Ensuring that residents have access to affordable housing is vital to the economic stability and growth of a city. In major metropolitan areas, such as New York City, the government employs a system of rent control to keep housing prices under control. Preferential rent is a product of the rent control system that can complicate matters for landlords and tenants.
Preferential rent is rent that a landlord agrees to collect from a tenant in an amount that is less than the rent-controlled maximum charge for a given rental unit. While New York City is the primary site of preferential rent laws and regulations, tenancy laws could include discussions of preferential rent wherever a local government provides rent control for its residents. Preferential rent is legal and, by definition, voluntary for landlords. Once a landlord does offer preferential rent, it must follow legal guidelines.
Rent control programs stipulate the maximum rent for units, along with the maximum percentage increase that landlords can charge for each year or lease term. In cases of preferential rent, the preferential rent exists alongside the legal rent under rent control limits. Percentage increases apply to both preferential and legal rent amounts. However, in the case of New York City, if a landlord charges preferential rent for four years without referring to a higher legal rent amount in the tenant's lease agreement, the preferential rent becomes the new legal rent, limiting the landlord's options for raising rent in the future.
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The lease agreement that a landlord and tenant sign plays a major role in determining how preferential rent works. For example, in New York, landlords an specify whether a rent amount represents preferential or legal rent. In cases of preferential rent, landlords can note the legal rent rate and whether the preferential rent lasts for the duration of the lease or the duration of the tenancy -- until the tenant chooses to move out.
Landlords may choose to offer preferential rent for a number of reasons. One such reason would be to provide a friend or family member with a discount rate. Another reason to offer preferential rent is to attract more tenants and compete with neighboring rental units. Rent control regulations also allow landlords to increase the legal rent if the landlord pays for major improvements to a rental unit. If this results in a rent that would be more than current tenants are able to afford, or new tenants would be willing to pay, the landlord may elect to charge preferential rent instead, preferring more tenants who pay lower rent to vacancies in a building.