Co-Op House Rules & the Proprietary Lease

When purchasing a cooperative apartment you should always read the house rules as they set the standards for living in this environment. For example, the house rules may require that a percentage of an apartment be covered with carpeting to prevent noise or a house rule may not permit swimming in the pool after a certain hour or the rules may contain a no pet policy. Nonetheless, house rules should not be read in a vacuum and its quite important for prospective purchasers to not only study the house rules, but also the proprietary lease, which sets the outer limits of a Board's authority to set the rules. So, when a rule exists in the house rules that is contrary to the proprietary lease, the lease typically holds the day.

Yet, if you are planning to move into a building where the proprietary lease authorizes the Board to set rules for something like carpeting and the house rules do in fact set such a rule, you will be blown away to know that a Board needn't enforce this rule and no one can force them to do so. Why is this you may ask? The answer is called the Business Judgment Rule whereby a Board acting in good faith is shielded from suit when making decisions. So a rule is only enforceable rule when the Board elects to enforce it.

Nonetheless, Boards should act reasonably and their rules are much more likely to be enforced when the rule not only is embodied in a house rule, but also exists in a proprietary lease. Moreover, Boards should uniformly apply their rules or be mindful of both Fair Housing Act violations for discrimination or claims of waiver when they do choose to enforce the rule randomly.

So, perspective purchasers should review the rules and proprietary lease prior to purchasing, but realize that its also important to get to know the members of the Board because their personalities may dictate your living environment.

Know Your Terms

A recent legal malpractice case finds a client suing its former attorneys for failure to include terms in a lease addressing their landlord’s ongoing construction.  As a result of this construction, the client was unable to occupy its office space for nearly four years and claims to have suffered lost profits and consequential damages amounting to millions of dollars. 

Attorneys must be aware of potentially disruptive issues like construction when they negotiate a lease and be sure to address them all in the contract. These attorneys failed to include a single lease term, and now they find themselves defending a multi-million dollar lawsuit arising from a simple commercial transaction. 

There is a lesson here for non-attorneys as well.  Oftentimes real estate brokers will rely on form contracts or draft provisions themselves.  Don’t.  A missing or improperly drafted term in an agreement can have significant financial consequences.  If even skilled attorneys, trained to anticipate litigation around every corner, may miss these issues, how confident are you that a Blumberg form will cover them?

License law doesn't equal company policy

While litigating a brokerage commission dispute this afternoon, it dawned on me that real estate agents just don't know their company policy on many issues that they face in their profession. In fact, when they do know their company policy they fight it saying its not what their license permits.

To be clear, company policy is not the same thing as license law, nor is it Department of State regulations and it certainly isn't ethics opinions. What company policy is instead is your company's rules that are much more restrictive than any of the proceeding categories. You see companies have to manage on the macro and try to minimize risks so they make internal rules that narrow the line of legality to attempt to avoid the line of illegality as much as possible.

So imagine license law, regulations and ethics opinions constituting a large circle and company policy as a smaller circle therein of what you can and cannot do as an aspect of your job. All big companies have policies and most agent's independent contractor agreement incorporates these polices by reference, so agents must know and constantly be updated on their policies.

Go read your manuals.

Lis Pendens for a Brokerage Commission? Not So Fast

A recent article in the Nassau Lawyer argued for the use of the lis pendens to enforce a broker’s right to a commission on the sale of real property.  Before we get our hopes up and start filing notices of pendency on every unpaid commission, let’s take a closer look at the law on this issue.

The lis pendens is a document recorded with the county clerk which warns potential purchasers of real property that litigation is pending which may affect title.  The lis pendens creates constructive notice of the pending lawsuit and renders the property unmarketable.  While this might sound like a great way to enforce your rights to a commission, the lis pendens is available only for actions that affect title, possession, use or enjoyment of real property.  A claim for money due under a contract meets none of these requirements, and it has been consistently held that the lis pendens is not an appropriate remedy. 

One court expressed its utter exasperation that brokers who hold themselves out as real estate professionals could be so ignorant of this “basic tenet of real estate law.” In the Second Department, which includes all of Long Island, it is well settled that this remedy does not apply to brokerage commissions.  See Homespring, LLC v. Lee, 2008 NY Slip Op 7618.

So what is the proper way to enforce your right to a commission?  In residential transactions, the proper remedy is Real Property Law 294-b, which gives a broker the right to record an affidavit of entitlement to a commission with the county clerk who will hold the amount of the commission until the broker’s rights can be determined by a court.  For non-residential transactions, a narrow exception exists which creates a lien when the commission derives from the broker’s negotiation of a lease longer than three years.  Lien Law § 2 (4), 3.

Can They Make That Rule? Co-Op and Condo Boards’ Authority to Promulgate House Rules

Cooperative and Condominium Boards have broad authority when it comes to making House Rules governing the activity within the community.  This authority derives from the governing documents of the cooperative or condominium, such as the by-laws.  House Rules may cover a wide range of topics from noise and odor levels, to the keeping of pets, to the conduct of owners and guests.

Unless there is a specific limitation on the board’s authority to make rules, such as requiring the rules to be “reasonable,” boards are generally given a high degree of deference in the rules they create.  If the board is acting in good faith, courts will tend not to second-guess them. Furthermore, these rules are usually binding without the consent or approval of the owners.

There is, however, one strong limitation on the authority of boards to make House Rules.  The board cannot attempt to modify the contractual rights of apartment owners through the promulgation of rules.  House rules cannot change, amend, or contradict what is contained in the by-laws, proprietary lease of a co-op, or condominium declaration. 

So if you find yourself asking, “Can they make that rule?” The answer is they probably can. 

Appraisal cost / quality prevents deficiency judgments in foreclosure

No the banks are generally not so nice about giving away their money; so one would wonder why they don't always pursue a deficiency judgment after a foreclosure auction.

The reason is that the bank has the primary burden of establishing the fair market value of the property at or about the time of the foreclosure auction pursuant to the RPAPL's section 1371 in order to get a deficiency judgment.

To accomplish this task the bank must hire an appraiser and, still more, a quality appraiser who produces an appraisal report that has evidence beyond a conclusory affidavit.

In such, the appraisal should go into the different appraisal techniques available and explain why a chosen technique is appropriate. Therefore, just getting a comparison analysis does not satisfy the burden so says the Supreme Court in Brooklyn in a recent decision, Flushing Savings Bank FSB v. Bitar.

So there you have it, its not necessarily kindness, but instead a difficult legal burden that motivates a decision not to pursue the deficiency judgment.

Estate Planning - Keep the Home Again

The new expanded definition of "estate", which included jointly held property, retained life estates and interests in trusts for Medicaid recovery purposes was repealed on March 27th, 2012. Also, spousal refusal has been maintained.

These two (2) events are key to individuals maintaining real property while receiving Medicaid benefits. Nonetheless, careful planning is required and all are still advised to find a competent Medicaid planning attorney to facilitate their plan.

Now recovery for Medicaid purposes is again limited to those assets that would have passed by probate (will or intestacy), not testamentary substitutes like jointly owned property as was anticipated this year.

CE Class in East Hampton Tonight - Conflicts of Interest

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Fed Reserve Bank of NY - Percent in Foreclosure by Zip Code

To see the foreclosure percent throughout the Tri-State Region, click here.

The maps also show percents for 60 / 90 days in default.

Local Zoning Amendments Banning Fracking are Permitted

A recent case decided in Tompkins County ruled that local zoning amendments banning all activities relating to hydrofracking were not preempted by the Oil, Gas, and Solution Mining Law (OGSML). So, municipalities can ban fracking in their territories.

In the Tompkins County case, the Plaintiff, a company engaging in exploration of land for hydrofracking, brought an action against the Town of Dryden attacking their zoning amendment which banned hydrofracking. The Court determined that the State’s OGSML did not prevent the Town from creating local zoning ordinances banning hydrofracking.

This decision is particularly important because many NY municipalities have been amending their zoning regulations in response to their resident’s concerns about hydrofracking.

Remember to always keep yourself apprised of local zoning amendments in order to ensure the latest developments in your municipality because laws and regulations in real estate may change daily.

For further information about the case, see Anschutz Exploration Corporation v. Town of Dryden, 2012 WL 556172, Slip Op. 22037 (2012).