DECEMBER 2003 / JANUARY 2004 REAL ESTATE NEWSLETTER

1.   NEW TAX SURCHARGE ON PROPERTY OWNERS

The New York City Council recently voted to postpone the implementation of a law that will add a 25% surcharge to the property tax bills of those who own property to obtain income from rent and do not live in the premises beginning March 2004. Such surcharge is also known as the “absentee-landlord surcharge.”

The reason for the delay is for the Dept. of Finance to identify those who are liable for the tax surcharge.  This action is nevertheless controversial; such law will only be applied to property that house 1, 2 and 3 families, which are also known as “Class 1” properties.  Property owners must provide evidence that such property is their primary residence in order to not be liable for paying the tax.

Officials at the Dept. of Finance are not certain that the surcharge may appear on property owners’ November bills. However, once the proposed postponement comes into effect, property owners may disregard the additional charges. 

It is highly unlikely that the surcharges will be repealed, since  the anticipated revenues from the additional surcharges, which are $44 million, have already been added to the current budget.

However, the director of finance for the City Council stated that taxes applied onto “Class 1” properties are lower than the taxes that are applied onto properties of other classes. 

The surcharge may create problematic situations where it may negatively impact the working class.  As tenants of “Class 1” properties are not mostly covered by tenant regulations, there is a probability that owners may pass the charges on to the tenants.

It is unfortunate that the government does not keep records of constituent residences. Thousands of property owners may be exempt from paying the surcharge and may not know it. Two ways for a property owner to be exempt from the surcharge is to either have the premises as their primary residence, or be registered under the STAR program.  In order to apply for the exclusion, homeowners must file an “Application to be Excluded from the Absentee Landlord Surcharge” available at www.nyc.gov/finance.

(New York Times, 11/16/2003)

2.   THE EMERGING NEED OF CO-SIGNERS

While most people think they have sufficient revenue to rent a unit, landlords may argue the contrary.

A Corcoran associate broker states that some landlords prefer tenants to have a six figure salary when renting a $1,900 monthly apartment.  Thus, when a tenant does not qualify under such terms, a co-signer or guarantor is necessary.  In case the tenant fails to pay rent, the guarantor adjusts the defaulted payments.

The responsibility of a guarantor can become a financial burden. The Corcoran associate states that rental landlords may demand a guarantor to have a salary that exceeds the monthly rent by one hundred percent, a have a credit report, two years’ tax returns, letter of employment and verification of property ownership within the tri-state area.

A CitiHabitats manager states there are ways around co-signers.  The tenant can obtain a letter of credit from a bank, also known as an LOC.

(NY Post 12/10/2003)

3.   MERGER CLAUSE UNABLE TO PROTECT DECEITFUL PURCHASE PERSUASION CLAIM

A shareholder of a cooperative apartment claimed to have been fraudulently persuaded by defendants to enter a contract for the purchase of a cooperative apartment at 136 East 76th Street, and to pay the amount of $113,900.00 for the contract deposit.

The plaintiffs informed the defendants that they would purchase the apartment only if the Board of Directors approved the construction of an enclosed terrace to the apartment. The brokers allegedly claimed to be able to obtain such approval.  After the plaintiffs signed the contract, the brokers informed the plaintiffs of the Board’s denial of the proposition.

 The Board of Directors refused the renovation proposition since the building lacks space to construct a terrace.

Defendants state that a provision in the rider enclosed along with the contract prevents the plaintiffs from claiming fraudulent inducements. In fact, the merger clause on the rider fails to recognize any representations made preceding to the signing of contracts.  Moreover, defendants claim that there is a lack of evidence of any agreement made with plaintiffs as to obtaining board approval for the renovation plan.

However, the Court found the merger clause to be general and therefore does not prohibit the plaintiffs from bringing the fraudulent inducement claim. According to the case of Chopp v. Welbourne & Purdy Agency, 135 A.D.2d 958 (1987) “general merger clauses do not shield a party from judicial inquiry into specific allegations of fraud in the inducement of the contract.” Therefore, the provision on the rider fails to dismiss the claims brought by the plaintiffs.  

The Court nonetheless denied the plaintiff’s request for an order declaring that defendants fraudulently induced them to enter a contract and denied the defendant’s request for a determination that the contract was canceled.  Such requests involved cannot have resolution during the preliminary stage of the case.

The court ordered that the restraining order placed on October 14, 2003 onto the contract deposit be lifted and a preliminary conference be held in November.

(New York Law Journal, 12/03/2003)

4.   RECENT CASE LAW DEVELOPMENTS

Louis Fink Realty Trust v. Harrison

The plaintiff alleged that, as a result of defendants engaging in a deceptive practice of commencing foreclosure proceedings under the name of an entity other than the true creditor, they received deceptive notices of default and acceleration relating to a Beverly Hills property. Plaintiffs sought an injunction against defendants’ allegedly deceptive practice, restitution of money wrongfully garnered, and disgorgement of gains from the deceptive practice.  The Court dismissed the action, holding that the federal-question claims are time-barred or fail to state claims. The Court noted that plaintiffs’ claim, pursuant to the Real Estate Settlement Procedures Act for failure to provide notice of change of loan services, is time-barred since the alleged violation occurred in April 1996, beyond the three-year statute of limitations

Jonathan W. Burke Realty Co. v. Alliance 77 LLC.

Plaintiff real estate broker sought summary recovery of a commission for finding a tenant, a tanning salon, for defendant’s commercial premises.  The landlord alleged that plaintiff misrepresented that zoning regulations barred the tenant’s performing construction work necessary for its operation. The Court denied summary judgment. Noting that the parties failed to provide it with a copy of the lease or with the relevant zoning provisions, it ruled that it was unable to determine what lease terms were agreed upon as well as which zoning or building restrictions applied.  The Court also ruled that a factual issue existed as to whether plaintiff was guilty of any misrepresentation that induced the landlord to enter into the lease, solely for plaintiff’s own interests and against its own interests.

Rochester Home Equity Inc. v. Upton

Plaintiff mortgage company sued a home refinancing applicant for lock-in and mortgage applications fees after she refused to consummate the application upon learning of plaintiffs mortgage assignments.  The Court dismissed the complaint, holding that because the lock-in agreement secured the mortgage’s relevant terms, plaintiff’s assignment disclosure was untimely.  According to the Real Estate Settlement Act and the Truth in Lending Act, the Court found that the statutes were intended to provide consumers with credit decision information before risking money. Thus, contracts to pay fees such as lock-in agreements must be preceded by all disclosures required by federal law.

5.   INT. NO. 380, THE RIGHTS OF TENANTS AND THEIR HOUSEHOLD PETS

Int. No.380 is a bill that intends to amend the administrative code in the City of New York in reference to the rights of pet owners in apartment buildings, in addition to limiting the enforcement of no-pet lease clauses onto senior citizens.  The sponsor of the bill is Councilwoman Melinda Katz of Forest Hills.

On December 8, 2003, a meeting was held at City Hall by supporters of the bill in the mission to win passage of the legislation that would limit no-pet lease clauses.

Section §1 of the bill provides that if a tenant harbors a pet for the duration of three months, and the owner of the premise acknowledges this fact and yet fails to enforce lease provisions prohibiting the keeping of such pet, then such provisions are to be waived for the duration of the tenants occupancy period.

According to Section §2, no person of sixty two years or       older may be evicted or denied occupancy because he/she harbors or intends to harbor a household pet.

However, Section §3 states that the waivers provided by the previous sections do not apply when the household pet causes damage, is a nuisance, or hinders the health, safety or welfare of the other occupants of the building or adjacent buildings.

Section §4 states that the local law will become effective as soon as the bill is passed.

Currently, landlords have 90 days to object to someone’s household pet.  But the bill protects the elderly from being evicted from rent regulated or rent controlled units because of household pet related issues.

Animal welfare advocates, Councilwoman Katz and Mary Max, who held the campaign called “Your Apartment or Your Pet” gathered 9,000 signatures.  During the congregation, advocates emphasized the studies suggesting that pet ownership can reduce stress and lower blood pressure.

6.   WHEN THE CO-OP BOARD BECOMES INADEQUATE

Many people question about how to remove Co-op Board members when they become hostile. Such hostility may include incessant use of uncontrolled substances and aggressive behavior.

Experts in real estate law state that co-op bylaws do not allow the board to remove any of the members.  It may only be done so by the shareholders through a special meeting.  If the meeting is purposely delayed, 25 percent of shareholders may write a petition and enforce a meeting.

During the meeting, the shareholders may vote whether the board members should be removed. If the bylaws call for cumulative voting, more than the majority of the shareholders may be necessary. In buildings with cumulative voting, state law requires that a director cannot be removed if the number of votes cast in opposition to his removal is equal to or more than the minimum number of votes necessary to guarantee election in the original election.

(New York Times, 12/07/2003)

7.   DECREASE IN SALES BY MORTGAGE LENDERS

In the beginning of December, mortgage purchases decreased by over 10 percent, despite the drop in long term interest rates. The purchase index was decreased by over  9 percent from over 400 for the last week of November.

The drop in refinancing as a share of total loan originations is bringing the desire of many home buyers to look at adjustable-rate and hybrid loan products, those where the rate is fixed for three to seven years, as an alternative to traditional fixed-rate financing, particularly as short-term rates remain so low.

The refinance share of mortgage activity decreased nearly one percent of total applications in one week.  The average contract interest rate for 30-year fixed-rate mortgages decreased by nearly .20 percent since two weeks ago.

In addition, the average contract interest rate for 15-year fixed-rate mortgage decreased .14 since two weeks ago.  The average contract interest rate for one-year adjustable rate mortgages decreased by .10 percent since two weeks ago.

(Inman News, 12/10/2003)