On-time rent discounts are not legal in stabilized units. Ever. Even though they are not necessarily harmful to tenants, the court has ruled that they are not allowed in leases.
In Park Haven, LLC v. Robinson, the Appellate Term found that a landlord cannot offer one rent amount if the tenant is on time with payment and another rent amount if the tenant is not on time. In the case of Park Haven, the landlord charged the tenant $1,449 per month when she was on time and $2,509 if she failed to pay by the fifth of the month. Such a scheme constituted, per the Appellate Term, “an unconscionable late charge and penalty, in that the increase is excessive and grossly disproportionate to any damages that could be sustained as a result of tenant’s failure to pay rent on time.”
Particularly with rent stabilized units, these types of discounts are not allowed because discounted rent provisions are not allowed because they can potentially lead to monthly fluctuations in rent amounts. For example, if one were to offer a preferential rent, it cannot revert to the legal rent just because the tenant failed to pay on time. The landlord must continue to offer the preferential rent agreed upon at the lease signing for the entire duration of the lease.
This is not to say that landlords are forbidden from charging tenants late fees. Even for stabilized tenants, such fees are allowed. However, it must be clear that the amount the tenants pay in rent continues to be the same from month to month, and that any additional fees paid by tenants do not alter the amount the landlord is allowed to collect in rent.
Two examples may be illuminative.
In scenario A, a landlord charges a tenant a preferential rent of $1,000 for a studio apartment. The legal rent on the unit is $1,050. On top of clearly distinguishing between the legal rent and the preferential rent amounts, the lease contains a provision that states that the landlord can charge the tenant a 5% late fee ($50) should they fail to pay by the fifth of the month.
In scenario B, a landlord down the block offers tenants a “discounted rent” when they pay on time. A tenant who pays on or before the fifth of the month gets a discounted rate on a studio apartment and pays $1,000. Should the tenant fail to pay by the fifth, she will have to pay $1,050.
Even though the results are the same (the tenant pays a total of $1,000 when the rent is on time and a total of $1,050 when the rent is more than five days late), scenario A is legal and scenario B is illegal. Landlords cannot alter the rent amount on a month-to-month basis. Landlords must offer a single rent that is consistent throughout the entire duration of a lease, though they can penalize tenants for late payments so long as such a provision is included within the first lease the tenant signs. Landlords can, according to DHCR Fact Sheet #44, charge late fees “where a clause in the vacancy lease allows for them to be charged by a certain specific date and the late fees are no more than 5% of the monthly rent currently being charged and collected.” However, to charge these fees by using a “rent discount” as the proverbial carrot instead of “late fees” as the proverbial stick is illegal.
There are several aspects of the Case of the Week that one could focus on, but firmly stating that on-time discount rent provisions in leases are illegal is without question the most important takeaway from this case. The legality of these provisions is not based on whether or not they are—as the Appellate Term wrote in the previously mentioned Park Haven case— “unconscionable” or “excessive and grossly disproportionate to any damages that could be sustained as a result of the tenant’s failure to pay rent on time.” They are necessarily illegal.
What to take away: Do not offer tenants an on-time discount rent provision in your lease. Such provisions are not legal.
To read more about this case, see what our friends at The Habitat Group have to say.