Real Estate & Title Insurance Trends
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MONDAY, SEPTEMBER 22, 2003 REAL ESTATE & TITLE INSURANCE TRENDS Co-ops and Certificates of Occupancy COs Contain Details That Could Have a Major Effect on the Terms of a Deal BY MICHAEL S. DEVORKIN all in order. Seller’s counsel submitted the purchaser and her attorney would have to AND CHARLES B. RICH standard Blumberg form contract with a weigh the risks. Was there any practical rider, and purchaser’s counsel vigorously harm? After all, the apartment in question AREFUL ATTORNEYS repre- negotiated the rider until satisfied. Neither had been used as a residence for decades and senting real property purchasers the contract nor the rider referred to the clearly did exist. Other apartments had generally inspect the certificate CO. The purchaser executed the contract been recently renovated, and the Building of occupancy (the CO) of the C and delivered a 10 percent deposit into Department had issued permits. The property before allowing their clients to escrow. Purchaser did not need financing, building had an underlying mortgage issued consummate the purchase. After all, the and the co-op board approval came easily. by a lender, which either had not noticed, CO limits the property to the uses set forth Near the closing, a serious problem arose. or was untroubled by, the CO. Should on the certificate, and no client would After drafting plans for renovations, counsel still be concerned? want to close on a property only to find out purchaser’s architect discovered a problem that it could not be used for the client’s in the building’s CO and was unwilling to ------------------------------------------------ intended purpose. sign and submit plans to the Building Before signing the contract, a Yet the same careful attorneys may rarely Department without correcting the CO review the CO of a building containing a co-op purchaser’s attorney problem. When purchaser’s attorney then co-operative apartment unit that their needs to review the building obtained a copy of the CO, it described the clients want to purchase. The reason is not building as having a basement, a first floor CO as part of purchaser’s hard to understand. The client is purchas- for a lobby and apartments, and apartments investigation of the ing stock and a proprietary lease, not an on the next nine floors. According to the building….. interest in real property, and the attorney Building Department, the top two floors did ------------------------------------------------ may not focus on the underlying real estate. not exist. The building’s offering plan The typical Blumberg forms used for the contained only a passing reference to the Review of the Multiple Dwelling Law purchase of a co-op are silent on the issue of building’s construction in the 1930s and no proves sobering. Section 301 states: “No the building CO. This article discusses the hint that the building had ever been multiple dwelling shall be occupied in potential problems in the purchase of a anything other than a 12-story building whole or in part until the issuance of a co-op, when issues pertaining to the CO are with a basement. certificate by the department that said not addressed prior to signing a contract. The Building Department’s records dwelling conforms in all respects to the provided no explanation. The original CO requirements of this chapter, to the building Case Studies from the 1950s described the building as code and rules.…” Under §302, other having 10 stories and a basement. Several potential problems exist if the building or In the first illustration, purchaser had a subsequently amended COs reiterated the use is not in conformity with the CO. The deal for a 12th floor penthouse apartment in discrepancy. The original plans for the building’s lender might be able to declare an established co-operative apartment building might have been helpful, if they the mortgage due. The Water Department building on the East Side. Purchaser’s indicated that a 12-story building was might be precluded from supplying water. attorney reviewed the co-op’s financials, approved and constructed, perhaps proving The co-op corporation might even be offering plan, and minutes, and found them that the CO merely contained a clerical precluded from maintaining an action for error. Not surprisingly, the plans could not rent or maintenance. Sections 304 and 306 Michael S. Devorkin is a partner at be found. They were lost in 70 years of are equally troubling, because they create Golenbock, Eiseman, Assor, Bell & Peskoe, and bureaucratic storage. potential criminal liability for purchasers, Charles B. Rich is an associate at the firm. Presented with such a situation, any owners, builders, architects and others. No NEW YORK LAW JOURNAL MONDAY, SEPTEMBER 22, 2003 wonder the architect was skittish about clear from the face of the CO or as a matter can be an expensive, lengthy, and time- filing plans for a building permit for of law. Would the Building Department consuming process, requiring a willing renovations to the apartment. approve a renovation plan for purely Board and a good expediter. One might conclude it unlikely that residential use as conforming to the In the alternative, can the purchaser get these risks would blossom into problems in existing CO? out of the deal? Had the parties known the ordinary course. The building had been In at least one recent case, the Building about the CO, they most certainly would this way for decades, and nothing had come Department informally took the narrow have made a different deal. The legal path is of it. However, what assurance could a view and insisted that use as a medical equally problematic for the purchaser. Does responsible attorney give to a client that office was a necessary component of the the contract itself permit rescission? Can this would always be the case? In the end, overall residential use. This could occur the purchaser rescind the contract based the parties settled the real-life dispute whether or not the “doctor’s apartment and upon a mutual mistake of fact or some other just discussed. office” designation was a calculated evasion legal principle? A second real-life illustration demon- by the developer or an historical anomaly In the illustrations we have discussed, strates the issue is not rare. Sprinkled left over from a small home office practice there was no fraud or concealment by the throughout New York City are apartments, that was abandoned 50 years ago. seller. The contracts contained no express generally ground-floor apartments, which representation concerning the CO, but did are reflected on the CO as “doctor’s contain several provisions that excluded Potential Courses of Action apartments.” Sometimes they are described representations and warranties that were as a “doctor’s apartment and office.” When In each of these illustrations, the problem not expressly set forth in the contract. The small doctor’s offices were more the norm, with the CO did not come to light until contract’s silence should not be shocking. doctors could live in their apartments and after the contract was signed, and the The Blumberg form No. 123 typically in use see patients there as well. A builder may contract did not address that contingency. — either the older and still often used have sought this designation, because it Practical problems abound. Assuming the October 1989 version or the newer July created a community use that allowed the new use is not a permitted use under the 2001 version — does not mention the CO. building to increase the overall square existing CO, if one or both parties attempt footage of the building when it was to correct or change the CO, the Building Case Law in New York constructed. Department requires issuance of a new CO In the second illustration, the purchaser legitimizing a “change” from the existing New York case law is not helpful to signed a typical Blumberg form contract, CO (even if the “changed” use had been in purchasers in these circumstances. The No. 123, for the purchase of such an effect for decades).1 New York Court of Appeals long ago apartment, intending to use it solely for The Building Department must review a held that: residential use. For many years, the apart- proposed amendment to a CO to determine a person who makes an absolute ment has been used solely as a residence and whether the proposed “new” use conforms promise to pay may not be excused from not for an office or a combined use. Indeed, to the building’s zoning and to all other performance because of the happening the co-op’s rules and lease did not permit it applicable laws. Unless the prior use of a contingency which destroys the to be used as an office. The purchaser made described in the CO was purposefully value of the stipulated consideration a large deposit and obtained a mortgage created to meet a zoning requirement (e.g., for such payment where inference is commitment. The deposit was forfeitable the developer built a doctor’s apartment to reasonable that an express condition so as liquidated damages, if the purchaser did increase the building’s square footage), providing would have been inserted in not close. the “new” use may be permitted by the the contract had the parties so intend- Prior to closing, purchaser’s architect building’s current zoning and may be made ed.… The test seems to be whether the drafted renovation plans and discovered “as of right.” Even if it is “as of right,” the event *** was or might have been that the CO described the apartment’s use board of the co-op would have to agree to guarded against.