duration of occupancy by the regulated tenants, notwithstanding a finding that the remainder of the building has been substantially rehabilitated and qualifies for exemption from regulation.

***

III. Documentation

The following documentation will be required from owners in support of a claim of substantial rehabilitation.

Records demonstrating the scope of the work actually performed in the building. These may include:

o an itemized description of replacements and installations
o copies of approved building plans
o architect's or general contractor's statements
o contracts for work performed
o appropriate government approvals
o photographs of conditions before
o photographs of conditions during
o photographs of conditions after the work was performed. 

Proof of payment by the owner for the rehabilitation work may be required. 

[END OF DHCR OPERATIONAL BULLETIN]

In general, for substantial rehabilitation a landlord needs to be able to prove that:


  • When the construction project commenced when the building was in substandard and seriously deteriorated condition and the Building was at least eighty percent (80%) vacant of residential tenants. 
  • All of the walls in the common area and the apartments were demolished.
  • One-hundred percent of more than 75% of the applicable Building-wide apartment systems contained on the list in DHCR Operational Bulletin 95-2 at I(A) have been completely replaced with new systems. 
  • All Building systems comply with all applicable building codes and requirements and the Building. 


This all needs to be proven by admissible and highly detailed proof. Litigating a Substantial Rehabilitation case is like litigating a construction litigation.

Substantial rehabilitation cases are often more than 10 single-spaced pages long. They are incredibly detailed. Suggesting that the proof that needs to be submitted must be very detailed. 

Here is an example from an actual decision regarding just one building system – electric:

"Concerning electrical wiring, Mr. Goldstein states that there could not have been a total replacement of the electrical wiring because as he observed during his 2012 inspection of the building and the tenant's room, the wiring in the tenant's room is deficient in, among other ways: there are only two outlets, one outlet has no cover and the electrical wiring in the junction box is open and exposed, the remaining outlet is incapable of supporting the tenant's appliances, the kitchen outlet does not have the required ground-fault circuit interrupter (GFCI) incorporated into it, as required by law, there is no 3-pronged grounded outlet, as would have been installed during a complete electrical replacement; that none of the various electricians who allegedly worked in the building ever filed complete plans for such work with the Department of Buildings; that the electrical application in the Department's records do not show the electrical work alleged." 

NOTE this was counteracted by LL’s proof which was:  

"The evidence in this proceeding shows that the electrical wiring in the building and the apartments was replaced. The 1979 vacate order states that no electricity was being supplied to the building. The Commissioner makes a reasonable inference, based upon the language of the vacate order, that given the substandard condition of the entire building and given the lack of electricity, the electrical system needed to be replaced. [There was an electricians affidavit.]  The owner submitted canceled checks … The tenant's contentions that as no permits for electrical work were applied for … and the poor condition of his outlets in his room show no total replacement of the electrical system are insufficient to rebut the 1979 vacate order and the owner's evidence."

Here is an example of the DHCR asking the petitioner for more information:

"On October 16, 2014, the Rent Administrator requested additional information from the petitioner, including the circumstances under which the building was vacant in 2008; when did the rehabilitation project start and end; whether any of the former tenants reoccupied their apartments; photographs before, during and after the renovation; an affidavit from the registered professional architect or engineer who worked on and/or certified the project stating which specific building wide and apartment systems were replaced pursuant to DHCR Operational Bulletin 95 - 2 and what work was done in the common areas of the building; copies of architectural plans approved by the DOB; and the new Certificate of Occupancy or Letter of Completion." 

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