In New York State, following a mortgagor’s default on a note, a lender must choose to either seek to enforce the note or guaranty or commence a foreclosure action. Generally, a lender can not bring two simultaneous actions. Although foreclosure is the most common action there may be instances where a lender may elect to bring an action on the note or guaranty. The requirements to elect one remedy are contained in Real Property Actions and Proceedings Law Section 1301. In practice, the rule states that a lender may not bring simultaneous actions on a note or guaranty and mortgage unless “special circumstances” exist.
What are special circumstances under RPAPL 1301? Courts in New York State have found special circumstances where:
a mortgagee has demonstrated that it will not be able to satisfy the amount due on the note from the foreclosure action;
there are allegations of fraud by the mortgagor or guarantor; or
in limited instances where a foreclosure action is stayed in bankruptcy.
Leases are extremely important to lenders because they create the cash flow that maintains and increases the value of a building. If there are any problems with a lease a lender may not include the rental income from that lease in determining the appraised value of the property or, even worse, a lender may refuse to finance a building with a lease form that is objectionable. Here are some lease issues that may raise red flags for lenders:
Unusual Termination Rights: Lenders will generally have a problem with leases that grant blanket termination rights to tenants. Landlords should either avoid termination rights entirely or require large termination fees for tenants that have termination rights.
Basic Economics: Are the rental obligations clearly spelled out? Is the rent commencement date easily ascertainable? Is the formula for calculating basic rent clear? If the language is obscure in any way a lender may require a lease amendment.
Options: Expansion rights can become problematic if they are granted to multiple tenants without proper coordination. For this reason it is critical that a landlord coordinates and keeps track of all option rights. Problems in this area may give rise to issues outside of financing.
Caps on Operating Expenses: The goal of collecting operating expenses from tenants is to break even. It should not become a profit center for a landlord nor should it impact on cash flows. Capping operating expenses may result in unnecessary and costly out of pocket expenditures by a landlord. For this reason, lenders strongly disfavor caps on operating expenses.
Offsets: Rents should not be offset for any reason.
Casualty: Lenders will want to ensure that tenants are maintaining adequate levels of insurance. In addition, lenders will want to be named as an additional insured on all policies. Finally, the lender will want complete control over insurance proceeds in the event of any casualty.
Tenant’s Financials: Lenders will want to know the financial strength of major tenants and will want to see leases that require tenants to produce audited financials either annually or upon demand.
01 Dec / 2012
The transfer of development rights allows for the transfer of permitted floor area ratio from one zoning lot to another. It has become an important tool for developers to maximize the amount of floor area that they can build on a given lot.
What is floor area ratio?
Floor area ratio or FAR is a ratio of total building floor area to the area of the zoning lot. Each zoning district has unique FAR, which when multiplied by the area of the zoning lot will produce the maximum amount of buildable floor area. For example, if a lot is 10,000 square feet and is in a zoning district with an FAR of 5.0, then the floor area of the building can not exceed 50,000 square feet.
How do you determine if a property has excess FAR to transfer?
In order to determine if a property has additional FAR to transfer, simply subtract the total square footage of the building by the maximum amount of FAR allowed. In our example, if the building on our lot contains 25,000 square feet of floor area then there is an additional 25,000 to transfer since the entire lot contains 50,000 square feet of buildable floor area.
How are development rights transferred?
With the exception of landmarked buildings and areas of New York City with special zoning requirements, transfers of development rights are generally accomplished between two contiguous zoning lots. The word transfer is actually a misnomer because the “transfer” involves merging two or more zoning lots into one and recording an agreement between the property owners that governs the allocation of available FAR.
For example, assume there is a 10,000 square foot vacant lot adjacent to the building in the first example. Both lots are in the same zoning district, which permits a floor area ratio of 5.0. To accomplish the transfer, the two zoning lots would be merged into one 20,000 square foot lot with 100,000 square feet of buildable floor area (20,000 multiplied by 5.0). Since one of the lots already contains a 25,000 square foot building, the total amount of available buildable floor area after the transfer would be 75,000. The parties would then enter into a recorded agreement, which gives the owner of the vacant lot the right to utilize all or a portion of the 75,000 square feet of floor area.
What are the limitations of transfers?
There are many practical limitations of transfers, principally, height and other building restrictions. Therefore, in addition to determining whether or not buildable floor area can be transferred, there must be an independent inquiry into whether or not it would even be valuable.
For corporate tenants, especially start-ups, the value of achieving some degree of flexibility in the event of increases and decreases in workforce is critical. With proper planning, corporate tenants can avoid penalties, wasted rent and interruptions in their business. One important tool to maintaining a high level of flexibility is sublet rights.
Subletting involves the leasing of all or a portion of a tenants space to a third party subtenant. The subtenant pays rent directly to the tenant and the tenant remains liable to the landlord for lease defaults. The ability to sublease is critical to tenants who face the problem of unused office space — which could grow into a big liability. It is easier to fire half your staff than it is to get rid of half your lease! Here are some key issues and problems that tenants and brokers should be aware of:
Sharing of Profits: In the event a tenant can negotiate a better deal with a subtenant, who is entitled to the profits on the sublease? Assuming a tenant is entitled to a profit, how does the lease define profit (i.e. gross or net). This issue is critically important today, as leases are signed at or near the bottom of the real estate market.
Landlord’s Consent Standards: Generally, leases that allow for subletting, will state that subletting is only permitted with the landlord’s prior written consent. This concept is simple enough, but what happens when a property owner wants to limit the tenant’s damages. One trap for tenants is limiting their remedy against landlords to specific performance. The problem with this remedy is that a tenant would have to initiate and prosecute an action and receive a court order before a subtenant would be allowed to execute a sublease. Unfortunately, there is an abundance of real estate and a shortage of subtenants that would wait around for the time it would take to get an order. Money damages are a better tool for tenants.
Recapture Rights: Some leases give the landlord the option to recapture space from a tenant on substantially similar terms as the proposed sublease. The danger with a recapture right is that the tenant can not control who will be in their space, which may be a concern if the tenant remains in a portion of the premises. When negotiating recapture rights, tenants want to be certain that space can not be leased to any competitor or other end user that would be problematic for the tenant’s business.
Limiting Prospective Subtenants: Many landlords include clauses in leases, which are anticompetitive and seek to prohibit a tenant from entering into a sublease with existing tenants in the building or any prospective tenants in the building whom the landlord has negotiated with in the past. Tenants should attempt to limit these restrictions as they can seriously reduce the pool of prospective subtenants.
Documents Required for Consent: Generally, most landlords will want basic information from subtenants, including financial statements, information about their business operation and the purposed terms of the sublease. Leases that require tenants to present a fully negotiated sublease to a landlord prior to consent are problematic. This requirement is onerous and may result in a lot of wasted time for tenants, subtenants and their respective brokers and attorneys.
Expansion rights are critical for tenants, who cannot predict how and when their businesses will grow. It is important, however, to distinguish the two basic types of expansion rights, the right of first offer and the right of first refusal.
Right of First Offer:
If a tenant has a right of first offer to a space, the landlord is required to provide the tenant with notice of the space becoming available for lease and the tenant will be the only person allowed to submit an initial offer. In the tenant’s lease, the parties will pre-negotiate how rent for the new space will be determined. The tenant’s lease will also provide important time frames within which the tenant must exercise its right. The calculation of rent and the time frames are the two most important, and therefore heavily negotiated, aspects of a right of first offer. Another, less negotiated, issue is under what circumstances, if any, the right of first offer can resurrect itself if the landlord does not lease the space.
Right of First Refusal:
If a tenant has a right of first refusal, then it has the right to match any offer made by a third party for the option space. A right of first refusal is different from a right of first offer because a tenant’s right of first refusal gives the tenant the advantage of having terms that were negotiated by a third party and tested by the market. Landlords generally avoid rights of first refusal because they make it difficult to market spaces.
29 Sep / 2012
A quitclaim deed is a type of deed that contains no covenants or warranties with respect to title. When a grantor conveys a quit claim deed to a grantee they are conveying whatever interest they actually possess, if any, at the time the transfer occurs. Simply stated this means that the grantor does not actually guarantee that he owns the property at the time of the transfer or that he even owns title free and clear of any liens or encumbrances. As a result, the quit claim deed offers no legal recourse to a grantee to recover losses from a grantor.
Quitclaim deeds are rarely used in arms-length transfers and are most commonly used to transfer property between family members or related corporate entities.
01 Sep / 2012
A Yellowstone Injunction is a special defense afforded to commercial tenants in New York State. A Yellowstone Injunction temporarily suspends an action to evict a commercial tenant until a determination of the underlying merits of the landlord-tenant dispute is resolved. In practice, a Yellowstone Injunction is an important tool for commercial tenants because it maintains the status quo so that a tenant may protects its assets and business while an eviction action is stayed. Essentially the Yellowstone Injunction can potentially delay an eviction proceeding for years, giving a tenant much needed leverage. Yellowstone Injunctions derive from First National Stores, Inc. v. Yellowstone Shopping Center, Inc. 21 N.Y.2d 630 (NY 1968).
A Yellowstone Injunction may be granted where:
(1) The tenant is a party to a commercial lease;
(2) The tenant has received either a notice of default, a notice to cure or a threat of termination of the lease;
(3) The tenant has requested injunctive relief prior to termination of the lease; and
(4) The tenant is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.
13 Aug / 2012
Article 31 of the Tax Law imposes a real estate transfer tax of $2 for each $500 of consideration or factional part thereof on transfers of real estate in New York. Transfers of “controlling interests” in partnerships, corporations or other entities that own interests in real estate are potentially subject to transfer tax liability as well. Here are some basic things to consider when determining if a transfer of interests in an entity would trigger transfer tax:
- The basic rule is that transfer tax is due if an entity transfers or acquires more than a 50% beneficial interest, capital, profits or voting stock.
- A transfer or acquisition of a controlling interest is deemed to have occurred if several transfers aggregate to 50% or more within a three year period.
- “Interest in real property” is defined to include not only a fee interest, but also a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy real property or the right to receive rents, profits or other income derived from real property. It also includes an option or contract to purchase real property. However, it does not include a right of first refusal.
- Under the Tax Law, the grantor is liable for the payment of real estate transfer taxes. When the grantor fails to do so, the tax will be the joint and several liabilities of the grantor and grantee.
For more information on New York State transfer taxes, please contract the author, Marc Fitapelli, Esq. at 646-201-9208 or firstname.lastname@example.org.
01 Aug / 2012
The rules for broker’s employment and compensation differ from conventional legal principles in ways that are surprising. We have summarized several frequently asked questions by brokers about commission disputes:
What if there is no written contract?
As a matter of practice, all brokerage agreements should be in writing to avoid unnecessary conflicts and litigation. A contract for a broker’s commission does not have to be in writing and can be inferred by the behavior and conduct of the parties. This is an unusual element of the law in New York State because it is contrary to the general legal principle that all contracts must be in writing to be enforceable.
What are the elements of a claim for a broker’s commission?
A broker must prove the following in order to state a valid commission claim: (1) that it is duly licensed; (2) that it had a contract, either express or implied, with the party to be charged with paying the commission; and (3) it was the procuring cause of the sale.
What does it mean to be the “procuring cause of the sale?”
In order to demonstrate that they were the procuring cause of the sale a broker must demonstrate that it procured a purchaser that was ready, willing and able to buy the subject property upon the all the material terms set forth by the seller (i.e. not merely price).
What if there is no agreement about the rate of the commission?
Failure to specify the rate at which a broker’s commission is computed does not, in itself, render a brokerage agreement unenforceable. When it is clear that the broker agreed to undertake work for a party, a court will presume that the parties understood that the commission to be paid would be the prevailing, normal and accepted rate.
22 Jul / 2012
Mechanics liens are a quick and relatively inexpensive remedy for contractors who were wrongfully denied payment for labor or materials furnished to an owner of real estate. They are a powerful and effective remedy because they interfere with an owner’s ability to sell or refinance property and will often trigger a default under an owner’s mortgage. Due to the ease in which mechanics liens are filed and the significant burden they will create, contractors and owners in New York should seek legal counsel early and be aware of two critical timeframes: (1) the deadline by which a lien must be filed; and (2) the deadline by which a lien must either be foreclosed or extended.
A mechanics lien may be filed either at any time while work is being completed or within eight months (four months for single family homes) after the completion of work, running from the date that the last item of work was performed or materials were furnished. If the contractor files in a timely manner, but the lien is defective and more than eight months have elapsed since the last item of work was completed, the contractor can not re-file the lien. A common strategy employed by property owners under the above situation who have no intention to sell or refinance their property and who are not pressured by a third party (i.e. their lender) is to simply wait until the eight or four month period elapses as these defective liens cannot be prosecuted. This leaves the contractor with the option of attempting to amend the lien through a judicial order. Amending a lien is an expensive process and there is no guaranty that a contractor will be successful.
A common strategy for contractors who have missed the deadline to file a mechanics lien is to attempt to enter the property to perform remedial work. Depending on the nature of the work, this strategy may be successful. However, there are certain legal nuances and practical impediments to such a strategy, issues that are outside the scope of this blog post.
Deadline to Act
Generally, mechanics liens will terminate one year after a notice of lien has been filed unless a foreclosure suit has been filed or the lien is extended. Once again, an owner’s most common strategy is to simply wait for the contractor’s next move. This is often an effective strategy because, while it is relatively easy to file a mechanic lien, the enforcement and prosecution of a mechanics lien is a long and costly process and contractors are often unlikely to bring suit for small lien amounts. Generally, if a contractor fails to act within the one year period their lien claim will be vitiated.
Each individual situation is different and contractors and owners should always seek the advice of an attorney before a mechanics lien is filed. Those who wait may miss critical deadlines or may be in a situation where it is too late to fix serious errors.