New Rules and Legislation

The New York City Building Code, Chapter 33, requires a developer to safeguard adjoining property during the conduct of all construction and demolition operations. Accordingly, a developer and an adjoining property owner may enter into a license agreement, whereby the adjoining property owner provides the developer with access to its property to install Code-required protections.  In return, oftentimes the developer, among other things, pays compensation to the adjoining property owner for such access.  If the parties cannot reach an agreement, the developer may seek to compel such access through the courts pursuant to Section 881 of the Real Property Actions and Proceedings Law.

While the Building Code does not explicitly provide a right to compensation, when these issues have been brought before them, New York courts have awarded compensation to adjoining property owners.  However, whether compensation is mandated and the amount of compensation is within the courts’ discretion.  Courts often consider the length of time for which access is necessary and the intrusiveness of the developer’s work on the use and enjoyment of the adjoining property by its owner and occupants.  Without clear guidance from the courts, a developer and an adjoining property owner need to give due consideration to the issue of compensation as illustrated below.

In her ruling released late last month, Manhattan Judge Arlene Bluth denied any license fee to the Condominium Board of the Fifth Avenue Tower, an adjoining property owner to the New York Public Library.  The Library will conduct a $200 million overhaul of its main Fifth Avenue branch.  In her decision, Judge Bluth specifically rejected the Condominium Board’s request for a $15,000 / month license fee.  It has been separately reported that the Condominium Board rejected the Library’s offer of a $3,500 / month license fee.  It appears that Judge Bluth may have denied any license fee to the Condominium Board based, at least in part, on the excessiveness of its demands.

In view of the lack of clear guidelines, developers and adjoining property owners should consult with their legal counsel and should be sure not to overplay their hands when negotiating license fees.

The New Jersey Supreme Court has unanimously held that the administrative process run by COAH in which municipalities show compliance with affordable housing obligations is no longer working and municipalities are no longer protected from builder’s remedy lawsuits in which a developer sues to build housing at a greater density than permitted by ordinance. The Court’s ruling came after COAH failed to adopt Third Round regulations as previously ordered. Third Round Regulations were originally due in 1999, but have been delayed for more than 15 years by court challenges and COAH’s failure to reach a consensus on the adoption of new regulations.

The Court agreed that Builder’s Remedy suits will now be heard by the courts thereby bypassing the COAH administrative process.

So as not to punish municipalities the Court has:

  1. Delayed implementation of the Order for 90 days to allow an “orderly transition;”
  2. Established a transition process and time table for municipalities to have their affordable housing plans deemed compliant by the Court.
    During the first 30 days following the order’s effective date courts will hear declaratory judgment actions by municipalities seeking to have their affordable housing plans declared constitutionally compliant ;
  3. Courts can provide municipalities with immunity from Builder’s Remedy lawsuits ( the equivalent of a COAH affordable housing plan certification) but that immunity will not be granted for an “undefined” time period and will be subject to periodic review. Municipalities can be stripped of their immunity if they abuse the process and do not achieve compliance;
  4. A court can only permit a Builder’s Remedy after it has the opportunity to address the constitutionality of the municipal affordable housing plan and found it to be “wanting.”

Municipalities must now rush to go to Court within 120 days and seek a declaratory judgment that their affordable housing plans are constitutionally compliant otherwise they will lose protection from Builder’s Remedy litigations.

The New Jersey Appellate Division recently ruled in Vollers Excavating and Construction, Inc. v. Citizens Bank of Pennsylvania, Docket No. A-3844-10T1 (March 5, 2012), that a construction lender has no obligation to pay an unpaid subcontractor on a project when the general contractor files for bankruptcy protection.  In Vollers, Vollers was a subcontractor to Opus East LLC (“Opus East”), the general contractor on a project known as Mercer Corporate Center (the “Project”).  Opus East was the sole shareholder of Mercer Corporate Center, LLC (“MCC”), the owner of the Project.  In 2007, MCC entered into a construction loan agreement with Citizens Bank of Pennsylvania (“Citizens”) for $23.3 million to finance the Project.  Also in 2007, Vollers entered into a subcontract agreement with Opus East for excavation, grading and other related services for the Project for approximately $3.3 million.  Vollers had no agreement with Citizens.

Construction on the Project commenced and, in the fall of 2008, Opus East began to experience cost overruns, which were jeopardizing the Project’s viability.  In May 2009, Opus East warned Vollers that Opus East and MCC may discontinue paying subcontractors.  In June 2009, Vollers filed a construction lien against the Project for $505,754.32.  In July 2009, Opus East and MCC filed bankruptcy petitions for relief under Chapter 7. 

With Opus East and MCC both in bankruptcy, Vollers attempted to collect directly from Citizens.  The trial court granted summary judgment to Citizens and dismissed the matter with prejudice.  The trial court concluded that Vollers’ contract was with Opus East (the general contractor), not with Citizens, and there was no evidence that Citizens knew that Opus East and MCC were in default and going into bankruptcy, but wanted Vollers to continue working without pay.   The trial court found no evidence that Citizens had a duty to pay Vollers for services that were rendered to Opus East and/or the Project.

The Appellate Division affirmed substantially for the reasons expressed in the trial court’s oral opinion.  The Appellate Division did expressly note that a lender providing a construction loan owes no duty to an unpaid subcontractor absent the lender’s express promise or assurance of payment.  Here, Vollers had no communications with Citizens, there was no evidence that Citizens made an express promise or assurance to pay Vollers and Citizens did not direct Vollers to continue working on the Project.

The Appellate Division made clear that Vollers was not a party to any of the loan documents between Citizens and MCC and had no rights thereunder.  There was no privity of contract nor any evidence that Vollers was an intended third-party beneficiary of the agreement between MCC and Citizens.  As a result, Citizens had no obligation to pay Vollers pursuant to Vollers’ contract with Opus East, and Vollers was unable to collect from Citizens. 

The Vollers case makes clear that subcontractors have no rights to collect against the construction lender in the event the general contractor or owner files for bankruptcy or otherwise leaves the project, absent some express promise by the lender to pay for the subcontractors’ work on the project. Absent that express undertaking, the subcontractor is limited to the general contractor (or others in privity, if any), owner (through its construction lien rights) and possibly a surety under a payment bond, if applicable, for recovery for its work at a project.  This is important because the subcontractor’s construction lien rights may be of no benefit if the construction lender forecloses on the Project property based on a defaulted construction loan.

The Commercial Real Estate Climate Continues to Falter and Warrants Review for the Viability of a Successful Real Property Tax Appeal

With measurable declines in the real estate market persisting, evidenced by the sluggish movement of vacancy and rental rates, a tax appeal is most likely justified in 2012.  Don’t let the fact that you did not explore this option in the past dictate your actions this year.  Just as in the case of refinancing your mortgage, it is never too late to take advantage of real savings opportunities.

Last year, the New Jersey Tax Court was busy docketing an unprecedented level of appeals and municipalities are again bracing for yet another consecutive record appeal season.  Downward adjustments to assessment levels have been generally warranted over the course of the last several years in conjunction with most property classes.  Due to the continued economic malaise and waning consumer confidence, further downward adjustments appear to be in order again in 2012. 

Despite the fact that there may have been recent signs suggesting the bottoming out of the real estate market (such as slow and modest increases in demand for industrial space over the course of the last quarter of 2011), this phenomenon would not affect the relevant real estate value as of the applicable 2012 tax year valuation date (October 1, 2011).  Towns will therefore continue to be forced to recognize that its assessments are subject to real and legitimate challenge and will need to be prepared to negotiate reasonable resolutions.  The process of ensuring that you are only paying your fair share of taxes can, however, only be initiated with the filing of a timely tax appeal.  The 2012 tax appeal filing deadline is April 1, 2012.

In the next several weeks, you will be receiving a Property Tax Assessment Notice (post card) from the municipal tax assessor, that will identify the tax assessment imposed upon your property for 2012.  The receipt of this notice should prompt you to seek assistance in determining whether a tax appeal is justified.

The assessment number included on this post card can be deceptive, as it often does not reflect the true value assigned by the town to your property. Without applying the town specific ratio you could be falsely lulled into believing that your property is being properly assessed when nothing could be further from the truth.  Such a miscalculation could lead to a very expensive mistake. 

Towns employ what is called an average or “equalization” ratio in order to convert the property tax assessment to true value (the so-called “equalization value”). Comparing the equalization value to the actual value of your property will determine whether an appeal has merit.  Reviewing your tax assessment card with your real property tax professional will ensure that you are not paying more than your fair share of the municipal tax burden and that the town is treating you fairly.

On September 23, 2011, New York Governor Andrew Cuomo signed into law Senate Bill 5203A and Assembly Bill 7358A, codified as the “Private Transfer Fee Obligation Act” in Article 15 of the New York Real Property Law. The new law imposes a ban on all new private transfer fees (“PTFs”), and provides notice, disclosure and remedy procedures for existing private transfer fee obligations. With the passage of this law, New York has joined the majority of states which have enacted legislation that completely bans, limits and/or requires the disclosure of PTFs.

In practice, PTFs have also been dubbed “Wall Street home resale fees,” “private transfer taxes,” “reconveyance fees,” “capital recovery fees,” “residential transfer fees,” and “transfer fee covenants.” These charges, whatever they may be called, usually amount to one percent (1%) or more of the sales price and are automatically inserted into the contract of sale on real property, to be paid by the seller to the original developer of the property or their designee, oftentimes a third party that holds no ownership interest in the property, every time the property is transferred for up to 99 years. They are usually buried within dozens or hundreds of pages of documents, or, in some instances, are found in a separate declaration affecting the property filed by the original developer. Prospective buyers and owners may not be aware of these fees until closing or, worse, when they try to sell the home years later and the fee shows up in a document obtained in connection with a title search of the property. The failure to pay the PTFs at closing typically results in a lien being imposed on the property.

Unlike traditional deed covenants, PTFs run with and burden the land without benefiting it. Although the fees may benefit a homeowners’ association, conservation land bank, non-profit organization, etc., they have been found to not be proportional or related to the purposes for which the fees were to be collected. Furthermore, PTFs are also used by builders and developers to provide themselves with an income stream long after a development is complete. The American Law Institute has described such PTFs as “unconscionable;” the U.S. Department of Housing and Urban Development has publicly opposed the use of PTFs, stating that “PTFs violate HUD’S regulations at 2 C.F.R. 203.41, which prohibit ‘legal restrictions on conveyance,’ defined to include limits on the amount of sales proceeds retainable by the seller.” In addition, the Federal Housing Finance Agency, determining that “such covenants are adverse to the liquidity and stability of the housing finance market and to financial safety and soundness,” has issued a proposed rule, published at 76 F.R. 6702 (Feb. 8, 2011), that would restrict the regulated entities – the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal Home Loan Banks – from investing in most mortgages on properties encumbered by PTFs.

Similarly, the New York State Legislature has determined that PTFs conflict with a preferred state public policy favoring “the marketability of real property and the transferability of interests in real property free of title defects or unreasonable restraints on alienation.” The legislature also declared that “a private transfer fee obligation shall not run with the title to property or otherwise bind subsequent owners of property under any common law or equitable principle.”

Real Property Law Section 472 defines a private transfer fee as “a fee, charge or any portion thereof, required by a private transfer fee obligation and payable, directly or indirectly, upon the transfer of an interest in real property, or payable for the right to make or accept such transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price, or other consideration give for the transfer.” Expressly excluded from this definition are: (a) the purchase price of the real property being transferred; (b) any real estate broker commissions; (c) the interest, fees and charges associated with a loan secured by a mortgage against real property; (d) rent payable under a lease; (e) payments to holders of options to purchase and rights of first refusal or purchase; (f) any taxes, fees, assessments, etc. imposed by governmental authorities; (g) fees paid to homeowners’, condominium, cooperative, mobile home or property owners’ associations that use them to directly benefit owners of the encumbered property; (h) fees payable for the benefit of certain non-profit organizations; and (i) fees pertaining to the purchase or transfer of a club membership relating to real property owned by the member. “Transfer” means “the sale, gift, conveyance, assignment, inheritance, or other transfer of an ownership interest in real property located in [New York] state.” 

The Private Transfer Fee Obligation Act prohibits entering into or recording PTFs after its effective date, and declares all such new PTFs void and unenforceable, not running with the land, and not binding on subsequent purchasers. Anyone who records or enters into an agreement imposing a private transfer fee obligation in their favor after the effective date would be liable for any damages resulting from that obligation, including the PTFs, attorneys’ fees and other costs to quiet title. Notwithstanding this strict prohibition and repercussions, section 475 further underscores the significance of disclosing any  PTFs by requiring the seller to furnish to the buyer, prior to closing, a written statement memorializing their existence, describing the PTFs and referencing the new law.

Moreover, PTFs entered into and/or recorded prior to the new law’s effective date of September 23, 2011, are not to be presumed valid and enforceable. The new law requires the receiver of the PTFs to give notice to subsequent buyers by recording, within six months of the law’s effective date, a document disclosing the existence of PTFs along with the additional information required under section 476, including the PTFs’ amounts and purposes. Failure to record would result in the agreement being unenforceable, and the real property could then be conveyed free and clear of the PTFs.

The Private Transfer Fee Obligation Act also sets up a mechanism by which an individual transferor can free the property of private transfer fee obligations currently burdening his real property. If a receiver of the PTFs does not provide a written statement of their payment within thirty (30) days of the written request asking for such a disclosure, then the transferor, after recording an affidavit describing its efforts to reach the receiver, may convey any interest in the real property to any transferee without paying the PTFs. From that point on, the real property would be free and clear of the PTFs.

Supported by the New York State Association of REALTORS, New York Taxpayers for Economic Justice, Inc., Consumers Union, Consumer Federation of America, and the Coalition to Stop Wall Street Home Resale Fees (formed by the National Association of Realtors and the American Land Title Association), among many others, Private Transfer Fee Obligation Act became effective immediately.