In the 1980's, a Brooklyn brownstone containing 7 units was converted to 4 units. None of the units were ever registered with the DHCR. A duplex unit was occupied by the owners from 1998 to 2008. In 2008, these owners sold the building, and the new owners rented the duplex to new tenants. They were given a "market" lease and paid the rent demanded for 4 years. In 2012, a Housing Court Judge determined that the tenants were rent stabilized and ordered a trial on rent overcharge. After trial, Housing Court Judge McClanahan found, in Chun v. Raywood, that the legal rent had to be set based on the DHCR's "default formula," a calculation used when no reliable rental history records are available, and ordered the owners to refund the amount overpaid for the past 4 years, plus interest. Under the "default formula" the rent could be set on the basis of the lowest rent stabilized rent for a comparable apartment in the same line of apartments, or on other alternative formulas that would generally result in a lower rent.
In the frenzied rush to rent an apartment in NYC, tenants often rely solely on the representations of brokers, managing agents, and landlords about the type of building they are about to rent. Many of today's tenants assume they are "deregulated" tenants, or tenants not subject to rent control or rent stabilization, and landlords do nothing to disabuse a tenant of the assumption, perhaps relying on a murky history that the tenant's apartment was deregulated because it was used for professional reasons or rented by an owner in the past. Don't assume your apartment is deregulated without checking because there are significant benefits to being a rent regulated tenant, including reasonable rent increases and generally, life-time tenure in the apartment.