When the annual allowable increase does not completely cover the landlord’s yearly increase in operating and maintenance expenses for a property, a landlord may petition for an additional base rent increase of up to 7%. This is known as an Operating and Maintenance or O&M increase. In determining whether an O&M increase is justified, all operating expenses must be considered (excluding debt service), including: property taxes, repairs, maintenance, insurance, pest control, garbage, water, etc. Electric and gas costs are not included in the calculation since an increase in utility costs may be passed through to the tenant by a separate petition. Additionally, increases in property tax resulting from a change in ownership are disallowed, as are increases in management expenses unless the landlord can show that the increased expenses are reasonable and necessary.
In order to qualify for an O&M increase, the landlord must demonstrate that total O&M expenses increased from one twelve month period to the next by more than the amount of the annual allowable increase. Two consecutive calendar years or a 24-month period prior to filing the petition must be used for the comparison of O&M expenses. For example, if filing a petition in 2006, a landlord could compare the total O&M expenses for 2005 to the total for 2004. Alternatively, the landlord could use a recent 24-month period, such as July 2003 through June 2004 compared to July 2004 through June 2005. Please note that selection of a particular 24-month period in order to create exaggerated results is disfavored by the Board. Under a recent amendment to the Rent Ordinance, the same landlord is limited to a total O&M increase of 7% in any five year period for any unit in a property with six or more residential units.
To determine the per unit O&M increase, the total cost increase is calculated and then divided by 12 months. That amount is then divided by the number of units in the building. Costs are allocated to the total number of units in the building, including commercial units, not just to the residential units.
If the per unit increase is not more than the annual allowable increase at the time the petition was filed, no additional increase based on O&M expenses will be granted. If the increase is more than the annual allowable increase, then an additional increase of up to 7% may be granted.
If an O&M increase is justified, it becomes part of the tenant’s base rent. The O&M increase can only be imposed on the tenant’s anniversary date and only after serving the tenant with a proper written notice of rent increase. The landlord must file the O&M petition before serving the notice of increase. The notice can be served at any time after the petition is filed, even after the Rent Board issues a decision. If the notice is issued before the petition is filed, the notice is void and cannot be the basis for a lawful O&M increase.
Tenants who lived in the building during any part of Year 1, the first comparison year, may be given an O&M increase. Tenants who moved into the building during Year 2, the second comparison year, may not be given an O&M increase unless ownership changed during Year 2 after the tenant moved in. Only one O&M increase based on costs related to the transfer of ownership of a property is allowed. Tenants may object to imposition of an O&M increase if the landlord has failed to perform requested repair and maintenance that is required by law.
If payment of the O&M rent increase would present a financial hardship for a tenant, he or she may seek relief from payment of the increase by filing a Tenant Financial Hardship Application with the Rent Board. A Tenant Financial Hardship Application must be filed within one year of the effective date of the O&M rent increase, or within fifteen days of the decision granting the landlord's petition, whichever date is later. A tenant must wait to file the Hardship Application until the tenant has received either a rent increase notice from the landlord or a written decision from the Rent Board. Once the tenant has filed the Hardship Application, the tenant does not have to pay the O&M rent increase unless the Rent Board issues a final decision denying the Hardship Application. If the Hardship Application is denied, the tenant will have to pay the O&M rent increase retroactive to the effective date indicated on the rent increase notice. If the Hardship Application is granted, relief from payment of the O&M rent increase may be for an indefinite period or for a limited period of time, depending on the nature of the tenant’s financial hardship.
To obtain a copy of the Operating and Maintenance Petition form, click here. Forms are also available at the Rent Board’s office.
Tags: Topic 322