Court Reviews 421-a Net Effective Rent Issues
As you may be aware, various tenants throughout New York City have commenced declaratory judgment actions relating to “Old” 421-a buildings. The tenants have alleged that where owners granted tenants a temporary construction rent concession, the “net effective rent,” rather than the actual lease rent, should be considered the legal stabilized rent upon which all renewals should be based. This would, of course, have the effect of substantially lowering the unit’s stabilized rent for the remaining tax benefit period.In some of these cases where the tenants are seeking class certification, owners moved to dismiss the cases for failing to state a cause of action. In one such case, Chernett v Spruce 1209, New York County Supreme Court Justice Arlene Bluth denied the owner’s motion to dismiss, holding that the tenants’ complaint stated a cause of action and could not be dismissed at this early stage. Instead, the Court held that the matter should proceed to discovery, whereby the tenants will attempt to show that the “construction concession” recognized and approved by the Court of Appeals in Century Operating Corp. is factually distinguishable from the construction concession in Chernett. The Court’s decision is not binding on other Justices in similar cases. It is unknown at this time whether the owner will appeal Justice Bluth’s order.
As that class action (and other actions) proceed, the circumstances of the concessions given to your tenants may negate your rent increase flexibility for vacancy leases, as well as create rent overcharge liability for leases with similar concessions that could be invalidated by the courts. If, ultimately, a net effective rent analysis is applied by the courts to “Old” 421-a buildings, such a requirement would likely impact the legal rent of market units in “New” 421-a buildings and affect the ability to deregulate market rate units in “New” 421-a buildings.
If you have any questions please contact us at your convenience.