The D.C. City Council gave initial approval yesterday to dramatic changes in the city's rent control laws that would give landlords the right to higher rent increases, exempt more properties from controls and provide incentives to increase the city's rental housing stock.

The legislation, passed by a 10-to-3 vote, would mean rents could be raised up to 12 percent when an apartment becomes vacant, instead of the current 10 percent ceiling. There would be no ceiling on rents for single-family houses once they became vacant.

Yearly rent increases on controlled units would continue to be pegged to the metropolitan consumer price index for the 6 1/2-year duration of the new law. Landlords who file hardship petitions with the city could be authorized a 12 percent rate of return on their properties, up from the current 10 percent.

The bill voted on by the council also contains a controversial "vacancy decontrol" provision specifying that four years from now, apartments would become exempt from all controls as they become vacant, assuming the city's vacancy rate is at least 6 percent and a $15 million tenant subsidy program, established by the legislation, is operating.

Yesterday's vote was the first of two that the council must take on the measure, designed to replace the current rent control law, which covers 120,000 units and expires April 30.

The action was a sharp departure from positions the council has taken in years past, when rent control was considered politically untouchable. It also departs from council action in recent weeks, when it appeared that the current system of controls would be maintained.

When the council began yesterday's session, the only rent bill under consideration was one introduced by Chairman David A. Clarke that would have extended provisions of the current law for four years.

But Clarke's bill, supported by five other council members, was drastically modified by a package of 26 amendments that had been negotiated and endorsed by a seven-member majority.

Clarke later called yesterday's action a "major disappointment," and added that he hopes for changes when the council votes again on rent control in two weeks. There was no indication, however, that the seven-vote bloc that prevailed in a series of votes yesterday would weaken.

In addition to exempting an estimated 5,000 single-family houses from controls as they become vacant, the substitute legislation would allow lifting of all controls from buildings that are 80 percent vacant on the effective date of the legislation, subject to the approval of city officials.

To get vacant and boarded-up properties back on the market and to assist owners of distressed property, the bill specifies that low-interest, tax-exempt bond financing would be made availabe for the construction and renovation of rental property.

The bill also replaces the word "landlord" with the term "rent provider," saying that a law should "use terms without the negative connotations" that are associated with the word "landlord."

Council member Charlene Drew Jarvis (D-Ward 4) introduced the substitute legislation before a capacity crowd, many of whom wore big yellow buttons that said: "Prevent Homelessness: Strengthen Rent Control."

"We lost the battle and my hope, of course, is that we won't lose the war," said Jim Henderson, an organizer for the Committee to Save Rental Housing. "We're going to work in the next two weeks to change some minds."

Others were not so optimistic. "They have gutted rent control and there is no comparison to other years," said Kathy Lipscomb, a union representative and tenant organizer.

"The persons who voted against tenants are counting on landlords' money to carry them in the next election."

When council member John A. Wilson (D-Ward 2), a supporter of the defeated Clarke bill, saw that his side was losing, he said: "I still believe this government may still be the best government that money can buy."

But Don Slatton, a representative for the Apartment and Office Building Association, said that the real estate industry was being given too much credit for having influenced the council.

While yesterday's vote reflected some "positive steps" for the industry, Slatton said, the council did not "step nearly far enough."

The rent control issue had clearly divided the council into two voting blocs, six members for the Clarke bill and seven members for Jarvis' substitute bill. Council member Frank Smith (D-Ward 1) tried time and again to defeat changes to the Clarke bill, but each proposal was quickly rejected by the solid bloc of seven votes.

Jarvis led the move for the changes, many of which had been contained in a rejected compromise bill that council member John Ray (D-At Large) had offered several weeks ago.

In addition to Jarvis and Ray, the members who voted for the substitute bill were William R. Spaulding (D-Ward 5), Nadine P. Winter (D-Ward 6), H.R. Crawford (D-Ward 7), Carol Schwartz (R-At Large) and Betty Ann Kane (D-At Large).

Clarke and two supporters of his bill, Smith and council member Polly Shackleton (D-Ward 3), voted for the substitute bill, indicating that the city has to have some sort of rent control law.

When the rent control debate began, Ray had angered tenants by proposing a bill designed to phase out rent control by lifting controls on units as they became vacant.

After the council vote, Ray, who maintained a low profile during the meeting, said he was pleased.

"We're going to see some changes in two or three years from now, and the skeptics about this bill will be able to see some movement in the housing market," Ray said. "We have tied rent control and efforts to put housing back on the market together for the first time."

But other members argued that the bill would not be in the best interests of tenants. Wilson, whose ward contains a large number of renters, said that the exemption of single-family housing would hurt poor people the most, and told his colleagues: "I don't think you're cold enough to want to do that."