Inside This Issue

LITIGATION UPDATE

When Bad Things Happen to Good Transactions .......1,2

TRANSACTIONAL UPDATE

When Bad Things Happen to Good Transactions .......1,2

Subordination, Non-Disturbance And Attornment Agreements .....................3,4

ADMINISTRATIVE LAW UPDATE

The Effect of Building-Wide Rent Reduction Orders or Class C Violations on MCI Applications .....................4,5

New Law Amends Housing Maintenance Code Requirements For Registrations of Multiple Dwellings ..............7

CASES AND TRANSACTIONS OF NOTE ............................4

CO-OP CONDO CORNER ...6

BBWG NOTABLE ACHIEVEMENTS ................7

E D I T O R S

Magda L. Cruz

Aaron Shmulewitz

Kara I. Rakowski

UPDATEMAY 2011 | VOLUME 10

Belkin Burden Wenig & Goldman, LLP | 270 Madison Avenue | New York, NY 10016 | Tel 212 .867 .4466 | Fax 212 .867 .0709 Attorney Advertising 1

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continued on page 2

WHEN BAD THINGS HAPPEN TO GOOD TRANSACTIONS Specific Performance as a Remedy for a Seller’s Default

L IT IGATION & TRANSACTIONAL UPDATE

By Matthew S. Brett, & Craig L. Price

As a full service real estate firm, we are often called upon to handle both transactions and litigation for our clients. Unavoidably, a transactional matter may end up in litigation, because another party has refused to live up to their contractual obligations.

A particularly common scenario is when a seller reneges on a contract of sale and refuses to close on the sale of a property. Sellers often repudiate their obligations without any legal justification and in direct contravention of the contract of sale.

The motivation for this behavior is varied, but not surprisingly it often revolves around a desire to extract a better sale price or to avoid immediate tax implications that was not initially contemplated.

Of course the purchaser is left in the lurch and must make some critical decisions. If the contract is explicitly repudiated, the purchaser will likely have the ability to recover the down payment deposited with the seller.

Unfortunately, purchasers are often loath to walk away from a deal they have negotiated and the contract is not always explicitly forsaken. In fact, sellers, wishing to avoid the legal consequences of an overt contract default, will hem and haw for a period of time to delay a closing. Demands to close by the purchaser are either adjourned or ignored by the seller.

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WHEN BAD THINGS HAPPEN TO GOOD TRANSACTIONScontinued from page 1

Ultimately, this will lead some purchasers to walk away from the deal or agree to additional demands of the sellers. Obviously, the determination to walk away from a deal or agree to these new demands is subject to important business considerations.

From a legal standpoint, however, a purchaser has powerful remedies to force the seller to live up to its obligations as negotiated, written and executed in a contract of sale. If such a situation arises, our transactional and litigation departments will coordinate with each other to bring the matter to a head and compel the closing of title.

Usually what happens in these scenarios is that when it appears that a seller is dragging their feet or avoiding a closing, the purchaser’s transactional attorney will serve the seller’s attorney with what is known as a “time is of the essence” or “TOE” notice pursuant to the terms of the contract. Such a notice sets a “law date” (i.e. a drop dead date) for closing and legally triggers certain remedies, including specific performance.

A purchaser who decides to serve a TOE notice must in fact be ready, willing and able—that is, being able to close on the TOE closing date. This of course includes the ability to tender the balance of the purchase price as well as the performance of all of the purchaser’s obligations under the contract.

When a TOE notice is served and the seller refuses to appear at the closing or simply ignores the notice, BBWG will often conduct a unilateral symbolic closing at our office. These “closings” are conducted in the presence of the title company (or a managing agent in the case of a cooperative), a bank attorney, if appropriate, and a stenographer who memorializes the presentation of all of the necessary closing documents and the purchaser’s readiness, willingness and ability to close, including

the ability to tender the balance of the purchase price.

Naturally, title is not really transferred at this type of closing, inasmuch as the seller is not present to actually convey title to the property. The true purpose of this event is to establish a complete record of the purchaser’s commitment to live up to the terms of the contract of sale.

As a result, the matter is now ripe for litigation. After it is well established that the seller has reneged on the transaction and the purchaser is ready, willing and able to consummate the deal, a specific performance action is commenced in the Supreme Court. A specific performance action is a lawsuit commenced by an aggrieved party (in this case the purchaser) to compel the other party to perform their obligations pursuant to a contract.

In the case of real property transactions, it is well settled in New York that specific performance is appropriate where (1) there is a valid contract; (2) purchaser (plaintiff) has substantially performed under the contract and is willing and able to perform any remaining obligations; (3) the seller (defendant) is able, but unwilling to perform its obligations and (4) the purchaser has no adequate remedy at law. An adequate remedy at law in essence means that the purchaser cannot adequately be compensated in monetary damages for the loss of the purchase of the property as it is unique. This does not preclude, if appropriate under the terms of the contract or because of fraudulent behavior on the part of the seller, the recovery of monetary damages in all situations. The recovery of damages may be appropriate in some situations.

Not surprisingly there are concerns that when a specific performance action is commenced, the seller may try to wrongfully convey the property to an unsuspecting third party. As a result, the legislature has

endowed aggrieved purchasers with a very powerful yet elegantly simple remedy: the Notice of Pendency otherwise referred to as a Lis Pendens.

The Notice of Pendency is a procedural remedy designed to put the world on notice of a pending or impending contract dispute concerning the property. So if a seller tries to sell the property to a third party, that third party purchaser would be hard pressed to find a lender to finance the purchase and a title company to insure good title to the property (or in the case of a cooperative, a managing agent willing to transfer the cooperative shares) when a Notice of Pendency has been docketed against the property.

The Notice of Pendency itself is a relatively simple document that is docketed with the clerk of the county in which the property is located after a specific performance action is commenced. It cannot be docketed unless such an action has in fact been commenced and there are penalties (sometimes severe) for filing a Notice of Pendency without a valid claim. As such, the reader must be warned, a Notice of Pendency must not be docketed against a property unless a valid claim to possession exists.

After the specific performance action is commenced it is litigated until it is either settled or brought to a judgment and title is conveyed to the purchaser. Often, these type of actions do lend themselves to a quick resolution. However, if the action is not settled, it could take several months to resolve itself.

If you or a purchaser is faced with a recalcitrant seller, you should immediate consult with counsel experienced in real estate transactions and litigation.

Matthew S. Brett (mbrett@bbwg.com) is a partner in the Firm’s Litigation Department.

Craig L. Price (cprice@bbwg.com) is a partner in the Firm’s Transactional Department.

L IT IGATION & TRANSACTIONAL UPDATE

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TRANSACTIONAL UPDATE

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENTSHOW TO AVOID FUTURE PITFALLS IN COMMERCIAL LEASES

By Allan Gosdin

With the high occurrence of commercial loan defaults in recent years, lenders have foreclosed

on many buildings with both commercial and residential tenants.

Although residential tenants in New York are afforded statutory and regulatory protections which bar a lender, as a new building owner, from summarily canceling residential leases and evicting tenants, commercial tenants do not have such legal protections.

It is common for a commercial lease to contain a subordination clause that makes the lease expressly subordinate to any existing or future mortgage (see, e.g., paragraph 7 of the REBNY Standard Form Office Lease and Standard Form Store Lease). The result of such a subordination clause is that, if a lender forecloses on the underlying mortgage and takes back the building, while the commercial tenant must fulfill its obligations under the lease, the lender is not necessarily obligated to honor the lease or the existing obligations of the former building owner.

As a practical matter, it usually is not in the interests of a lender to evict its commercial tenants, especially in a soft market where commercial rents have decreased. However, if the existing lease is a below market lease and the commercial rental market has improved since the lease was signed, the lender may very well conclude that it can get substantially higher rent for the space if it recovers it. Such a bottom-line-driven decision may justify the expense and inconvenience of evicting the current commercial tenant. In addition, the lender

or new owner of the building may want to demolish the building for redevelopment or have the building occupied by a different type of tenant. If a lender decides to evict a commercial tenant after foreclosing on its mortgage, if the lease only has a basic subordination clause such as contained in the REBNY form, with no additional protective language in tenant’s favor, a commercial tenant will have no recourse against the lender and ultimately will lose the space.

For this reason, it is critical for a commercial tenant to ensure that its lease contains a provision that requires the landlord to obtain a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) from all current mortgagees, and from any future lenders.

An SNDA is a written instrument between a lender and a commercial tenant (sometimes the landlord will also be included as a party) which confirms the relationship between the lender and tenant—i.e., that the lease is expressly subordinate to the underlying mortgage. Most importantly, the “non-disturbance” portion of the SNDA provides that if the lender forecloses and takes over the building, so long as tenant pays its rent and complies with the lease, the lender will not disturb its tenancy. Often, an SNDA is recorded in the land records so that it (and the existence of the underlying lease) becomes a matter of public record.

Once a commercial tenant obtains an SNDA, the lender is barred from evicting the tenant without cause because such eviction would violate the SNDA.

In negotiating an SNDA, a commercial tenant also should try to ascertain whether there are other specific landlord obligations which it wants to have enforceable against the lender, especially landlord obligations to perform certain work or expend certain monies to build out the leased space. A typical SNDA will include language that provides that the lender is not responsible for past obligations of the landlord (i.e., completion of landlord work, payment of a tenant improvement allowance, honoring free rent, etc.). If there are significant landlord obligations which a tenant wants to keep enforceable, it should try to negotiate language in the SNDA whereby the lender agrees to honor those obligations. Several years ago BBWG represented a commercial tenant which was leasing space in an office park. The lease provided that the landlord had significant construction obligations, a construction allowance, a significant free rent period and rent abatement if the construction was not completed in a timely fashion. We successfully negotiated an SNDA whereby the landlord’s lender agreed to honor those crucial landlord obligations. It was vital that these items be honored by the lender; as it turned out, the lender foreclosed on its mortgage and the commercial tenant was well protected.

In short, it is of utmost importance that a commercial tenant seek to protect itself by obtaining an SNDA from every lender of its landlord.

Allan Gosdin (agosdin@bbwg.com) is an associate in the Firm’s Transactional Department.

ADMINISTRATIVE LAW UPDATE

THE EFFECT OF BUILDING-WIDE RENT REDUCTION ORDERS OR CLASS C VIOLATIONS ON MCI APPLICATIONS

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By Phillip L. Billet and Paul Kazanecki

As most building owners know, the installation of a “Major Capital Improvement” or “MCI” at a building

will entitle the building owner to file an “MCI Application,” requesting permission to increase the rents of the building’s rent-regulated apartments. Pursuant to the applicable regulations and DHCR policy, however, if a building-wide “rent reduction order” or Class C (i.e., “immediately hazardous”) violations are in effect at the time the MCI Application is filed, the existence of such order or violations will delay the processing of the Application and can result in a denial of the Application.

This article explains how DHCR processes an MCI Application where a rent reduction order or Class C Violations are in effect at the time the Application is filed.

Section 2522.4(a)(13) of the Rent Stabilization Code provides in substance that DHCR may not grant an MCI Application if it determines that the owner is not maintaining all required services or that there are current immediately hazardous violations of any municipal, county, State or Federal law which relate to the maintenance of such services.

In its “Policy Statement 90-8,” DHCR sets forth guidelines on how it will process an MCI Application where rent reduction orders or Class C violations are in existence at the time the MCI Application is filed.

Effect of a Building-Wide Rent Reduction Order

If a building-wide rent reduction order (i.e., an order finding that the owner had failed to maintain a building-wide service or services) is in effect at the time an MCI Application is filed, there is a chance DHCR will deny the application unless the owner has either filed a rent restoration application with DHCR, seeking to restore the rents that were reduced by said rent reduction order, or has challenged the rent reduction order by filing a PAR.

If a rent restoration application has been filed, DHCR will not process the MCI Application until said application is decided. If the rent restoration application is granted, DHCR will grant the MCI Application, but will make it effective as

JOSEPH BURDEN, co-cha i r o f BBWG’s L i t iga t ion Depar tment , and DAVID BRAND, an a s soc ia te in the depar tment , succe s s fu l l y repre sented a Park Avenue South condominium in obta in ing a cour t o rder to permi t the condominium to use a un i t owner’s t e r race a s a s t ag ing a rea fo r por t ions o f ex te r io r repa i r work on the bu i ld ing requ i red by Ci ty l aw. The uni t owner, who had t r i ed to b lock such nece s sa r y use , was a l so ordered to re imburse the condominium’s l ega l f ee s , in an amount to be de te rmined by a re f e ree .

ROBERT T. HOLLAND, a par tner in BBWG’s Li t igat ion Depar tment , and JAMIE CHAPMAN, an assoc iate in the f i rm’s Transact ional Depar tment , success fu l ly represented an Upper East Side condominium in obta ining summary judgment aga inst a unit owner on the non-payment of more than $43,000 in common charges for two unit s .

CRAIG INGBER, a par tner in BBWG’s Transact ional Depar tment , represented an inst i tut ional investor in re f inancing mortgages on three mult i fami ly proper t ies in Brooklyn with an aggregate mortgage amount in excess of $20 mi l l ion. MR. INGBER al so represented four Upper East Side cooperat ives in the re f inancing of the i r under ly ing mortgages .

CASES AND TRANSACTIONS OF NOTE

ADMINISTRATIVE LAW UPDATE

THE EFFECT OF BUILDING-WIDE RENT REDUCTION

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of the date when the rent reduction order ceased to be in effect.

If the owner has filed a PAR against the building-wide rent reduction order, DHCR will not process the MCI Application until the PAR is decided. If the PAR is granted, and the rent reduction order overturned, DHCR will grant the MCI Application as if the rent reduction order was never issued. If the PAR is denied, DHCR will deny the MCI Application.

Policy Statement 90-8 provides a second chance for an owner whose MCI Application is denied based upon the existence of a building-wide rent reduction order. Pursuant to the Rent Stabilization Code, an MCI Application must be filed no later than two years from the date the MCI is physically completed. However, Policy Statement 90-8 provides that if an MCI Application is denied based upon the

existence of a building-wide rent reduction order, the owner will be granted an extension of time in which to re-file the Application, in the amount of 90 days from the date the MCI Application is denied. This extension, however, will only be granted if the owner restores services and files a rent restoration application within 60 days of the date of the rent reduction order.

(Note that pursuant to DHCR’s Operational Bulletin 95-1, if a building-wide rent reduction order is issued after the issuance of an MCI Order, the owner will be permitted to continue to collect the MCI Increase, notwithstanding the issuance of the rent reduction order.)

Effect of an Individual Apartment Rent Reduction OrderIf at the time an MCI Application is filed there is an individual apartment rent reduction order in effect (i.e., an order finding that the owner had failed to maintain a required service or services within an individual apartment), DHCR will (if the MCI Increase is otherwise approved) grant the MCI Application; however, the owner will not be permitted to increase the rent of the apartment whose rent was reduced until after the rent is restored, and will also forfeit any retroactive increase for the period during which the rent reduction order was in effect.

Effect of Class C ViolationsPolicy Statement 90-8 also provides that if a tenant answers an MCI Application by advising that there are immediately hazardous violations at the building, and after an inspection, DHCR determines that there are in fact conditions which gave rise to hazardous violations, DHCR will deny the application with the understanding that the owner would be permitted to re-apply for an MCI Increase (within the two year time limit), after the condition is remedied.

In practice, however, before it conducts an inspection, DHCR will provide the owner with an opportunity to demonstrate that the conditions which gave rise to the violations have been corrected. In the case of “lead paint violations,” the owner will be required to demonstrate that it actually removed the listing of violations from HPD’s records.

SummaryA building owner who wishes to file a MCI Application based upon its installation of a Major Capital Improvement at its building should make sure that all building-wide rent reduction orders and/or Class C violations are addressed as soon as possible. If there is a building-wide rent reduction order in effect, the owner must: (a) correct the condition which gave rise to the order and file a rent restoration application as soon as possible; and (b) file a PAR if warranted.

It must be noted, however, that even if the owner believes that the rent reduction order was improper and files a PAR against such order, it should still file a rent restoration application if possible. This way, if its PAR is denied, its MCI Application can be granted based upon its filing of the rent restoration application.

If there are C violations pending, the owner must correct the conditions which gave rise to the violations as soon as possible.

An owner, however, should not delay its filing of an MCI Application until it has all applicable services restored, since it may find itself past the two year deadline.

Phillip Billet (pbillet@bbwg.com) is an associate in the Firm’s Administrative Law Department.

Paul Kazanecki (pkazanecki@bbwg.com) is a Legal Assistant.

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ILSA APPLIES TO CONDO DEVELOPMENT, BUYERS CAN RESCIND PURCHASE CONTRACTS DUE TO SPONSOR’S FAILURE TO DELIVER PROPERTY REPORT

Bodansky v. Fifth on the Park Condo LLC United States Second Circuit Court of Appeals

COMMENT | In upholding the purchasers’ rescission rights, the Court ruled that the “100-lot exemption” established by the Federal statute was determined at the time of contract signing, not subsequently. The Court held that, since this development did not qualify for that exemption when the purchasers signed their contracts, the sponsor was subject to the statute’s disclosure requirements, and the sponsor’s failure to comply enabled the purchasers to rescind.

HOA UNIT OWNER CAN SUE HOA BOARD FOR ITS FAILURE TO ENFORCE DECLARATION REQUIREMENTS EQUALLY AGAINST ALL UNIT OWNERS

Molander v. Pepperidge Lake Homeowners Association Appellate Division, 2nd Department

COMMENT | While the Court did dismiss several other claims against the HOA over its decisions to impose fines on THIS Unit Owner and require him to install sprinklers for construction of a dormer in violation of HOA rules, the Court refused to dismiss his claim for the HOA’s failure to enforce those same requirements against OTHER Unit Owners at the same time.

FAILURE BY HOLDER OF UNSOLD SHARES TO OBTAIN YELLOWSTONE INJUNCTION PRIOR TO EXPIRATION OF CURE PERIOD ENABLES CO-OP’S TERMINATION OF PROPRIETARY LEASES TO PROCEED

Goldcrest Realty Company v. 61 Bronx River Road Owners, Inc. Appellate Division, 2nd Department

SELLER OF CO-OP TO REJECTED PURCHASER CAN SUE CO-OP BOARD FOR AGE DISCRIMINATION UNDER STATE HUMAN RIGHTS LAW

Stalker v. Stewart Tenants Corporation New York County Supreme Court

COMMENT | The Court dismissed several other claims in the seller’s complaint, but tried hard to preserve this discrimination claim, on public policy grounds. Co-op Boards now face potential discrimination suits by sellers, as well as purchasers, based on the purchasers’ demographic profiles.

SUIT BY REJECTED CO-OP PURCHASER AGAINST BOARD DISMISSED, SINCE PURCHASER COULD NOT PROVE BAD FAITH CONDUCT

Fishman v. Charles H. Greenthal Management Corp. Appellate Division, 1st Department

COMMENT | The Court indicated that the turndown was based on the purchaser’s finances, perceived by the Board to be inadequate.

CONDO BOARD CAN CONTRACT TO INSTALL CELLPHONE FACILITY ON BUILDING ROOF, UNDER BYLAWS AND BUSINESS JUDGMENT RULE

Vassi v. The Salem House Condominium Board Supreme Court, New York County

COMMENT | In dismissing the complaint, the Court noted that the instal-lation of the facility was non-structural, would not interfere with build-ing residents’ use of the roof, did not constitute a significant expense to the Condominium, and there was no proof of health hazards. Installation of such facilities is becoming an increasingly popular revenue generator for many co-ops and condominiums. Reconciliation by appellate courts of conflicting lower court decisions is still warranted.

Co-op | Condo CornerBy Aaron Shmulewitz

Aaron Shmulewitz heads the Firm’s co-op/condo practice, consisting of more than 300 co-op and condo Boards throughout the City, as well as sponsors of condominium conversions, and numerous purchasers and sellers of co-op and condo apartments, buildings, residences and other properties. If you would like to discuss any of the cases in this article or other related matter, you can reach Aaron at 212-867-4466 or (ashmulewitz@bbwg.com).

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AARON SHMULEWITZ, head of BBWG’s co-op/condo practice, responded to an inquiry in the March 27

Sunday Real Estate Sect ion of the New York Times regarding a shareholder’s obligations to abate asbestos

in connection with replacement of f loor t i les . MR. SHMULEWITZ was also quoted in an art ic le in the

March 16 Wall Street Journal regarding co-ops and condominiums enacting smoking bans in apartments.

ROBERT A. JACOBS, a par tner in BBWG’s Transact ional and Appeal s Depar tments , was quoted in the

May edi t ion of the Manhattan Market Watch newslet ter publ i shed by Warburg Real ty, on the i s sue of

the increas ing conf l ic t between the changing demographics in SOHO and Art i s t - in-Res idence zoning

res t r ic t ions , as wel l a s i t s impact on potent ia l purchasers .

BBWG Notable Achievements

NEW LAW AMENDS HOUSING MAINTENANCE CODE REQUIREMENTS FOR REGISTRATIONS OF MULTIPLE DWELLINGS

ADMINISTRATIVE LAW UPDATE

By S. Stewart Smith

On September 8, 2010, Mayor Michael R. Bloomberg signed into Law New York Law Number 2010/044 entitled

“Filing registration statements by owners of dwellings.”

The new law, which became effective January 31, 2011, amends the registration requirements of multiple dwellings. Section 27-2098 of New York City Administrative Code (the “Code”), both prior and subsequent to the new amendment, requires each owner of a multiple dwelling to file a registration statement known as a Multiple Dwelling Registration (“MDR”) with the Department of Housing Preservation and Development of the City of New York. An owner is required to list his or her name, business address and residence address on the MDR. If a multiple dwelling is owned by a corporate entity, the MDR must identify the corporation and its address

along with the name, business address and residence address for each corporate officer.

The recent amendment adds several new mandates to the registration requirements. Under the amendment, not only must the corporation and its officers be identified, but the MDR must also include the names and addresses of shareholders owning more than 25% of the ownership entity. The revised law goes on to state that in the event that a shareholder of more than a 25% interest is itself a corporate entity, for the purposes of determining whether an individual meets the threshold for listing their individual information in the MDR, each individual shareholder of such “parent” entity is to multiply his or her interest in the “parent” by the percentage held by such “parental” entity in the ownership entity.

The new law goes on to require that if the building is owned by a partnership, then the general partner and all limited partners holding more than a 25% interest in the partnership are to be listed on the MDR

along with their respective business and home addresses.

The new law also added subsection 27-2098(a)(6) to the Code which states that post office boxes or a similar type of mail delivery box maintained by a privately operated mail facility may no longer be listed on MDR’s as the business address for any entity or individual. MDR’s listing such address will now be rejected by HPD.

Notwithstanding that MDR’s listing shareholders and partners personal information are not, in and of themselves, public information, such individuals who may be reluctant, for privacy reasons, to be listed on a MDR should note that MDR registrations are susceptible to Freedom of Information Law (“FOIL”) requests.

S. Stewart Smith (ssmith@bbwg.com) is an associate in BBWG’s Administrative Law Department.

Please Note: This newsletter is intended for informational purposes only and should not be construed as providing legal advice. This newsletter provides only a brief summary

of complex legal issues. The applicability of any or all of the issues described in this newsletter is dependent upon your particular facts and circumstances. Prior results do not

guarantee a similar outcome. Accordingly, prior to attempting to utilize or implement any of the suggestions provided in this newsletter, you should consult with your attorney.

This newsletter is considered “Attorney Advertising” under New York State court rules.

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