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Terminating An Easement in 2021

On July 1st, Governor Cuomo signed a bill allowing the implementation of a new method of protecting land after the Town of Guilderland was granted the power to dole out easements. The new law (S.6469/A.7096) states that towns in New York State must request the authority to apportion easements, which then must be approved through state law. According to the NY State Senate website, the bill…

Authorizes certain towns to adopt a local law to provide that, real property whose interests or rights have been acquired for the purpose of the preservation of an open space or an open area may be partially exempt from local real property taxation, provided that the owner or owners of such real property enter into a conservation easement agreement with the municipality.1

An easement is “an interest in land in the possession of another which (a) entitles the owner of such interest to a limited use or enjoyment of the land in which the interest exists; (b) entitles…protection…against third persons from interference in such use or enjoyment; (c) is not subject to the will of the possessor of the land and (d) is capable of creation by conveyance.”2

The implementation of this bill, as well as recent easement-related disputes across the country, has resulted in an increase of inquiries on how to remove restrictions on property—including easements.

This article examines the eight ways to terminate an easement: abandonment, merger, end of necessity, demolition, recording act, condemnation, adverse possession, and release.

ABANDONMENT

Although an easement can arise in a variety of ways, any easement can be extinguished by the easement’s abandonment by the owner of the dominant estate. In order to prove abandonment, it is necessary to establish not only an intention by the dominant estate holder to abandon the rights to the easement, but also some overt act or failure to act; this carries the implication that the owner neither claims nor retains any interest in the easement. However, the act must unequivocally reference the intent to abandon the easement and clearly demonstrate that the dominant estate owner is permanently relinquishing all right to the easement and not merely deserting it for some temporary period.3 Mere nonuse is not enough to constitute abandonment, even if for a long period of time.

MERGER

An easement, once granted, may be ended by a merger. Under the merger doctrine, an easement will terminate when the dominant and servient estates become vested in one person. To satisfy this, there must be a complete unity of the dominant and servient estates, meaning that one person or entity owns the entire plot of land. When only a portion of the servient or dominant estate is acquired, there is no complete unity of title. Therefore, the easement still stands.4

Many easements find their origins in situations where one party owned the entirety of a piece of property that the owner subsequently decided to subdivide into various lots.5 The overall development plan may or may not have included the specific plan to burden some lots with the obligation to provide various easements for the benefit of other lots, such as the common easement of passage required for a landlocked inner lot. A merger is one of the most important means for destroying an easement as it allows a developer a financial means to extinguish an easement as long as a willing seller is available.

END OF NECESSITY

Easements created by necessity terminate when the necessity comes to an end.6 The most common example of easement by necessity best illustrates how this may occur. Imagine a landowner has a fairly substantial piece of acreage and decides to subdivide it into lots. One of the lots the owner creates is completely landlocked inside the other lots. As the owner sells off those lots, the sale creates an easement of access on those lots, enabling the owner of the landlocked lot to access the highway. This is an easement of necessity. Even when no agreement exists as to the right of access, the owner requiring access has a right to it. But, when a new means of access becomes available and the original necessity perishes, the landowner loses its right of access.[image error]

DEMOLITION

An easement in a building or land will terminate when that burdened building or land is completely destroyed. This doctrine arises out of 357 East Seventy-Sixth St. Corp. v. Knickerbocker Ice,7 a case involving a party wall.

In Knickerbocker, parties were adjacent property owners. Plaintiff demolished the building on its property except for the party wall. Plaintiff intended to use the party wall for support of a garage. Before plaintiff built the garage, defendant demolished its building and the entire party wall. Consequently, plaintiff built an independent wall on its own premises, even though the party wall was suitable for continued use. The court found that when plaintiff demolished its building, it put an end to the necessity of support on its side of the wall. Defendant put a definitive end to the easement when it demolished its entire building and put an end to the necessity of the support on its side of the wall. By demolishing his structure, he demolished his need for the easement and therefore, in effect, demolished the easement.

RECORDING ACT

A good faith purchaser for value is not bound by an easement which is not properly recorded prior to a purchase of the encumbered property.8 The easement does not terminate notwithstanding a failure to record the easement if the good- faith purchaser possessed actual knowledge and notice of any facts which would lead a reasonably prudent purchaser to make inquiries.9

CONDEMNATION

A government can create an easement by way of condemnation. However, Strnad v. Brudnicki notes that a governmental agency can also abolish an easement by condemning it.9 This could take a number of forms, depending on the facts of the situation. One such set of facts would be when the government has condemned a plot of land, which plot is subject to an easement in favor of the adjoining property owner, and the government removes the easement by condemning it.

ADVERSE POSSESSION

Adverse possession may extinguish an easement. For example, in Spiegel v. Ferraro,11 the Court of Appeals discussed a situation in which there was a particular driveway that was the subject of an easement. However, the burdened estate owner fenced off that driveway and patrolled it with guard dogs.12 The court found that after 10 years of that fencing in, the land was now free of the burden of the easement.

The July 2008 Amendments to Article 5 of the Real Property Actions and Proceedings Law (RPAPL), which made sweeping changes to the adverse possession law, made no mention of easements. This author personally believes this was a mere oversight; however, as a result, the new law does not apply at this time, making all adverse possession of easement cases subject to the old law.

RELEASE

An easement once granted may be ended by a release in writing stating that the owner of the easement gives away all rights and remedies including the ability to sue under the easement.13

The termination of an easement is one of the most misunderstood areas of real estate law. This, accompanied by an increase of easement-related disputes, naturally results in the exponential rise of easement termination inquiries. These aforementioned 8 ways to terminate an easement – abandonment, merger, end of necessity, demolition, recording act, condemnation, adverse possession, and release – may determine the efficacy of one’s dispute.

It is also important to note that abusing the rights one has under an easement is not a ground for extinguishing said easement. The mere use of the easement for a purpose not authorized, the excessive use or misuse, or the temporary abandonment thereof, are not of themselves sufficient to constitute an abandonment which would extinguish the easement.14 That is not to say that the servient estate owner is without a remedy, but destruction of the easement is not that remedy.

The attorneys at Adam Leitman Bailey, P.C. have a strong and demonstrated history of winning their clients’ easement- related cases. By uniting many of the best real estate attorneys of its generation, Adam Leitman Bailey, P.C. has become one of New York’s most prominent real estate law firms. The firm excels by solely practicing real estate law and only taking on projects and cases where it is among the best in the field. Adam Leitman Bailey, P.C. has achieved groundbreaking results in the courtroom, in the board room, at the closing table, in the lobbies of legislative bodies, and in every other venue where talented legal advocacy is key to its clients’ interests.

 

Endnotes:

NY state Senate Bill S6469. NY State Senate. (2021, July 1). https://www.nysenate.gov/legislation/... of Prop. §450 (1944).Gerbig v. Zumpano, 7 N.Y.2d 327, 165 N.E.2d 178, 197 N.Y.S.2d 161 (1960).Will v. Gates, 89 N.Y.2d 778, 784, 680 N.E.2d 1197, 1200, 685 N.Y.S.2d 900, 903 (1997).Will v. Gates, 89 N.Y.2d 778, 680 N.E.2d 1197, 685 N.Y.S.2d 900 (1997).The law requires that such an implied easement be actually necessary for the use and enjoyment of theproperty, not merely convenient to the owner of the dominant estate. Paine v. Chandler, 134 N. Y. 385 (1892).263 N.Y. 63, 188 N.E. 158 (1933).Webster v. Ragona, 704 A.D.3d 850, 776 N.Y.S.2d 347 (2004).As the Court of Appeals stated in Simone v. Heidelberg, an encumbrance must be “record[ed] in the servientchain [of title]…so as to impose notice on subsequent purchasers of the servient land.” Simone v. Heidelberg, 9N.Y.3d 177, 877 N.E.2d 1288, 847 N.Y.S.2d 511 (2007).200 A.D.2d 735, 606 N.Y.S. 913 (2009), accord Zutt v. State, 99 A.D.3d 85, 949 N.Y.S.2d 402 (2d Dept. 2012).73 N.Y.2d 622, 543 N.Y.S.2d 15 (1989).Perhaps the most extreme example ever of satisfying the “hostility” requirement of adverse possession.Andrews v. Cohen, 221 N.Y. 148, 116 N.E. 862 (1917).Gerbig v. Zumpano, 7 N.Y.2d 327, 165 N.E.2d 178, 197 N.Y.S.2d 161 (1960).

The Evolving Burden of Proof for Foreclosure Judgments

Judgments of foreclosure and sale granted in favor of lenders are being reversed. This article highlights the underdiscussed expanded burden now imposed by the Second Department that lenders must satisfy to successfully foreclose on a defaulted loan. Many foreclosure proceedings already at the judgment stage are being unwound for the proofs submitted by the lenders years prior when moving for summary judgment now being considered insufficient to prove that the loan is actually in default. These 11th hour reversals of foreclosure judgments, however, can and should be avoided from the start.

In order for a lender to establish its prima facie entitlement to judgment as a matter of law in an action to foreclose a mortgage, the lender “must produce the mortgage, the unpaid note, and evidence of default.” CitiMortgage v. McKenzie, 161 A.D.3d 1040, 1040 (2d Dep’t 2018). For as long as practitioners can remember, a sworn statement from the lender or the lender’s servicer based on business records confirming that the loan is in default was enough to achieve summary judgment and the appointment of a referee to report on the amount due. Not anymore. The actual business records relied upon must now be produced to prove that a borrower is in default on a loan.

With many foreclosure proceedings now actively pending in the system for years due to borrower delay tactic litigation, court backlogs, and legislative stays and delays before getting to the final stage of a judgment of foreclosure and sale, this changed standard to prove the default is unraveling the oldest of proceedings in the Second Department to the detriment of the lenders. Practitioners must learn how to prove the default from the start to ensure that any judgment granted is airtight and not later overturned to catapult the lender back to the very beginning.

PROVING THE DEFAULT IN THE SECOND DEPARTMENT

As was recently reiterated by the Second Department in Wilmington Savings Fund Society, F.S.B. v. McLaughlin, 2021 NY Slip Op 04576 (2d Dep’t 2021), a foreclosing plaintiff can establish a borrower’s default on a loan by submitting an affidavit from an affiant with authority that lays the proper foundation for the admission of business records that will prove the default, but that also includes the actual business records relied upon. As was highlighted in Deutsche Bank National Trust Co. v. Hossain, 2021 NY Slip Op 04480 (2d Dep’t 2021), the failure to attach the business records to substantiate the default will be deemed a failure to demonstrate “proof of the facts constituting the claim” in the Second Department. Assertions in a sworn affidavit without the supporting business records annexed now constitute nothing more than inadmissible hearsay in this context. Bank of Am., N.A. v. Huertas, 195 A.D.3d 891 (2d Dep’t 2021).

Determining what constitutes sufficient evidence to prove that a loan is in default varies on a case by case basis. Certainly, a borrower’s admission made in response to a notice to admit will suffice, or an affidavit from a person with actual personal knowledge of the default will meet the burden as well. Deutsche Bank National Trust Co. v. McGann, 183 A.D.3d 700 (2d Dep’t 2020).

Less clear, however, is the type of business record that an affidavit can review and provide to sufficiently prove the default. The Second Department continues to hold, as recently as Flatbush Two v. Morales, 190 AD 3d 826 (2d Dep’t 2021), that there “is no requirement that a plaintiff in a foreclosure action rely on any particular set of business records to establish a prima facie case, so long as the plaintiff satisfies the admissibility requirements of CPLR 4518(a), and the records themselves actually evince the facts for which they are relied upon.”

It was made clear, though, that an affidavit annexing only a default notice as the substantiating business record will fail to prove the default in the Second Department. In Wilmington Savings Fund, F.S.B. v. Peters, 189 A.D.3d 937, 939 (2d Dep’t 2020), the Second Department held that while the affiant established that she was familiar with the servicer’s recordkeeping practices and procedures, she was unable to demonstrate the borrower’s default in payment, since the only business records annexed and incorporated into the affidavit were two notices of default and “no payment records were proffered with the motion.” In U.S. Bank N.A. v. Rowe, 194 A.D.3d 978, 980 (2d Dep’t 2021), the Second Department reiterated that where the only business record annexed is the notice of default, the default in payment is not established.

The Second Department also makes clear that if the loan was in default prior to the foreclosing plaintiff owning the note, then an affidavit with annexed business records to prove the default must also lay the proper foundation for the admission of business records from the predecessor note owner or servicer.

As was most recently decided by the Second Department in Bank of NY Mellon v. Deloney, 2021 NY Slip Op 4655 (2d Dep’t 2021), an affidavit is insufficient to prove a default where the affiant “did not attest that he was personally familiar with the record-keeping practices and procedures of the plaintiff or those of the plaintiff’s predecessor in interest, or that the records generated by the plaintiff’s predecessor in interest were incorporated into the plaintiff’s own records or routinely relied upon in its business, and failed to attach any business records of the plaintiff or its predecessor in interest to his affidavit.”

In Tri-State Loan Acquisitions III v. Litkowski, 172 A.D.3d 780, 783 (2d Dep’t 2019), for another example, the Second Department held that “the plaintiff failed to establish the defendant’s default in payment under the note” because, while the affiant attested to his affidavit being based on the books and records maintained by the plaintiff, “he failed to lay the proper foundation for admission” of the records from the prior note owner.

The court took issue with the affiant not stating that the prior note owner’s records “were provided to plaintiff and incorporated into the plaintiff’s own records,” not asserting that “the plaintiff routinely relied upon such records in its business,” and not attesting to having personal knowledge of the “business practices and procedures” of the predecessor note owner. “[T]he mere filing of papers received from other entities, even if they are retained in the regular course of business,” is just no longer enough. Id.

THE FIRST, THIRD, AND FOURTH APPELLATE DIVISIONS

The First Department seemingly does not place the same burden on lenders to annex the referenced business records to the sworn affidavits asserting that a loan is in default. In United Nations Fed. Credit Union v. Diarra, 194 A.D.3d 506 (1st Dep’t 2021), the First Department unanimously affirmed the granting of summary judgment stating that the “Plaintiff also submitted an affidavit of its loss mitigation analyst, who averred that he had first-hand knowledge of the facts surrounding the action, reviewed plaintiff’s business records, and determined … that defendant had defaulted on the loan,” with only copies of the default notices and the loan documents submitted in additional support.

A recent decision in the Third Department falls in line with the First Department’s standard. In Bayview Loan Servicing v. Freyer, 192 A.D.3d 1421, 1423 (3d Dep’t 2021), the Third Department found that the affiant “established personal knowledge of plaintiff’s business practices and procedures” and that records provided by the sub servicer of the loan “were incorporated into its own records and routinely relied upon,” however, annexed as business records were only copies of the default notices and a letter log history not showing a loan default date or any pay history, and the sworn affidavit was nonetheless found to be sufficient to establish the borrower’s default.

There are no recent Fourth Department cases on point.

ESTABLISHING THE AMOUNT DUE UNDER THE LOAN

After a lender establishes that a borrower is in default, an order of reference is entered, and the lender goes on to prove the actual amount due under the defaulted loan. In the affidavit of computation prepared for presentation to the appointed referee to consider in support of the amount due, the lender will again need to establish the proper foundation for the admissibility of business records to prove the stated amount due and, further, will need to actually produce those referenced and relied upon records. A sworn affidavit that lists and even delineates the amounts owed from a review of business records, alone, is no longer sufficient.

In Wilmington Savings Fund Society, F.S.B. v. Isom, 190 A.D.3d 786, 788 (2d Dep’t 2021), following its same standard for proving that a loan is in default, the Second Department held that the affidavit that was submitted to establish the amount due and owing under the loan “constituted inadmissible hearsay and lacked probative value because the affiant did not produce any of the business records he purportedly relied upon in making his calculations.” The referee’s finding was, therefore, not found to be substantially supported by the record, resulting in the judgment of foreclosure and sale being reversed, the referee’s report being rejected, and the plaintiff being rewound back to submitting proofs of the amount due to the referee at the oath and report stage.

Similarly, in Bank of New York Mellon v. Davis, 193 A.D.3d 803, 804 (2d Dep’t 2021), the Second Department held that “the affidavit of an employee of the plaintiff’s loan servicer, submitted for the purpose of establishing the amount due and owing under the subject mortgage loan, constituted inadmissible hearsay and lacked probative value because the affiant did not produce any of the business records she purportedly relied upon in making her calculations.”

The plaintiff in Federal National Mortgage Association v. Home & Property Works, 191 A.D.3d 847, 849 (2d Dep’t 2021) shared a similar fate, with the judgment of foreclosure and sale being reversed and the referee’s report being rejected for the plaintiff’s failure to produce the actual business records showing the amount due, thereby sending the plaintiff backwards to the computation stage with valuable time lost.

RECOMMENDATIONS AND THE FUTURE OF BUSINESS RECORDS FOR FORECLOSURES

As the Second Department distinctly demarcates in Selene Finance, L.P. v. Coleman, 187 A.D.3d 1082, 1085 (2d Dep’t 2020), “it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted.”

Once the proper foundation for the admission of business records is established, practitioners must annex the actual business records that the affiant relied upon in confirming the default and in calculating the amount due under the loan, so as to avoid a later finding that the affidavit constitutes inadmissible hearsay. Best practice is to include a pay history, which shows the last payment received on the loan, in conjunction with a payoff statement that details all amounts due and owing.

When purchasing loans that are already non-performing, investors should require full payment histories in addition to the payoff statements for each loan. Lenders, note owners, and servicers should update their payoff statement models to always include the due date for the loan. Most importantly, however, with New York’s often lengthy litigation timelines and constantly evolving proof standards for contested foreclosures in the current climate, the practitioners are the ones that must take elevated care in introducing and producing properly vetted business records to avoid setbacks on the docket that are completely within the foreclosing plaintiff’s control.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Jackie Halpern Weinstein is a partner at the firm and head of it’s Foreclosure Litigation Group. Danny Ramrattan, an associate at the firm, assisted in the preparation of this article.

Under Regina, Just What Is Fraud?

INTRODUCTION

The most talked about recent case in the real estate industry is Regina Metro v. DHCR (2020). In it, New York’s highest court, the Court of Appeals, set bright line standards in rent overcharge cases in rent stabilized apartments. Unfortunately, one of those lines was not bright enough. The question the Court of Appeals did not answer clearly was when to base an overcharge calculation on the rent charged four (or six) years prior to the complaint, and when to go back further. Regina says the answer to that question depends on whether the landlord committed fraud. The definition of “fraud,” however, although essential to determine the level of the landlord’s liability, is only hinted at in Regina. Nor have the lower courts actually provided clear answers to these questions. This article can only suggest what the answers ought to be.

COMMON LAW FRAUD

At first blush, it would seem easy to define “fraud”. The law historically recognizes the elements of fraud as the making of a false statement, knowledge of the falsity by the speaker, reliance by the victim on the truth of the statement, and damage inflicted on the victim. In order to bring rent overcharges under the rubric of “fraud,” the false statement could simply consist of such words as “this is the rent.” The recipient of that statement could be a tenant or the New York State Division of Housing and Community Renewal (DHCR). Because rent stabilization requires owners to annually register rents with that agency, such statements are ubiquitous.

THORNTON FRAUD

However, in looking at overcharge cases, we immediately see that they potentially conflate the age-old understandings of “common law fraud,” particularly those elements of fraud that pertain to the victim: reliance by the victim on the truth of the statement and the resulting damages inflicted on the victim. If the tenant is in on the scheme, then it is not the tenant, but the DHCR or the entire renting public that is relying on the truth of the false statement. However, while the DHCR might in a sense be victimized by the landlord’s lie, the DHCR will not suffer monetary damages from it and neither will anyone that does not actually rent the apartment. The next tenant in such a fraudulent scheme would be overcharged, but having agreed to pay the contract rent in an arm’s length transaction, can they really be said to have suffered monetary damages? And such a tenant may not even exist, as the tenant who participated in the lie could still be in residence.

Therefore, to try to understand “fraud” within the meaning of Regina, we need a broader definition of “fraud” that, while including common law fraud, allows for other actions as well— actions that do not depend on the owner lying to the tenant, but which might allow for the tenant to be in on the scheme.

The Court of Appeals itself, in Thornton v. Baron (2005), in effect created such a category of “fraud” without further qualification. In Thornton, because the tenants were co-conspirators in the phony rent, the court appeared to adhere to a layperson’s understanding of fraud as “an act of deceiving or misrepresenting”—without getting into the niceties of who said what to whom and who was hurt by it. This ordinary English language understanding of fraud includes common law fraud, but adds other possible scenarios to it, which we shall call “Thornton fraud”.

First, anything that is common law fraud is also Thornton fraud; that much is clear.

But Thornton fraud also includes situations in which the owner and the tenant are in on the scheme together, and work together to invent and perpetuate the lie. In that scenario, the scheming tenant may or may not be paying a higher rent than legally allowed, but the next tenant in the apartment certainly will.

Such schemes include when the landlord and the tenant pretend that the tenant is not really a tenant, but is actually a sub-tenant. In that scheme, the so-called “real tenant” may perhaps be some family member of the landlord’s who has never seen the apartment and certainly has no interest in it. The law calls such a person an “illusory tenant”. Another variation on the illusory tenancy is when the real tenant has a two-year lease, but during the first year, some nonexistent person is named as the tenant, whom the real tenant replaces during the second year of the lease, with the landlord having taken a vacancy increase for both the nonexistent person during the first year and the real tenant during the second year. In a third variation, the apartment may have been empty for several years, during which the landlord created a series of fictitious tenants, claiming a vacancy increase for each. Whether the eventual real tenant knows about this scheme or not, this appears to be what is meant by the sorts of actions that, although not qualifying as common law fraud, appear to qualify as Thornton fraud. Grimm v. DHCR (2010) emphasized that illusory tenancies created by the owner are not the only kind of conduct that may constitute Thornton fraud.

In another common scheme, the landlord claims to be able to boost the rent because of improvements made to the apartment during a period of vacancy. If there were no such improvements, or if some of the improvements were phony (for example, the landlord falsely claimed to have replaced the kitchen countertops), this is probably Thornton fraud, regardless of whether the incoming tenant knew about the fictitious improvements. But Regina makes clear that fraudulent conduct must be willful, and does not exist simply because of an improperly charged rent. However, the trial courts, in some cases, are disregarding the criteria of willfulness and deregulation; instead characterizing much more mild misconduct as fraud. They may need further guidance from the Court of Appeals.

WHY DOES IT MATTER?

Under Regina, only fraud can overcome the four- or six-year rule in calculating an overcharge, so that a court may reach back further than that to calculate a rent equal to the lowest registered rent in a comparable apartment in the building; or, under certain circumstances, lower still. This is the so-called “default formula”. The imposition of the default formula is, under current law, the most severe penalty a landlord can face in an overcharge proceeding—and it can be very severe indeed.

LEVELS OF MISCONDUCT, LEVELS OF PENALTY

In calculating overcharge damages, there are three levels of wrongfulness of which a landlord can be guilty: (1) mistake, (2) willfulness, and (3) fraud.

These levels of wrongfulness correspond to three levels of penalty for an overcharge. The penalty for an overcharge by ignorance is a refund of the rent overpaid within the statute of limitations, plain and simple. The penalty for an overcharge by willfulness is triple the rent overpaid within the statute of limitations. The penalty for Thornton fraud (which, we recall, includes common law fraud) is to lower the rent to some artificial rate reaching back to the initiation of the tenancy, and tripling that.

Having three levels of wrongfulness with three corresponding levels of penalty accords well with Anglo-American common law. Victorian England’s “one gallows fits all crimes” policy was a notorious fiasco. Where there is willfulness, the landlord is punished by the exaction of a triple penalty. The more extreme penalty of tripling damages calculated by an artificially lowered rent is reserved those who practiced Thornton fraud. Regina calls these a “limited category of cases.” That limit can only be honored if any sort of wrongdoing does not get lumped into Thornton fraud. But the lower courts have not given definite guidance as to where to draw that line.

LEVEL 1: MISTAKE

Roberts v. Tishman Speyer Props. LP (Court of Appeals 2009) is a classic case of mistake. The landlords in that case, along with the DHCR, believed incorrectly that apartments could be deregulated during the J-51 tax benefit period. For their ignorance, the landlords were obligated to refund to the tenants the difference between the rent that was paid and the lower rent that should have been paid (“simple damages”). But reliance on incorrect legal authority is not the only example of ignorance. Courts generally regard good-faith reliance on erroneous legal advice as another species of ignorance, the penalty for for which is to refund the rent overcharged in ignorant reliance on the bad advice.

LEVEL 2: WILLFULNESS

The next tier of landlord culpability is willfulness. Here, not only is the landlord wrong in calculating the rent, but the landlord lacks the proof to demonstrate that the rent was correct. While the English word “willful” ordinarily mean “on purpose,” in rent stabilization litigation, it merely means “unable to prove ignorance.” Current cases indicate that the mere exaggeration of individual apartment improvement costs, as long as the improvements really were performed, would be considered a willful overcharge. The punishment for willfulness is that the landlord must pays the tenant triple what the landlord would have paid under ignorance.

LEVEL 3: FRAUD

The worst level of landlord culpability is fraud, which includes both common law fraud and the landlord’s fabrication of rental events in collaboration with the tenant. As a penalty, the landlord must pay the tenant (innocent or guilty) three times the difference between the rent reset according to the default formula and what was actually paid.

The “default formula” is not a formula at all, but in many cases an examination of the history of the entire apartment building; and in others, an arcane examination by DHCR of the entire neighborhood, using criteria that are so opaque that this method may be rightly termed “setting the rent by dartboard.” However, when the rent is set by the default formula, it is reliably much lower than when it is set under willfulness, i.e., the reliable rent from four (or six) years earlier than the tenant asserted the complaint against the landlord. As applied, the default formula often has the effect of raising damages from six to seven figures—particularly once the default formula has lowered the legal regulated rent from four to three figures.

FIXING MISTAKES

Another giant question was left unanswered by Regina: Once a landlord becomes aware of the rent being incorrect and fails to fix it, is this willfulness or fraud?

Unfortunately, no reported appellate case states a rule for failure-to-fix in isolation. All the cases that mention it involve other kinds of misconduct as well. Fixing such misconduct generally consists of setting the rent at the correct rate and then re-registering the apartment with DHCR at that amount.

Two aspects of Regina militate against construing mere failure to-fix as Thornton fraud.

First, Regina itself modified a calculation by the Appellate Division which shortchanged the landlord. Had the landlord re-registered the apartment at the rent determined by the Appellate Division, it would have been wrong. (Indeed, prior to Regina, it could not have known what was right.) Thus, it would have been impossible for the landlord to re-register the rent at the correct level. To this tenant advocates respond, “Then the landlord should have registered the rent at the wrong level,” but that argument rings hollow. For how does one rationalize doing the wrong thing purposely?

Second, the examples Regina gives of fraud are all doing things dishonestly (malfeasance). But failure-to-fix is failing to do something (nonfeasance). Regina itself gives no example of fraud that consists of a failure to act, and the Court presumably omitted such examples on purpose.

ACTING QUICKLY

Often, landlords do try to fix things. However, tenants’ counsel have consistently claimed that these actions were “Too little, too late.” The landlord who does not fix the problem as thoroughly and quickly as possible is going to face a more difficult battle to convince a judge that the landlord did not wait to get caught before making the fix. In Montera v. KMR Amsterdam (2021), the Appellate Division deemed it “too late” when “[t]he owner finally addressed deregulation only after its conduct was revealed by an anonymous complaint.” Clearly, under Montera, “waiting to get caught” is a very low standard. The landlord has to act before then. But conversely, Montera allows for the landlord to avoid the most dire consequences by being prompt in its remedial measures.

It would be wiser policy for “delayed fixing,” standing alone, not to be construed as fraud, in which case the landlord will be motivated to correct the improper rent and registration, because if it does so, it will suffer only the lower penalty associated with willfulness. But if there is no such incentive, then the landlord, knowing it will be punished as severely for willfulness as for fraud, will be motivated to attempt a cover-up of the mistake, in the hope that the cover-up won’t be discovered. In other words, it becomes worth the risk to cover up, if the penalty for doing so and delayed fixing is the same, and if it is the fixing that will expose the wrongdoing.

PILED-UP MISCONDUCT

Some would argue that enough discrete willful acts can add up to fraud without there being any clear guidance as to how many such acts would constitute “enough”. However, there are no higher court cases showing such a collection of examples actually crossing from willfulness to fraud—and none holding that it can’t. Nolte v. Bridgestone Assoc. LLC (1st Dept. 2018) is a mixture of the kinds of conduct that merit a mere finding of willfulness, together with fabricated IAI records. In such circumstances, the other misconduct is merely additive. At least in Nolte, the fiction of the IAI records is the key to the finding of fraud by the court.

INVESTIGATION

All of this discussion is predicated on the idea that the facts are clear. But often, this is not the case. In Grimm, the Court of Appeals implicitly charged DHCR with a duty to investigate when there are serious allegations in a tenant’s complaint of Thornton-type fraud. By extension, this means that when the overcharge complaint is first filed in State Supreme Court, the court is obligated to allow the tenant to conduct such an investigation via the discovery process.

CONCLUSION

Although Regina does not actually acknowledge it, the kind of “fraud” it refers to in rent overcharge cases is broader than common law fraud. Landlords who are guilty of this new kind of fraud face treble damages based on rents reset using the default formula—the most severe penalty known in rent stabilization. Landlords who act quickly to correct their prior mistakes stand the best chance of avoiding that fate.

Development—Court Grants Petitioner License to Temporarily Enter Adjacent Property To Facilitate Construction of Petitioner’s Construction Project Pursuant to Real Property Actions and Proceedings Law §881, Subject to Terms and Conditions

The court granted the petitioner’s property owner a license, pursuant to Real Property Actions and Proceedings Law (RPAPL) §881, “to enter upon a portion of the land of respondent (adjacent property owner), subject to several terms and conditions.”

The respondent was ordered to grant the petitioner, a limited non-exclusive license for access to the adjacent property by the petitioner and its construction team.

The terms and conditions of the license addressed, inter alia, a pre-construction survey, temporary protections, water-proofing work, monitoring equipment, the petitioner’s sole responsibilities at the petitioner sole cost and expense, for repairs to respondent’s property, a license fee of $2,500 per month, and a pro-rata per day for each partial month while any part of the “temporary protections” remained installed upon the respondent’s property or cantilevered over the property line. Subject to unavoidable delays, including delays related to weather, additional work required by regulatory and governmental inspections, labor shortages or strikes, governmental orders and all matters outside the control of the petitioner, the term for the license was limited to 24 months, “time being of the essence.”

However, the court provided that such time may be “extended pursuant to a written amendment to this License executed by all of the Parties hereto, of which consent shall not be unreasonably delayed, withheld or conditioned by” the respondent owner. The license included provisions for insurance, indemnification, notices and arbitration, etc.

The court acknowledged that RPL §881 does not permit the petitioner to “permanently encroach” upon the respondent’s property. The court also explained that “the sections of any boundary wall in which joists of (petitioner’s) building are encased constitute the wall shared by (petitioner) and (respondent owner’s) buildings (i.e., the party wall).” The court stated that the petitioner’s construction, “upon its own side of any such party wall, subject to the easement for the support of a (respondent’s) building, would not constitute a permanent encroachment upon a (respondent’s) building.”

Thus, the court held that the petitioner was “entitled to a license to conduct waterproofing as to any such section, as it will not constitute permanent encroachment upon a (respondent’s) property.”

However, court further stated that “whether the portions of the wall that do not encase the joists of petitioner’s building constitute an independent masonry wall belonging wholly to (the respondent) or are part and parcel of the party wall shared equally by both parties must be resolved in a declaratory judgment action.” The respondent had not yet served an answer and counterclaim seeking declaratory judgment relief.

Comment: This case is of interest since so many people who renovate buildings or construct new buildings need to encroach upon their neighbor’s property in order to do their construction work and to protect their neighbor’s property. This decision is helpful because it incorporates the provisions of the subject license agreement.

Adam Leitman Bailey, counsel for the petitioner, expressed gratitude for the court taking the time to address, inter alia, his adversaries’ “land bullying” and allowing his client to “build their dream home.” Adversary counsel did not comment.

Co-op and Condo Owners’ Right To Inspect: An Update

With orders to stay indoors, and residents working at home and boards tasked with deciding on how to run their buildings making important decisions on how to avoid spreading the deadly virus, heightened tensions and heated moments between shareholders and owners and their boards naturally reached new levels. One of the tools used to engage in cooperative and condominium war games—requesting the inspection of the corporate books and records and the minutes of the meetings—reached new levels of creativity calling for an update of our prior article on the subject.

In revisiting the topic of this article, which we last discussed in 2016, see “Court Clarifies Condo Owners’ Right to Inspect,” New York Law Journal, 12/20/2016, we give a broader overview of the development of the right of shareholders and condominium owners to inspect the corporate records of their respective governing entities. Petitions by shareholders and condominium unit owners continue to be made, and the cases in which courts are asked to determine the right to inspect arise in a variety of circumstances to which the guiding principles of the law must be adapted.

Most recently, the First Department, in Healy v. Carriage House condominium, 166 AD3d 518 59 NYS3d 24 (1st Dept. 2018), ruled that petitioner condominium unit owners were entitled to inspect certain books and records consisting of “[a]ll documents and records relating to the condominium’s settlement agreement with the condominium sponsor.” The court agreed with petitioners “that understanding how the condominium reached the settlement agreement is a valid purpose,” and that, in addition to the settlement agreement itself, petitioners were entitled to inspect all documents “reasonably relevant and necessary to the stated purpose of exploring the settlement process.” The court held that petitioners’ stated purpose was “a proper subject of the common law right of inspection.”

The Common Law Right

It has been well established, from Colonial times and even before, that stockholders/shareholders have a common law right to inspect the books and records of the corporation whose stock they own. The prevailing principles, which still guide decisions of New York courts ruling on these questions in the present day, were explained long ago in Matter of Steinway, 159 NY 250, 258-259 (1899):

The right of a corporator, who has an interest, in common with the other corporators, to inspect the books and papers of the corporation, for a proper purpose and under reasonable circumstances, was recognized by the courts of king’s bench and chancery from an early day, and enforced by motion or mandamus, but always with caution, so as to prevent abuse.…In Rex v. Fraternity of Hostmen, the reporter states that the court said: “Every member of the corporation had, as such, a right to look into the books for any matter that concerned himself, though it was in a dispute with others.” (Emphasis added)

The Steinway court further explained that “Stockholders of a corporation had, at common law, a right to examine, at any reasonable time and for any reasonable purpose, any one or all of the books and records of the corporation,” and that “[t]his rule grew out of an analogous rule applicable to public corporations and to ordinary co-partnerships, the books of which, by well-established law, are always open to the inspection to members.”(Internal citations omitted) (Emphasis added).

Steinway also set forth the guiding principle that shareholders “are entitled to such inspection, though their only object is to ascertain whether their affairs have been properly conducted by the directors and managers.” The court continued:

Such right is necessary to their protection. To say that they have the right, but that it can be enforced only when they have ascertained, in some way, without the books, that their affairs have been mismanaged or that their interests are in danger, is practically to deny the right in the majority of cases. Oftentimes frauds are discoverable only by examination of the books by an expert accountant. The books are not the private property of the directors and managers, but are the records of their transactions as trustees for the stockholders.

Though recognizing that statutes had been passed allowing shareholder inspection of corporate books and records, the court nevertheless stated that “[t]hese statutes, however, do not supplant the common law right.” In ruling on the applicability of the New York statute that was then applicable, the court held: “We do not think that the statute now in force is exclusive, or that it has abridged the common-law right of stockholders with reference to the examination of corporate books. By enabling a stockholder to get other information in a new way, it did not impliedly repeal the common-law rule which enabled him to get other information in another way.”

The Expanding Scope of Examination

The Court of Appeals reaffirmed these principles in Crane Co. v. Anaconda Company, 39 NY2d 14, 18 (1976), noting that, at common law, in addition to there being a “proper purpose” for the records inspection, the shareholder must show that it is “acting in good faith.” The court noted that the “conceptual basis for this right is derived from the shareholder’s beneficial ownership of corporate assets and the concomitant right to protect his investment.”

The court also noted that the current Business Corporation Law (BCL), Section 624(b) gives shareholders the right to examine, during usual business hours, the minutes of the proceedings of its shareholders and the record of shareholders, and to make extracts therefrom for any purpose reasonably related to such person’s interest as a shareholder, provided that the shareholder also furnishes to the corporation an affidavit that such inspection is “not desired for a purpose which is in the interest of a business or object other than the business of the corporation.” BCL Section 624(c) (Emphasis added).

More recently, the Appellate Division, First Department, in Pomerance v. McGrath, 104 AD3d 440, 961 NYS2d 83 (1st Dept. 2013) (Pomerance I), found that “the rationale that existed for a shareholder to examine a corporation’s books and records at common law applies equally to a unit owner vis-à-vis a condominium.” (Emphasis added). Unlike BCL 624(b), the Condominium Act, Article 9-B of the Real Property Law (RPL) 339-w limits the statutory right of condominium owners to examine the “receipts and expenditures arising from the operation of the property.”

Nevertheless, the court concluded that condominium unit owners “should be given rights similar to those of a shareholder under [BCL 624(b)], at least where elections for a condominium board are concerned.” Limiting Pomerance I to its facts, the court did not apply its own “rationale” to the inspection of other books and records that condominium owners might seek to examine.

However, the First Department’s reluctance to extend the rationale to other condominium records was short-lived. In Pomerance v. McGrath, 143 AD3d 443, 38 NYS3d 164 (1st Dept. 2016)(“Pomerance II”), the court held that, “so long as she seeks to do so in good faith and for a valid purpose,” the condominium owner had the right “to examine monthly financial reports, building invoices, minutes of board meetings, and appropriately redacted legal invoices.” (Emphasis added).

In addition to recognizing the right of shareholders and of condominium owners to examine, virtually without limit, the books and records of their governing organization, the court in Pomerance II also expanded the right of shareholders and owners to create electronic copies “as is now common,” and not just paper copies, of the books and records examined. The court went so far in liberalizing the scope of examination to allow copying of both paper and electronic confidential records, saying that requiring owners to sign a confidentiality agreement would entail “minimum burden.”

Proper Purpose Required

With the right to examine books and records under common law or under BCL 624(b) effectively guaranteed, the ability to exercise that right next depends upon whether the person seeking access to the records has offered a “proper purpose” for examining the records. Nevertheless, “[i]n an enforcement proceeding the stockholder must allege compliance with the statute,” and “[a]t this point the Bona fides of the shareholder will be assumed and it becomes incumbent on the corporation to justify its refusal by showing an improper purpose or bad faith.” Crane Co., supra, 39 NY2d at 20 (Internal citations omitted) (Emphasis added). However, “when the right is guarantied by statute the motive for its exercise is immaterial, but when it rests upon the common law it will not be allowed for speculative purposes, the gratification of curiosity, or where its exercise would produce great inconvenience.” Steinway, supra, 159 NY at 263.

Boards are solicitous of their records and very chary about giving any access to those seeking to examine them. Therefore, boards will strive to limit records examinations on grounds that the shareholder/owner’s purpose for reviewing the records is not sufficiently “proper” and/or that, even if a proper purpose has been proffered, it is a pretext and not made in good faith.

Purposes Deemed Improper

“Improper purposes are those which are inimical to the corporation, for example, to discover business secrets to aid a competitor of the corporation, to secure prospects for personal business, to find technical defects in corporate transactions to institute ‘strike suits’, and to locate information to pursue one’s own social or political goals.” Tatco v. Tatco Brothers Slate Co., Inc., 173 AD2d 917, 569 NYS2d 783 (3d Dept. 1991). In addition, if the scope of any inspection demand is so onerous as would be likely, without good cause, to disrupt the business affairs of the corporation, it will also be deemed improper.

Nevertheless, if inquiry is otherwise warranted, the right to examine will be limited by the court to such corporate records as the subject reasonably requires. “It is in the court’s discretion to exercise its authority to limit or expand the scope of members’ inspection of corporate records to the material necessary to protect the interest of the corporation.” Wells v. League of American Theatres & Producers, Inc., 183, Misc.2d 915, 920, 706 NYS2d 599, 604 (Sup. Ct., NY Co., 2000 (Atlas, J.).

Purposes Deemed Proper

In contrast, “proper purposes are those reasonably related to the shareholder’s interest in the corporation. They include among others, efforts to ascertain the financial condition of the corporation, to learn the propriety of dividend distribution, to calculate the value of stock, to investigate management’s conduct, and to obtain information in aid of legitimate litigation.” Tatco, supra, 173 AD2d at 918, 569 NYS2d at 784. Pomerance I, supra, and Pomerance II, supra, suggest that condominium owners should also be entitled to determine the financial condition of the condominium and calculate the value of their common interest by inspecting Board records containing the sales prices of recent and past conveyances of units in their buildings.

Examples abound of courts approving shareholder/owner inspection demands where good faith is not in question.

In Goldstein v. Acropolis Gardens Realty Corp, 116 AD3d 776, 777, 982 NYS2d 922, 922-923 (2d Dept. 2014), the court held that “the petitioner satisfied the requirements of Business Corporation Law 624(b), and [was] therefore entitled to a list of shareholders and their mailing addresses, as well as all Board meeting minutes from 2001 to the present.” Moreover, the court found that, “in light of the terms of the relevant proprietary lease, the petitioner established his contractual right to inspect all of Acropolis’s books of account from 2001 to the present.” (Emphasis added).

In GDLC, LLC v. The Toren Condominium, 53 Misc.3d 1214(A), 48 NYS3d 265 (Sup. Ct., NY Co., 2016), the petitioners were a sitting member of the condominium board, a sitting member of the Commercial Board, and the owner of the condominium’s largest commercial tenant. The petitioners sought access to the condominium’s 2015-2016 financial statements, its 2016 budget, and a settlement agreement that arose out of a litigation commenced in 2011 by the condominium against its sponsor.

The condominium had asserted that the condo building’s design and construction were defective and that there were multiple violations of the New York City Building Code. The petitioners alleged that the condo board “secretly” settled the litigation against the sponsor in 2015 without petitioners’ input or knowledge and had refused to disclose any documents. Among the documents to which petitioners were refused access was an engineer’s report assessing the physical conditions of the building (the “RAND Report”). The Board had commissioned the RAND Report in anticipation of litigation against the sponsor.

The court ruled, on multiple grounds, that the petitioners were entitled to the records demanded, including the RAND Report. Petitioner, as a corporate director, “must keep himself informed as to the policies and business affairs of the corporation” and would be potentially liable “for improper management during his term in office.” Therefore, corporate directors have “an unqualified right, having its roots in the common law, to inspect their corporate books and records.”

Similarly, petitioner, as a board member, had a “fiduciary duty to the condominium and individual unit owners,” pursuant to which he had “unfettered access to” and was “entitled to inspect and copy the books and records, including the settlement agreement and the RAND Report.” Petitioner, as commercial unit owner, was entitled to the requested documents, because “unit owners of a condominium collectively own the common elements thereof and are responsible for the common expenses.

In addition, the commercial unit owner was entitled to inspect the requested documents because “it may be bound by the settlement agreement with the condominium’s sponsor and that the alleged design defects might affect its unit.”

The court also noted that, to the extent any of the demanded records and documents (including the RAND Report) were confidential, the petitioners (through their sitting Board member) had a fiduciary duty to maintain their confidentiality – to avoid exposing the condominium to alleged “substantial damages.”.

In Bondi v. Business Education Forum, Inc., 52 AD2d 1046, 384 NYS2d 291 (4th Dept. 1976), the shareholder sought to examine the corporate minutes, accounts, and records “to inquire into the reason for its economic difficulties.” The court held that a stockholder who is acting in good faith and for the purpose of protecting his investment and ascertaining whether the corporation is being properly managed, has the right to inspect the corporate books and records “at reasonable hours and in a manner that will not unduly disturb the corporation in the conduct of its affairs.” In this case, petitioner was “especially entitled to the examination in view of the offer by the directors of the corporation to buy his stock at a grossly reduced price.”

In A&A Properties N.Y. Ltd v. Soundings Condominium, 177 Misc.2d 200, 675 NYS2d 853 (Sup. Ct., NY Co., 1998), plaintiffs were owners of condominium units that, as a group, owned more than 5% of the units of the condominium and were either under contract and/or in negotiation to purchase additional units which would bring their beneficial interest to over ten percent. In the notice of annual meeting, the condominium board of managers proposed an amendment to the by-laws that would “restrict future ownership by any one person, entity or its affiliates to five (5%) percent of the Common Interests of the condominium.”

The plaintiffs sought an order to stay the meeting and to direct defendants to permit an inspection of the condominium records to ascertain the names and addresses of the unit owners, many of whom did not reside in the building.

The court held that, although the condominium Act (RPL 339-w, supra) does not authorize an inspection of a list of unit owners, there was “no valid reason why the Board should not furnish a unit owner this information and avoid the owner having to incur the time and expense of obtaining the list from the public records” of deeds and individual real property tax assessments.

The court noted that “plaintiffs desire to communicate their reasons for opposing the proposed bylaw amendment to their fellow unit owners is sufficient bona fide reason for obtaining the list.,” and “that “[t]he dissemination of their views is consonant with the concepts of organizational democracy.”

In Dwyer v. DiNardo & Metschi, P.C., 41 AD3d 1177. 838 NYS2d 745 (4th Dept. 2007), the court held that petitioner had “set forth a proper purpose for the inspection, i.e., that an inspection of the books and records of respondent was necessary in order to determine the value of the shares.” A hearing was not necessary because respondent did not show that petitioner was acting in bad faith and thereby failed to justify its refusal to permit the requested inspection. The court further explained that “[a]t a minimum, book value requires…that the entries be complete and correct,” and that “petitioner should be accorded an opportunity to determine the accuracy of the values of those items fixed by management and reflected in respondent’s financial statements which bear on book value.” (Internal citations omitted).

Finally, in People Ex. Rel. Spitzer v. Greenberg, 50 AD3d 195, 851 NYS2d 196 (1st Dept. 2008), the court determined that the former officers and directors of a corporation had the right to inspect legal memoranda created during their tenure relating to transactions underlying a suit brought against them by the New York Attorney General. The court held it is “well settled in New York that, although a corporate director has an absolute, unqualified right, with roots in the common law, to inspect the corporate books and records, once he is removed from office such right terminates forthwith.”

However, although the former director no longer has a voice in governing the corporation, the “former director may still have a qualified right to inspect the books and records covering the period of his directorship whenever in the discretion of the trial court he can make a proper showing by appropriate evidence that such inspection is necessary to protect his personal responsibility interest as well as the interest of the stockholders.”

In Greenberg, since the defendants had already been sued and sought the internal legal memoranda that were allegedly prepared for their use and relied upon by them in order to support their advice of counsel defense in the suit, the court held that they were entitled to the memoranda despite the attorney-client privilege belonging to the corporation that might otherwise have precluded access to the documents.

Conclusion

The principles set forth in Steinway and confirmed in Crane are clear. However, the cases in which courts must apply those principles vary widely in their facts and circumstances. The disputes that occur between the gatekeepers of corporate and condominium books and those who seek to examine the business and transactions recorded in those books will continue unabated.

There will always be need for more transparency and need too for prudential husbandry of corporate affairs. The task of attorneys engaged on either side of the dispute will be to persuasively articulate why the facts, in the particular case before them, should tip the balance between granting or refusing the requested records inspections.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. John M. Desiderio is managing partner of the firm’s Real Estate Litigation Group.

How to start a business in a pandemic and thrive in a post-pandemic world

This pandemic and the government’s response to it have forced America into a new economy that will be painful for the staid businesses of yesterday.

At the same time, this may be the most extraordinary time to open the right business since the American revolution.

Money is cheap; interest rates are at record lows and vacant spaces are plentiful nationwide at the lowest rents since I started practicing law.

America is bursting at the seams as people get their vaccines, step out, and spend money like never before.

I have spent the last year in the trenches with countless shops going out of business because of mistakes they made when they first signed their lease. The new business model for those starting fresh in 2021 must offer the confidence that it will not fail but also the humility that it must protect itself in case life happens.

Here are three things that every new business must do before opening shop:

Never Sign a Lease in Your Own Name

Most leases are for at least 10 years. No one can predict what life will be like that far ahead—the business may need to triple its space in 10 years or unfortunately it may have to close up because it cannot make the rent or pay its employees.

Because your paycheck and your home are both in your name, the landlord can go after both of these items if the store shutters.

Companies should sign a lease using the name of a limited liability company or an S-corporation. I try to persuade potential retailers against using the name of the store or company name for the LLC or S-corporation in case the company takes off. I recommend an anonymous name that only holds the money the company collects.

If the landlord does not go for the LLC or demands a personal name, then many landlords will accept an additional security deposit or additional money to be held by the landlord in case the tenant defaults in the payment of rent.

If that is not acceptable, then many landlords will accept a document called a “good-guy guaranty.” The good guaranty allows the tenant to get out of the lease and no longer owe the landlord money at any time as long as the tenant has paid the rent in full at the time of terminating the lease in writing.

Following this advice will often determine whether the business financially lives or dies during trying times.

Location, Location and the Law

It is well known that where you place your business may determine the amount of human traffic you will receive. In addition, in many locations and especially busy areas, the local towns and cities may heavily regulate what types of businesses can reside at certain locations.

Before signing that lease and investing money into a space, check with the local town or an attorney to make sure that such a business’ use will be permitted.

Also, even if the business is permitted, you may want to spend time around town to understand if your neighbors will revolt if your dream is to have a bar with a live rock band playing on the block. One way to test this would be to see what business previously resided at the location.

Negotiating Repairs into a Lease

American states enforce lease provisions. Structural repairs can sometimes cost more than a year’s profits.

It is imperative that the lease makes the landlord responsible for all repairs, or at a minimum, structural, or serious repair issues.

Typical structural repairs include the roof, the boiler, the elevator, the HVAC, and anything behind the walls that you cannot see. In many cases, it may be worth walking away from a lease rather than being responsible for these repairs.

Adam Leitman Bailey is an award-winning real estate and business attorney based in New York State. His latest book is “ Real Estate Titles: The Practice of Real Estate Law in New York .”

Original Article Here

Foreclosure in your future? Here are 4 ways to save your home from that fate

In 2020 the number of homeowners who have fallen at least three months behind on their mortgage payments has increased 250 percent

As federal and state moratoriums blanket the country, more Americans have fallen behind on their mortgage payments at levels not seen since the Great Recession. Fox News reported this news on March 2 and the Consumer Financial Protection Bureau offered details in this article earlier this month.

The Consumer Financial Protection Bureau calculated that in 2020 the number of homeowners who have fallen at least three months behind on their mortgage payments has increased 250 percent to over two million households and is now at a level not seen since the height of the Great Recession in 2010.

These homes are estimated to owe almost $90 billion in deferred principal, interest, taxes, and insurance payments. Unfortunately, these numbers may not tell the complete picture because when the moratoriums soon expire and the lawsuits flood the courts, these numbers could be much larger.

However, if you fall into one of these groups, there are ways to save your home and avoid being foreclosed on if you act now. Here are my four top suggestions:

1. Call Your Lender:  Lenders Are Making Record Deals

Lenders are losing money because they are unable to foreclose on homes during the moratoriums.

Therefore, many lenders are offering special items on their menu to entice borrowers to pay their mortgage, including deferring loan payments to a later date or the end of the loan, deferring or lowering interest payments, lowering fees, and keeping you from defaulting on the loan in other creative ways.

2. Sell Your Property and Price It Right

If you have already communicated with your lender and the payment plans and forbearance payments are just not in your budget, many of the markets in the nation are breaking records; you may make a profit by selling your home.

The key is to find a broker that is going to care about you, your property, and most importantly that your property is priced to sell.

By pricing it to sell, the property will not stay on the market longer than you can afford. It may even create so much interest that it starts a bidding war, in which case several buyers might make offers to buy the property.

If this happens, it would likely raise the selling price.

3. Read All of Your Mail Every Day

You cannot afford to miss your court date or an invitation from your lender to make a deal on your payments. All of your mail from your lender must not only be read but must be responded to immediately.

Too many homes have been lost because the borrower missed their court appearance or failed to call a lender back when the lender was offering lower payments.

4. Save Your Money

As someone who has represented lenders for 27 years, I find that the second greatest enemy against paying the mortgage besides unemployment is blowing a paycheck on other bills and expenses.

Paying your mortgage is infinitely more important than that much-needed home renovation.

I cannot stress enough that the moratorium does not mean that the mortgage will never be due—these payments are only delayed temporarily.

Despite the chatter, even the United States Constitution prohibits the government from interfering with private contracts and therefore the payment of mortgages. This will result in a foreclosed home if payments are not made.

Adam Leitman Bailey is a real estate attorney and a New York Times bestselling author. Bailey is based in New York where he represents many of the largest lenders in America.

An Unsettling Decision for Liquidated Damages in Settlement Agreements

Adam Leitman Bailey and Dov Treiman discuss the Court of Appeals decision “Trustees of Columbia v. D’Agostino,” where the court handed down a 4-3 decision with a new interpretation of the law of liquidated damages with regard to surrender agreements. The case, they contend, “rewrites the rules of when a tenant simply gives up on the space.”
By Adam Leitman Bailey and Dov Treiman

In November, 2020, the Court of Appeals handed down a 4-3 decision with a new interpretation of the law of liquidated damages with regard to surrender agreements. Trustees of Columbia v. D’Agostino, —N.E.3d—, 2020 WL 6875988, 2020 N.Y. Slip Op. 06937 rewrites the rules of when a tenant simply gives up on the space.

In Trustees v. D’Agostino, two great icons of New York City had, as sophisticated business entities, negotiated the reduced rent of the space the famed supermarket chain was renting and eventually surrendered from the esteemed university. In their surrender agreement, the parties had negotiated for D’Agostino to make vastly reduced payments compared to those called for under the lease over a payout period, upon default of which payments, D’Agostino was to be held liable to Columbia for the full remaining amount of unpaid rent under the unexpired term of the lease the surrender agreement had canceled.

Background

Columbia, although having broad implications for the pandemic, did not arise from the pandemic itself, but four years earlier when D’Agostino stopped paying its rent under the lease from Colombia University. With some two years remaining on the lease and D’Agostino still in possession of the premises, the parties entered into a surrender agreement that called for D’Agostino to make payments calling for approximately $260,000, roughly a quarter of what the remaining payments under the lease would have been.

After the agreement was signed, the supermarket decided to surrenderer the premises and after making two of the $43,000 periodic payments called for under the agreement, D’Agostino stopped making further payments after Columbia re-rented the premises to a new tenant. As called for by the agreement, Columbia served a notice to cure and when D’Agostino failed to effect such a cure, Columbia invoked the agreement’s remedy of D’Agostino being called upon to pay the balance of the lease’s rent, some one million dollars.

Trial Term, the Appellate Division, and the Court of Appeals 4-3 found this to be an unenforceable penalty since the remaining payments on the surrender agreement would have been approximately $175,000. Thus, the majority courts focused on the ratio of the missed payments in the agreement to the consequence under the agreement, roughly 1:7.5 rather than the ratio of the lease payments waived to the lease payments reinstated, almost precisely 1:1.

The Majority Holding

In striking down the agreement’s reinstatement of the lease rent the agreement had waived, the court regarded the surrender agreement without regard to the amount of money owned and defaulted upon in the lease agreement. It refused to see the lease itself as part of the transaction—on grounds that the surrender agreement had cancelled it—looked only at the arithmetic of the piece of paper at hand and outlawed it. The court wrote, “(T)he Surrender Agreement constituted a new contract between the parties that terminated the lease and all prospective obligations flowing from the tenancy.” Viewing the surrender agreement as a new contract, the majority struck down the enforcement provision as an unenforceable penalty, rather than liquidated damages.

The majority’s holding reveals that not only does it reject disincentives to noncompliance in these surrender agreements, but it does so in all settlement agreements. Thus, does this holding reverberate through all fields of law that see actual or potential litigation.

The Dissent

A stirring dissent has the better side of the argument for both landlords and tenants and all businesses trying to survive an economic depression. The dissent argues that the surrender agreement and the lease should be read together as one single transaction, that the majority’s rule discourages settlements and in so doing actually acts against distressed tenants, and that sophisticated business entities should be allowed to craft their own deals. It wrote, “This result is incompatible with our freedom of contract precedent and the strong public policy favoring enforcement of settlement agreements.”

The dissent highlights that now given a choice between a defaulting tenant who has impunity for defaulting, and a defaulting contractor who has no reason to obey the surrender agreement, the landlord has no incentive to enter a surrender agreement at all. The dissent writes, “This will discourage commercial landlords from agreeing to settlements of this nature, to the detriment of defaulting tenants…” The majority dismisses this argument, holding that the landlord got what it bargained for, an opportunity to re-rent the space. But the landlord is not actually in the business of trying to rent space. The landlord is in the business of having rent paying tenants and it is of this bargain the majority’s decision did deprive the landlord.

‘Columbia’ Harms Business

Perhaps the Columbia’s majority ruling is limited to cases where, as here, the tenant is, as part of the entire deal, surrendering the premises, and the only remaining question between the parties is not how to govern a struggling tenancy, but how to fund a failed one.

The problem, however, is that the majority decision, if applied to ongoing tenancies, severely restricts the viability of the forbearance agreements that continue to be so essential during this depression, if not for supermarkets who continue to do a brisk trade under current conditions, then certainly for restaurants, gyms, and other gathering places that are struggling with severely reduced patronage.

The majority fails to appreciate the needs of the commercial landlord and tenant. Street litigators who practice every day need these tools to make deals to keep tenants in business while having a means to collect the rent and evict if the business that has been given the second chance, cannot pay.

Were it not so easy to get around the majority’s ruling, its effect could be truly seismic in these times when so many tenancies are failing through fault neither of their own nor of their landlord. These are horrific times for business. Tenants, and especially their guarantors, need a safe way out of their no longer viable tenancies and landlords need to be able to offer such safe passage. The dissent correctly argues that the majority makes it difficult for landlords to offer such.

What Commercial Landlord-Tenant Relationships Need

Landlords, in these times, need to reduce risk. So do tenants. The Columbia majority dismisses this, writing:

A party’s default is a risk common to all contracts, without unique effect in the context of a surrender of premises. And the existence of that risk does not and cannot justify exaction of a penalty.

Yet, in Holy Props. v. Cole Prods., 87 N.Y.2d 130, 637 N.Y.S.2d 964 [1995], the Court of Appeals was far more solicitous of risk avoidance when it wrote, “Parties who engage in transactions based on prevailing law must be able to rely on the stability of such precedents.” Preservation of stability was the issue in Holy Properties, but in Columbia, it is something too easily dismissed.

Of this, the dissent notes, “This principle of New York contract law has special import in real property transactions where, as here, commercial certainty is a paramount concern.” (Punctuation and citations omitted.)

Drafting Agreements in the Real World

Those of us who do this kind of practice, know that in crafting an agreement, any kind of agreement, whether it is an agreement that is essentially transactional in nature or one that is after the relationship between the parties has broken down, we face two categories of questions: (1) What obligations do we seek to impose on each other? (2) And how shall we make sure the other side honors those obligations?

In answering the second question, we tend to think in two categories, carrots and sticks. We hunt for carrots that can encourage compliance and we look for sticks that punish noncompliance. As to the carrots, there is always the problem when one side has already, in the agreement, given up everything it has to offer. This is typical of surrender agreements. The landlord has already agreed to forego its income flow and to accept either immediate surrender of possession or the tenant remaining in possession accompanied by a vastly reduced payment, typically over an elongated payment schedule. There are even agreements tenants and landlords are negotiating calling for immediate surrender, but already setting forth the terms of re-occupancy should the landlord fail to find a replacement tenant and the tenant wants to return after the pandemic. With all of these concessions from landlords, there are no incentives left to sweeten the pot so as to ensure compliance.

As to sticks, the doctrine of unenforceable penalties makes it difficult to craft remedies that contain just enough terror attached to the noncompliance as to discourage it, but not so much as to be struck down. Here, Columbia’s attorneys had a relatively mild “stick.” Under the terms of the agreement, if it defaulted in the agreed reduced payments, D’Agostino was then to pay what it had originally contracted to pay anyhow under the lease, but for the agreement.

Of course, there is always the possibility of nonmonetary carrots and sticks, but thus far, the doctrines of unenforceable penalties do not reach into these nonmonetary matters. For example, in ordinary agreements dealing with a tenant’s nonpayment of rent, failure to adhere to the schedule set forth in the agreement can lead to eviction. However, in surrender agreements, it is generally too late in the tenancy to employ such an agreement, but in other kinds of agreements, nonmonetary consequences for failure to live up to contractual obligations could occur. With increasing hostility to severe consequences for noncompliance coming from the Court of Appeals, as evidenced at first by 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc., 24 N.Y.3d 528, 536, 2 N.Y.S.3d 39 [2014] and now by Columbia, nonmonetary inducements to compliance might also fail as “unenforceable penalties.” This line of decisions, based on well established principles of the law of liquidated damages and unenforceable penalties, is becoming so strict as to hamstring negotiators trying to put together a viable deal. If the law degenerates to “the weaker party always wins,” stronger parties have no further motivation to negotiate at all.

Recall that under Holy Props. v. Cole Prods., 87 N.Y.2d 130, 637 N.Y.S.2d 964 [1995], a commercial landlord has no duty to mitigate its damages when a tenant abandons a lease. 172 Van Duzer Realty Corp., supra, softened the hit tenants would take under such circumstances by insisting on a discount for present value, but it did not altogether outlaw the acceleration of all future rent coming due immediately. But under Columbia, which cites to both Holy Properties and 172 Van Duzer Realty Corp., under the guise of liquidated damages doctrine, the full accelerated rent is an illegal penalty if it is the contracted for alternative to making a negotiated vastly reduced payment.

We note that Columbia does not leave the jilted landlord completely without remedy. If the jilting tenant fails to make a payment under the surrender agreement, the jilted landlord may enter judgment for the payments that were supposed to have been made in the surrender agreement as if the tenant had been in compliance. In short, lacking any carrots to offer the tenant for compliance, Columbia removes all sticks for noncompliance and the only thing that the jilted landlord gets is a judgment for the payments that were agreed to and should have been made. There is, for the tenant, neither incentive to comply, nor disincentive to default. Indeed, in Columbia landlord is awarded a judgment without any indication as to whether D’Agostino actually paid off the judgment. Of course, we recognize that failure to get paid on a smaller judgment is no greater monetary loss than failure to get paid on a higher one.

How Parties Can Still Negotiate

However, for the careful drafter, not all is lost. One can draw up these agreements so as to elude the harsh and impractical rules of Columbia.

At the core of Columbia’s holding is that since the surrender agreement terminates the lease, the agreement cannot go on to use the lease as a metric for the money that would have been owed. The simple solution to this is not to terminate the lease. These agreements can be called “Amendments to Lease Agreement” so as to distinguish them from the surrender agreement Columbia strikes down.

In a properly drawn post-Columbia quasi-surrender agreement, instead of the agreement terminating the lease, it modifies it. Thus, the agreement should take the form of a lease amendment, restating and affirming the obligations of the lease, but modifying them so that so long as the tenant timely makes the payments called for in the lease amendment agreement, the landlord shall accept them in lieu of full rent. As long as the tenant makes the payments, the tenant stays in possession.

For those agreements where the surrender of the premises is being negotiated, amend the lease so the amendment to the lease would accelerate all the rent due on the balance of the lease with the implementation of a Van Duzer discount for present value, together with a termination of all further possessory rights the tenant may have. The actual surrender of the lease would need to be delayed until a new tenant is found.

Conclusion

Columbia v. D’Agostino is an unfortunate precedent. It does, as the dissent points out, discourage the drafting of surrender agreements in their traditional form. However, there is an out. Landlords who seek to come to terms with their tenants who cannot make a go of it need not fear the harsh rule of Columbia. Instead of a freestanding agreement, the parties may simply modify the lease so as to make it work for them correctly. These are horrible economic times, but we lawyers possess the tools necessary to ease nonfunctional relationships and to make them workable.

 

Adam Leitman Bailey is the founding partner and Dov Treiman is the landlord-tenant managing partner of the Manhattan law firm, Adam Leitman Bailey, P.C.

Nowhere To Call Home

In a city as populous as New York, homelessness has been a problem for years. What can be done to fix it? New York’s top Real Estate Lawyers share their insights.

In July 2020, there were 58,089 homeless people who slept in the New York City Municipal shelter system, according to the national coalitions for Homeless (NCH), the oldest advocacy and direct service organization for homeless men, women, and children. Families make up two-thirds of the homeless shelter population. The rate of homelessness in the city has reaches the highest levels in recent years since the Great Depression. The number of homeless single adults is 133 percent higher than it was 10 years ago, according to the organization. While the pandemic exacerbated the problem due to leaving many unemployed and evicted from their homes, the problem started long before, with NCH citing the lack of affordable accessible to lower-income residents as the primary cause of homelessness. We talked to the Best Lawyers – recognized attorneys to discuss the growing rate of homelessness in New York City and what can be done to solve the issue.

Best Lawyers in the Law (BLL): How could homelessness be prevented? 
Adam Leitman Bailey (ALB): Almost all of the homeless population today could be prevented by abolishing rent regulation and other anti-capitalistic programs that remove housing stock from a pool of available housing and raise housing prices. With an economy as strong as New York’s with so many resources, only severe governmental interference via poorly drafted housing laws or closing down businesses could bring housing to its knees. IN the last two years, the state government and state executive branch managed to achieve this feat causing a sharp decline in housing and the economy in general.

Best Lawyers in the Law: What are legal measures that can be taken to combat the problem of homelessness in New York? 
Adam Leitman Bailey: A government needs to take care of its weakest citizens and incentivize property owners to provide housing for those that need it most. However, that same government has a duty to provide a platform to allow a democracy and capitalist system where businesses can thrive. Without one, the other will not be an option. Passing housing laws that punish property owners and reward very few tenants like with rent regulation and the housing stability and tenant protection act passed in 2019 have led to thousands of vacant unites and tens of millions of dollars in less tax revenue for New York City and state. Once these laws are repealed and a free-market system is restored, we can pass the most needy — our homeless population who should be guaranteed food and a bed and assistance finding a job.

Best Lawyers in the Law: How can homeless shelters be improved?
Adam Leitman Bailey: Homeless shelters work when societies do not have barriers on their ownership to property. When free from government intervention, their property is worth more and they can donate more and do donate more to homeless organization because they know that the key to attracting tenants or owners to an area is having a safer city where everyone has a place to live.

Adam Leitman Bailey, P.C. Obtain Residential Eviction During COVID and Permission to Use Self-Help

The team at Adam Leitman Bailey, P.C. (ALBPC) continues to find creative ways to assist landlord clients in the wake of the nonfunctional New York Housing Courts.  In a recent case, a landlord-client learned that his tenant, in violation of the lease and New York law, had been illegally subletting his apartment through Airbnb to subtenants.  One subtenant, emboldened that at present evictions are nearly impossible to achieve in New York Housing Court, changed the locks, switched the electricity bill to his name, and refused to pay rent to the landlord. The landlord also received credible reports that the illegal subtenant was dealing drugs from the apartment.

Without recourse in Housing Court, Adam Leitman Bailey, P.C. instead commenced an action in Supreme Court seeking a permanent injunction and specific performance under lease as well as an award of attorneys fees.  Contemporaneously with filing the summons and complaint, Adam Leitman Bailey, P.C. moved for immediate injunctive relief requesting that the court enjoin and restrain the subtenant from continuing to occupy the apartment.

At the hearing on the motion, Adam Leitman Bailey, P.C. argued that the landlord was entitled to an injunction because the occupant’s use of the apartment was clearly transitory and a violation of New York’s Multiple Dwelling Law, which prohibits the transient subletting of an apartment in multi family apartment buildings.  Adam Leitman Bailey, P.C.pointed to text messages and the occupant’s own e-mails containing admissions that he was residing in the apartment pursuant to an illegal Airbnb rental. As to irreparable harm, Adam Leitman Bailey, P.C. argued that by virtue of the illegal sublet, the landlord was subject to potential heavy fines, building closures, and vicarious liability for actions the landlord cannot control, particularly with the nonfunctional Housing Courts.

Subsequent to the hearing, and as a result of Adam Leitman Bailey, P.C.’s filings, the illegal subletter made representations to the landlord and the court that he would vacate the apartment and check into a hotel, as a result of which, the landlord changed the locks to the apartment.  However, rather than vacate the apartment as he represented he would do, the illegal subletter returned and broke into and damaged the apartment and the sent threatening e-mails to Adam Leitman Bailey, P.C. attorneys that the landlord not change the locks again and that he intends to remain in the apartment.

After receiving these e-mails, Adam Leitman Bailey, P.C.drafted and prepared another motion by order to show cause setting forth the illegal subletter’s lies and misrepresentations and requested that the order to show cause papers be submitted for immediate decision.

Adam Leitman Bailey, P.C.’s persistence paid off. In a victory for the landlord and despite the court’s busy docket inundated with landlords vying for court relief, the very next day, the court granted the landlord an injunction plus the rare addition of permitting self-help, allowing the landlord to immediately change the locks on the apartment door.  The police department never intervenes in civil actions involving landlord-tenant matters.  To overcome that obstacle, Adam Leitman Bailey, P.C.foresaw the illegal occupant’s behaviors, forced him to admit to the court that he was breaking the law and showed the Court his true colors. Ultimately, the winning decision converted the case to criminal trespass if he did not vacate by week’s end and that compelled the police to help our client get possession of the apartment safely.

Adam Leitman Bailey, P.C. attorneys Dov Treiman, Carolyn Rualo and Israel Katz secured the injunction for the client.