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Belkin Burden Wenig & Goldman, LLP

E D I T O R S

Magda L. cruz

UPDATE

Aaron shmulewitz Kara I. Rakowski

de ce MBe R 2 0 1 3 | VOL U M e 2 9

L IT IGAT ION Up dAT e

Inside This Issue LITIGATION UPDATE The New Loft Law Regulations.................1, 2, 3 ADMINISTRATIVE LAW UPDATES The Importance of Applying to Restore Rent ...................3 TRANSACTIONAL UPDATES Knowledge is power: The Importance of due diligence ............................5 BBWG IN THE NEWS ........4 BBWG NOTABLE ACHIEVMENTS .................4 CO-OP / CONDO CORNER ....................... 6, 7

The New LOfT LAw ReGULATIONs By Lisa Gallaudet The New York City Loft Board (Loft Board) has promulgated “final” rules governing buildings subject to Article 7-C of the Multiple Dwelling Law (the “Loft Law”). These buildings are commonly known as “IMDs,” or interim multiple dwellings, due to the absence of a certificate of occupancy despite the existence of residential usage. The final rules became effective on September 12, 2013. They incorporate and implement the 2010 expansion of the Loft Law to a broader number of buildings that fell under Multiple Dwelling Law section 281(5) (the “New Loft Law”), and additional 2013 amendments to those laws. The final rules also included some minor changes that affect buildings covered under the original Loft Law. The amendments to the Loft Law, as now implemented by these final rules, are extensive. If you own an IMD building, or a building that may qualify to be an IMD, you should discuss the final rules and registration process with an experienced Loft Law attorney. The following are the most significant changes to the pre-existing Loft Law: The New Loft Law Although the New Loft Law that was promulgated on June 21, 2010 contains several changes, the most

significant is the occupancy “window period” for coverage. The New Loft Law extended regulatory coverage to buildings or units in buildings that meet certain requirements and were residentially occupied by three families living independent of each other for twelve consecutive months during the years of 2008 and 2009. This new “window period” resulted in a significant number of new applications filed with the Loft Board over the past three years. In addition, the New Loft Law provides that any occupant who was in occupancy on June 21, 2010 and meets all of the qualifications of the New Loft Law may be covered, regardless of whether the occupant is a subtenant or roommate of the prime tenant. However, if a tenant subdivides a space and was only residing in a portion of the unit on June 21, 2010, and sublet the subdivided space to a subtenant, the prime tenant will only be covered for the portion of the unit he/she actually occupied. The regulations regarding the apportioned rent for that space are detailed and circumstantial and should be discussed with an attorney. The 2013 Amendments In January 2013, Governor Cuomo signed a further amendment to the Loft Law to reduce the milestone increases an owner can receive throughout the legalization process from 6% upon the filing of an alteration application, 8% upon the issuance of a work permit and 6% upon achieving Article continued on page 2

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LITIGATION Up date

The New Loft Law Regulations continued from page 1

7-B compliance, to 3%, 3%, and 4%, respectively. Under the New Loft Law, if a building contained a use incompatible with residential use on the date the New Loft Law became effective, June 21, 2010, the building was exempt from Loft Law coverage. Under the 2013 amendment, the incompatible use had to exist on the date a tenant filed for coverage. The amendment also granted the Loft Board discretion to exempt certain uses from the classification of “incompatible with residential use.” This is a new area of regulation under the Loft Law and the seminal cases are currently being litigated. Therefore, it is unclear how the Loft Board’s discretion will affect coverage applications in buildings that owners claim contain such incompatible uses. The 2013 statutory amendment also reduced the required size of a unit from 550 square feet to 400 square feet, enabling tenants in units that otherwise meet the

qualifying criteria under the Loft Law and are at least 400 square feet to apply for coverage.

buildings covered by the New Loft Law. Alteration Application: March 21, 2011 Permit: June 21, 2011

The Deadline to File for Coverage is March 11, 2014 The adoption of the final rules triggered the six month deadline for all tenants to apply for coverage under the Loft Law and for all owners to register their buildings as an IMD by March 11, 2014. Any application for coverage or registration for coverage under the Loft Law after this date will not be accepted by the Loft Board. This deadline applies to buildings that qualify under the original Loft Law and also the 2010 expansion and 2013 amendment to the Loft Law. It is the first time the Legislature has promulgated a deadline, creating a finite number of IMD buildings in New York City as of March 12, 2014. Legalization Compliance Deadlines

Article 7-B Compliance: December 21, 2011 Certificate of Occupancy: June 21, 2013 II. Deadlines established for IMD units that qualified for coverage under the New Loft Law due to the 2013 statutory amendment. The code compliance timetable has been extended as follows: Alteration Application: June 11, 2014 Permit: September 11, 2014 Article 7-B Compliance: Within 18 months of the issuance of the permit Certificate of Occupancy: March 11, 2016

I. Deadlines established in 2010 for Extensions of time to comply with the amended code compliance timetable An application to the Loft Board for an extension of the code compliance deadlines must be filed prior to the expiration of the deadline. However, the final rules have carved out exceptions to this general rule: (1) New owners who have acquired an IMD building after deadlines have passed may apply for an extension within 90 days from the date of acquiring title; 2) Where an IMD is found to be covered under the Loft Law after the compliance deadlines have passed, the owner may file for an extension within 90 days after the issuance of a final order determining the continued on page 3

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LITIGATION Up date

continued from page 4

coverage issue by a court of competent jurisdiction, or the issuance of an IMD registration number, whichever is first; and (3) An owner has missed a deadline due to the 2013 amendments, which shortened certain deadlines. All extensions granted will be limited to one year in time and one extension per owner per code compliance deadline.

Non-Conforming Units Owners sometimes find that a registered IMD unit cannot be legalized pursuant to the New York City Building Code due to its size, design, or location in the building. In such circumstances, the Executive Director of the Loft Board can order the owner to apply for a variance to obtain approval from DOB, order the owner to alter the plans to make the unit legal or revoke the unit’s Loft Law coverage if the other two options are unavailing.

The Loft Law has changed a great deal over the past three years. The legal issues relating to which units and which tenants can be covered under the New Loft Law continue to be complex. The adoption of the final rules, which took effect September 12, 2013, has offered some needed clarity on how to treat the new wave of buildings being registered as IMDs as a result of the New Loft Law. Lisa Gallaudet (lgallaudet@bbwg.com) is an associate in BBWG’s Litigation Department, concentrating on regulatory issues confronting NYC loft owners.

ADM INISTRAT IVE L AW Up date

The Importance of Applying to Restore Rent By Alexa Englander Tenant complaints resulting in DHCR’s issuance of a Rent Reduction Order for rent stabilized units run the gamut from minor, easily curable conditions to conditions rendering an apartment uninhabitable. With the exception of conditions on the extreme ends of the spectrum (such as de minimis conditions, which are insufficient to warrant a rent reduction, or immediately hazardous conditions, which trigger more serious penalties), the result of DHCR finding a decreased service is generally the same. DHCR will issue an Order Reducing Rent to the level under the tenant’s lease that was in effect prior to the tenant’s filing of a decreased service complaint. DHCR will also direct the owner to restore the deficient service. Many landlords operate under the mistaken belief that (i) a tenant’s rent is automatically restored when the conditions cited in the Rent Reduction Order are corrected, (ii) a landlord may take rent increases subsequent to DHCR’s issuance of a Rent Reduction

Order, so long as the cited conditions no longer exist, (iii) tenant turnover nullifies a Rent Reduction Order and (iv) a new building owner is not liable for overcharges incurred under former ownership. None of these common misconceptions are true. If a landlord does not apply to restore rent after a Rent Reduction Order issues, the landlord may not take any Rent Guidelines Board (“RGB”) or Major Capital Improvement (“MCI”) increases until an Order Restoring Rent issues—even if the conditions cited in the Rent Reduction Order have been restored for years. If a landlord takes RGB or MCI rent increases under the mistaken belief that the rent has been restored, the landlord could incur liability for rent overcharges. Many landlords are also unaware that Rent Reduction Orders are not “wiped out” by the four-year statute of limitations governing most overcharge complaints. In a 2010 decision, the New York State Court of Appeals held that DHCR should, “in calculating any rent overcharge, honor Rent Reduction Orders that, while issued prior to the four-year limitations period, remained in effect during that period.” Based on this

ruling, DHCR’s finding of an overcharge based on a Rent Reduction Order issued years (or, in some cases, decades) prior can result in significant financial liability for a landlord, including treble damages. In addition, overcharge liability is not affected by a change in ownership. The Rent Stabilization Code provides that, with limited exceptions, “a current owner shall be responsible for all overcharge penalties, including penalties based upon overcharges collected by any prior owner.” When a Rent Reduction Order issues, a landlord should take steps to correct the cited conditions and apply to restore the rent as soon as possible. A prospective purchaser should perform thorough due diligence prior to purchasing a rent regulated multiple dwelling, including review of DHCR records to determine whether there could be exposure to overcharge liability based on Rent Reduction Orders issued well in the past. Alexa Englander (aenglander@bbwg.com) is an associate in BBWG’s Administrative Law Department.

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BBwG IN The News SHERWIN BELKIN, a partner in BBWG’s Administrative Law and Appeals Departments, was quoted in an article in the October 21 edition of The Wall Street Journal entitled “Tenant Rights in Focus,” regarding the impact on landlords of onerous subpoenas issued by the New York State Tenant Protection Unit.

AARON SHMULEWITZ, head of BBWG’s co-op/condo practice, responded to an inquiry in the Sunday New York Times Real Estate section on November 3 regarding the rights and obligations of co-ops vis-à-vis occupied apartments owned by investors.

JOSEPH BURDEN, co-head of BBWG’s Litigation Department, was quoted in an on-line article on DNAinfo New York on November 20, concerning an owner use dispute between the head of the Hudson River Park Trust and a rent stabilized tenant, who is a singer, poet and owner of the event planning company “Party Poopers.”

MARTIN MELTZER, a partner in BBWG’s Litigation Department, authored an article that appeared in the November/ December edition of The Mann Residential Report, entitled “What To Do About Offensive Odors in Apartment Buildings.”

MATTHEW BRETT, a partner in BBWG’s Litigation Department, penned an article that appeared in the November edition of New York Housing Journal (published by Community Housing Improvement Program), entitled “The Path to City Hall and Rent Regulation.”

BBwG NOTABLe AchIeVMeNTs STEVEN KIRKPATRICK, a partner in BBWG’s Litigation Department, was a featured panelist in a program presented by the New York Association of Realty Managers on October 24. Mr. Kirkpatrick spoke on the issue of impairment coordinators required by the New York City Fire Code.

KARA RAKOWSKI, a partner in BBWG’s Administrative Law Department, gave a seminar to brokers on November 13, sponsored by the Real Estate Board of New York, on how certificate of occupancy violations affect usage, and how to deal with such violations.

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tran sactional Up date

Knowledge is Power: The Importance of Due Diligence This month’s issue will tackle all corners of the pre-contract investigation with regard to the purchase of a co-op or condo unit, including a new sponsor conversion.

By Craig L. Price & Nicki Neidich Buying real estate in New York City is a highly monetized decision that allows purchasers to make their mark in the biggest city in the country. As exciting as that is, your new investment might not be as valuable if you solely rely on what you saw with your broker and your inspector before signing the contract. Therefore, the best practice is to further investigate the property from a legal perspective prior to signing the purchase agreement. The protocol for conducting due diligence varies whether the property is a single family home or townhouse, new construction or resale, condominium unit, or co-op. Over the next two issues, we will detail the recommended course of due diligence for a co-op or condominium unit and a one-tofour family home.

Most concerns ultimately relate to the amount of money that must be expended to acquire and maintain the value of the premises and keep the premises free of liens or title problems. Other issues that should be illuminated by a diligent review of materials involve daily quality of life issues that come with living in a multiple dwelling. Prior to purchasing a co-op or a condo unit, you should review the: • Offering plan and amendments; • Minutes of the board of directors; • By-laws; • House rules; • Last two (2) years financial statements; and • Any other materials that govern operation of the building. Cumulatively, these sources of information will give the best possible view into the building’s recent history, including the details of its conversion, its economic viability, the history of maintenance

increases, the tax deductibility of the maintenance, current or anticipated capital improvement projects, current or proposed special assessments, financing restrictions, litigation, flip taxes and, finally, fees associated with closing. In addition, living in an apartment building comes with a host of additional concerns that homeowners typically do not encounter. Due diligence creates the best chance of knowing prior to signing a contract how the building is managed, whether there are pet restrictions, restrictions on alterations, problematic neighbors (including noise or smoke odor complaints, leaks, insects, rodents and bed bug issues), subleasing restrictions, if the unit includes rights to a storage unit, roof deck or parking space, and any other building-specific rules and restrictions. Of special note for recently converted and new construction buildings, prospective unit owners should be aware of the number of units still owned by the sponsor, if financing contingencies are allowed, the procedure to purchase and associated closing costs, whether the building has been issued its temporary certificate of occupancy and when construction is anticipated to be completed. With an asset as valuable as a piece of New York City real estate, prospective purchasers are advised to be as thorough as possible with their due diligence prior to contract signing in order to plan for a smooth closing process. Craig L. Price (cprice@bbwg.com) is a partner in BBWG’s Transactional Department. Nicki Neidich (nneidich@bbwg.com) is an associate of the firm. Either attorney can be reached to discuss these and other due diligence issues in anticipation of purchasing property in New York.

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Co-op | Condo Corner By 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).

NEW CONSTRUCTION CONDO’S CLAIMS AGAINST SPONSOR DISMISSED, SINCE COMMON LAW BREACH OF WARRANTY CLAIMS PRE-EMPTED BY STATUTORY WARRANTY MECHANISM, INAPPLICABLE HERE The 20 Pine Street Homeowners Association v. 20 Pine Street LLC Appellate Division, 1st Department COMMENT | Continuing a clear trend, the Court also dismissed the Condominium’s other claims against the sponsor and its principals for fraud and other claims. CONDO BUYER AT LIEN FORECLOSURE SALE MUST PAY OFF EXISTING MORTGAGE, SINCE MORTGAGE LIABILITY DISCLOSED IN TERMS OF SALE Plotch v. Kapco Industries, Inc. Appellate Division, 1st Department CO-OP BOARD’S 2012 DECISION TO IMPOSE ADDITIONAL SHARES FOR APARTMENT EXPANSION, AND TO RESCIND PRIOR BOARD’S 2006 DECISION NOT TO IMPOSE SHARES, IMPROPER AND NOT PROTECTED BY BUSINESS JUDGMENT RULE Goldman v. 7 East 35th Street Owners, Inc. Supreme Court, New York County COMMENT | In this curious decision, the Court held as it did despite noting apparent misleading statements and conduct by the plaintiff when he was the Board president to elicit the “no-share” decision in 2006. CO-OP CAN BE SUED FOR TRESPASS FOR UNAUTHORIZED ENTRY BY BUILDING SUPERINTENDENT INTO APARTMENT AND TERRACE York Towers, Inc. v. Kotick Supreme Court, New York County COMMENT | The entry was to listen to alleged HVAC noise when the shareholder was not home, not for repairs as permitted by proprietary lease.

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CONDO ENTITLED TO SUMMARY JUDGMENT ON CLAIM FOR UNPAID COMMON CHARGES, WITH AMOUNT TO BE DETERMINED BY REFEREE The Board of Managers of The Park Avenue Court Condominium v. R20F 120 East 87th Street, LLC Supreme Court, New York County CO-OP’S PENTHOUSE SHAREHOLDER CANNOT BLOCK CONSTRUCTION OF ROOF GARDEN APPROVED BY SUPER-MAJORITY OF SHAREHOLDERS PURSUANT TO PROPRIETARY LEASE Baker v. 16 Sutton Place Apartment Corporation Appellate Division, 1st Department MECHANICS LIEN, WILLFULLY EXAGGERATED BY $50,000, INVALIDATED LMF-RS Contracting, Inc. v. Kaljic Supreme Court, New York County COMMENT | While involving an office building, this case is instructive with regard to the effect of exaggerated lien amounts. However, despite invalidating the lien, the Court refused to stay execution of the warrant of eviction against the tenant arising from the filing of the (now-invalidated) lien. CO-OP BUYER CANNOT SUE SELLER, BROKER OR LENDER OVER 50-SQUARE FOOT DISCREPANCY IN APARTMENT SIZE Estrada v. Metropolitan Property Group, Inc. Appellate Division, 1st Department COMMENT | The Court held that the buyer should have known of the discrepancy, and could have measured before signing the contract.


COURT REFUSES TO CONTINUE STAY OF EXECUTION OF EVICTION WARRANT OVER UNAUTHORIZED PURPORTED-COMPANION DOG, AS REQUESTED BY HUD East River Housing Corp. v. Aaron Civil Court, Landlord & Tenant Part, New York County COMMENT | The Court noted that the shareholder’s claimed depression resulted from the eviction proceeding, not beforehand, and that the dog had been a stray found and kept by the shareholder.

CO-OP CANNOT FORCE REMOVAL OF CITIBIKE STATION IN FRONT OF BUILDING Cambridge Owners Corp. v. New York City Department of Transportation Supreme Court, New York County COMMENT | The Court held that the DOT had followed all procedural and administrative requirements, and that the bike station did not violate any legal requirement, including for disabled access to building. CONDO LIEN SUBORDINATE TO BLANKET MORTGAGE ON SPONSOR UNITS AMT CADC Venture v. 455 Central Park West Condominium Supreme Court, New York County

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Belkin Burden Wenig & Goldman, LLP 270 Madison Avenue | New York, NY 10016

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New York Office | 270 Madison Avenue | New York, NY 10016 | Tel 212 .867 .4466 | Fax 212 .867 .0709 Connecticut Office | 495 Post Road East, 2nd Floor | Westport, CT 06880 | Tel 203 .227 .1534 | Fax 203 .227 .6044 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.


BBWG December 2013 Newsletter