Thursday, October 20, 2011

Sellers Concession without disclosed Gross-up = Subterfuge

So says the Committee on Professional Ethics to the New York State Bar Association in Opinion 882 (10/14/11). This Opinion is a follow-up and clarification of Opinion 817 (2007), which has been the subject of great discussion in the real estate world since its issuance.

In essence, these Opinions discuss the ethics of increasing a purchase price, to in effect, increase a mortgage, to thereafter pay the buyer's closings costs (which is traditionally a sellers concession), but now a seller's concession without a concession on the part of the seller. The issue is this: A seller's concession with a gross-up changes the Loan to Value ratio and consequently the risk of the investment for the mortgagee. Further, this risk is shared with whomever later purchases the mortgage coupled with tax assessors and the like. Yet, without full disclosure in all of the closing documents, future mortgage purchasers / property assessors will not be placed on appropriate notice of the increased risk, consequently paying more for the purchase than the value; hence, the Subterfuge.

In essence, the closing parties circumvent the Banking Law's restrictions on closing costs to mortgage ratios & manipulate public records on closing prices.

The Opinion goes on to state a lawyer, whether the seller's, buyer's and lender's, who participates in a transaction with a sellers concession and gross-up without full disclosure in all closing papers is violating Rule 8.4(c) of his ethic's rules.

Lastly, the Opinion states that a lawyer is not discharged from this obligation by the suggestion of the mortgage broker, loan officer or other employee of the bank. Therefore, its a non-waivable requirement to disclose a sellers concession and gross-up.

The disclosure required is that: "The sales prices has been increased by a sum equal to the seller's concession". Write it in all your real estate papers and your are in the clear. Now lets go close some deals.

Wednesday, October 19, 2011

Limits on the Roommate Law

Just about a week ago, I was co-instructing our Real Estate School’s course, the Long Island Landlord. We were presented with a thought provoking question about the ability of a landlord to limit the occupants in a rental premises. The buzz and chatter in the room that commenced when we mentioned the roommate law made it clear that this was a hot topic.


If you don’t know about the roommate law, you can read it by clicking here. This law has been around since 1983 for the protection of tenants and occupants, not landlords. So it's about time to know this law.


It is essential for a landlord to know and understand the roommate law because it enables a tenant to prevent an eviction regardless of the terms of the lease. Yet, it is further important for tenants to know and understand what their rights are with relation to occupancy so that they can exercise those rights in preventing such an eviction. This is true particularly with regard to family members who are afforded the greatest rights under the law.


While the rights of immediate family members of the leasing tenant, as defined in the Real Property Law, are great, other roommates are not afforded such broad protection. Nonetheless, and as a matter of illustration, Section 8 landlords can impose occupancy restrictions regardless of the roommate law. This is because the law states: “Nothing in this section shall be construed as invalidating or impairing the operation of, or the right of a landlord to restrict occupancy in order to comply with federal, state or local laws, regulations, ordinances or codes”.


Consequently, we always advise landlords to be familiar with all the laws applicable to their rentals as some lease provisions are void as a matter of public policy according to the tenant-friendly New York State laws.

Monday, October 10, 2011

Yes, tenants must pay rent during foreclosure

While case law was established over a year ago, we consistently get

The Question: If I am in foreclosure, how can I make my tenants pay their rent?

The Answer: Bring a summary proceeding pursuant to RPAPL Article 7.

Yet, if a receiver is appointed in a foreclosure action, the receiver & not the owner should bring the action.

In General Elec. Capital Corp. v. Loretto-Utica Residential Health Care Facility, the Court held that landlord's default does not relieve tenants responsibility to pay rents.

It should be noted that some Counties, like Suffolk, require the landlord to provide notice to the tenants if they are in foreclosure. Yet, this has nothing to do with the requirement to pay rent.

Real Estate Conveyances Now Digitally Recorded, or at least soon...

On September 23, 2011, the Governor signed a new law affecting the recording of real property conveyances.

Pursuant to the law, a digital or electronic record should be accepted by the recording office as originals, including a digital copy of a notarization.

This is a great law and should be viewed as a sign that government is becoming more efficient and effective. As records become completely electronic, transaction and storage costs will be reduced while access and organization will be enhanced. Hopefully, this law is a trend and only the start to government embracing technology. Next up, lets get Court conferences by web to reduce unnecessary costs on clients for attorneys to wait 3 hours for a 5 minute scheduling meeting. The technology is there, lets start to use it.

Interestingly, the law doesn't apply to leases for a term of 3 years or less, Wills, and Powers to Convey.

WARNING - This new law doesn't take effect until 365 days after its enactment and it requires regulations prior to its use.

Wednesday, October 5, 2011

Right to always Assign or Sublet a Lease

At last night's class, Long Island Landlord, a real estate agent inquired whether a landlord could draft a lease to a single family residence, which flat out precluded assignments or sublets. While indicating that a landlord may not, I could not recall the statute or the wording, which was the foundation for this rule and therefore agreed to provide it on the blog today.

Real Property Law §226-b(1) states: Unless a greater right to assign is conferred by the lease, a tenant renting a residence may not assign his lease without the written consent of the owner, which consent may be unconditionally withheld without cause provided that the owner shall release the tenant from the lease upon request of the tenant upon thirty days notice if the owner unreasonably withholds consent which release shall be the sole remedy of the tenant. If the owner reasonably withholds consent, there shall be no assignment and the tenant shall not be released from the lease.

Therefore, a landlord cannot fully prevent a tenant from a right to assign or sublease by unconditionally withholding consent unless the landlord is willing to release the tenant from the lease (in a 4 or more residential unit apartment, a landlord can never unreasonably withhold consent). A landlord should be mindful that releasing the tenant from the lease would result in the tenant being free and clear of all responsibilities, but allowing the assignment or sublease would result in the tenant plus an additional tenant being liable to the landlord, unless there is a novation accompanying the assignment or sublease, which is not required. Therefore, it would seem that except in special circumstances a landlord should only object to an assignment or sublease if they have good cause.

Real Property Law §226-b(6) states: Any provision of a lease or rental agreement purporting to waive a provision of this section is null and void.

Therefore, you cannot draft around this provision. Yet, there are certain properties the statue does not apply to such as a rent stabilized apartments. To be clear, the statute does apply to single-family residences.


WARNING - Read the statute prior to relying on this blog to be sure its applicable to your specific situation and to comply with its notice requirements.