A publication of Seyfarth Shaw's New York Real Estate Practice. The ReaList newsletter covers New York real estate news, events, and trends.
Real Estate Litigation:
“Subject to” Written Agreement Requirement May Not Require Written Agreement
A party that wishes to make its obligation subject to execution of a written agreement executed by both parties can do so, but must express that intent clearly and unmistakably. In Stone Hill Capital Management v. The Bank of the West, a bank sold a syndicated loan at auction, making its acceptance "subject to" execution of a written agreement. The bank ultimately changed its mind, and no formal written agreement was ever executed. The Court of Appeals nevertheless granted the winning bidder summary judgment, holding that the phrase "subject to" was insufficient to manifest the required unmistakable intent not to be bound until execution of a definitive agreement.
Real Estate Finance:
Mortgage Recording Taxation Without Complication
The current framework of collecting mortgage recording tax in New York State overly complicates real estate transactions. The assignment and consolidation of mortgage process allows for the possibility of (i) double taxation (particularly in the residential market), (ii) defects in the mortgage chain complicating foreclosures and title insurance, and (iii) mercurial lenders and sellers insisting on being compensated for a portion of the mortgage tax “savings”.
New York is one of only seven states, not including the District of Columbia, that require a mortgage recording tax to be paid on the principal amount of a loan secured by a mortgage, subject to certain qualifications. Article 11 of New York State’s Tax Law allows for mortgage recording tax to be paid on the difference between the unpaid principal amount of an existing mortgage and the principal amount of the new mortgage loan.
In the abstract, determining the correct amount of mortgage tax is a matter of rudimentary arithmetic. In practice, preserving the benefit of mortgage tax previously paid has developed into a Kafkaesque labyrinth of vintage notes, mortgages, allonges, consolidations, amendments, and affidavits.
One method of simplifying mortgage tax payment and documentation is to distill the paperwork into a one-page affidavit. A mortgagor would sign an affidavit that complies with Section 255 of New York State Tax Law and Section 275 of New York Real Property Law by stating (i) the unpaid principal balance of the existing mortgage pursuant to a payoff letter attached as an exhibit thereto and that the proper mortgage tax was paid thereon, (ii) the new loan amount, (iii) the amount of mortgage tax to be paid at closing on the difference thereto, (iv) that assignee has not acted as a nominee of the mortgagor under the mortgage, and (v) the mortgage being assigned continues to secure a bona fide obligation.
The District of Columbia has already implemented a similar streamlined practice for collecting mortgage tax, effectively eliminating the burden of the mortgage assignment and consolidation process, while still ensuring compliance with the spirit of Section 255 and Section 275. The audacity of the taxes imposed by the Stamp Act stirred the American colonies into open rebellion; the least we can do is cut down on the paperwork.
If you have any questions, please contact Cyril Derzie.
Condominiums and Cooperatives:
Appellate Division Affirms Condominium Board’s Rights To Foreclose Unit And Collect Rent From Defaulting Unit Owner
The Appellate Division, in Heywood Condominium v. Wozencraft, affirmed a condominium board’s rights to (i) foreclose on a condominium unit whose owner had failed to pay common charges and (ii) evict the unit owner from the unit for having failed to pay fair market rent for his use and occupancy of the unit. The Appellate Division based its opinion not only on the Condominium Act (Real Property Law § 339 aa), but also on the bylaws of the condominium. The bylaws specifically provided that the condominium had the right to file a lien against the unit for unpaid common charges, interest, legal fees, costs and expenses incurred in collecting its common charges, the right to foreclose the lien and the right to appoint a receiver. The Appellate Division also upheld the right of the condominium to restrict the defaulting unit owner’s use of non-essential building amenities pursuant to the terms of the house rules. Heywood is distinguishable from other similar condominium foreclosure cases where the condominium was unable to obtain a foreclosure judgment that included attorneys’ fees, late fees and interest because the condominium’s bylaws failed to provide for these additional costs.
If you have any questions, please contact Dennis Greenstein or Tom Gleason.
Health Care Real Estate & Finance:
BoomerCare? Baby Boomer Senior Housing Affordability Issues
As the "Baby Boomer" generation continues to age and enter retirement, the need for senior housing and long-term care facilities offering services to residents across the socioeconomic spectrum continues to grow. One of the critical questions facing health care facility owners and developers is how to provide affordable long-term care for low and middle income patients. This question has become particularly relevant in light of potential reductions to, or restructuring of, Medicaid funding. While the senior housing industry recognizes this growing community of socioeconomically diverse patients requiring care, there are financial obstacles to facilities desiring to serve this community. An innovative solution that some health care financiers are working on with local housing authorities is to layer in low income based tax credits and/or Section 8 vouchers into new senior housing development projects. While this structure would likely subject the facilities to additional governmental restrictions, it could offer a reasonable incentive to providers to care for a growing part of the population in a financially viable manner.
Decision Deadlocks and Exit Rights in JV Agreements: A Balancing Act
When documenting a joint venture (JV) care must be taken so that the decision making deadlock remedies and the parties’ exit rights from the JV complement each other. There are buy/sell provisions designed to “encourage” the parties to resolve major decision deadlocks or remove the deadlock through the buyout of one of the parties from the JV. If there is a decision deadlock, the basic buy/sell provisions allow either party to offer a buyout price for the other party’s JV interest. The offeree party may either accept the buyout offer or turn it around and buyout the offeror party’s JV interest. JV documents also typically allow the parties to exit the JV via (i) a sale of their respective JV interests, subject to the other party’s right of first refusal or right of first offer as well as drag-along and tag-along rights, and (ii) a property level forced sale provision upon economic stabilization of the property. The decision making deadlock remedies and the parties’ exit rights from the JV must be appropriately integrated into the JV so an exit right cannot be used to thwart or undermine the decision making deadlock remedies.
If you have any questions, please contact Miles Borden.