NYSBA SPRING 2008 | Vol

Home , Condop, Remainder (law)

NYSBA SPRING 2008 | Vol. 36 | No. 2 N.Y. Real Property Law Journal A publication of the Real Property Law Section of the New York State Bar Association

Inside • Landlord’s Checklist of Silent Lease Issues . . . and other important articles Your key to professional success… A wealth of practical resources at www.nysba.org

• Downloadable Forms organized into common And now . . . practice areas the N.Y. Real Property Law • Comprehensive practice management tools Journal has a new online look! • Forums/listserves for Sections and Committees • More than 800 Ethics Opinions • NYSBA Reports – the substantive work of the Association • Legislative information with timely news feeds • Online career services for job seekers and employers • Free access to several case law libraries – exclusively for members

Go to www.nysba.org/RealPropertyJournal The practical tools you need. to access: The resources you demand. Available right now. • Past Issues (1998-present) of the N.Y. Real Our members deserve Property Law Journal* nothing less. • N.Y. Real Property Law Journal Searchable Index (1998-present) • Searchable articles from the N.Y. Real Property Law Journal that include links to cites and statutes. This service is provided by Loislaw and is an exclusive Section member beneﬁ t* *You must be a Real Property Law Section member and logged in to access. Need password assistance? Visit our Web site at www.nysba.org/pwhelp. For questions or log-in help, call (518) 463-3200.

For more information on these and many other resources go to www.nysba.org Table of Contents

A Message from the Section Chair ...... 4 (Karl B. Holtzschue)

Real Property Law Section Summary of Results of Survey on Dry Closings ...... 6 (Karl B. Holtzschue)

Reverse Mortgages—Mortgage Recording Tax Exemption ...... 9 (Marvin N. Bagwell)

Landlord’s Checklist of Silent lease Issues (Second Edition) ...... 13 (S.H. Spencer Compton and Joshua Stein)

Cooperatives and Condominiums in the New York CIty Housing Court ...... 45 (Gerald Lebovits and James P. Tracy)

Detailed Chart Comparing Provisions of Current Bankruptcy Bills Dealing with Modification of Home Mortgages, as of December 13, 2007 ...... 58 (Prepared by Mark S. Scarberry)

BERGMAN ON MORTGAGE FORECLOSURES: Says the Borrower to the Lender: “Now Here’s What I Want You to Do . . . “ ...... 64 (Bruce J. Bergman)

Real Property Law Section Annual Meeting Program and Luncheon ...... 66

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 3 A Message from the Section Chair

Real Property Law Section: New • Educate the public about real Mortgage Mission Statement and Current estate law and the benefi ts of Foreclosure. Projects using lawyers in real prop- Our Task Force erty transactions, particularly on Mortgage 1. Mission Statement residential transactions; and Foreclosure is The RPLS has reviewed and up- analyzing vari- • Work with the real estate dated its Mission Statement: ous mortgage fi nance, brokerage, title in- foreclosure The Real Property Law Sec- surance, surveying, and other notice bills and tion serves New York real related industries, to improve trying to fi nd property lawyers and the practices, communications, a way to have the legislature co- public, promotes the success- and working relationships. ordinate the notice bills. It will also ful transaction of real estate 2. Committees and Task Forces be analyzing the impact of the Home business in New York State, Equity Theft Prevention Act and will and contributes to the sound The Section has 18 Committees consider proposing legislation to cor- development of real prop- and 7 Task Forces (listed on the RPLS rect any problems (e.g., with deeds- erty law in New York State. part of the NYSBA Web site). The in-lieu of foreclosure). Toward that end, we: largest memberships are for Con- dominiums and Cooperatives (252), MERS. The Real Estate Financing • Identify and draw attention Title and Transfer (176), Real Estate Committee is studying issues raised to problems, abuses, and is- Financing (164), Commercial Leasing by MERS (e.g., MERSCORP, Inc. v. sues affecting real property, (162), Land Use and Environment Romaine, 8 N.Y.3d 90 (2006) (county recommending improve- (122), Landlord and Tenant Proceed- clerk had duty to record and index ments in real property law, ings (79) and Legislation (59). Check mortgages that named MERS as procedure, and practice as out these and other committees on lender’s nominee; dissent by Kaye, J., appropriate; our RPLS Web site at www.nysba. urged legislative reform). The Com- • Publish a high-quality Journal org/realprop and join one. mittee has drafted memos in op- to keep Section members position to A9295 and A9491, which 3. Current RPLS Legislation informed of developments would grant discretion to County Projects and the latest thinking in real Clerks to reject documents. property law; Adverse Possession. A9156/ Subprime Lending. The Real S5364A was an attempt to reverse • Provide a Section Web site Estate Financing Committee has the outcome in Walling v. Przybylo, 7 also been asked to study proposals and give Section members a N.Y.3d 228 (2006), by providing that variety of forums to discuss in response to the subprime lending a title claim based on adverse posses- problems (e.g., A8972 Responsible the state of the law and pos- sion could not succeed if the claimant sibilities for improvement; Lending Act, which would defi ne and had knowledge of the true owner- regulate subprime loans). • Offer high-quality continu- ship. Our Section opposed the bill ing legal education programs (RPLS Legislation Memorandum #13) Title Agents and Service Charg- to Section members suf- because it contained ambiguities and es. The Section successfully negoti- fi cient to meet all their CLE raised important issues, and the Gov- ated an exclusion from the controlled requirements; ernor vetoed the bill. Our Task Force business prohibition for attorney title on Adverse Possession has studied agents and examining counsel in the • Act as a resource for legisla- the law and has recommended a title agents registration bill (A1743/ tors and government offi - better alternative to help ensure that S877) and consequently supported cials and comment on and, homeowners are on notice of adverse the bill. Our Title and Transfer Com- where appropriate, initiate possession and to eliminate claims mittee has drafted a bill to require legislation; based on minor encroachments and disclosure of service charges to con- lawn mowing. The RPLS Executive sumers in connection with title insur- • Establish and operate com- Committee has approved the bill and ance that would separately identify mittees and task forces that sent it to the NYSBA Executive Com- (1) payments to third parties and (2) seek to achieve the Section’s mittee for its approval. service charges. goals within numerous areas of real property law;

4 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Offensive Restrictive Covenants. sulted in delays of completion of clos- 6. Section Web site In response to a request for comment ings for hours, even days. Surveys Our RPLS Web site at www. from an Assistant Counsel to the were conducted of RPLS members nysba.org/realprop has several use- Governor, we are drafting a memo in and NYSAR members. A summary ful features: N.Y. Real Property Law opposition to the bill (A5182/S5727), of the RPLS survey is on p. 6 and the Journal issues back to 1998; commit- vetoed by the Governor, that would survey itself is to be published on the tee rosters and mission statements; have required title companies to re- RPLS Web site. A report was submit- minutes of Executive Committee cord a document removing racial and ted by the Superintendent of Banks meetings; schedule of RPLS CLE other offensive covenants. Our memo to the Governor and Legislature on and committee meetings (Upcom- suggests that existing laws and prac- July 13, 2007, which called for fur- ing Events); Real Property Forum tices by title insurers in not reporting ther investigation by December 2007. discussion group (Section Listserve); such restrictions appear to be effec- It appears that no further action is RPLS Blog; listing of bills of interest tively addressing the concern. It is the contemplated by the Banking Depart- in the Senate and Assembly (Status of opinion of the Section that existing ment unless the Section urges them Pending Legislation); and 2007–2008 Federal and State Laws that prohibit to act. Legislative Memoranda: prepared by the enforcement of such restrictions the RPLS. Go to our Web site to keep effectively address the issue. 5. N.Y. Real Property Law Journal on Lexis and Westlaw up with the latest developments. 4. Dry Loan Closing Survey and Articles from our Journal are to be Karl B. Holtzschue Report published on Lexis and Westlaw, with Last year, members reported that a time delay (intended to not discour- banks’ funding procedures often re- age membership in the Section).

NEW YORK STATE BAR ASSOCIATION

Save the Dates Real Property Law Section Summer Meeting July 24–27, 2008 Hotel Hershey • Hershey, PA

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 5 Real Property Law Section Summary of Results of Survey on Dry Closings By Karl B. Holtzschue, RPLS Chair

1. RPLS Study of Dry Closings 3. The Following Is a Summary of the Results of The New York Superintendent of Banks was re- the RPLS Survey quired, under Chapter 500 of the Laws of New York 1. How many residential closings did you handle last 2006, to conduct a study of residential mortgage closings year? where funds were not available for the closing (so-called Quantity of “dry closings”). The Banking Department contacted Closings Frequency Percent the Real Property Law Section (RPLS) to ask for reports (skipped) 13 4.1% from its members regarding the frequency of such dry 0 3 0.9% closings, the type of lending institutions involved, and 1-25 72 22.8% the other implications for the lack of funds at closing. 26-50 74 23.4% To that end, the Title and Transfer Committee, at the 51-75 28 8.9% request of the RPLS Chair, solicited and assembled that 76-100 45 14.2% information. The RPLS had 5,158 members at the time; 101-125 6 1.9% 3,697 members having e-mail addresses were invited to 126-150 13 4.1% participate. Respondents took the survey in the 19-day 151-175 5 1.6% period from January 23 to February 10, 2007; 332 com- 176-200 13 4.1% pleted responses were received. The RPLS Survey is to 201+ 44 13.9% be published on the RPLS Web site at www.nysba.org. Total 316 100.0% 2. Superintendent of Banks Report Total quantity of closings: 52,141 The Superintendent of Banks submitted a 10-page “Report to the Governor and the Legislature,” dated July 2. In what counties did those closings occur 13, 2007, which described surveys by the RPLS, N.Y.S. (please select all that apply)? Association of Realtors and the N.Y.S. Bankers Associa- New York 153 (46.1%) tion. It concluded that: (1) dry closings do not comprise Nassau 151 (45.5%) a signifi cant portion of residential real estate closings; Queens 139 (41.9%) (2) many problems arise with the involvement of mul- Suffolk 124 (37.3%) tiple parties and geographically remote and/or specialty Kings 116 (34.9%) lenders; (3) lenders based outside of New York expect Westchester 100 (30.1%) that a notarized closing is permitted and that they may Bronx 69 (20.8%) receive signed closing documents prior to making funds Richmond 55 (16.6%) available; (4) there is a clear difference in proper closing Rockland 54 (16.3%) between closings in bank settings and non-bank set- Orange 47 (14.2%) tings; (5) failure to consummate a proper closing is due Dutchess 43 (13.0%) broadly to a lack of knowledge by participants in non- Albany 37 (11.1%) bank closings. The Department stated that it would not Saratoga 37 (11.1%) draw any fi nal conclusions or take any specifi c regulato- Ulster 31 (9.3%) ry actions at that time. It recommended the development Schenectady 30 (9.0%) of a more comprehensive survey and research tool, to be Rennselaer 29 (8.7%) completed by December 2007. Putnam 24 (7.2%) At this time it does not appear that the Banking Sullivan 22 (6.6%) Department will take further action unless urged to do Monroe 20 (6.0%) so by the RPLS or others. [had the most over 5%]

6 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 3. How many times in the past year have you person- 40-49 7 ally experienced, or have your associates or para- 50-59 11 legals experienced, dry closings where funds were 60-69 3 not available at the time of closing? 70-79 4 Quantity of Closings Frequency 80-89 1 (skipped) 16 90-99 1 0 53 100+ 21 1-09 128 Total 322 10-19 44 20-29 29 7. Have you experienced situations where the lender 30-39 12 has no contact locally and you are asked to be their 40-49 8 local attorney for the transaction and required to 50-59 12 prepare the loan documents, close the loan and re- 60-69 3 turn the package to the lender before funding will 70-79 4 occur? 80-89 1 Yes: 196 (64.1%) 100-109 7 No: 110 (35.9%) 150-159 3 250-259 2 8. Have you experienced any problems with this type 322 of arrangement? Total dry closings: 5,140 Yes: 135 (55.6%) Percentage of closings that were dry: No: 108 (44.4%) 5,140/52,141 = 9.85% 9. Is it your general experience that lenders will not 4. In those situations, what type of lenders were wire funds until they have received copies of all of involved? the loan documents? Select all Operate through local Yes: 116 (38.4%) Lender that apply mortgage broker? No: 186 (61.6%) Yes No Unknown In-State Bank 40.4% 67.1% 13.6% 19.3% 10. If that is so, what is the usual delay after delivery Out-of State Bank 67.2% 76.6% 5.0% 18.5% of those loan documents before funds are available In-State Non-Inst’l 19.0% 71.4% 7.9% 20.6% to complete the transaction? Out-of State 1-3 hours: 116 (52.5%) Non-Inst’l 28.9% 67.7% 15.1% 17.2% 4-6 hours: 52 (23.5%) Non-Bank Lender 12.0% 54.3% 15.2% 30.4% 7-12 hours: 13 (5.9%) Other 1.5% 28.6% 42.9% 28.6% Other: 40 (18.1%)

5. If you selected “other” above, please identify the 11. Is it your general experience that lenders will not type of lender. wire funds until they have received a fully execut- Federal Credit Union, at all times through mortgage bro- ed and complete HUD-1 Settlement Statement? kers, NY HDC, Internet mortgage lender, e-trade. Yes: 187 (61.3%) No: 118 (38.7%) 6. In how many of those situations, was there a local attorney, closer or escrow agent involved in the 12. If that is so, what is the usual delay after delivery transaction to whom funds could have been wired of the HUD-1 before funds are available to com- in advance? (please enter a number) plete the transaction? Could get wire Frequency 1-3 hours: 141 (65.3%) (skipped) 62 4-6 hours: 34 (15.7%) 0 12 7-12 hours: 10 (4.6%) 1-9 121 Other: 31 (14.4%) 10-19 38 20-29 29 30-39 12

14. If yes, please identify the type of closer: Bringing CLE to you... Local Attorney: 188 (56.6%) Licensed Title Company Closer: 73 (22.0%) anywhere, anytime. Settlement Company Agent: 72 (21.7%) Out-of-Area Attorney: 52 (15.7%) NYSBA is proud to present the most flexible, “on Mortgage Broker: 4 (1.2%) demand” CLE solutions you could ask for. 15. What solutions would you suggest to address this With CLE Online (also available as CLE on CD), problem? you can now get the valuable professional learning you’re after [Suggested solutions listed on pages 33-43*] ...at your convenience. 16. Would the suggested solution above require de- > Get the best NY-specific content from the livery of funds to a local contact the day preceding state’s #1 CLE provider. closing? > Take “Cyber Portable” courses from your Yes: 222 (81.0%) laptop, at home or at work, via the Internet No: 30 (10.9%) or on CD. Not sure: 22 (8.0%) > Download CLE Online programs to your iPod or MP3 player. 17. If there is a local contact, should that local contact be a licensed attorney? > Everything you need to obtain full MCLE credit is included online or on CD! Yes: 250 (87.7%) No: 8 (2.8%) Not sure: 27 (9.5%) Come click for CLE credit at: www.nysbaCLEonline.com 18. What is the frequency with which the funds are or to purchase CDs call 800.582.2452 presented when available in a form other than a bank check or an attorney trust account check, such as a corporate check drawn on the local closer? [Various answers on pages 44-45*]

19. Please provide examples of the types of lenders involved: In-State Bank: 100 (30.1%) Out-of-State Bank: 165 (49.7%) In-State Non-Inst’l: 55 (16.6%) Out-of-State Non-Inst’l: 83 (25.0%) Non-Bank Lender: 39 (11.7%) Other: 6 (1.8%)

20. What other problems have you personally experienced, other than delay in funding, resulting from dry closings? [Various answers on pages 53-63*]

*Page numbers refer to the ﬁ nal published survey, a copy of which is available online at www.nysba.org/realprop.

8 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Reverse Mortgages— Mortgage Recording Tax Exemption By Marvin N. Bagwell

Pursuant to Section 252 of the 60, 62, or 70 years of age when Mom reverse mortgage pursuant to state Tax Law,1 certain reverse mortgage takes out the reverse mortgage. Will law, whereas HUD, by not providing borrowers are exempt from having this keep Mom, who is the life tenant insurance for such a “jumbo” mort- to pay the mortgage recording tax. or trust benefi ciary, from qualifying gage, effectively curtails its issuance Recently, the New York State Depart- for the mortgage tax exemption? It pursuant to federal authorization. ment of Taxation and Finance issued might. (Admittedly this statement is a point an advisory opinion in response to a of contention. There is anecdotal There is a second level of in- petition submitted by Jason Jerozal— evidence that some reverse mortgage quiry which must be kept in mind. In Primary Land Services, LLC (herein- lenders believe that they do not need Jerozal, the Department made clear after Jerozal),2 in which it attempted federal or state authorization to issue that there are two types of mortgages to clarify exactly which reverse reverse mortgages. The proof is that which qualify for the mortgage tax mortgage borrowers qualify for the these lenders are devising programs exemption: (1) mortgages which are exemption. The problem, which the whereby the reverse mortgages will authorized by §§ 280 (borrowers at Department attempted to address, be secured by a vacation home, a least 60 years of age) and 280-a (bor- involves the ages of the co-owners of property type which does not meet rowers who are 70 years of age) of the the property secured by the reverse the principal residence require- Real Property Law (hereinafter RPL) mortgage. Reverse mortgages taken ment of federal or state law and (state authorized reversed mortgages) out by individual borrowers, tenants regulations.8) and (2) HUD HECM reverse mort- by the entirety, joint tenants with the gages.6 The basic qualifi cation rules To come back full circle, under right of survivorship, or tenants in for both are the same; the borrower HUD’s HECM program, when title common do not pose any diffi culty. In must own the property to be secured is held by a living or inter vivos trust, those cases, it is clear under state law by the reverse mortgage and the the benefi ciaries of the living trust that the youngest of the borrowers property can contain no more than must all be at least 62 years of age.9 has to be at least 60 years of age3 or 70 years of age4 to qualify for a reverse one to four family units of which one This means that Mom and Dad, the mortgage and for a mortgage record- unit must be the borrower’s princi- usual trust benefi ciaries, must meet ing tax exemption. To qualify for a pal residence. The major difference the age requirement. However, the federally authorized reverse mort- however, aside from the 60 and 70 contingent benefi ciaries, (usually the gage, better known as a Home Equity (state) and 62 (federal) minimum- kids) are not required to be 62 years Conversion Mortgage (hereinafter age distinction referenced above, is of age. in the amount that the borrower can HECM) insured by the Department Although there is no advisory borrow. The amount that a 62-year of Housing and Urban Development opinion directly on point, the state old can borrow under HUD’s HECM (hereinafter HUD), the borrower will probably follow HUD on this program is determined pursuant must be at least 62 years of age.5 point and require that the trust ben- to a complex formula involving the efi ciaries (Mom and Dad) must meet The problem occurs when there zip code of the property’s location, the statutory age requirement but the are third-party owners with an inter- the borrower’s actual age, the inter- contingent benefi ciaries need not do est in the property who may or may est rate, the borrower’s equity in the so.10 In the advisory opinion issued not be of the requisite ages. This oc- property and other factors. However, in response to the Edna Huff Trust curs when title is held by a borrower given these factors, the mortgage (hereinafter Edna Huff), the grantor having only a life estate in the prop- amount that HUD will actually insure and presumed benefi ciary of the trust erty (usually Mom) with co-owners in the New York City metropolitan was 77 years of age. The trustees (usually the kids) holding the remain- area is capped at $362,790 for a one- were her children. Because the trust der interest. The problem also arises family home and at $697,696 for a met the federal HECM requirements, when title to the property is held four-family home.7 the State Department of Taxation and by a trust where Mom is the benefi - The state has no such cap. Hence, Finance opined that the trust quali- ciary and the kids are the contingent a lender can fi nd authority to is- fi ed for an exemption from having to benefi ciaries. It is certainly possible sue a multi-million dollar “jumbo” pay the mortgage recording tax. Since that the third-party kids may not be

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 9 Mrs. Huff met the federal age require- mortgage tax exemption. However, Pursuant to Tax Law § 252-a(2),17 ment, it was immaterial that the trust- the affi davit required by state law to in order to claim an exemption from ees did not, even though the trustees, be presented to the recording offi ce to the mortgage recording tax, the as the title holders, were required to obtain the exemption had to be modi- lender is required to attach an affi da- execute the mortgage and the §§ 280 fi ed to set forth that the mortgage met vit setting forth the basis for claiming or 280-a Affi davit which must be pre- the federal requirements. the exemption when submitting the sented to the recording clerk in order reverse mortgage to the County Clerk The result of the current state to obtain the mortgage tax exemption for recordation. Different affi davits regulations is that the person who has (see discussion below). are required when the mortgage put title to his or her property in a liv- is state authorized pursuant to §§ Under HUD’s HECM program, ing trust will qualify for a mortgage 28018 or 280-a19 of the Tax Law or when title is held by a life tenant, the tax exemption on a “jumbo” reverse authorized pursuant to federal law remainder persons do not have to mortgage (even if the contingent and regulations under 12 U.S.C. § be 62 years of age or older; they can benefi ciaries do not meet the state 1715z-20.20 The forms of the affi davits be under 62.11 Under state law, the statutory age requirement), whereas are attached as Appendices A and B remainder persons must be over the a similarly situated person who has to this Memorandum. age of 60.12 In the William H. Bradt only a life estate to his or her proper- advisory opinion,13 Emma Fonti, who ty with the remainder interest in third The point here is only to point was over the age of 60, held a life parties will qualify for the reverse out the ambiguity. It is not to stake estate in her property. Her children, mortgage only if the third parties out a policy position. After all, a who were under the age of 60, held meet the state statutory age require- person who has enough equity in the remainder interest. As co-owners ments. This is because HUD caps the their home to qualify for a million- of the property to be secured by the mortgage amount that it will insure, dollar “jumbo” reverse mortgage reverse mortgage, they would be thereby leaving borrowers who wish probably can afford to pay the co-mortgagors and, as such, also to take out a “jumbo” reverse mort- mortgage recording tax no matter be required to execute the reverse gage having to meet state require- how the property is titled. It is up to mortgage documents and the RPL § ments to qualify for a mortgage tax the people whom we voters send to 280 affi davit in order to obtain the exemption. State law treats property Albany to eliminate or continue the mortgage tax exemption. The Depart- held by a living trust differently from disparate treatment. It is also up to ment held that since the children property that is held in a life estate. members of the elder bar to be aware failed to meet both the federal (62) At the risk of repetition, the contin- of the discrepancy when undertak- and the state (60) age requirements, gent benefi ciaries of a living trust do ing their client’s estate planning. This the reverse mortgage did not qualify not have to meet the 60 or 70 years of is just one other factor to take into for the mortgage tax exemption. Note age requirement, whereas the persons consideration. that the Department decided the holding the remainder interest after a William H. Bradt advisory opinion14 life estate must do so. Endnotes before the federal regulation on re- This may be a little confus- quiring the life tenant to meet the age 1. N.Y. Tax Law § 250 (McKinney 1998). ing. Here is a table you might fi nd requirement went into effect. 2. Advisory Opinion from the State of New useful:16 York Commissioner of Tax and Finance In Jerozal,15 the Department was TSB-A-07(5) R (Oct. 18, 2007). In order to qualify for the Mort- given the opportunity to update its 3. N.Y. Real Prop. Law § 280 (McKinney gage Tax Exemption, are the benefi - position. Ms. M, age 62, entered into a 2006). ciaries of a living trust or remainder- HUD HECM reverse mortgage. How- 4. N.Y. Real Prop. Law § 280-a (McKinney persons (when the borrower holds ever, Ms. M had conveyed the prop- 2006). only a life estate) required to be over erty to members of her family, retain- 5. See U.S. Dep’t of Hous. & Urban Dev., the applicable ages: 60 or 70 (for state Handbook No.: 4235.1 Rev-1: Mortgage ing only a life estate for herself. The authorized reverse mortgages) or 62 Credit Analysis 4-4 (1994). family members were all under the (for HUD HECM reverse mortgages)? 6. See supra note 2. age of 62. Pursuant to federal regulations, Ms. M was the sole borrower, 7. FHA Mortgage Limits List, https://entp. HUD HECM State hud.gov/idapp/html/hicost1.cfm (last but the co-owning family members Trusts Yes (1) Yes (2) visited April 23, 2008). were required to execute the mort- Life Estates No (3) Yes (4) 8. Kelly Greene and Valerie Baurelin, gage documents. Since this reverse Reverse Mortgages, Wall St. J., Nov. 13, mortgage met the 1996 HUD HECM The contingent benefi ciaries 2007, at D1. requirements, the Department opined (usually Mom and Dad’s kids) do not 9. See U.S. Dep’t of Hous. & Urban Dev., that the mortgage qualifi ed for the have to meet the age requirement. Handbook No.: 4235.1 Rev-1: Mortgage Credit Analysis 4-5(A) (1994) (which

10 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 provides that “all beneﬁ ciaries of the 14. Id. Marvin N. Bagwell is the Vice- trust must be eligible HECM borrowers 15. See supra note 1. President and Eastern Divisional at the time of origination and until the mortgage is released . . .”). 16. See U.S. Dep’t of Hous. & Urban Dev., Counsel of United General Title Handbook No.: 4235.1 Rev-1: Mortgage Insurance Company in White Plains, 10. See Advisory Opinion from the State Credit Analysis 4-5(A) (1994); Advisory of New York Commissioner of Tax and New York. Mr. Bagwell is a graduate Opinion from the State of New York Finance TSB-A-96 (4) R (May 22, 1996). Commissioner of Tax and Finance of Harvard College and Harvard Law (In answer to petition No. M960126B by TSB-A-96 (4) R (May 22, 1996); 24 C.F.R. School. Mr. Bagwell is a certiﬁ ed CLE The Edna Huff Trust, where the issue § 206.35 (1996); Advisory Opinion from instructor for Virginia and Pennsyl- presented was whether the recording of the State of New York Commissioner of a reverse mortgage placed on premises vania. He is admitted to practice in Tax and Finance TSB-A-07(5) R (Oct. 18, held in trust is exempt from the mortgage 2007); Advisory Opinion from the State Virginia and in New York. He is a recording tax. (Article ll of the Tax of New York Commissioner of Tax and Past President of both the New York Law) based on the exemption provided Finance TSB-A-04(2)R (Jul. 19, 2004). State Land Title Association and the in section 252-a.2 of the Tax Law (the exemption for reverse mortgages)). 17. N.Y. Tax Law § 252-a(2) (McKinney 1998). Title Insurance Rate Service Associa- 11. 24 C.F.R. § 206.35 (1996). 18. See supra note 3. tion (“TIRSA”). 12. Advisory Opinion from the State of New 19. See supra note 4. York Commissioner of Tax and Finance 20. National Housing Act, 12 U.S.C. § TSB-A-04(2)R (Jul. 19, 2004). 1715z-20 (2001). 13. Id.

APPENDIX A SECTION 252 AFFIDAVIT (Reverse Mortgages Pursuant to Section 280 or 280-a of the Real Property Law)

STATE OF NEW YORK ) ) to wit: County of ______) ______, being duly sworn deposes and says: 1. I am the ______of ______, the mortgagee in the mortgage made by ______to the mortgagee, dated ______, in the amount of $______submitted herewith for recording. I am familiar with the facts set forth herein. 2. The mortgage is a reverse mortgage made pursuant to Section 280 (280-a) of the Real Property Law. 3. All of the mortgagors are at least 60 (Section 280) or 70 (Section 280-a) years of age. 4. The mortgage is on real property improved by a one-to-four family dwelling or condominium unit that is the residence of the mortgagor or mortgagors. 5. The mortgage conforms to all of the provisions of Section 280 or Section 280–a of the Real Property Law. Wherefore, your deponent requests the mortgage submitted herewith for recording be recorded without the payment of a mortgage recording tax pursuant to Section 252-a subd. 2 of Article 11 of the Tax Laws of the State of New York.

______

Sworn to before me this ______day of ______, 20______Notary Public

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 11 APPENDIX B SECTION 252 AFFIDAVIT (Reverse Mortgages Pursuant to 12 U.S.C. § 1715z-20 (HUD HECM Reverse Mortgages))

STATE OF NEW YORK ) ) to wit: County of ______) ______, being duly sworn deposes and says: 1. I am the ______of ______, the mortgagee in the mortgage made by ______to the mortgagee, dated ______, in the amount of $______submitted herewith for recording. I am familiar with the facts set forth herein. 2. This mortgage is a reverse mortgage that conforms to the applicable federal law and regulations issues pursuant to 12 U.S.C. § 1715z-20. 3. Therefore, this mortgage is exempt pursuant to Section 280(4) or Section 280-a (4) of the Real Property Law and exempt from the mortgage recording tax pursuant to Section 252-a.2 of he Tax Law. Wherefore, your deponent requests the mortgage submitted herewith for recording be recorded without the payment of a mortgage recording tax pursuant to Section 252-a subd. 2 of Article 11 of the Tax Laws of the State of New York.

______

Sworn to before me this ______day of ______, 20____

______Notary Public

12 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Landlord’s Checklist of Silent Lease Issues (Second Edition) By Landlord’s Silent Lease Issues Subcommittee, Commercial Leasing Committee, Real Property Law Section, New York State Bar Association S.H. Spencer Compton and Joshua Stein, Subcommittee Co-Chairs

In commercial leasing, a “standard form” Even if you know your Stan- or trends described above. Many does not necessarily say everything it dard Form is somewhat out of date of them also refl ect the reality that needs to say. This checklist offers a sup- or needs work (usually true), you judges hesitate to infer obligations plemental checklist to give any landlord’s probably will lack the time in any or prohibitions in leases or contracts, lease a “tune-up.” particular transaction to revisit the particularly in New York, and par- Standard Form and improve it. If ticularly at the behest of a landlord. When a landlord and a tenant you want to give the Standard Form Courts often say that if a landlord agree on the business terms of a sub- a tune-up, or even a complete over- wanted to impose on a tenant any stantial commercial lease, the land- haul, you may fi nd the task daunting, particular obligation, burden, restric- lord may ask its counsel to prepare and entirely incompatible with the tion, or prohibition, the landlord had the fi rst draft of the lease. If you are timing and budget of any particular the opportunity to do so in the lease. that counsel, you will probably start transaction. To do the job right, you If the landlord did not use that op- the assignment by using one or some might fi rst need to assemble a half portunity, then courts often deny the combination of the following, which- dozen other leases that seem particu- landlord a second chance. Landlords ever apply(ies): larly well done, thorough, and up to need to say everything the fi rst time • A standard form of lease, pos- date. Then you will need to read each around. This checklist represents an sibly recent but more likely not; and compare it against the Standard attempt to help them do exactly that. Form, updating and improving the It is the courts, more than resources • A form of lease from another Standard Form as appropriate. This like this checklist, that force com- recent transaction; or is a job that almost no particular pleteness and thoroughness—and • A similar lease negotiated be- transaction will ever support. It will hence girth—in legal documents. probably never rise to the top of your tween the same parties or their The “Landlord’s Checklist of “to do” list at any other time either. It affi liates. Silent Lease Issues” complements an is just too large and amorphous and earlier “Tenant’s Checklist of Silent For purposes of this checklist, a a bit painful. But you should prob- Lease Issues,” prepared by a similar “Standard Form” means any of these ably consider doing it once in a while subcommittee.1 The “Tenant’s Check- possibilities. anyway. list” was intended to help tenants’ Whatever Standard Form land- To simplify any such task, and to attorneys identify and raise possible lord’s counsel uses, it will probably create a guide and starting point for issues in lease negotiations, empha- cover the traditional leasing issues any landlord’s counsel who wants sizing tenant-oriented issues typically adequately. The Standard Form will to rethink and perhaps update a not addressed at all in landlords’ not necessarily deal with recent Standard Form, the New York State lease documents. The “Landlord’s developments in leasing law; recent Bar Association Real Property Law Checklist” focuses on commercial reported cases; unreported litiga- Section Commercial Leasing Com- leasing issues that a landlord’s Stan- tion and disputes; newly discovered mittee in 2000 appointed a subcom- dard Form probably does not, but gaps and glitches in Standard Forms mittee to prepare the fi rst edition of a possibly should, cover. As a general generally; advances in technology; or “Landlord’s Checklist of Silent Lease proposition, the Landlord’s Checklist changes in the marketplace and the Issues.” tries to suggest pro-landlord changes world. To the extent that participants in a Standard Form that will be rel- in other transactions have developed The subcommittee tried to iden- evant in at least 15% of commercial better ways to handle particular tify and collect leasing issues that a leasing transactions. To make it onto landlord-tenant issues or identifi ed typical Standard Form might likely the list, though, an issue must also new issues or concerns that typical omit, or not adequately cover, all as be less than 50% likely to appear in commercial leases have not covered, considered from a landlord’s per- a typical Standard Form—assuming those improvements will probably spective. These issues—the so-called that the Standard Form was intended not have found their way into the “landlord’s silent lease issues”— to cover transactions of the type for Standard Form. might arise from any of the causes

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 13 which the issue is relevant, but has that an author of a “state-of-the- residential leasing transactions. Most not been updated recently. The Land- art” Standard Form might wish issues here will apply to some leases lord’s Checklist theoretically ignores to cover, all collected in one but not others. Any reader should any provision that the subcommittee place. interpret every item in the checklist thinks is 50% or more likely (when as if prefaced by the words: “if ap- The subcommittee believes that relevant) to appear in a typical Stan- plicable, appropriate, desired, pos- this Landlord’s Checklist delivers dard Form, or likely to be relevant in sible, and realistic under the circum- exactly that—in a reasonably (and less than 15% of commercial leases. stances, taking into account the size perhaps even surprisingly) succinct and nature of the transaction, market The subcommittee applied both and contained manner—and will conditions, the landlord’s project, the the “15% test” and the “50% test” help commercial leasing practitioners. tenant mix, the needs and negotiating in an absolutely arbitrary, capri- That was true of the fi rst edition and positions of the parties, the timing, cious, and subjective manner, with is even truer of the second edition. and all other circumstances, including no evidence, data, or other empirical Does the Checklist Give Land- whether the lease already adequately information, validation, confi rma- lords an Unfair Advantage?—As an covers the point in question.” tion, or corroboration of any kind objection to this checklist, some might whatsoever. Random exceptions were The checklist does not try to argue that Standard Forms are al- made with precisely the same lack of suggest which issues apply to which ready landlord-oriented enough—no analytical rigor. Ultimately, the test types of leases, which issues matter one benefi ts by piling on even more was applied inconsistently, unpredict- most, or how a tenant might respond landlord rights and tenant burdens ably, and based on pure whim. Thus, to any of these issues. Because of (also sometimes known as “gotcha” the inclusion or exclusion of any these limitations, this checklist will clauses). The landlord may counter particular issue carries no weight. add more value for an experienced that argument by stating that once The checklist merely amounts to a lease negotiator than for a novice. in possession, the tenant has all the reasonable reference point for anyone Even a novice, though, will fi nd it leverage and judicial sympathy, and representing a landlord and looking useful. Any reader of this checklist the landlord merely has the words of for points to consider. Such imperfec- should use it prudently and with the lease on which to rely. tion is inevitable in any checklist of judgment, and not stop thinking just this type. A landlord would say that if because something appears on this the lease enforcement game were checklist. When the co-chairs of the Silent played on a level playing fi eld, then Lease Issues Subcommittee fi rst pro- Caveats, Warnings, Disclo- perhaps lease forms would not need posed creating a Landlord’s Check- sures—This checklist does not repre- to be landlord-oriented; they could list of Silent Lease Issues, one of the sent a position statement or recom- be “balanced” and “fair.” The use of more active members (and a former mendation by The New York State landlord-oriented Standard Forms co-chair) of the Commercial Leasing Bar Association or its Real Property (including “new and improved” Committee argued that a list of land- Law Section, Commercial Leasing landlord-oriented Standard Forms lord issues would be amorphous and Committee, any of its subcommit- of the type this checklist suggests) potentially unending. Shouldn’t such tees, or any member of any of them. merely represents some minimal ef- a list ultimately include everything The checklist does not establish a fort to restore balance to the landlord- that any good lease should include? “minimum standard of practice” and tenant relationship. Tenant’s counsel And if it does, what value does the is neither exhaustive nor complete. It would, of course, disagree. list add? A landlord should simply is offered merely as a tool for leas- start with a good Standard Form, the As a variation on the theme of ing practitioners, with the hope that Committee member argued, then leveling the playing fi eld, this Land- it might help. This checklist creates modify it to refl ect the business deal lord’s Checklist will also help land- no legal duties or obligations. No and any particular concerns the trans- lord’s counsel respond to a major representation or warranty is made action might create. tenant that insists on using its own regarding the enforceability, validity, form of lease. The points this check- or practical feasibility (or tenant pal- All this may be true. But the sub- list mentions will tend to be the same atability) of any provision suggested committee co-chairs believe: points that a tenant’s form of lease here. The checklist simply lists some • A “good” Standard Form is not disregards. issues to consider when updating a so easy to identify; and Standard Form. Intended for Major Commer- • Even with a “good” Standard cial Space Leases—This checklist is Although the authors of the Form, you may benefi t from intended mainly for substantial com- checklist and the subcommittee mem- having a somewhat condensed mercial space leases, for both retail bers will be honored and pleased summary of the latest issues and offi ce uses. It does not apply to if anyone who reads this checklist

14 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 mentions it in lease negotiations, this for well over fi ve minutes. “Books” idea, “fairness” is very much in checklist does not estop any author or also often force the reader to learn the eye of the beholder, much like subcommittee member from taking something about related legal issues “progressive,” “public interest,” and any position in any lease negotiation. not directly responsive to the user’s “reform.” To reach the right result specifi c question, surely an ineffi cient in any particular case, it may make Notes on Style—In the edit- and unnecessary use of time. Similar- more sense to let each party identify ing process, the authors decided to ly, counsel will need to develop lease its own needs and then let the two express some issues as affi rmative language from sources outside this parties negotiate a reasonable middle recommendations, to achieve a more checklist (the library, perhaps?) or by ground that works under the particu- direct and lively presentation. Thus, thinking, an activity that seems less lar circumstances. Of course, that ap- the checklist sometimes says a land- and less a daily part of the modern proach tends to take longer and cost lord “should” consider some concept practice of law. more than trying to defi ne a standard or even “should” incorporate specifi c “one size fi ts most” middle-ground provisions in its lease. You must take Written from Landlord’s Per- commercial lease. each such statement with a bushel of spective—This checklist considers salt. The subcommittee does not pur- lease negotiations from a landlord’s Subcommittee Membership— port to establish or defi ne “standard” perspective. It is a landlord’s check- To develop the Second Edition of requirements for what any lease list. The subcommittee members do the Landlord’s Silent Lease Issues “should” or “should not” say. Every not necessarily believe tenants should checklist, the Landlord’s Silent Lease lease represents its own negotiation, accept (or at least accept without ob- Issues Subcommittee held a series of depending largely on the consider- jection) a landlord’s position regard- meetings every quarter or so, starting ations above. Making defi nitive “one- ing any issue this checklist suggests. soon after publication of the fi rst edi- size-fi ts-all” recommendations would To the contrary, when representing a tion of this checklist. Those meetings thus be inconsistent with reality—a tenant, members of the subcommit- were widely announced through bad joke. Such an approach in this tee would reject many suggestions State Bar communications channels. checklist does, however, simplify, in this checklist. Nevertheless, most Each meeting covered a few sections streamline, and add life to the pre- of the lease provisions suggested of the checklist in alphabetical order, sentation, which could otherwise be in this checklist come from actual eventually reaching the end. Each deadly (and perhaps still is). landlords’ leases proposed in actual meeting amounted to a brainstorm- transactions. ing and educational session, during This checklist mentions each which everyone had the chance to issue only once, even if it might rea- As a future project, it might be compare notes and learn something sonably belong under more than one possible to develop a checklist of new. Even if these meetings had not heading. No cross-references are pro- recommended “middle-ground” led to the work product offered here, vided in these (or any other) cases. outcomes on all the major commercial they gave all participants an unusu- Any user of this checklist should read leasing issues. For each issue, one ally valuable and advanced form of it from beginning to end. would seek to identify the legitimate continuing legal education. concerns of each party and fi gure out Finally, the checklist generally a reasonable way to accommodate Anyone who attended at least does not provide legal citations or those concerns. The overall goals one meeting qualifi es as a “mem- specifi c lease language, with a few of such a project are: (1) to assure ber” of the subcommittee. On that exceptions. Counsel will need to the landlord a reliable rental stream basis, subcommittee members for track down legal citations by other refl ecting the occupancy value of the the second edition include at least: means, including perhaps a visit to tenant’s space; (2) to give the tenant Francisco Augspach, Adam Leitman the library. A “library” is a room or the fl exibility it needs to run its busi- Bailey, Marc Becker, Yosi Benlevi, other central physical facility that ness even as circumstances change Andrew Berkman, Joshua Bernstein, contains a range of “books,” which over time; and (3) to give neither Wally Bock, Harvey Boneparth, Rob- are objects consisting of multiple party a potential “holdup opportuni- ert Bring, Spencer Compton, Kathy paper sheets, printed on both sides, ty” where the lease allows that party Cook, Thomas Curtis, Julie DiMauro, in which people who claim expertise to extract an unexpected “windfall” Joanne Feil, Mario Ferazzoli, Jim Fior- in a particular legal area share the from the other side because the other illo, Herbert Fisher, Gerald Goldstein, benefi t of that expertise. A “book” side needs some form of reasonable Robert Gorzelany, Kenneth Gordon, can sometimes be even more effec- concession or cooperation. George Grace, Leonard Hecht, Austin tive than “Google” as a legal research Hoffman, Richard Janvey, Ira Kauf- technique. Unfortunately, “books” In other words, one would try man, Michael Kahn, Matthew Klein, are also more work to use, often to create a “fair” lease. Such efforts James Kole, Michael Korn, Abe requiring the user to leave his or her have been undertaken in the past.2 Krieger, Alfredo Lagamon, Lawrence computer terminal and email stream Although this all sounds like a great

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 15 Lenzner, Bruce Leuzzi, Mark Leven- to comply with any of these laws. rules, and regulations that govern son, Richard Liebman, Sally Anne In any case, the landlord must un- alterations and activities within the Levine, Lloyd Lowy, Ray Lustig, Olga derstand those requirements before premises should also apply to the Berde Mahl, Newton Mandel, Marisa signing the lease. In the worst case, hoist. In the lease or a separate agree- Manley, Jeffrey Margolis, Theodore they may ultimately mean that this ment, the parties should memorialize Marks, Joel Miller, Thomas Neufeld, particular tenant won’t make sense the terms of the tenant’s use of the John Oler, Robert Parella, Paul Petras, for this particular building. hoist, including priorities, versus Norman Powell, Dave Richards, the landlord and other tenants if Leonard Ritz, Diane Schottenstein, 1.03 Artists’ Rights. the hoist will not belong exclusively John Seligman, Ronald Sernau, Mal Prohibit the tenant from installing to the tenant. Require the tenant to Serure, Robert Shansky, Scott Shostak, any artwork that could give the artist remove the hoist by a certain date. Charles Skop, Alexander Sokoloff, a right under federal law to prevent Should the landlord have the right Joshua Stein, Stewart Stern, Gail the artwork from being modifi ed to “free rides” on any hoist? If other Telleysh, Frances Trachter, Linda or removed. If the tenant has an tenants complain about the hoist or Trachter, Robert Vidoni, Benjamin agreement with the artist governing even try to claim rent offsets because Weinstock, William Weisner, Jeffrey removal, the landlord needs to see of it, the tenant should indemnify the Weitzman, and Jo-Ann Whitehorn. and approve that agreement and it landlord. If the landlord has installed must allow modifi cation or removal. the hoist, provide for scheduling, If you participated but were not Consider requiring a direct agree- charges, and the right to remove it. In listed, please notify either co-author ment between the artist and the land- any agreement or lease provisions on and we will add your name when we lord on these issues. the hoist, think about how the hoist next republish this checklist. If you is attached; use of walkie talkies; the would like to participate in a third 1.04 Completion of Alterations. landlord’s liability under scaffolding edition (should we ever produce Require the tenant to close out the laws; insurance; and the landlord’s one), please let the co-authors know. job, close out all alteration permits liability to other tenants. Consider re- and deliver a fi nal certifi cate of occu- quiring that the landlord, rather than 1. Alterations and Build-Out pancy within a certain time after the the tenant, control the hoist. tenant has obtained its fi rst building 1.01 Activities Outside Premises. permit. At completion, require the If the lease lets the tenant perform 1.08 Filings. tenant to deliver an estoppel certifi - any alterations outside the premises Consider requiring that the landlord’s cate confi rming the satisfactory com- (such as cable or riser installations, architect or expeditor supervise or pletion of any work the landlord per- changes in elevator operation, HVAC handle all certifi cate of occupancy forms for the tenant. (The lease will equipment installations, backup gen- fi lings, and perhaps all other govern- probably already allow the landlord erator, or fuel storage and transmis- mental fi lings for the tenant’s work. to request an estoppel certifi cate at sion), then require the tenant to meet any time. The landlord should simply all the same requirements (including 1.09 Labor Harmony. remember to exercise that right.) removal/restoration) that would The tenant’s obligation to maintain labor harmony should relate not just govern alterations within the prem- 1.05 Consent. ises, plus additional requirements as to construction, but also to any other State that the landlord’s consent to activities at the premises. Establish a appropriate. At the landlord’s option, any alteration does not imply the consider having the landlord, not specifi c monetary consequence if the landlord represents or warrants that tenant doesn’t comply, such as $_____ the tenant, perform any alterations such alteration complies with appli- that affect space outside the prem- for each day of noncompliance. cable laws. The landlord should not (Describe it as liquidated damages, ises, with the tenant obligated to be responsible for any contractors, reimburse. and include the “magic language” architects, or engineers, even if the necessary to make the liquidated landlord approved or required them. 1.02 Americans with Disabilities damages enforceable.) Also, try to prohibit the tenant from starting any Act (and Similar Laws). 1.06 Construction Protocol. of its work until the landlord has Require the tenant’s alterations to During construction, require the ten- completed all “base building” and comply with not only the ADA, but ant to fence off or close off its prem- other landlord work. also state and local laws on disabled/ ises. As its staging area, the tenant handicapped access, which are often may only use the area the landlord 1.10 Landmark Buildings. more burdensome. Give the landlord designates. an express right to block any alter- If the building is designated as an historical landmark (or similarly pro- ation—even just within the leased 1.07 Exterior Hoist. tected area), include whatever “magic premises—if it might require changes If the tenant wants to use a hoist out- language” the landmark protection to space outside the leased premises side the building, all lease provisions,

16 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 law requires. If the building is not the term—particularly for major or faults after the landlord incurred sig- so designated, but might make an diffi cult-to-restore alterations such as nifi cant expense for tenant improve- attractive target for designation, the a slab cut for an internal staircase. To ments. Provide that to the extent the tenant should agree: (a) not to fi le for the extent that the landlord wants— tenant does not use the entire tenant historic designation and (b) to oppose or might want—the tenant to leave improvement allowance by a specifi c any such designation if the landlord a major alteration in place, give the date, the landlord may keep it. Limit so requests. landlord that right. More generally, to the tenant’s ability to use the tenant the extent that the lease contemplates improvement allowance for anything 1.11 Modifi cations to Plans and major alterations that might be diffi - that does not directly improve the Specifi cations. cult to restore, try to defi ne in a lease landlord’s real property (such as The tenant should have no free right exhibit exactly what must stay and “soft costs,” furniture, and network to modify its plans and specifi cations what must go at the end of the term wiring). in the fi eld except as necessary to con- (and the landlord’s options). form to fi eld conditions. If the tenant 1.18 Tenant Work Letter. modifi es its plans and specifi cations 1.15 Scope of Work. The tenant work letter will become after the landlord approves them, the Even if the tenant will bear all con- part of the lease. Give it the same alterations as modifi ed should still struction risks and costs, the landlord degree of legal scrutiny as the rest of meet the original landlord require- should think twice before agreeing to the lease. The landlord should confer ments. If the landlord wants to avoid tenant alterations that may require a with its architect to make sure that dealing with a fl ood of change orders, major compliance effort and/or cost. the landlord can in fact deliver what the landlord might give the tenant Regardless of what the lease says, the lease exhibits require. some leeway, but subject to criteria to tenant construction projects that will protect the landlord’s interests in the raise major issues will often, one way 1.19 Tenant’s Records. building. or another, end up costing the land- Consider requiring the tenant to lord money and grief. For example, maintain records of the costs of its 1.12 Plans and Specifi cations. they may spotlight code compliance improvements for six years. This in- Require the tenant to deliver plans issues elsewhere in the building or formation may help in real estate tax and specifi cations (initial, as-built, require additional work that neither protest proceedings. If the tenant’s and as fi led with the building depart- party anticipated. Landlords need to cost of any particular alterations ex- ment) in a specifi ed (or more current) understand those problems before ceeds $____, consider requiring the computer aided design (“CAD”) they undertake the landlord-tenant tenant to deliver its cost records no format using naming conventions relationship that may bring issues out later than upon completion of con- and other criteria as the landlord ap- of the woodwork. struction (plus some reasonable addi- proves or requires. Also, require the tional time so the tenant can organize tenant to deliver copies of all govern- 1.16 Supervisory Fee. and fi nalize its records). mental approvals necessary for the Allow the landlord to charge a super- alterations, including a building per- visory fee for any tenant alterations 1.20 Third-Party Fees. mit and a temporary and permanent and for any landlord review of envi- Require the tenant to reimburse the certifi cate of occupancy, as and when ronmental and other conditions. The landlord for its architect’s, lender’s applicable. landlord’s wage schedule or stan- fees under the loan documents and dard rates in effect from time to time other in-house and outside profes- 1.13 Punchlist Waiver. should constitute prima facie evidence sional fees in reviewing plans and If the landlord has delivered the of reasonableness. specifi cations. premises to the tenant, and the tenant starts work (or takes occupancy 1.17 Tenant Improvement 1.21 Warranties. to conduct business) in any area, Allowance. Require the tenant to provide a war- then the tenant waives any claims Coordinate the landlord’s payment ranty on completed alterations or at about the landlord’s work in that to the tenant of any tenant improve- least an assignment of any warranty area, unless previously included in a ment allowance with the terms of the it receives from its contractor. If the punchlist notice to the landlord. landlord’s construction loan or other tenant surrenders space (either at the fi nancing. Consider requiring the end of the term or because the ten- 1.14 Restoration. tenant to provide a declining letter ant reduces its occupancy), require State that the landlord’s consent to of credit (initially in the amount of the tenant to assign to the landlord any alteration does not waive the the tenant improvement allowance, any warranties the tenant received tenant’s obligation to remove it and or the landlord’s cost of build-out) to for any improvements or equipment restore the premises at the end of protect the landlord if the tenant de- surrendered.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 17 1.22 Temporary Signage. 2.04 Fixture Financing. 2.08 Prohibit Other Landlord’s Require a retail tenant to install tem- Prohibit the tenant from fi nancing Takeover. porary promotional signage during its fi xtures, or impose appropriate Any other landlord’s takeover of the construction and before opening. protective conditions upon any such lease, perhaps as an inducement to fi nancing arrangements. move the tenant to space in that land- 2. Assignment and Subletting: lord’s building, should be deemed a Consent Requirements 2.05 Future Sublease–Related prohibited sublease. Transactions. 2.01 Assignment/Sublet of Other Even if the lease allows the tenant to 2.09 Restriction. Tenants’ Leases. sublet, think about future transac- Prohibit assignments or sublets to Even if other tenants’ leases permit tions that might arise from the sublet- existing tenants in the building or for assignment or subletting, ask this ting, such as further subleasing by less than fair market rent or the pres- tenant to agree not to accept an as- subtenants. Therefore, require the ent rent. Prohibit the tenant from sub- signment of any other tenant’s lease tenant to obtain the landlord’s ap- leasing to any entity (a) that occupies or a subletting of any of its premises proval for any future modifi cation or any other building the landlord (or in the building without the landlord’s termination of a sublease, any recap- its affi liate?) owns within a specifi ed consent. ture, any subsubletting, or any expan- area or (b) with whom the landlord sion or assignment by the subtenant. 2.02 Change of Control. is actively negotiating or has recently A landlord will regard any of these Treat a change of control of the tenant negotiated. Consider prohibiting any transactions as a future opportunity, (unless a public company) as an as- assignment/sublet to (1) any party which the landlord wants to preserve. signment. To monitor, require the ten- with whom the landlord (or its affi li- ant to: (a) represent and warrant the ate) is in litigation (or its affi liate), or 2.06 Government Tenants. perhaps even any party with whom tenant’s current ownership structure, A government tenant often burdens perhaps in an exhibit, when the par- other landlords have had signifi cant the elevator, HVAC, parking, lobby, litigation; (2) a controversial entity ties sign the lease, to establish a base- restrooms, and security. A govern- line and defi ne “change of control”; such as a terrorist organization; (3) ment agency tends to produce a any party entitled to diplomatic im- (b) deliver an annual (or upon re- higher occupant density than the quest) certifi cate from its accountant munity; or (4) specifi ed entities or typical private sector tenant. This can their affi liates (such as a chain store or attorney, or perhaps a corporate change a high-quality building to a offi cer, confi rming the tenant’s then- or multi-site restaurant operator second-tier building. Governmental that may have become notorious for current ownership structure; and (c) occupancy (even by a subtenant) can report any change of control. Do not its aggressive litigation programs sometimes lead to the unexpected against landlords). Also, prohibit as- limit the restriction to refer only to imposition of governmental procure- corporations, partnerships, and lim- signment/sublets to any government ment regulations on the landlord. (domestic or foreign); any govern- ited liability companies. The restric- When drafting a sublease consent tion on transferring equity should ment agency; a government contrac- provision, consider limiting occupant tor doing its contracted work in the apply even to future entity types not density, power consumption, park- yet known. space; or any other entity whose ing, operating hours, and noise. If the presence could subject the landlord landlord is generally willing to allow 2.03 Continuing Status as to governmental procurement and af- a particular government agency as Affi liate. fi rmative action regulations. (Federal tenant, state that only a particular If the lease allows “free transfers” to procurement regulations sometimes agency (or its successor performing the tenant’s affi liates, require that the make the landlord a deemed fed- the same functions) can occupy the assignee or subtenant thereafter re- eral contractor under circumstances space. Any change of agency should main an affi liate throughout the lease like these. State regulations vary, of be deemed an assignment. Conform term. If the affi liation ceases, then the course.) On the other hand, the land- the use clause accordingly. tenant must notify the landlord (but lord may prefer not to limit itself to any particular grounds for disapprov- the landlord should not assume the 2.07 Prohibit Collateral al and rely instead on its right to “rea- tenant will remember to do so). Once Assignment of Lease. sonably” reject proposed transactions the affi liation ceases, the transaction Any prohibition against assignment on grounds such as those suggested becomes a prohibited transaction that and subletting should also prohibit in this paragraph. This approach has requires the landlord’s consent and any collateral assignment of the lease the disadvantage, though, of creat- possibly a payment—failing which (such as mortgaging, encumbering, or ing an amorphous factual issue that the transaction may become an event hypothecating the lease). of default. may require litigation to resolve. Moreover, the cases make clear that if

18 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 a landlord agrees to act “reasonably,” sublease, particularly if the tenant’s nerable in this regard. Consider elimi- this imposes a meaningful restriction pricing is below current market value nating “reasonable” when describing on the landlord and could require (or the landlord’s conception of cur- the landlord’s consent requirement. the landlord to demonstrate an ob- rent market value) or the landlord’s Instead, list specifi c permitted crite- jectively sound basis for its decision, asking price for direct space. ria, then agree that the landlord must such that a “reasonable person” type be reasonable only once the tenant of landlord would reach the same 3.06 Contiguous Subleased has met these criteria. result—not a conversation that any Floors. landlord should relish having. Consider requiring sublet fl oors to 3.11 Recapture Right. be contiguous—ideally at the top or If the tenant wants to sublease any 3. Assignment and Subletting: bottom of the tenant’s stack. Perhaps space, give the landlord a right to re- Implementation require that any subleasing maximize capture that particular space. Defi ne contiguity (in some defi ned way), the recapture period window as 3.01 ADA. to facilitate future transactions and well as the date when any recapture Prohibit any assignment or sublet- fl exibility. becomes effective. Avoid circular- ting that triggers incremental ADA or ity (such as saying the recapture other legal compliance requirements 3.07 Leasing Agent. becomes effective on the date of the in the building or by the landlord in Require the tenant to designate the sublease, but the sublease becomes the premises. (As with some of the landlord’s managing agent as leasing effective upon the landlord’s consent other suggestions about assignment agent at market-rate commissions and, therefore, never becomes effec- and subletting, the fi rst place to con- for any contemplated assignment or tive). If the tenant wants to sublease sider this issue is in the original lease sublet. 50% or more of its space, also allow itself—don’t wait until the tenant the landlord to recapture right the 3.08 Partial Subleases. wants to assign or sublet.) entire leased space. If the landlord ex- Wherever the lease refers to sublet- ercises any recapture right, consider 3.02 Advertisements. ting, it should refer to a subletting requiring the tenant to pay the land- The landlord should have the right to of “all or any part of” the premises, lord a brokerage commission equal pre-approve any advertisements for because a bare reference to subletting to what the tenant would have paid assignment or subletting. The lease may let the tenant argue that the pro- a third party to broker a comparable should prohibit any reference to pric- vision relates to a sublet of the entire transaction. For any partial recapture ing in those advertisements. premises only. This is yet another right, require the tenant to pay for example of how a literal and narrow any demising wall or other space- 3.03 Assignor Guaranty. reading (or the possibility of a literal separation expenses that may arise. As a condition to any assignment that and narrow reading) produces ever- These could include code compliance the lease allows, consider requiring longer legal documents. any unreleased assignor—and any expenses to establish a legally sepa- guarantor of the lease—to deliver a 3.09 Processing Fee. rate occupancy. guaranty with full suretyship waivers Charge a processing fee for any as- 3.12 Rent Increase Upon or at least an estoppel certifi cate to signment/subletting, payable when Assignment. confi rm that the signer remains liable. the tenant submits an application. If the tenant assigns, let the landlord In either case, state that any future The tenant should agree to pay the increase base rent to fair-market rent. changes in the lease obligations do landlord’s attorneys’ fees and ex- When assigning a lease with percent- not exonerate the guarantor, though penses for any assignment or sub- age rent, consider resetting the base the guarantor need not stand behind lease, whether or not the transaction for the rent calculation—either to any incrementally greater obligations. requires or receives the landlord’s current market rent or, in the case of consent. 3.04 Breach of Anti-Assignment retail space, the sum of existing base Covenant. 3.10 Prohibited Use. rent plus the average percentage rent A breach of the covenant not to as- Even if the tenant has certain rights for some specifi c period before the sign the lease without the landlord’s to assign or sublet, the new occupant assignment. (Anemic percentage rent consent should create an automatic should expressly remain bound by will, however, often correlate with a event of default, not merely a generic the use clause in the lease. Although tenant request to assign or sublet.) default for which the tenant might that proposition may seem self- 3.13 Subtenant Nondisturbance. have a cure period. evident, courts may infer some unin- If the landlord agrees to provide non- tended fl exibility on use if the parties disturbance or recognition rights to 3.05 Confi dentiality. negotiate a right to assign or sublet. subtenants, require that the “nondis- Require the tenant to keep confi den- Retail landlords are particularly vul- tial the terms of any assignment or turbed” (or “recognized”) subleases

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 19 satisfy clear and objective standards. belongs entirely to the landlord (a claim 100% of the sublet/assignment Before agreeing to nondisturb (or rec- proposition that has a ring of fairness profi t, this would vitiate the tenant’s ognize) any actual or potential sub- to it but may reverberate with a dull incentive to negotiate any sublease lease, the landlord must ask whether thud); profi t at all. The landlord might it wants to be “stuck with” that therefore prefer a somewhat lower 3.14.03 If the tenant does not fur- sublease and all its terms if the main percentage. In any case, the landlord nish the necessary information for lease terminates. The landlord may might also want to require that the the landlord to calculate assignment/ want to require minimum rents, a sublease be at market rents or higher. subletting profi ts, the landlord may certain form of sublease, arm’s length estimate and the tenant must pay negotiations, a reasonable confi gura- 3.15 Transactional Requirements. the estimated amount until a correct tion (such as multiple contiguous full For any assignment/sublet, indepen- amount is established; fl oors), subrent that does not decline dent of any consent requirements, over time, and other characteristics. 3.14.04 The landlord may condi- require the tenant to satisfy certain The sublease should not impose ob- tion the closing of any assignment/ conditions (such as permitted use, ligations on the landlord that exceed subletting transaction on the tenant’s reputation, net worth of assignee/ the landlord’s obligations under the acknowledging the amount of the subtenant, and no violation of exclu- main lease regarding the subleased landlord’s profi t participation and sives) and delivery of certain docu- space. If the tenant occupies multiple making any payments due on closing ments satisfactory to the landlord fl oors, try to limit the nondisturbed that transaction; (such as assignee/subtenant’s certi- space to full fl oor(s) at the top or bot- fi ed fi nancial statements, uncondi- tom of the tenant’s stack. Subtenant 3.14.05 The landlord may collect tional assumption of the lease, and nondisturbance or recognition agree- profi t payments from the assignee or reaffi rmation of guaranties). Should ments can create issues similar to sublessee if the tenant fails to pay; any of these requirements exceed those which already apply under the partial release clauses in mortgages 3.14.06 For a sublease, amortize the base lease? (concern about “cherry picking” and/ tenant’s transaction costs and other or destruction of expected value), deductions over the term of the sub- 4. Bankruptcy and opportunities for fraud or abuse lease, not only from early subrent (such as an obligation to “nondis- payments; 4.01 Characterize Tenant turb” a below-market sublease to Improvement Contribution as Loan. the tenant’s brother-in-law). Any 3.14.07 Require the tenant to dis- To the extent that as an economic landlord obligation to deliver agree- close all income derived from any matter the tenant’s rent reimburses ments to protect subtenants should subtenant (potentially backed by a the landlord for tenant improve- be conditioned on the absence of any certifi cate from the subtenant and ments, consider restructuring such default under the main lease. If the from the tenant’s principals); payments as payments on a loan, in- landlord does agree to enter into a 3.14.08 Require the tenant to deliver dependent of the lease, evidenced by nondisturbance agreement with any copies of all assignment/sublease a note. Require the tenant to pledge subtenant, the landlord may want to documents to the landlord for re- (at least) its leasehold as security and hold the subtenant’s security deposit view before the landlord signs off on perhaps supplement that security (although beware becoming involved anything; with a separate “tenant improve- in sublandlord/subtenant disputes) ments loan letter of credit.” This and may want the tenant to reim- 3.14.09 Carefully defi ne, limit, and structure may give the landlord an burse the landlord’s legal fees in re- scrutinize the scope and timing of all argument to avoid Bankruptcy Code viewing the sublease and negotiating “offsets” or “credits” the tenant may limitations on the landlord’s claim for the nondisturbance agreement. claim in calculating its profi ts; “rent,” although the landlord would then instead face all the risks of being 3.14 Tenant’s Profi t. 3.14.10 Consider requiring the ten- a secured or unsecured creditor. The ant to pay the landlord’s share of sub- If the tenant must pay the landlord landlord’s choice of poison will vary let profi ts in a present-valued lump a share of the consideration or other with circumstances, but merits con- sum at sublease execution; profi t the tenant receives from a sub- sideration in structuring the lease. letting or assignment: 3.14.11 Try not to allow the tenant 4.02 Letters of Credit. 3.14.01 Allow the landlord to audit to deduct any of the work allowance If the tenant delivers a letter of credit the tenant’s books and records; the tenant provided for the assignee or subtenant; and in place of a security deposit for more 3.14.02 Any tenant revenue aris- than a year’s rent, consider the ef- ing from rent concessions the land- 3.14.12 Keep in mind that, even fect of Bankruptcy Code (11 U.S.C.) § lord made under the original lease though the landlord might want to 502(b)(6). Check the drawdown con-

20 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 ditions of the letter of credit to con- 5.02 Means of Notice. 5.08 Who May Give Notices. fi rm that the landlord has the right Allow either party to give notice by State that the landlord’s counsel or (though not the obligation) to draw facsimile or email, provided that managing agent (as engaged from on the letter of credit if the tenant the sender (a) keeps a confi rmation time to time) may give notices for the fi les for bankruptcy, even if the tenant sheet or print out and (b) delivers landlord. Negate any suggestion that remains totally current in payments. a paper copy of the same notice to the party that gives the notice needs Don’t just rely on the proposition that the recipient by overnight delivery. to provide any evidence of author- a tenant bankruptcy would constitute (Clarify that the overnight-delivery ity. If the tenant wants evidence of an “Event of Default”; instead, the copy only confi rms the notice, but the authority, allow them to ask for it, but letter of credit should expressly al- notice will be effective when faxed or without thereby deferring the effec- low the landlord to draw on it in this emailed.) Try to allow more than one tiveness of the notice. event. permitted means of giving notice. 6. Compliance with Laws 4.03 Multiple Leases. 5.03 Next Business Day Delivery. If the same tenant (or its affi liate(s)) Defi ne “overnight” delivery as “next 6.01 ADA. leases multiple locations, try to struc- business day” delivery, to avoid oc- If the tenant uses the premises as ture the transaction as a single com- casional case(s) saying “overnight” “public accommodation” or for any bined lease for all locations to prevent doesn’t mean any particular num- other use that triggers extra ADA the tenant from “cherry picking” in ber of nights (yet another example requirements in the building (such bankruptcy. If the landlord must use of bad cases producing ever-longer as the lobby or public corridors), the multiple leases, try to provide cross- documents). tenant should pay for the work neces- defaults and give all the leases the sary to bring the premises into com- same date. Try to avoid any language 5.04 Routine Rent Invoices. pliance with those legal requirements. Avoid any suggestion that the land- that would allocate particular rent to 6.02 Defi nition. particular premises, thus inviting or lord cannot send routine rent or other invoices both (a) by ordinary mail Defi ne “Laws” broadly to include supporting selective lease rejection. future enactments and amendments, Even a formulaic adjustment of rent and (b) only to the tenant (no copies to counsel or the like). Negate any insurance regulations and require- based on casualty or condemnation ments, utility company requirements, may create enough of a hook for a duty to send out base rent invoices unless they notify the tenant of an administrative promulgations, and bankruptcy judge. Try to fi gure out recorded declarations, present and how not to create that hook. increase in base rent. The landlord should try to send only an annual future. 4.04 Shopping Center Premises. invoice setting forth the year’s base 6.03 Legally Required Bankruptcy Code (11 U.S.C.) § 365 rent and known monthly escalation Improvements. payments. gives a landlord greater rights upon a Require the tenant to perform all im- tenant’s bankruptcy if the landlord’s provements to the premises required building constitutes a “shopping cen- 5.05 Service of Process. State that notice (or process) may by law. For any such required im- ter.” But the statute does not defi ne provements that relate to the building “shopping center.” Within reason and be served on the tenant by serving the tenant’s principal at his or her as a whole, the tenant should pay its the bounds of reality, the landlord 3 residence. proportionate share. If the tenant can try to include favorable language resists (which it probably will, and in the lease to confi rm that the land- 5.06 Tenant’s Notices. should), consider limiting the ten- lord’s project constitutes a “shopping Copies of notices from the tenant (or ant’s obligation to apply only to laws center.” perhaps just notices of alleged land- enacted after the lease commences. 5. Bills and Notices lord defaults) should also go to the (The tenant will probably still resist landlord’s counsel. and the parties will probably reach 5.01 Date of Delivery Defi nitions. the usual negotiated outcome in any Confi rm that every permitted means 5.07 Tenant’s On-Site Contact. space lease. The landlord will bear of notice also provides for the date Require the tenant to provide a pri- the risk of present and future laws when that particular notice will be- mary single on-site contact for opera- that generally govern similar build- come effective. Try to make all notices tional issues. Also require the tenant ings and generic occupancies like the effective as quickly as possible, even to give the landlord that person’s tenant’s. The tenant will bear the risk if the tenant refuses to accept the current home and cellular telephone for legal requirements that arise from notice. numbers. the tenant’s nongeneric or unusual use of the space.)

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 21 6.04 Operating Licenses. (c) require both the original notice 7.06 Limitation of Remedies. Require the tenant to maintain all and the reminder notice to state con- The lease should say that if the land- licenses necessary to operate its busi- spicuously (in all capital boldface let- lord wrongfully withholds consent ness in the premises. ters) that the landlord must respond (for example, the landlord acts unrea- within that period or will be deemed sonably even though it agreed to act 6.05 PATRIOT Act. to have granted its consent. reasonably), then the tenant’s only The landlord should check the remedy is specifi c performance—not Offi ce of Foreign Assets Control 7.03 Discretionary Consents. monetary damages, and especially (“OFAC”) list of terrorist entities on- If the business agreement between not consequential damages. As a line at www.fi ncen.gov to determine the parties does not require the backup position, the lease could whether the tenant or, in the case of landlord to be reasonable about as- require expedited arbitration, per- a corporate tenant, any of its prin- signment or subletting, simply ban haps with the potential arbitrator(s) cipals appears on the list. Require both—instead of requiring “consent designated in the lease. This might the tenant to certify that it is not a in Landlord’s sole discretion”—to particularly make sense for construc- terrorist or someone with whom the avoid possible claims of an implied tion disputes, if the tenant anticipates landlord cannot legally do business, obligation to be reasonable. Also, performing substantial construction. using language that refers to spe- in this case, negate any implication Negate any potential tort or common cifi c types of prohibited person. For that the landlord must at least con- law liability as a result of withholding what it’s worth, also have the tenant sider whatever proposal the tenant consent unreasonably or in violation indemnify against any loss the land- presents. of the lease or applicable law. lord suffers (including, of course, the landlord’s attorneys’ fees) because 7.04 Expenses. 7.07 No Representation. the tenant really is a terrorist or falls Require the tenant to pay any fees or State that the landlord’s consent to within some other category of prohib- expenses the landlord incurs, includ- anything is not a representation or ited person. ing legal costs, in connection with warranty that the matter consented any consent, even if denied. Consider to complies with law or will meet the 7. Consents requiring an application fee in con- tenant’s needs or otherwise makes nection with any consent request. Try 7.01 Conditions to Consent. any sense at all. to make the reimbursement obliga- Even if the landlord has agreed to be tion broad enough so it even applies 7.08 Permitted Use. reasonable about a consent, require if the tenant initiates discussions with State that the landlord has no obliga- the tenant to satisfy certain condi- the landlord for a totally discretion- tion, implied or otherwise, to allow tions fi rst, for example, the tenant not ary lease amendment or waiver, as any change in the permitted use of be in default under the lease. Require opposed to a consent already contem- the premises, even if the landlord the tenant to deliver an estoppel plated within the four corners of the consents to (or is required to consent certifi cate and copies of all relevant lease. to) an assignment or subletting or any documents. Set other requirements alterations. tailored to the particular consent at is- 7.05 Lender’s Rights. sue. Remember that the landlord may Review the landlord’s loan docu- 7.09 Reasonableness. forget to impose any such requirements to assure that the landlord’s When the landlord agrees to be “rea- ments as a condition to the consent rights and obligations under the lease sonable,” try to set specifi c criteria the when issued. The lease should give track the landlord’s obligations as tenant must fi rst meet. Once the ten- the landlord a checklist of what to borrower under the loan. What land- ant has met these criteria, the land- require, assuming that the landlord lord consent rights do the existing lord will not unreasonably withhold will think of opening up the lease and loan documents require the borrower its approval. Any mortgagee’s disap- looking at it when the tenant actually to retain? And what landlord consent proval of a matter should automati- requests a consent. rights will future lenders probably re- cally constitute a “reasonable” basis quire? (If the loan documents are be- for the landlord to withhold consent. 7.02 Deemed Consent. ing negotiated at the same time, try to Without some criteria or clear fl ex- If the landlord has agreed that failure correct any disconnects by modifying ibility for the landlord, the interpreta- to grant or withhold consent within the loan documents if necessary. The tion of “reasonableness” can result in a specifi ed number of days will be concerns in this paragraph go beyond litigation that will often be stacked deemed consent, try to: (a) have this assignment and subletting, but seem in favor of the tenant. Consider re- concept apply only in particular areas mostly likely to apply to assignment quiring arbitration on any issue of (such as consents to transfers or alter- and subletting.) reasonableness. ations), (b) require a reminder notice before the deemed consent arises, and

22 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 7.10 Scope of Consent. 8.05 Impairment of Business. ing the tenant to maintain business Any consent applies only to the par- Defi ne an event of default to include interruption insurance, then the lease ticular matter under consideration, events (beyond the usual insolvency should allow the tenant to abate rent and does not waive any future re- list) that may indicate the tenant is for a casualty. If, however, the casu- quirement to obtain the same consent preparing to shut down. These might alty affects only part of the premises, if similar matters arise later. include the tenant’s announcing that then limit the abatement accord- it will make substantial distributions, ingly, so it applies only to the extent 7.11 Survival of Conditions to dividends, or asset sales outside the that the premises are not useable. A Consent. ordinary course of business; shut landlord must, however, carefully Whenever the tenant must satisfy down its operations elsewhere; sus- coordinate any such provision with certain conditions to obtain the land- pend or terminate a substantial part the landlord’s insurance program, to lord’s consent (or to take any action of its business; or lay off staff above a prevent surprises and problems. without obtaining the landlord’s con- certain threshold. At a minimum resent), consider as a general proposi- quire reporting of these matters. 9.03 Tenant Waiver. tion whether the lease should require Require the tenant to waive the provi- the tenant to cause those conditions 8.06 No Right to Cure Event of sions of New York Real Property Law to remain satisfi ed even after the con- Default. § 227 (which allows a tenant to termi- sent is granted or the action taken. Once an event of default has oc- nate a lease in the event of a casualty curred, should the tenant have a that renders the premises untenant- 8. Default wide-open cure right even after the able), and comparable provisions in 8.01 All Rent Due at Signing. tenant’s cure period has already other states. Consider requiring the tenant to pay lapsed? Whenever the landlord can 9.04 Termination Right; all rent for the term of the lease at exercise remedies “if an event of Limitation on Restoration. signing, but state that the landlord default shall have occurred and be Provide no right (or a limited right) agrees to accept monthly installment continuing,” this quoted language for the tenant to cancel upon casualty. payments only so long as no event of effectively gives the tenant an open- To the extent the lease requires the default exists. ended right to cure the event of default, provided the tenant does so landlord to restore, impose appropri- 8.02 Cross Defaults. before the landlord actually exercises ate conditions, including completion Provide for cross defaults as against its remedies. Does the landlord really of insurance adjustment and recovery other leases with the landlord or its want that? Also provide that if the of adequate insurance proceeds. affi liates, or even against other obli- landlord accepts rent after giving a 9.05 Time to Restore. gations of the tenant or its affi liates notice of termination of the lease, the If the landlord has the right or obliga- (such as fi nancial covenants under rent constitutes merely a payment on tion to restore after a casualty, mea- bank loans). account of sums due. It does not vitiate the notice of termination—or any sure any deadline from the landlord’s 8.03 Default Notices. landlord right to terminate—unless it receipt of insurance proceeds—not Provide that default notices need not brings current all arrearages. from the date of casualty. Insurance specify cure periods. Although any policies require restoration “with due default notice will need to specify the 8.07 Noncurable Defaults. diligence and dispatch.” If the lease default, give the landlord the right The landlord may want to state that defi nes an unrealistically short resto- to supplement any default notice to certain defaults are noncurable, such ration period and allows the tenant include any additional defaults that as prohibited transfers. to terminate the lease if the landlord were missed or correct any miscal- misses the deadline, this will cre- culations, without thereby extending 9. Destruction, Fire and Other ate an issue with lenders. Moreover, the tenant’s cure period (unless the Casualty depending on policy language, any change is substantial). resulting lease termination may not 9.01 Disaster. constitute loss covered by the land- 8.04 Discount for Timely Consider drafting a clause to address lord’s insurance program. Payment. loss of the tenant’s ability to use the Consider increasing “face rent” in premises because of disaster condi- 10. Development-Related the lease by some high percentage, tions that go beyond the building, or Issues but also state that if the tenant pays arise entirely outside the building, 10.01 Air and Development Rights. its rent by the fi rst day of the month, such as fl ood or terrorist attack. If the project includes development then the tenant receives a discount 9.02 Rent Abatement. rights from other locations, should equal to the increased part of the rent. If the landlord maintains rental in- the landlord include them as part come insurance, rather than requir-

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 23 of the defi nition of the project? The condominiumization would affect 10.08.05 Expressly allow the land- answer may vary depending on state building operations, the use clause, lord to reconfi gure parking and the and municipal law. Have the ten- tax allocations, and everything else. building as a whole; ant waive any right to object to any What role should the condominium merger or transfer of development board have? 10.08.06 The lease should auto- rights, and agree to sign any zoning matically remain subordinate to any lot merger if requested to do so. The 10.06 Construction Restrictions. future easements and other recorded tenant should have no right to limit State that nothing in the lease limits documents the landlord signs to fa- any other uses within the project. by implication the landlord’s right to cilitate further development; construct or alter any improvements 10.08.07 Review/revise/adjust the 10.02 Building Expansion. (including kiosks) anywhere on the defi nition of “Building”; and If the landlord may at some point landlord’s property. If the lease does expand or add fl oors to the build- contain any such restrictions, state 10.08.08 The tenant should waive ing, build in enough fl exibility so the that they are limited to their express any rights to light or air. landlord has no issues when doing terms. so. For example, give the landlord 10.09 Relocation Right. the right to enter the premises to 10.07 Demolition. Give the landlord the right to relocate install structural supports for any Allow the landlord to terminate the the tenant to comparable premises in construction above the premises; lease after reasonable notice if the the building or in some other specifi c to install new posts, pillars, or sup- landlord intends to demolish the building the landlord or its affi liate ports as necessary; and to move walls building. Set as low as possible a owns. around to accommodate any of this standard for the landlord to satisfy. work. Allow the tenant an equitable For example, avoid any requirement 11. Electricity rent adjustment for any interference that the landlord must be unalter- 11.01 Additional Electrical or reduction of the premises, but ably committed to demolition or Capacity and Riser Rights. have the tenant waive any right to must have terminated other leases If the tenant negotiates additional an injunction, damages, or claim of or obtained a demolition permit or power and/or additional riser space, constructive eviction. (Commentators construction fi nancing. Give the ten- the landlord will want to preserve raised their eyebrows when a recent ant incentives to cooperate. Set up remaining electrical capacity and/or case reached the result the previous a process so the landlord will fi nd riser space for other tenants. Will the sentence suggests, even in the face of out quickly whether the tenant will landlord want the tenant to remove silence in the lease. Despite the land- try to fi ght the early termination of any additional installations at the end lord-friendly outcome in that case, a the lease. For example, the lease can of the lease term? careful landlord’s counsel will want require the tenant, promptly after re- to prevent the issue entirely.) ceiving a termination notice, to deliv- 11.02 Change of Provider. er an appropriately tailored estoppel State that if the landlord changes the 10.03 Building Name and/or certifi cate and an increased security electricity provider for the building, Address. deposit. Pay the tenant a demolition the tenant must use the new provider, Allow the landlord to change the fee only if the tenant vacates strictly to the extent legally allowed, even name or address of the building. on time. if the tenant directly meters its own Require the tenant to refer to the consumption. building only by whatever name or 10.08 Expansion Rights. address the landlord gives it. If the landlord may want to expand 11.03 Delivery of Electrical Service. the physical size of the building: The tenant should comply with elec- 10.04 Building Standard trical conservation measures and any 10.08.01 Consider resetting base Specifi cations. limits on power grid availability, in- years after the expansion; The landlord should reserve the cluding required shutdowns that may right to modify building standard 10.08.02 Consider how the expan- arise. specifi cations. sion would affect the tenant’s proportionate share for escalations (after 11.04 Electrical Service. 10.05 Condominium Conversion. completion and lease-up); If the tenant’s space is directly me- If the landlord considers condo- tered, require the tenant to keep the minium conversion at all likely, think 10.08.03 Require the tenant to sign landlord informed of the tenant’s about it in the lease. Allow the land- appropriate documents as needed; electrical consumption, with copies lord to delegate its responsibilities to of bills. This may facilitate the land- 10.08.04 Allow the landlord to ex- the condominium board. Adjust pass- lord’s long-term planning of electrical pand the measure of real estate taxes throughs to include condominium service for the building and future re- by adding other tax lots to the project; fees as appropriate. Consider how leasing of the space.

24 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 11.05 Electricity Measurement. fails to vacate the premises at the end environmental remediation) by the In defi ning the electrical capacity that of the term, the tenant must pay a use expiration date, the tenant must pay the landlord must provide, multiply and occupancy charge (not “rent”) holdover rent until completion. the required watts per square foot by equal to the greater of (a) some high useable, not rentable, square feet. percentage of the fi nal adjusted rent 12.07 Security Deposit. (including escalations) under the Consider requiring an incremental 11.06 Post-Termination Electric lease and (b) some high percentage security deposit to back the tenant’s Charges. of the then fair market rental value of end-of-term obligations. To the extent any utility provider has the premises. Calculate the charge on 12.08 Tenant Waiver. the right to recalculate charges and a monthly basis for an entire month Require the tenant to waive any civil bill the landlord later, expressly al- for every full (or partial) month the procedure law or rule that would low the landlord to bill the tenant for tenant holds over. Confi rm what the allow a court to issue a stay in con- its share of such charges. If the elec- maximum enforceable holdover rate nection with any holdover or other tric utility has a certain time within may be (it can vary). Describe this summary proceedings the landlord which they can send such a bill, give payment as liquidated damages and might institute. the landlord the same time plus 60 not a penalty. Consider simplifying days for processing. matters by saying that the fi nal year 12.09 Time of Essence. of occupancy will require the tenant 12. End of Term State that “time is of the essence” for to pay either fair market appraised the tenant’s obligation to vacate the 12.01 Abandoned Personalty. rent, or a very, very high rate. Give premises. State that upon lease termination, any the tenant an option to terminate the personalty in the premises that the lease effective just before that last 13. Environmental lease requires the tenant to remove— year of the term begins, on at least a 13.01 Copies of Notices. but the tenant does not remove—will year’s notice. This way, if the tenant be deemed abandoned. Require the stays, the landlord can try to collect Require the tenant to promptly deliv- tenant to pay to remove and store very high rent. The landlord doesn’t er copies of all notices it receives from that personalty unless the landlord have to hold its breath to the last any state or federal environmental elects to retain or discard it. minute to see if the tenant will de- agency relating to the property. cide to default. (The whole arrange- 13.02 End-of-Term Assessment. 12.02 Cables, Conduits. ment would look something like the Allow the landlord to require an The landlord should retain owner- “anticipated repayment date” and environmental assessment at the ten- ship of all cables and other wiring “hyperamortization” provisions that ant’s expense at the end of the term. in the building. Require the tenant have sometimes appeared in securi- Require the tenant to remediate any to remove cables, conduits, wires, tized loans.) raised fl oors, and rooftop equipment conditions that would have been at the end of the lease term either in 12.05 Landlord’s Property. the tenant’s responsibility under the all cases or at the landlord’s request. At the landlord’s option, the tenant lease. (For clarity, the landlord might Require the tenant to indemnify the should leave behind any improve- also want to provide for a “baseline” landlord from all liability in connec- ments, fi xtures, or personal property assessment at lease commencement.) tion with that removal. To the extent that the landlord paid for (including 13.03 High Risk Uses. through a rent abatement). Consider that the lease allows any of these For a gas station or other high-risk the tax implications of ultimate items to remain, require the tenant to use, consider: (a) establishing an envi- ownership. properly cap and label them. ronmental baseline by undertaking a 12.03 Consequential Damages. 12.06 Obligation to Restore. sampling plan before occupancy (this If the tenant holds over, require the Require the tenant to restore the will establish what problems, if any, tenant to pay all damages the land- premises (including removing sig- already exist); (b) requiring periodic lord incurs, including consequential nage) at the end of the term. Where monitoring, especially at locations damages such as the loss of the next appropriate, specify by exhibit which where groundwater might be readily prospective tenant. Consider giving alterations may remain, which must affected, and along perimeter areas the tenant a window of up to 60 days remain, and which must be restored. where migrating oil can be detected; before consequential damages apply. The restoration obligation should (c) obtaining an indemnifi cation that Holdover rent would apply as usual. survive expiration or sooner termina- is both very broad (all environmental tion of the lease. State that if the ten- risks) and very specifi c (particular 12.04 Holdover. ant does not complete restoration or environmental issues arising from Consider providing that if the tenant other end-of-term activities (such as the tenant’s particular business); (d)

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 25 requiring the tenant to post a bond reasonably believes that a violation 14.01.03 Condition for Audit. Allow if the tenant cannot obtain environ- of environmental law exists, all at the the tenant to audit operating costs mental liability insurance; and (e) tenant’s expense. only if those costs increase more than if underground tanks already exist, a specifi ed percentage over a speci- requiring the tenant to: (1) accept the 13.08 Required Tank Removal. fi ed prior year or base year. tanks “as-is,” (2) comply with all ap- The landlord might want the right to plicable laws, including obtaining all perform a further environmental as- 14.01.04 Confi dentiality. Require permits (as well as annual registra- sessment at the end of the term, and the tenant and its auditor to sign a tion and recertifi cation), (3) post all require the tenant to remove any un- confi dentiality agreement satisfac- state-required fi nancial assurances, derground storage tanks (especially tory to the landlord for any audit (4) maintain, repair and replace, if but not only if the environmental and its results before disclosing any required, all tanks, and (5) maintain assessment discloses problems) and records or information to the tenant all required records and inventory perform any required remediation. or its auditor. The agreement should, controls. Condition the return of the tenant’s among other things, prohibit the ten- security deposit on the tenant’s com- ant and its advisors from disclosing 13.04 Interior Air Quality. pleting any such removal and/or the existence of any audit or any of Disclaim any landlord liability for remediation. its results, including any settlement, mold, bad air, or “sick building syn- particularly to other tenants in the drome.” Also allow the landlord to 13.09 Tenant Indemnifi cation. building. The tenant’s breach of the prohibit smoking anywhere in the Require the tenant to indemnify the confi dentiality agreement should con- building or at adjacent sites such as landlord against all environmental stitute an incurable default under the sidewalks and terraces. violations affecting the landlord’s lease or at a minimum preclude the property and arising out of the ten- tenant from initiating further audits 13.05 Landlord Indemnifi cation. ant’s use and occupancy. That indem- for several years. If the landlord agrees to indemnify nity should survive the expiration or the tenant for past environmental termination of the lease. 14.01.05 Costs of Audit. Ask the problems, limit this indemnifi cation tenant to pay for the landlord’s out- to any liability that exists under pres- 14. Escalations of-pocket costs for any audit (such as ent law based on present violations. photocopying, staff time, document 14.01 Audit Issues (Operating Exclude any liability arising from retrieval, accountants’ time spent Costs) future laws, amendments of existing answering inquiries, etc.), at least if laws, or any action (or failure to act) 14.01.01 Auditors. Prohibit contin- the audit fails to disclose any material of the tenant that exacerbates any gent-fee auditors or auditors who issues (i.e., issues serious enough that existing condition or increases any have worked for other tenants in the landlord would need to pay for existing liability. the building. If the landlord agrees the tenant’s audit). to reimburse audit costs (such as if 14.01.06 Dispute Resolution. 13.06 Notice of Hazardous the tenant’s audit reveals a certain Provide a private and fi nal mecha- Conditions. level of mistakes), then negate any nism (such as arbitration) to resolve Require the tenant to notify the land- reimbursement to contingent fee au- any dispute about operating costs. lord of any leaking or other hazard- ditors. Consider requiring a national ous or potentially adverse condition CPA fi rm. Insist that such fi rm agree 14.01.07 Inspection Restrictions. on the premises, including mold, to notify the landlord of any under- Allow the tenant (or its representa- leaks, and other conditions that charges or errors in the tenant’s favor tive) to examine specifi ed books and could cause mold. Require the ten- that the audit discloses, and to give records only, and only for a specifi ed ant to abate any such circumstances the landlord a copy of the auditor’s period, but prohibit copying. Require promptly. full report. (If the auditor doesn’t, the that any audit comply with the land- tenant should agree to do so.) If the lord’s reasonable requirements and 13.07 Reports; Inspections. tenant engages any particular lease instructions. The tenant should agree to deliver, auditor, require that lease auditor to or reimburse the landlord’s cost to agree not to represent other tenants in 14.01.08 Limits. Limit the timing, obtain, updated environmental re- the building. frequency, and duration of audits. ports. Give the landlord and its en- Require the tenant to complete the vironmental consultant the right to 14.01.02 Claims. Require specifi city, audit by a date certain after notifying inspect the premises and perform en- completeness, and fi nality in any ten- the landlord of the audit. Consider vironmental assessments (including ant claim of discrepancy or error. requiring the tenant to audit multiple invasive assessments) if the landlord years at once, or requiring that the

26 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 notice of audit specify the specifi c is- use operating cost escalations to pay interest factor on the landlord’s unre- sues the tenant intends to raise (diffi - operating costs. imbursed capital outlay. cult if the tenant has not yet seen any 14.02.07 Liability for Refunds or of the underlying records). 14.03.04 “Gross Up” Clause. The Rent Credits. The landlord’s liability landlord should have the right to 14.01.09 Threshold for Payment. If for any refund (or credit) of overpaid “gross up” (for example, if the build- overcharges (net of undercharges) escalations should terminate after a ing has an occupancy level under total 3% or less of total annual operat- specifi ed number of years (and auto- 95%, increase the amount of oper- ing costs (a generally accepted defi ni- matically upon any sale, receivership, ating costs to the amount that the tion of “materiality”), then the tenant or foreclosure of the building?) to landlord would have incurred for full should receive no adjustment or re- prevent open-ended obligations or is- occupancy). Expect the tenant’s coun- imbursement of its audit costs. Defi ne sues in this event. Consider whether sel to negotiate a gross-up in the base carefully the factor to which the lease the landlord should have the right to year operating costs as well. applies the 3% factor. Use as large pay in installments, or limit the ten- a number as possible. For example, ant’s relief to a future offset against 14.03.05 Major Repairs. Do not refer to 3% of gross annual operating rent (unless the lease expires before necessarily limit multiyear amortiza- costs rather than 3% of the tenant’s the tenant fully recovers what’s due). tion of large repair costs to “capital” escalation payment. items. Particularly if leases limit 14.02.08 No Decrease. Escalation for- escalations or if the landlord wor- 14.02 Generally mulas should never allow rent to go ries about base years for new leases, down. the landlord may want the ability to 14.02.01 Base Year. Consider whether spread major noncapital repair costs anything might make the current 14.02.09 Survival; Timing. Limit the over multiple years. base year for operating costs unusu- time during which the tenant may ally high, such as a spike in insurance challenge any escalation or demand 14.03.06 No Fiduciary Duty. Negate costs, energy cost spikes, a change in a refund that the landlord “forgot” any fi duciary duty regarding op- management, extraordinary repairs, to pay. (Be careful, though. The ten- erating cost escalations and their or unusual capital expenditures.4 ant may try to make this reciprocal administration. Normalize the base year for operat- for the landlord’s billings.) All the ing costs to adjust for such unusual tenant’s obligations on escalations 14.03.07 Off-Site Costs. Avoid spikes. Or, instead, consider a fi xed should survive the expiration or ter- limiting “operating costs” to those dollar amount to defi ne the base. mination of the lease. incurred physically within the particular building. The landlord may 14.02.02 Brokers’ Commissions. 14.03 Operating Costs incur off-site operating costs, such as Exclude all escalations from the cal- in a multi-use project (such as holiday 14.03.01 Broad Defi nition. Consider culation of broker’s commissions in decorations in a central plaza) or for any special characteristics of the the brokerage agreement. off-site equipment, installations, traf- property that may lead the landlord fi c improvements, shuttle bus servic- 14.02.03 Ease of Proof. Make operat- to incur costs outside the typical op- es, or the like to benefi t the building. ing costs easy to prove. The landlord erating cost defi nitions in a generic doesn’t want to have to prove all the lease. For example, if a reciprocal 14.03.08 Reality Connection. When underlying facts. How would a judge easement agreement or a ground negotiating the operating cost escala- respond to the defi nition of operating lease imposes costs similar to real es- tion clause, confi rm that the clause, costs in the lease, and all the various tate taxes or operating costs, expand particularly as negotiated, matches defi nitions and exclusions? Ask a the appropriate defi nition to include the landlord’s current practices in litigator. them. operating the building, so the landlord can actually make the necessary 14.02.04 Examples. For any com- 14.03.02 CAM. Avoid the term calculations and adjustments without plex or intricate escalation formula, “CAM” (common area maintenance) experiencing a long slow descent into consider adding an example, but because operating cost escalations accounting hell. Consider consulting don’t make the numbers dramatic or cover far more than common area with the landlord’s accountant and shocking. maintenance. A tenant may argue the building manager. Ask both to re- that the phrase “CAM” somehow de- 14.02.05 Fixed Fee. Consider replac- view the defi nition of operating costs ceives the tenant. ing escalations based on operating and any exclusions. costs or CAM with a fi xed dollar 14.03.03 Capital Improvements. 14.03.09 Reserve Charge. To avoid fi gure. Amortize capital improvements only the common arguments about how in the comparison years, not the base 14.02.06 Implied Covenants. State to treat “capital” items, consider es- year, for operating costs. Include an that the landlord has no obligation to tablishing an annual per-square-foot

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 27 capital reserve charge. The landlord 15. Estoppel Certifi cates ship, such as option exercise letters, would not need to account for these notices, and the like. 15.01 Additional Requirements. funds and the lease would defi ne In defi ning the scope of an estoppel categories of “capital type” costs to 15.07 Ratify Guaranty. certifi cate, allow the landlord to re- which tenants need not contribute. Allow the landlord to require a con- quire any additional information the (If, however, this reserve charge stays fi rmation/ratifi cation of any guaran- landlord reasonably requests. Think constant from year to year, includ- ty, not merely an estoppel certifi cate about uncertainties that, at some later ing the base year, then the landlord from the tenant. date, a lender might want the tenant will never be able to collect a penny to confi rm—such as whether the ten- 15.08 Reliance. of escalations under the typical pass- ant exercised an option, the dollar Allow reliance by prospective pur- through of only increases in operating amount of base operating costs, or chasers, mortgagees or any par- costs. Therefore, make it a separate any nonstandard dates that might ticipant in a future securitization, additional charge.) help defi ne either party’s obligations. including rating agencies, servicers, 14.03.10 Timing. Try not to agree to trustees, and certifi cate holders. tight time limits (or, worse, a “time 15.02 Attach Documents. is of the essence” provision) for the Require the tenant (if asked) to attach 16. Failure to Deliver landlord’s obligation to provide to any estoppel certifi cate a copy of Possession operating statements. The landlord the lease and all amendments, op- 16.01 Condition of Premises. should, of course, try to be timely, tion exercise letters, and other docu- Substantial completion should suffi ce based on cases that have required ments that defi ne the landlord-tenant (for example, temporary certifi cate of such timeliness based in part on an relationship. occupancy) for the landlord’s deliv- inferred “fi duciary duty” because the 15.03 Estoppels. ery of the premises. landlord controls the information. Require the tenant to agree to de- 14.03.11 Use of Generally Accepted liver future estoppel certifi cates at 16.02 Delivery Dispute. Accounting Principles (“GAAP”). In any time on the landlord’s request. Provide for a short deadline for the defi ning operating “costs” (not “ex- Provide that such certifi cates shall tenant to report any issue or problem penses,” perhaps an accounting term bind the tenant whether or not the about the premises or the landlord’s of art), try not to refer to GAAP. The landlord can demonstrate detrimental work. If possible, state that taking of term often arises in two places: (a) reliance. (Does that concept work?) possession constitutes acceptance for when defi ning what the landlord can all purposes. 15.04 Exhibit. pass through to tenants; and (b) when 16.03 Delivery Procedure. excluding “capital” items. GAAP Attach a form of estoppel certifi cate as a lease exhibit (conform to typical Try to tie the “Commencement Date” may unintentionally skew the calcu- to an objective event—preferably lation of operating costs in ways the lender requirements), but build in fl exibility for future lender requests. within the landlord’s control—or a landlord would regard as a surprise. date, rather than to any notice from Again, coordinate with the landlord’s Include a certifi cation of the tenant’s current ownership structure. the landlord. Notices are often not accountant. as easy to give (and give quickly) as 14.04 Other Escalations 15.05 Failure to Respond. they would seem to attorneys draft- Establish specifi c meaningful rem- ing leases. Any delay in giving a com- 14.04.01 Consumer Price Index. edies for failure to sign an estoppel mencement date notice will mean lost Use the Consumer Price Index for all certifi cate within a short period. revenue for the landlord. Urban Areas (“CPI-U”) index. Many These might include: deemed estop- believe that this index has historically pel; a power of attorney to execute it 16.04 No Liability. increased faster than the Consumer for the tenant; or a nuisance fee (such The landlord should incur no liabil- Price Index for Urban Wage Earners as $100 per day). ity for failing to deliver possession and Clerical Workers (“CPI-W”) on the commencement date for any index. 15.06 Legal Fees. reason, including holdover or con- If the landlord agrees to give an es- struction delays. The lease should ex- 14.04.02 Fixed Percentage Increase. toppel, require the tenant to pay the pressly waive any applicable law that Neutral, predictable, and easy to landlord’s legal fees and expenses. may provide otherwise. The tenant’s administer. The landlord should establish proce- obligation to pay rent should com- 14.04.03 Porter’s Wage. Include dures to assure that when the tenant mence on possession. Perhaps extend fringe benefi ts and all other labor requests an estoppel, the landlord the term by the duration of any land- costs. The wage rate used should not will be able to list all documents that lord delay in delivering the premises, refl ect “new hire” or other transition- defi ne the landlord-tenant relation- especially if the delay exceeds a cer- al wage rates. tain amount of time.

28 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 16.05 Rent Abatement. any plans, specifi cations, or request guarantor, require the tenant to notify To the extent the landlord agrees to for any consent/waiver. Avoid a fl at the landlord of the guarantor’s death give the tenant a rent abatement for fee. Set the fee according to a formula or disability. late delivery, limit the duration of based on the size of the job or hours the abatement (for example, if the necessary, with a fl oor. 18.06 Tenant’s Financial Condition. rent abatement exceeds a set number Require the tenant to deliver annual of days, thereafter the tenant must 17.03 Witnesses. fi nancial statements for itself and either terminate or wait, but cannot The tenant should reimburse the any guarantor. Negotiate the right continue to claim an abatement).Try landlord for costs incurred if the to require a security deposit, rent to defer any such abatement (for ex- landlord or its personnel are called as adjustment, or other consequences to ample, spread it out in equal annual a witness in any proceeding related to protect the landlord if the fi nancial installments over the remaining term the lease or the tenant. condition of either deteriorates. of the lease). This will reduce imme- 18. Future Documents and 18.07 Termination of Lease Memo. diate damage to the landlord’s cash fl ow at a time when the landlord may Deliveries If the tenant obtains a memorandum face fi nancial stress. of lease, then: (a) the tenant should 18.01 Further Assurances. agree to execute and deliver a termi- 16.06 Termination Right. The land- Require the tenant to enter into any nation of memorandum of lease in re- lord (not just the tenant) may want amendments that the landlord rea- cordable form if the lease terminates the right to terminate the lease if the sonably requests to correct errors early; and (b) consider requiring the landlord ultimately cannot deliver or otherwise achieve the intentions tenant to sign such a termination at possession by a date certain. of the parties, subject to reasonable lease execution, to be held in escrow. limitations. 17. Fees and Expenses 19. Guaranty 18.02 Future Events. 17.01 Attorneys’ Fees and The parties should agree to memori- 19.01 Estoppel Certifi cate. Expenses. The tenant should reim- alize any commencement date, rent The guarantor should agree to issue burse the landlord’s attorneys’ fees adjustment, or option exercise in a estoppel certifi cates promptly upon and expenses both broadly and with lease amendment. If the parties don’t request. Any failure to do so should specifi city (for example, for actions actually do that, though, the lease constitute a default under the lease. and proceedings, including appeals, should say the failure does not affect and in-house counsel fees and ex- either party’s obligations. (It would 19.02 “Good Guy” Guaranty. penses). The reimbursement obliga- merely create an issue of proof, al- Consider a “good guy” guaranty tion should cover attorneys’ fees and though the lease needn’t say that.) (i.e., a guaranty of rent and perhaps expenses incurred in connection with: all other obligations under the lease, (1) any litigation the tenant com- 18.03 Governmental Benefi ts, including liens, building permits, mences against the landlord (includ- Generally. Require the tenant to co- certifi cate of occupancy and comple- ing any declaratory judgment action operate in a timely manner, as neces- tion of construction, continuing only or any action to interpret or apply sary, to help the landlord qualify for until the tenant surrenders the prem- the lease), unless the tenant obtains a any available tax or governmental ises vacant, in satisfactory physical fi nal favorable judgment; (2) negoti- benefi ts (such as tax abatements). condition, and free of any occupancy ating a lender protection agreement rights, provided the guarantor gives 18.04 Permitted Disclosure. for the tenant’s asset-based lender; ___ months notice of surrender and If the landlord agrees to any confi - (3) the landlord’s (or its employee’s) pays ___ months rent). Upon the ten- dentiality restrictions, or if governing acting as a witness in any proceed- ant’s surrender, and as a condition law automatically infers such restric- ing involving the lease or the tenant; to release of the guaranty, the tenant tions, then the landlord should ex- (4) reviewing anything that the tenant should release the landlord in writing clude from such restrictions the right asks the landlord to review or sign; from all lease obligations. to disclose any information to actual (5) any lien fi ling, even if the lien fi l- or prospective mortgagees, equity in- ing does not constitute a default; (6) 19.03 Guarantor Consents. vestors, or purchasers. bankruptcy proceedings; (7) obtain- Tailor the guarantor’s consent/waiver boilerplate to refl ect circumstances ing a nondisturbance agreement for 18.05 Reporting. the tenant; and (8) considering and of the lease, such as pre-consent to Require the tenant to immediately any future assignment of lease, and responding to any tenant request for report if the tenant or any guarantor an amendment or waiver. any state-specifi c language necessary experiences: (1) any adverse change or helpful for a guaranty. in fi nancial position; or (2) any litiga- 17.02 Fees and Expenses. tion that could adversely affect the The tenant should pay a fee (and ex- 19.04 Guarantor Consideration. ability to perform. For an individual penses) for the landlord’s review of In any guaranty, recite the relation-

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 29 ship between the guarantor and the material reduction in the tenant’s or a for any insurance carrier (typically tenant to confi rm the guarantor will guarantor’s net worth). a minimum A:X by AM Best or A by receive some benefi t from the lease. Standard & Poors). 19.10 Tenant Bankruptcy. 19.05 Guarantor’s Net Worth. The guarantor (and any unreleased 21.03 Coordination with Loan Require regular reporting of each assignor) should acknowledge its li- Documents. guarantor’s net worth. State that a ability will not decrease if a tenant Conform the insurance requirements material decline in a guarantor’s net bankruptcy “caps” the landlord’s in the lease to those in the landlord’s worth or a guarantor’s death or bank- claim for “rent.” current loan documents. Allow the ruptcy constitutes an event of default landlord to change the insurance unless the tenant promptly furnishes 19.11 Unreleased Assignors. requirements in the lease as needed additional collateral or guaranties sat- If the tenant assigns the lease, then to comply with the landlord’s and isfactory to the landlord or meeting unless the landlord has released the any mortgagee’s future reasonable an agreed fi nancial test (such as a net assignor, recognize that the assignor requirements. worth equal to some multiple of the remains functionally a guarantor of annual rent). Any remedies triggered the lease. Any reference to a guaran- 21.04 Evidence of Insurance. by a guarantor’s bankruptcy should tor of the lease should include any Require “evidence” of insurance be perfectly enforceable against a unreleased assignor, and the lease (the “ACORD 28” form, formerly tenant. should treat them the same way. “ACORD 27”)5 or a copy of the tenant’s insurance policy at lease sign- 19.06 Lease Assignment. 20. Inability to Perform ing, not a “certifi cate” of insurance If the landlord sells the property, then 20.01 Exception to Force Majeure. (the “ACORD 25” form), which is the guaranty should, by its terms, Force majeure should never limit any often regarded as worthless unless automatically travel to the purchaser, monetary obligation of the tenant, or modifi ed. If possible, require deliv- whether or not the transfer docu- any obligation to maintain insurance. ery of a binder (not just the relevant ments say so. ACORD form). Have the binder or 20.02 Force Majeure. certifi cate specify appropriate ISO 19.07 Security. For the landlord, force majeure endorsements in the policy. The lease Consider securing a lease guaranty should include a failure to obtain should require the tenant to deliver obligation with a letter of credit or governmental consents or permits evidence of insurance whenever other security. By tying such a letter and acts of government, war, terror- necessary to facilitate the landlord’s of credit to a guaranty rather than to ism and insurrection. refi nancing of the property, with a the lease, the landlord may reduce nuisance fee for late delivery of cer- the likelihood that the tenant’s bank- 20.03 Triggering Event. tifi cates of insurance. ruptcy estate could “claw back” any If the tenant negotiates a force ma- letter of credit proceeds that exceed jeure clause, require the tenant to 21.05 Improvements and the landlord’s permitted claim for notify the landlord promptly of any Betterments. rent in the tenant’s bankruptcy. “force majeure” event. The exten- Have the tenant insure any improve- sion of time should continue only so ments and betterments it makes to its 19.08 Social Security/EIN Number/ long as such triggering event actually space, not just its personal property. Address. causes the tenant delay. State the social security or employer 21.06 Insurance Advice. identifi cation number (and, perhaps, 21. Insurance Work with the landlord’s insurance driver’s license and passport num- broker/consultant to check, update, ber) and home address of any guar- 21.01 Additional Insureds. and improve the insurance require- antor beneath its signature line. This Include the landlord and its manag- ments of the lease as appropriate. underscores the fact that the guaranty ing agent and mortgagee as “ad- Keep an eye on TRIA/terrorism-relat- is intended to constitute a personal ditional insureds,” not “named ed legislation. obligation of the guarantor and may insureds.” The latter may owe premi- facilitate enforcement. In the case of ums and may prevent the landlord 21.07 Insurance Broker. any foreign or out-of-state guarantor, from seeking indemnifi cation against Allow the landlord (at its option) to require appointment of an in-state the tenant for any claims. deal directly with the tenant’s insur- agent for service of process and a ance broker to obtain any insurance 21.02 Approval Rights. consent to jurisdiction. documents the lease requires. But Allow the landlord to approve the the lease should state that doing so 19.09 Springing Guaranty. identity and fi nancial condition of imposes no liability or obligation on Consider a springing guaranty if cer- the tenant’s insurance carriers. Set the landlord, and doesn’t excuse the tain adverse events occur (such as a minimum fi nancial rating standards tenant from any obligations.

30 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 21.08 No Fault Liability. 21.12 Should Landlord Insure? handled. These clauses should be mu- Resist the inclination to state that Consider having the landlord tual, covering all losses caused by any the tenant gets no rental abatement insure the tenant’s improvements insured risk (even negligence of the after a casualty if the tenant caused (with the tenant reimbursing the landlord or the tenant), provided the the casualty. Though this may sound allocable insurance cost—premium, insurance carrier has consented to the “fair,” remember that the tenant has co-insurance and all other insurance waiver. Such consents often appear in paid for its share of insurance cover- costs—either directly as additional standard insurance policies, although age through operating cost escala- rent or as an operating cost), and this should be confi rmed. tions or otherwise. Fault may not be having the landlord restore (or give easily determined. Also, if rent does the landlord the right to require the 22. Landlord’s Access to not abate upon a casualty, then the tenant to restore) with any insurance Premises landlord can’t make a claim under its proceeds. 22.01 Emergency Contact. rental income insurance. State that if Require the tenant to provide the the landlord cannot collect insurance 21.13 Tenant Failure to Insure. name, telephone number and email proceeds, the tenant’s rent abate- If the tenant fails to insure and a fi re address of an emergency contact and ment ceases. Any tenant waivers of occurs, then make the tenant liable recite in the lease, subject to change liability should expressly cover negli- for the entire loss and not merely the by proper notice. gence and should benefi t not just the unpaid insurance premiums—even if landlord, but also the usual litany of the landlord knew about the failure to 22.02 Keys. landlord-related parties, the property insure. (Such a provision responds to The tenant should deliver copies of manager, and so on. cases that limit the tenant’s liability to all keys and access codes to the land- the amount of the unpaid premiums.) lord. The landlord should consider, 21.09 Plate Glass Insurance. For net leased properties where the though, whether it truly wants what- Require any retail tenant to carry tenant is responsible for buying the ever liability travels with the keys plate glass insurance (This coverage insurance, give the landlord the right and access codes, especially if the ten- relates only to glass on the fi rst fl oor (but do not impose the obligation) to ant has unusually valuable personal of a building.) buy the required insurance and ob- property. The landlord may want to tain reimbursement from the tenant. 21.10 Rent Coverage. be selective about requiring keys and A landlord will usually prefer to 21.14 Tenant’s Rights to Proceeds. access codes. maintain rental income insurance, as Make any right of the tenant to re- 22.03 Landlord’s Right to Enter. part of a larger property insurance ceive insurance proceeds subject to Give the landlord the right to enter to package. In that case, it probably the rights of the landlord’s mortgagee perform repairs in the premises and makes no sense to require the tenant and to fulfi llment of any tenant resto- to facilitate the landlord’s ability to to maintain business interruption ration duties under the lease. perform repairs and do work in other insurance. Any rental/business inter- tenants’ premises. ruption insurance should cover addi- 21.15 Tenant’s Special Use. tional rent (such as escalations or tax Consider the tenant’s specifi c use 22.04 No Eviction. pass-throughs) and percentage rent as and whether the lease should re- Make clear in the lease that the land- well as base rent. The landlord should quire any particular insurance. For lord’s entry onto or inspection of the try to carry rental income insurance instance, if the tenant sells liquor on premises does not constitute an actual coverage for at least 12 months, more the premises,require the tenant to or constructive eviction and does not for very large buildings that would purchase liquor liability insurance entitle the tenant to any rights or rem- take longer to rebuild. The landlord and dram shop coverage. If the ten- edies, or any claim, offset, deduction, will typically want to supplement the ant gives away liquor without charge, or abatement of rent. coverage with 12 months of extended then the lease should require host period of indemnity to cover the re- liquor liability insurance. More gener- 22.05 Notice Requirements. leasing period. ally, if the tenant’s use and occupancy The lease should state that the land- of the premises presents an unusual lord may enter without notice in an 21.11 Self-Insurance. situation or risk of loss, consult with emergency. Even absent an emer- If the tenant self-insures, state that it a professional risk management fi rm gency, oral notice to someone on site cannot benefi t from the waiver of li- for special insurance requirements. should suffi ce. This is yet another ability for purposes of the waiver of example of an area where a require- subrogation. The tenant must act as 21.16 Waiver of Subrogation. ment for “written notice” may sound the insurer. Understand “waiver of subrogation.” perfectly reasonable, but in the real This is a tricky topic, often wrongly

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 31 world such a requirement is com- and is diligently prosecuting the cure 24.03 Other Leases. pletely impractical. of its default, the tenant should have State that the landlord makes no rep- no rights or remedies against the resentations, warranties or covenants 22.06 Reconfi guration. landlord. about other tenants (past, present or Reserve for the landlord the right to future) or the terms of their leases. reconfi gure or change the means of 23.03 Liability. access to the premises. Any liability of the landlord should 25. Maintenance and Repairs end if the landlord transfers its inter- 22.07 Secure Areas. est in the premises. 25.01 Broad Repair Obligations. Limit the tenant’s right to create se- Where the tenant has broad repair ob- cure areas (areas the landlord may 23.04 Liability for Prior Owners’ ligations, expressly include “ordinary not enter without the tenant’s permis- Acts. or extraordinary, structural or non- sion) by annexing an exhibit to the As a rather aggressive position, say structural, foreseen or unforeseen” lease specifi cally identifying such that after any conveyance of the repairs. areas. property (even outside foreclosure), the new owner is not liable for (and 25.02 No Overtime. 22.08 Signs and Showings. the tenant may not assert any credit, The landlord should have no obliga- The landlord should insist on having claim or counterclaim because of) tion to do any work at overtime or the rights to: (1) show the premises any claims the tenant might have premium rates. to prospective purchasers, mortgag- had against the former owner, such ees or appraisers and post “for sale” 25.03 Periodic Upgrades. as for overcharges and refunds of Beyond maintaining the premises “as signs; and (2) during the last [12] escalations. months of the term, show the prem- is,” the lease could require the ten- ises to prospective tenants and post 23.05 Statute of Limitations. ant to upgrade and renovate every “for rent” signs. Require the tenant to assert any claim specifi ed number of years, to keep against the landlord within 90 days the premises exciting and new, par- 23. Landlord’s Liability after the tenant fi rst became aware of ticularly for retail space. Perhaps the the facts supporting the claim. tenant must invest a certain amount 23.01 Exculpation. within a certain period as a condition Limit the landlord’s liability to its 23.06 Tenant’s General Indemnity. to exercising any lease renewal rights. interest in the property or, better, to Require the tenant to indemnify the whatever equity the landlord would landlord against all harm arising 25.04 Right to Perform. have if it had entered into a mortgage from the tenant’s use and occupancy If the tenant’s acts or omissions cause securing fi nancing equal to 80% of of the premises and the property, damage to another tenant’s premises, the value of the property. Negate any including all environmental matters the landlord can repair them at this personal liability of the landlord and as well as anything the tenant installs tenant’s expense. its partners, members, managers, outside the premises. The indemnity offi cers, directors, affi liates, and the 25.05 Specify Repair Obligations. should survive lease expiration or Avoid distinguishing repairs as like. Recent cases have applied the termination. “implied covenant of good faith and “structural” (the landlord’s responsi- fair dealing”—a tort theory of liabil- 24. Landlord’s Representations bility) and “nonstructural” (the ten- ity—to sidestep exculpation clauses ant’s responsibility). Draw these lines in leases. To avoid the possible effect 24.01 Express Not Implied. specifi cally and in detail. Otherwise, of such cases, state that the landlord’s State that the landlord makes no a court may decide what the parties exculpation applies not only to claims implied covenants, representations intended. under the express terms of the lease, or warranties. Limit the landlord’s 25.06 Tenant’s Obligation. but also to claims of any kind what- responsibilities to those expressly The tenant must maintain, repair soever arising from the relationship set forth in the lease (i.e., hopefully, and/or replace any parts of the between the parties or any rights and none). building—including storefronts and obligations they may have relating to 24.02 Merger. sidewalks—that exclusively serve the the property, the lease, or anything State that any agreements, written premises. related to either. or otherwise, predating the lease (in- 25.07 Wireless Internet. 23.02 Landlord Default. cluding prior lease drafts) merge into If the tenant’s wireless internet ser- Give the landlord the same open-end- the lease. Indicate that any statements vice causes interference, the tenant ed cure periods for nonmonetary de- or representations on the landlord’s must resolve. The landlord may re- faults that tenants typically obtain. So Web site or in the landlord’s advertis- quire the tenant to password-protect long as the landlord has commenced ing are not part of the lease. its wifi service.

32 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 26. Occupancy 27.02 Conditions. 27.06 Option Rent. Condition any option exercise on the Set a “fl oor” for option rent equal to 26.01 “As Is” Condition. tenant’s: (a) not being in default (and the previous rent under the lease. The tenant should represent and ac- not potentially being in default) both knowledge that it takes possession on the exercise date and on the effec- 27.07 Option Subject. of the premises and the building and tive date, and perhaps even for ____ Make any expansion option subject to common areas in their “as is, where years before the exercise date; (b) not existing exclusives and renewal claus- is” condition as of the commence- having assigned the lease or sublet es of other tenants. To preserve tenant ment date. more than a certain amount of space; diversity, the landlord may even want the right to negotiate a renewal with 26.02 No Obligation Except (c) retaining a certain minimum oc- an existing tenant before the space Specifi c Work. cupancy; (d) actually operating in the become available under an option or Confi rm that the landlord has no space; (e) satisfying a net worth test right of fi rst refusal. obligation to perform any work or (fi xed dollars or rent multiple) for at least ____ years before exercising the make any installations to prepare for 27.08 Reduction Options. option; (f) if the lease allows the ten- the tenant’s occupancy, except as the If the tenant negotiates an option to ant to “give back” space, the tenant lease expressly states. “give back” space, this raises many has never exercised any “giveback” of the same issues as expansion or 26.03 Service Contracts. right; (g) if the lease gives the tenant renewal options. In addition, think Consider whether the tenant should “fi rst refusal” rights, the tenant has about the practical issues that any covenant to reimburse the landlord not recently waived any such rights space reduction might create. Will for some share of the cost of all ap- that have arisen; and (h) if the tenant the tenant need or want to leave any plicable service contracts (such as has invested a certain dollar amount installations in place to service their HVAC, boiler, sprinklers, alarms, in capital improvements during a remaining space in the building? If approved contractors) or to maintain specifi ed period. the tenant gives back a partial fl oor, such contracts for the premises at the who will construct—and pay for the tenant’s expense. 27.03 Coordination of Options. The landlord should parse through construction—of any new demis- 26.04 Tenant Covenants. all possible preemptive rights to as- ing walls or any incremental costs to The tenant should covenant to fi le its sure that no two tenants can ever comply with building code require- plans, obtain its construction permits, claim the same space at the same ments for a separate occupancy? install its fi xtures, obtain any permits time. Given that these problems can How will the landlord need to change necessary for business operations, even arise if the landlord exercises the its operations if a fl oor previously and open for business, in each case by utmost care, the landlord may want occupied by one tenant becomes a a certain date. The tenant should then to include appropriate exculpatory multiple-tenant fl oor? Will the ten- agree to operate for at least a certain language in the lease. Limit the tenant’s elevator lobby signage need to minimum period. ant’s remedy if the landlord inadver- change? Exclusive elevator banks? tently allows overlapping options. Submetering and other confi guration 27. Options (Expansion/ of utilities? What happens if the ten- Renewal/Reduction) 27.04 Multiple Bites at the Apple. ant gives a notice of reduction but If the landlord offers “fi rst refusal” then can’t move out on time? If the 27.01 Carveouts from Purchase space and the tenant does not take it tenant reduces its occupancy, should Rights. (or if the tenant declines to exercise it lose some of the concessions it oth- If the tenant negotiates an option an option), then for a specifi ed num- erwise negotiated in the lease? If the or right of fi rst refusal to purchase ber of months deem the tenant to tenant gives back multiple fl oors, the the landlord’s building, exclude: (a) have waived any fi rst-refusal rights lease might require contiguity among foreclosure or its equivalent (and any (and any options that would other- those fl oors, and require them to con- subsequent transaction); (b) transac- wise apply), at least where they relate sist of the highest (or possibly lowest) tions between the landlord and af- to comparable space, broadly defi ned. fl oors in the tenant’s stack. fi liates or family members; (c) other permitted transactions, such as trans- 27.05 Option Maintenance Fee. 27.09 Time of the Essence. fers of passive interests or creation Require the tenant to pay a nominal Make time of the essence for exercis- of preferred equity for mezzanine annual fee to preserve future options. ing any option or right of fi rst refusal. lenders (and any exercise of remedies This gives the tenant an incentive to Say that timely notice constitutes by the lender); and (d) if the tenant terminate any option rights that it an agreed and material condition of “passes” on its preemptive right, then does not truly need. exercise. Recognize that the courts all subsequent transactions.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 33 sometimes validate late exercise after 28.03 Fixed Rent Increases. 28.09 Radius Clause. the fact. Perhaps provide for a protec- Increase fi xed minimum rent (and the Include a “radius clause” in any lease tive rent adjustment in this case (for percentage rent breakpoint) periodi- requiring percentage rent, i.e., the example, to fair market rental value cally over time based on projected tenant may not compete with itself if the lease would not otherwise pro- increases in gross sales. within a restricted area without the vide for it). landlord’s consent. 28.04 Gross Sales. 27.10 Timing. Defi ne gross sales to include sales by 28.10 Recordkeeping. Make the exercise deadline early subtenants and concessionaires. Require the tenant to maintain re- enough to give the landlord time to cords, in accordance with GAAP or relet if the tenant does not exercise its 28.05 Inclusions/Exclusions. any other generally accepted account- option. Provide that the landlord may For percentage rent purposes, con- ing standard, suffi cient to make any immediately commence showing the sider whether to include any cata- audit meaningful. The tenant should option space if the tenant does not ex- log or Internet sales that the tenant keep its records at an accessible and ercise its option. Coordinate the tim- makes through the store. Take into reasonable location, specifi ed in the ing with other leases to facilitate as- account the mechanics of the tenant’s lease. If the tenant moves its records, sembling large blocks of space in the business. Prohibit the tenant from it should agree to promptly notify future if the landlord wants to do so. claiming any credit for goods that a the landlord. The tenant should agree A landlord usually wants plenty of customer bought through a catalog or to keep its records for at least three lead time and notice, but may want to over the Internet (unless previously years. give the tenant as little lead time and included in store sales). Exclude sales notice as possible, to maximize the to the tenant’s employees only if the 28.11 Sales Reports. landlord’s fl exibility in dealing with tenant makes those sales at a discount Even if the tenant does not pay per- unexpected changes in occupancy. If (or, better, include them at such dis- centage rent, a retail tenant should an existing lease ends earlier than an- counted price). still provide monthly sales reports. ticipated, give the landlord the right This helps assess the tenant’s profi t- 28.06 Increases. to accelerate any future option or fi rst ability, the long-term prospects of the Provide for an increase in percent- refusal right that the tenant may have project, and how to approach future age rent upon any change of use or on the affected space. rent negotiations. change of the tenant. Clarify whether 27.11 Update Due Diligence. percentage rent bumps are com- 28.12 Violation. If the tenant wants to exercise an op- pounded or merely added to the If the tenant violates the radius tion, condition it on the tenant’s sat- bump(s) in previous year(s). clause, then consider requiring the isfying conditions (such as net worth) tenant to include as “gross sales” (for 28.07 Kick-Out Right. that applied when the parties signed percentage rent purposes) the greater Give the landlord the right to termi- their lease. of (a) a specifi ed percentage of gross nate the lease if percentage rent does sales at the premises; or (b) the gross 28. Percentage Rent and Radius not reach a certain level by a certain sales of the tenant’s store in the re- Clause date. Upon any such termination, stricted area if it violates the radius require the tenant to reimburse the clause. 28.01 Audit Right. landlord for all its unamortized leas- Let the landlord audit the tenant’s ing costs, including the cost of tenant 29. Quiet Enjoyment gross sales. If the tenant underpaid improvements, brokerage commis- percentage rent by more than 3%, the sions, negative rent, inducement pay- 29.01 Conditions. tenant should pay interest and the ments, free rent, and cash allowances. New York law (and probably the law costs of the audit. Try to continue any “kick-out right” of other states) implies a covenant over the entire lease term. of quiet enjoyment if the lease says 28.02 Effect of Casualty. nothing. Say that quiet enjoyment is The lease should state that if the 28.08 Limit Any Percentage Rent subject to the rights of mortgagees, premises are closed part of the year Penalty Period. ground lessors, other tenants, matters because of a casualty or condemna- If any cotenancy or other problem of record and all other terms of the tion, the “breakpoint” for percent- arises, the lease may allow the ten- lease. Condition the covenant of quiet age rent will drop. (This assumes ant to pay “percentage rent only.” In enjoyment upon the tenant’s not be- the lease expresses the “breakpoint” those cases, if the landlord ever solves ing in default. as a fi xed dollar amount, and not a the problem, regular rent should once formula referring to actual fi xed rent again apply. After a certain time, al- 29.02 Limit Services. payable from time to time. The lat- low the landlord to require the tenant Expressly limit the landlord’s obliga- ter would be more common, so this to either terminate or resume paying tion to provide services and other problem usually does not arise.) regular rent. obligations regarding the building to

34 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 bare occupancy and express obliga- Commercial Incentive Program, or and then ask whether this would tions under the lease. Try to prevent “ICIP,” in New York City). If the land- have reduced the tenant’s tax escala- the courts from using the “covenant lord obtains such benefi ts, the lease tion, after considering base years. The of quiet enjoyment” as the basis to should say whether the landlord or tenant’s refund should not exceed infer possible landlord obligations the tenant will ultimately receive the that hypothetical reduction. to provide services beyond those economic benefi ts of the program the lease requires. But also consider and how those benefi ts interact with 30.10 Tax Contests. whether modifying the covenant of real estate tax escalations. If an ICIP Prohibit the tenant from contesting quiet enjoyment at all justifi es the reduction arises from a particular ten- taxes without the landlord’s consent. controversy and negotiations it may ant, all parties will typically expect If the landlord does consent, the land- cause. it to be allocated just to that tenant. lord may want the right to require the If the landlord might convert the tenant to post a bond or letter of cred- 30. Real Estate Taxes building to condominium ownership, it equal to any contested taxes (if the tenant did not need to pay the taxes 30.01 Allocation of Tax Liability. think about how it would affect the fi rst, as a condition to the contest) and The landlord might not always want tax escalation defi nitions. use counsel the landlord approved. to allocate taxes by square footage. 30.06 Imperiled Abatement. The tenant should indemnify the For example, retail space may in- If the property benefi ts from any tax landlord against all losses that arise crease taxes more than residential abatement, deferral, subsidy, or the from any tax contest the tenant initi- or offi ce space. Try to require each like, think about the risk that some- ates. The landlord will almost always tenant to pay for any real estate tax one might challenge the validity of prefer to handle the contest. increases that result from that partic- such benefi t. If any such challenge ular tenant’s installation. If one tenant arises or someone threatens such a 30.11 Transfer Taxes. receives a tax abatement, the other challenge, allow the landlord to re- Consider possible transfer taxes on tenants should typically contribute quire the tenant to pay monthly (just the lease. New York, for example, im- to real estate taxes based on the pre- like a regular payment of real estate poses a transfer tax on certain leases abatement taxes. taxes) an appropriate contribution that extend beyond 49 years (including options) or contain a purchase 30.02 Base Year Real Estate Taxes. toward whatever incremental taxes, option. Defi ne “Base Year Real Estate with interest, the landlord might owe if the challenge succeeds. The land- Taxes” to include water and sewer 31. Remedies charges, as “net of any special assess- lord would refund these payments ments” and “as fi nally determined.” with interest if the challenge failed. 31.01 Abandonment. Consider the impact of varying tax Without a structure like this, the land- The landlord’s seizure and re-entry years for varying tax jurisdictions, lord will bear much of the risk of any of the premises based on “abandon- such as school district, water district, challenge and, in practice, may not ment” can create risk, because of un- municipal, county, and so forth. be able to shift much of that risk to certainty about what “abandonment” tenants. means. Try to defi ne abandonment in 30.03 Business Improvement the lease, such as nonpayment of rent 30.07 Management Fee. District (“BID”) Charges and Special and physical absence from the prem- If the landlord protests real estate Assessments. ises for a certain time. State that if the taxes, impose a reasonable extra Include any “BID” charges and spe- tenant defaults beyond cure periods management fee to compensate for cial assessments in the defi nition of and also removes a signifi cant num- the landlord’s time, trouble, and ef- “Real Estate Taxes.” ber of fi xtures and equipment, that fort. Such a fee might apply generally would constitute an abandonment or, if appropriate, only to particular 30.04 Estimated Tax Payments. and a surrender of the premises, enti- tenant(s) requesting the tax contest. Require the tenant to make monthly tling the landlord to repossess. Thus, estimated tax payments, especially if 30.08 Payments in Lieu of Taxes the landlord need not bring summary the landlord’s mortgage requires tax proceedings or give the tenant further escrow payments. Time the tenant (“PILOT”). Include PILOT payments in real es- cure rights. Expressly allow self-help payments to precede the tax escrow for abandonment. payments by a few days. tate taxes. 31.02 Default Rate. 30.05 Further Assurances. 30.09 Successful Contest. If a tax contest succeeds, the tenant Require the tenant to pay interest at The tenant should agree to assist the the default rate on amounts past due landlord, as reasonably necessary, will not necessarily be entitled to its share of the full refund. Instead, even after judgment (when the statu- to qualify for tax abatements and tory judgment rate would otherwise benefi ts (such as the Industrial and subtract the refund from actual real estate taxes for the year in question, apply).

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 35 31.03 Equitable Relief. rent adjustment, or a suspension or 31.11 Waiver of Jury Trial. Try to state that the landlord can ob- deferral of some privilege or benefi t. The waiver should apply to all mat- tain injunctive and declaratory and If the tenant’s “minor” default con- ters arising out of the landlord/ten- specifi c performance-type relief re- tinues for a specifi ed period, at some ant relationship and the property, not garding all nonmonetary covenants— point it should constitute an event of merely the lease, so as to reach tort both negative and affi rmative (su- default. Consider the degree of rea- claims between the parties. pervised and monitored by a special sonableness necessary for the remedy master if necessary). to qualify as liquidated damages. 31.12 Yellowstone Injunction. Consider whether the landlord can 31.04 Inducement Repayments. 31.07 No Mitigation. proactively add language to the lease State that if the lease terminates early Provide that the landlord has no ob- to limit the availability and potential because of default, the tenant must ligation to mitigate damages. If the burden of so-called “Yellowstone” repay with interest the unamortized landlord agrees to mitigate, the lease injunctions under New York law. For balance of the landlord’s rent con- should defi ne exactly what the land- example, consider some or all of the cessions, brokerage commissions, lord must do. following, each of which responds to contribution to the tenant’s work, one or more of the issues that arise in and work the landlord performed 31.08 Nonpayment. “Yellowstone” proceedings: for the tenant. (The tenant will argue If the tenant fails to pay rent, ex- that this gives the landlord double pressly allow the landlord to exercise 31.12.01 Cure Period Extension compensation. That may be true—but a “conditional limitation” right and Rights. Provide that the tenant may only if the tenant actually pays the terminate the lease, not just com- obtain an open-ended cure period, damages the lease or governing law mence nonpayment proceedings. and as much time as the tenant wants requires the tenant to pay. The land- (Many Standard Forms establish a to litigate an alleged default, by de- lord can agree to offset any liquidated “conditional limitation” only for all positing with the landlord as security damages provided for in the lease by defaults except failure to pay rent.) an amount equal to the landlord’s es- the damages suggested in this para- Expressly allow the landlord to exer- timate of the cost to cure the alleged graph if the tenant actually pays the cise a “conditional limitation” right to default. State that such a deposit latter damages. But in that case, why terminate the lease and also prosecute constitutes the only way the tenant bother?) simultaneously a proceeding for non- can evidence its ability and desire to payment of rent. Try to negate the cure the default. Only if the tenant 31.05 Interest and Late Charge. usual rule that requires the landlord actually makes the deposit, will it be Require the tenant to pay interest on to elect between the two—although entitled to prevent the landlord from late payments, in addition to a late of course the landlord cannot actually terminating the lease. charge. Multiple defaults or bounced obtain both forms of relief. 31.12.02 Final Cure Period Before checks within a specifi ed period Eviction. State that if the landlord ob- should trigger special consequences 31.09 Ownership or Succession. tains a warrant of eviction, the tenant up to and including termination of Consider asking the tenant to excuse will automatically have—or the land- the lease. For example, the land- the landlord from any obligation to lord can agree at any time to grant lord can require a higher late fee; a prove ownership or succession in any the tenant—a short fi nal cure period larger security deposit; that the next eviction proceeding. The landlord before the landlord proceeds with default be incurable; or that future would need to prove only tenant actual eviction. A “last clear opportu- payments—or at least all payments default. The tenant would then bear nity to cure” at the end of the eviction for the next specifi ed number of the burden of proving that the party proceedings substantially undercuts months—be made by certifi ed or ca- claiming to be the landlord is really the basis for a “Yellowstone” injunc- shier’s checks or wire transfer. just an impostor without rights. If enforceable, this would eliminate a side- tion. Provide that the Landlord may 31.06 Intermediate Remedies. show that merely gives any tenant an offer the tenant any such “last clear Deal with the fact that courts typi- opportunity to trip up the landlord, chance” either in the notice to cure or cally refuse to terminate leases based with no practical benefi t in the real at any later point before the lease has on “minor” defaults such as failure world. actually terminated. to deliver fi nancial information or 31.12.03 Financial Defaults. Require 31.10 Right to Cure. an estoppel certifi cate. For these the tenant to acknowledge that it can- Allow the landlord to cure the ten- defaults, establish intermediate rem- not obtain a “Yellowstone” injunction ant’s defaults and bill the tenant for edies. Make them meaningful, but for any fi nancial default, even if un- the landlord’s expenses, with interest not Draconian, such as liquidated certainty or disagreement exists about at the default rate as additional rent. damages ($500/day), a temporary the tenant’s obligations. (Uncertainty

36 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 or disagreement will always exist in 32.03 Finalizing Dates. If the tenant insists on the right to these cases.) The tenant must pay Where important dates remain to be remeasure, defi ne the formula for fi rst, fi ght later. determined after lease signing (such measurement (for example, refer to as the delivery date or the commence- the Building Owners and Managers 31.12.04 Landlord Court Victory. ment date), state that the landlord can Association (“BOMA”) standards). State that if the Landlord prevails in later deliver a commencement date Have the landlord’s architect/space litigation, the lease will be deemed letter to the tenant (a form of which planner certify such measurement to have terminated on the date the the lease could include as an exhibit) to the landlord. If the tenant later Landlord delivered notice of default, memorializing all relevant dates. The brings an action against the landlord and the holdover rent rate applies letter should automatically become for bad measurement, the landlord from that date forward. Require the effective unless the tenant delivers may have a claim against the design tenant to deposit this amount in a written objection to the landlord professional. escrow during the pendency of any within ten days after receipt. “Yellowstone” injunction. 32.08 Rent Concessions. 31.12.05 Other Rights and 32.04 Free Rent. Allow the landlord to undo or recap- Remedies. State that a “Yellowstone” Defi ne the free rent period as ending ture a rent concession and any other injunction, if granted, limits only the on a particular date (defi ned in the inducement if the tenant defaults landlord’s right to terminate the lease term sheet), not a certain number of before fully applying the concession. and does not limit any other rights months after an event (such as lease Consider extending a rent conces- or remedies (such as late charges, de- signing or delivery of premises). sion for a longer time (such as six fault interest, and reimbursement of Consider including a rent schedule months of 50% free rent rather than the landlord’s expenses). for clarity. This approach shifts to the three months of 100% free rent) or in tenant the fi nancial risk of protracted stages over the lease term (such as 31.12.06 Waiver. Require the ten- lease negotiations. Free rent periods one month free after every 24 months ant to waive its right to bring a should apply only to fi xed rent. As a rather than several months free at the “Yellowstone” injunction (but rec- compromise in “free rent” negotia- beginning). Condition any rent con- ognize that existing law makes such tions, consider allowing a retail ten- cession on the tenant’s fi nishing its a waiver unenforceable). Perhaps ant to pay rent in gift certifi cates for a initial alterations by a certain date or consider limiting the duration of any certain period. meeting certain other specifi c condi- “Yellowstone” injunction to 20 days. tions of special importance. Consider 32.05 Lockbox. any accounting implications for the 32. Rent If the tenant pays rent into a lockbox, landlord. 32.01 All Payments Are consider how to handle the risk that “Additional Rent. the lockbox administrator will de- 32.09 Rent Not Per Square Foot. ”Defi ne “additional rent” to include posit a check that the landlord would State rent as a fl at amount rather than all payments the lease requires of the have wanted to reject. For example, basing it on the square footage of the tenant. This will support the use of the lease might say that any such de- premises. This can prevent controver- “summary dispossess” rights for non- posit does not waive the landlord’s sy about square footage and remea- payment of all these amounts. The rights, as long as the landlord refunds suring. Avoid any statement about same characterization may have unfa- the amount of the incorrectly deposit- the square footage or rentable square vorable consequences in bankruptcy, ed check within some short time after footage of the premises. the lockbox administrator deposited though. Hence the landlord may wish 32.10 Stock Options. to be strategic about this issue. it. Thus, the landlord can correct the lockbox administrator’s mistakes and For tenants with initial public of- 32.02 Commercial Rent Control. preserve the landlord’s rights. fering (“IPO”) potential, consider Leases already require the tenant to whether to require (or accept) stock, make a corrective payment when rent 32.06 Payment. options, or warrants. (This paragraph control terminates. Consider requir- The lease should include an express was added early in the development ing the tenant to escrow the short- covenant to pay rent, not merely a of this checklist, sometime before fall amount with the landlord each schedule of rental amounts. Allow the April 2001. Recognizing that no one month during any rent control pe- landlord to require the tenant to pay has yet repealed business cycles, the riod, and pay interest on the shortfall all rent by wire transfer. co-authors decided to leave this paragraph in place.) (with credit for any interest earned on 32.07 Remeasurement. the escrow). Negate any possible remeasurement of the space or the common areas.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 37 32.11 Waiver. tenant’s abandoned personal prop- 34.05 Lien on Personalty. Consider requiring the tenant to erty and signs. Consider taking a lien on the tenant’s waive legal principles that can auto- personal property (but typically not matically convert a terminated lease 34.02 Increased Security. “fi xtures”), perfected with a UCC-1 into a month-to-month tenancy, with Require the tenant to increase the fi nancing statement. Any security notice requirements for termination. security deposit if the rent rises or interest should by its terms survive (Some subcommittee members reject the tenant’s fi nancial rating drops lease termination; otherwise it might such a waiver, arguing the automatic below a certain point. Should any terminate with the lease. conversion makes sense.) other circumstances trigger such a requirement? 34.06 Mortgagee Requirements. 33. Rules and Regulations Accommodate future mortgagee re- 34.03 Letter of Credit. quirements (for example, allow the 33.01 Compliance. Consider requiring the tenant to landlord to pledge the landlord’s Require the tenant to comply strictly deliver a letter of credit in place of a interest in the security deposit or to with the rules and regulations at- cash security deposit to try to reduce transfer any letter of credit to the tached as an exhibit to the lease, and the impact of any possible tenant mortgagee). If the tenant ultimately also with any changes (or perhaps bankruptcy. To minimize administra- needs to cooperate with these mea- only just “reasonable” changes) that tive complexity, require the tenant sures, establish a tight time frame for the landlord makes later. Consider to elect at lease signing whether it that cooperation. Allocate any result- whether the landlord’s rules and will post cash or deliver a letter of ing costs, including attorneys’ fees. regulations correctly refl ect present credit. Don’t allow either/or. Only if circumstances and building opera- the landlord insists on the prompt- 34.07 Replenishment. tions; if not, update them. est possible closing, allow the ten- Require the tenant to replenish ant to deliver a letter of credit after promptly the amount of any security 33.02 Lease Incorporation. signing. Close with a cash security that the landlord draws, or restore the If the rules and regulations contain deposit. This avoids extensive delays letter of credit accordingly. anything unusually important, move in dealing with banks’ letter of credit it to the body of the lease. Courts may departments. 34.08 Segregated Account. ignore rules and regulations. State The landlord should comply with any that if any confl ict exists between the 34.04 Letter of Credit state-specifi c requirements on hold- rules and regulations and the lease, Requirements. ing security deposits. When these the lease governs. If the tenant delivers a letter of provisions require notices to the ten- credit, require that: (1) the issuing ant about the security deposit, try to 33.03 No Liability. bank be (a) reasonably acceptable build those notices into the lease, if If the landlord does not enforce the to the landlord and (b) a New York possible and permissible. Before the rules or regulations against other Clearinghouse bank; (2) the landlord landlord disburses any interest to the tenants—or if other tenants violate can draw the letter of credit at a bank tenant, the tenant should execute and them with impunity—this should branch in the same city as the land- deliver a W-9 form to the landlord. As impose no liability or obligation upon lord upon presentation of merely a a fallback, the lease should include the landlord. A landlord often wants sight draft (no drawing certifi cate or the same language and information to have the freedom to enforce rules other documentary conditions); (3) as a W-9 form. and regulations against some tenants the letter of credit be an “evergreen” but not others. or the bank must notify the landlord 34.09 Waiver. (at least __ days before expiry) of any Require the tenant to waive any dam- 33.04 Recycling. failure to renew and the landlord ages claim against the landlord for Consider requiring the tenant to sepa- may draw (or better, shall be deemed any wrongful drawing on the letter of rate its waste. The landlord’s require- automatically to have drawn) the let- credit, and any right to enjoin or oth- ments may exceed those of applicable ter of credit; (4) even if the letter of erwise interfere with a drawing. law. Consider adding a provision credit is an “evergreen,” the issuer governing medical waste or other must confi rm the current expiry date 35. Services tenant-specifi c recycling or waste dis- upon request; (5) the letter of credit posal requirements. 35.01 Additional Services. will not expire until at least a speci- If the landlord agrees to make avail- 34. Security fi ed period after lease expiration; and able additional electricity or HVAC (6) the landlord can transfer the letter services, allow the landlord to set 34.01 End-of-Term Issues. of credit without charge to any lender aside capacity for future needs, as the Expressly allow the landlord to apply or purchaser (or, if there is a charge, landlord estimates them. State that the security deposit to costs to restore the tenant must pay it). the landlord will furnish building the demised premises and remove the

38 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 services only during “building stan- 35.07 Telecommunications/Fiber 36.02 Expenses. dard” hours, with some fl exibility to Optics Cable Provider. Require the tenant to reimburse the (re)defi ne what that means. Consider requiring the tenant to use landlord’s expenses for obtaining any the landlord’s telecommunications/ SNDA from the landlord’s mortgag- 35.02 Changes in Building fi ber optics cable provider. Give the ee, including the landlord’s reason- Operation. landlord the right to change provid- able attorneys’ fees. Allow the landlord to change how the ers. Negate any landlord obligation building operates and the services the to continue to use any particular pro- 36.03 “Financeability” Provisions. landlord provides (such as the num- vider. (The Federal Communications To avoid negotiating a separate sub- ber of elevators and security levels Commission constantly reviews and ordination, nondisturbance and at- and procedures), subject to reason- revises the rules in this area which of- tornment agreement (an “SNDA”), able standards. To the extent that the ten supersede lease language.) include directly in the lease all mort- landlord agrees to particular perfor- gagee protections and benefi ts that an mance standards, build in fl exibility 35.08 Tenant Complaints. SNDA would typically give a mort- if usage levels change (for example, Limit who can complain about build- gagee. Require the tenant to confi rm if the long-term storage area for old ing services. Require a written notice these protections if a mortgagee so fi les on the third fl oor becomes a of any such complaint, signed by requests, with the form of confi rma- cafeteria). specifi ed offi cers of the tenant. Excuse tion attached as an exhibit (perhaps the landlord from any liability for within the form of estoppel certifi - 35.03 HVAC. utility service failures. cate). Build in fl exibility to add any Defi ne any HVAC standards as de- other SNDA protections that some sign criteria, not as performance 35.09 Tenant-Provided Services. future mortgagee might (reasonably?) specifi cations. The landlord’s only ob- Prohibit the tenant from providing its require. Tightly limit any cure period ligation should be to operate HVAC own building-related services, such for any default arising from the ten- in conformance with design criteria. as cleaning, especially if this might ant’s failure to sign an SNDA. The tenant should be responsible for create labor problems. any distribution problems within the 36.04 Lease Subordinate. premises. 35.10 Utilities. Make the lease automatically subject Require the tenant to pay for tempo- and subordinate to the landlord’s 35.04 Off-Season Air- rary utilities during construction. If existing or any future fee mortgage. Conditioning. the tenant’s business will consume Try not to condition subordination on If the landlord provides air-condi- unusual amounts of utilities or servic- delivery of an SNDA. tioning before or after the regular air- es (such as a hairdresser, restaurant, conditioning season (because of hot or trading fl oor), require the tenant to 36.05 Mortgagee Modifi cations. weather or tenant requests), allow the pay its share of such usage, and think Require the tenant to agree to any landlord to charge tenants for that ex- about how to allocate it. reasonable modifi cation that a mort- tra service, even if the lease does not gagee requests, if it does not materi- yet require air-conditioning. 36. Subordination and ally reduce the tenant’s rights or ma- Landlord’s Estate terially increase its obligations. 35.05 Specifi cations. To the extent the landlord agrees to 36.01 Condominium or Ground 36.06 Mortgagee Right to meet specifi cations for any landlord Lease. Subordinate. services, consider the assumptions The landlord should retain the right State that any mortgagee can unilat- that underlie those specifi cations. For to create a condominium regime or to erally subordinate its mortgage to the example, elevator specifi cations as- enter into a ground lease of the entire lease, in whole or in part, at any time, sume a certain level and distribution building. Provide for the rights and including after commencement of a of occupancy and type of usage. If the obligations of the landlord and the foreclosure action. Any such subordi- tenant installs a cafeteria, this may tenant in such an event. Require the nation should bind the tenant auto- alter traffi c patterns so much that tenant to cooperate, as reasonably matically, whether or not the tenant the landlord should have the right necessary, provided the new structure has been notifi ed of it. to change the elevator performance produces no material adverse impact specifi cations. on the tenant. Allow the landlord to 36.07 SNDA Form. equitably adjust escalation formulas Require the tenant to execute any 35.06 Sprinklers. if the building becomes a condo- SNDA form that the landlord’s lender Charge the tenant for sprinkler main- minium or the landlord makes some requires or attach an industry stan- tenance and upgrades. Consider similar structural change. Allow the dard model SNDA, such as the one charging a monthly fee for static landlord to delegate its duties to the the New York State Bar Association water. condominium board of managers.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 39 promulgated. Edit the form of SNDA The tenant should agree to indemnify deliver the equipment in good work- to make it nonrecordable, and prohib- the landlord against all liability and ing order with all permits, warranties, it recordation. State that if the land- roof damage that arises from the and maintenance history documents. lord delivers a conforming SNDA and tenant’s rooftop equipment. Charge Restrict testing of backup generators the tenant does not sign and return for the tenant’s use of rooftop space. (sometimes very noisy). it within a specifi ed period, then the State that the landlord may require landlord has fully performed its obli- the tenant to relocate equipment 37.07 Uniform Elevator Lobbies, gations regarding obtaining an SNDA elsewhere on the roof, and to provide Signage, Entrance Doors and from that mortgagee. screening or walkways, all at the Window Shades. tenant’s expense. Prohibit the resale Require all tenants to maintain uni- 36.08 Zoning Lot Mergers. of services. State that any use rights form elevator lobbies, signage, en- Require the tenant to cooperate granted to the tenant do not limit the trance doors and window shades. As and timely execute documents as landlord’s use rights. Describe the an alternative, consider giving the necessary. tenant’s rooftop rights as a “nonex- landlord the right to require future clusive license.” uniformity. Give the landlord the 37. Tenant’s Equipment and right to install thermal fi lm on the in- Installations 37.05 Signage and Identity. side surfaces of any windows. Confi rm that the landlord controls all 37.01 Conduits and Risers. rights to exterior signage (including 38. Use The landlord should control/coordi- the name of the building, any fl ag- nate use of conduits and risers that 38.01 Advertising. pole, and rights to install plaques or run through or adjacent to the prem- In a retail lease, consider requiring other identifi cation), even if exterior ises. The landlord should have no the tenant to include the name and signage affects light and air. Prohibit liability for claims arising out of the address of the premises, as appropri- digital, fl ashing, or video signs, or es- tenant’s use of conduits and risers. ate, in all regional and internet adver- tablish criteria for such signs (such as Allow the landlord to relocate con- tising. Or, in the alternative, prohibit how often they may change). Signage duits; to recapture unused conduit or the tenant from using the name, im- can only advertise this operation at riser space; and to require the tenant age, or likeness of the building in its this location; it cannot advertise the to remove cables, conduits, and risers advertising, or control the manner in tenant’s products or services gener- no longer in use. which the tenant does so. ally. If the landlord installs any signs 37.02 Ducts and Ventilation. for the tenant, the tenant should pay 38.02 Certifi cate of Occupancy. Require the tenant to pay the cost of for them. As an alternative, state State that the landlord does not rep- any alterations or upgrades. Require that the tenant’s signs must comply resent or warrant that the tenant may the tenant to ameliorate at its expense with signage criteria attached as a use the premises for the permitted any venting or odor problems report- lease exhibit, which the landlord may use. Even delivery of a certifi cate of ed by other tenants. modify or update from time to time. occupancy does not create such a rep- For future changes in signage criteria, resentation or warranty. 37.03 Electromagnetic Fields give the landlord an express right to (“EMF”). upgrade the tenant’s signs, at the ten- 38.03 Continuous Operation. The tenant should agree not to cause ant’s expense. Require the tenant to Require a retail tenant to open and any EMF interference. If the tenant cooperate and execute all necessary stay open during certain prescribed generates EMF interference, the ten- documents. Give the landlord the hours with suffi cient personnel and ant should agree to solve the prob- right to remove signage temporarily inventory. If the tenant breaches, try lem. Negate any landlord liability. for repair or compliance with law. to defi ne the landlord’s measure of Allow the landlord to limit placement In drafting lease provisions, think of damages. Also, provide for remedies of machines that may cause EMF, signage as a profi t center, which the other than an injunction or a lease even within the premises. landlord should preserve and protect. termination (such as higher rent), because a court may not grant an 37.04 Rooftop Equipment. 37.06 Supplemental HVAC, injunction and the landlord would The landlord should control roof Backup Generator, and Fuel Tank. probably not want to terminate the rights, including penetrations, fuel The tenant must maintain its equip- lease. supplies, ancillary equipment, reloca- ment in compliance with law and tion, and size and weight of any roof- good practices (such as monthly 38.04 Cotenancy. top dish or other equipment. Require inspections), and keep written main- Provide for fl exibility in cotenancy the tenant to remove its equipment tenance records. These installations requirements to accommodate pos- (and any connecting cables) and re- become the property of the landlord sible future changes in the retail store the roof at the end of the term. at the end of the term. Tenant must marketplace. Avoid requirements that

40 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 over time may become impossible to defi ne the required standard of op- 39.02 Recapture. satisfy (for example, because of mul- eration, such as “white tablecloth” Give the landlord the right to recap- tiple name changes)Terminate the co- or “table service” in the case of a ture any vault area if the landlord, tenancy requirements at some point restaurant. a utility, or governmental authority (for example, based on time or sales ever needs the space. thresholds). 38.10 Noise and Odors. If the tenant’s operation emits noise 39.03 Use and Occupancy. 38.05 Density. or odors (such as a bar, a restaurant, Since vault space may lie outside the Limit density in the premises, i.e., or a donut store), defi ne in the lease boundaries of the landlord’s prop- how many people in how much specifi c noise and odor mitigation erty, state that the landlord makes no space. measures, rather than a general obli- representation about any right to use gation of the tenant to control or pre- or occupy such space. If the tenant 38.06 Exclusive Uses. vent noise and odors. Allow the land- uses any vault space, require the ten- Track exclusive uses to avoid confl ict. lord to impose additional noise and ant to maintain, repair, and pay any The landlord would ideally have no odor control measures if the landlord municipal fees imposed from time to liability for confl icting exclusive use determines that the initial measures time. Alternatively, the landlord may clauses or enforcement of exclusive do not work. State that the landlord want to prohibit the tenant’s use of use clauses. Consider limiting the has no responsibility for other ten- any vault space to avoid liability and tenant’s remedies if the landlord ants’ noise or odors, provided the other issues. violates any exclusivity clause. For landlord exercises reasonable efforts example, allow the tenant to pay to require such tenants to comply 40. Miscellaneous “percentage rent” only--but have no with applicable codes. other remedy—if the landlord vio- 40.01 Additional Security. lates the clause. If some other tenant 38.11 Recapture Right. Make the tenant responsible for any operates a prohibited use, allow the In a retail lease (especially one with- additional security (and any dam- landlord to assign to this tenant any out an operating covenant), give the ages) necessitated by the tenant’s right to enforce the prohibitions in landlord a continuous or periodic presence in the building and its use of the other tenant’s lease. Carve out recapture right if the tenant ceases to the premises. from any “exclusive use” any store operate for a stated period. Structure 40.02 Arbitration. that operates the same use as one of the right so a lender can exercise it If the tenant has the right to invoke multiple uses, but not its primary use. after foreclosure. For example, do arbitration of disputes, condition this Consider measuring limited permit- not just give the landlord a one-time right on the absence of any rent de- ted excluded use by square footage, right to recapture within a certain fault. Expressly exclude any rent dis- time of day, or percentage of sales. period after the tenant closes its store; pute from the arbitration right. If the provide for a periodic or continuous landlord cares about quick resolution 38.07 Limited Hours of Operation. right. Consider limiting hours of opera- of any arbitrated dispute, agree in the tion as appropriate (for example, in 38.12 Single-Store Operation. arbitration clause on possible arbitra- a mixed-use building with security Require the tenant to use and operate tors (and the number of arbitrators), concerns). the premises only as a single retail the arbitration agency, and the rules operation (no separate stores or stalls, that will apply. Don’t leave these mat- 38.08 Loss of Exclusive. except bona fi de licensed depart- ters until a dispute arises. Specify ar- Provide that if the tenant does not use ments or concessions not operated bitrators, or arbitrator qualifi cations, its exclusive use right, the right per- under a separate name). Prohibit the so that the arbitrators will understand manently terminates. (A temporary tenant from segregating any part of the landlord’s business and position termination does not help the land- its space from the rest of the space for (or even favor the landlord?). Specify lord much.) use as a separate store, with or with- a limited and short list of issues for out a separate entrance. which arbitration will apply (such 38.09 Narrow Use. as escalation charges; disputes about Draft the use clause narrowly (for 39. Vault Space repairs; and assignment and sublet- example, not general offi ce use, but ting if the landlord has agreed to be offi ce use for a computer consulting 39.01 Diminution. reasonable). Landlords often believe company operating under a specifi c State that any reduction of vault tenants are more willing to arbitrate business name). Then say: “and for space (such as use by any govern- than to litigate. Arbitration should no other use.” If the landlord re- ment or utility) does not entitle the not apply to nonpayment, dispossess, quires a certain quality level, don’t tenant to any rights. or conditional limitation proceedings. use words like “fi rst class.” Instead,

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 41 Require any arbitrator to issue a writ- No default? Other criteria or condi- 40.15 Survival. ten explanation of its decision. tions? When the landlord agreed to The tenant’s obligations and liabilities the concession, what assumptions did under the lease should survive the 40.03 Broker’s Representations. the landlord make? What happens if expiration or termination of the lease. State that any representations made those assumptions stop being true? by any broker, including about square For example, if the tenant’s good 40.16 Tenant’s SEC Filing. footage, do not bind anyone and shall credit eliminates any requirement for Because a publicly held tenant whose not be used to interpret the lease. bonds or other landlord protections, lease is a “material obligation” must undo this concession if the tenant’s fi le a copy of the lease with the ten- 40.04 Completion Bond. good credit turns bad. Can the tenant ant’s publicly available SEC fi ling, Before the tenant undertakes altera- exercise any privilege or right only consider having the tenant: (a) repre- tions estimated to cost above $_____, once or only within a certain period? sent that the lease is not a “material require the tenant to deliver a bond or Or does it apply throughout the lease obligation”; (b) agree to notify the letter of credit in an amount equal to term? Can the tenant assign any par- landlord if the tenant later must pub- __% of the estimated cost. If the land- ticular special privilege if the tenant licly fi le the lease; and (c) agree to try lord doesn’t require such a measure assigns the lease? If the tenant exer- to have rental information redacted because of the tenant’s great credit, cises any privilege or right, should or given “confi dential” treatment. consider giving the landlord the right the lease require the tenant to deliver to rescind that concession if the ten- an estoppel certifi cate, any docu- 41. Due Diligence ant’s credit changes or if the tenant ments the tenant entered into in ex- 41.01 Consents. assigns the lease. ercising the privilege or right, or any Does any mortgage, ground lease, 40.05 Confi dentiality. other documents? These issues po- other space lease, development agree- Require the tenant to keep the terms tentially arise for every tenant “right” ment, or REA limit who may be a of the lease confi dential, subject to ap- or “privilege,” including permitted tenant in the building? Confi rm this plicable law, rules, and regulations. assignments, releases from liability, tenant complies and, if appropriate, options, and exclusive uses. obtain representations and warran- 40.06 Continued Status. ties (for example, not a “prohibited The tenant should agree to update 40.11 Marked Leases. person”). Does the transaction require its representations and warranties When preparing fi nal lease docu- any consent on the landlord’s side, from time to time and to stay in good ments for signature, mark them such as from a joint venture partner? standing throughout the lease term. against the landlord’s standard If necessary, obtain consents from form to facilitate future lease review the landlord’s mortgagee, mezzanine 40.07 Diplomatic Immunity. projects and administration. Do not lender, or ground lessor. If applicable, obtain the tenant’s necessarily distribute those marked waiver of diplomatic immunity. copies to tenants. 41.02 Credit. Ascertain under the specifi c circum- Perform a credit check, an OFAC stances whether this waiver will be 40.12 Original Lease Document. check, and a UCC search for the enforceable. If it won’t be enforceable, The landlord may scan and destroy actual entity that will be the tenant fi nd a different tenant. its original lease in the ordinary under the lease (not just its parent or course of business. The landlord affi liate). 40.08 Independence of Covenants; need never produce an original No Termination Right. counterpart. 41.03 Financial Statements. The tenant should acknowledge that Obtain and review the tenant’s, its af- all landlord’s covenants are indepen- 40.13 Resale. fi liates’, and the guarantor’s fi nancial dent. The tenant should waive any Prohibit the tenant from reselling to statements. right to terminate based on the land- other tenants any telecommunication lord’s default. services, satellite capacity, electricity, 41.04 Identities of Tenant and or other utility or service. Guarantor. 40.09 Interpretation. Determine early the exact name of Say once (and only once) that “in- 40.14 Security Cameras. the tenant and any guarantor(s). clude” means “without limitation.” Reserve the landlord’s right to install Understand the tenant’s stock owner- security cameras in common areas. ship structure. Get the right entity as 40.10 Limits on Tenant’s Rights. Require the tenant to waive any right the tenant. To the extent that the landlord gives to object to such cameras, and any the tenant any special “right” or right to sue the landlord over any pri- 41.05 Other Leases. “privilege,” condition it as appropri- vacy and/or labor/workplace issues Does any other tenant have a right ate. Certain minimum occupancy? arising from their use. of fi rst refusal or other pre-emptive rights for the space now being leased?

42 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 41.06 Previous SEC Filings. 42.03 Certifi cate of Insurance. 42.10 UCC-1 Financing Statement. If the tenant is publicly held and Have an insurance consultant review File a UCC fi nancing statement if the any previous lease of the tenant was the tenant’s insurance certifi cate as landlord obtains a security interest in a “material obligation,” the tenant well as the underlying insurance the tenant’s personal property. should have incorporated that prior coverage. lease in a previous SEC fi ling. As a 43. Post-Closing; Monitoring 42.04 Good Standing and strategic matter, the landlord may Note: The following handful of sug- Organizational Documents. wish to review this fi ling and see gestions on lease administration and Obtain and review the tenant’s good what the tenant accepted in the previ- enforcement does not constitute as a standing certifi cate and government- ous transaction. complete guide to administering and certifi ed copies of organizational enforcing leases. 41.07 References. documents. Ask for an organiza- Obtain references for the tenant and tional chart if the tenant’s structure is 43.01 Abandonment. its principals. complex If the tenant appears to have moved out, then before entering and tak- 41.08 Scope of Premises. 42.05 Guaranty. ing control of the premises, consider Think about where the premises be- Obtain a guaranty executed by the sending an “estoppel” notice to the gin and end, identifying and resolv- correct guarantor and acknowledged. tenant reiterating the lease provisions ing any uncertainties. Don’t just refer, on “abandonment” and inviting the for example, to “the eighth fl oor” or 42.06 Letter of Credit. tenant to confi rm that it has not aban- “all the rentable space on the eighth Review the letter of credit form in doned the premises (with payment fl oor.” Prepare a clear diagram (or at advance. Obtain lender sign-off as of any unpaid rent). If any doubt least a sketch) to attach to the lease. needed. exists about whether the tenant has Even for a full-fl oor tenant, clearly 42.07 Memorandum of Lease and abandoned the premises, consider demarcate where the premises end Release. using a summary possession action and the common areas (and other rather than self-help to avoid claims landlord-controlled areas) begin. Do If the lease requires the landlord to of wrongful eviction. the premises include service closets? sign a memorandum of lease, also obtain a release of memorandum Elevator lobbies and restrooms, in the 43.02 Alteration Consents. case of full-fl oor premises? of lease, and deposit it in escrow with the landlord’s counsel or some A lease sometimes says the tenant need not remove its alterations and 41.09 Tenant Representations. other third party willing to assume restore the premises at the end of the Obtain representations and warran- responsibility. term unless the landlord requires ties about the ownership structure 42.08 Opinion of Counsel. such restoration as a condition to the of the tenant, perhaps backed by a landlord’s approval of the particular secretary’s certifi cate and copies of For a major lease, consider obtaining work. In those cases, the landlord documents. an opinion of counsel about the tenant’s due authorization, execution, must remember to exercise its right to 42. Other Documents and delivery of the lease, though require restoration when appropriate. probably not enforceability of the 42.01 Advice and Administration lease. Consider requesting a represen- 43.03 Change of Address/Notice Memo. tation by the tenant that entering into Party. The landlord may desire counsel to the lease does not violate any pre- If the landlord relocates, it should prepare a memorandum summariz- existing agreements. send a formal notice of change of ad- ing important provisions of the lease dress to the tenant, with a copy to and advising the landlord on actions 42.09 Taxpayer Identifi cation any other tenant representatives des- it should remember to take to avoid Number; W-9 Form. ignated in the lease to receive notices. problems, issues or disputes. Require the tenant’s taxpayer iden- Keep current addresses of all notice tifi cation number under the tenant’s parties with the lease or in a single 42.02 Brokerage Agreement. signature. Sooner or later the land- database. Consider the effect of a possible ten- lord will need it. If the tenant delivers ant default on the landlord’s liability an interest-bearing security deposit, 43.04 Delivery of Premises. for unpaid brokerage commissions. the landlord will need the taxpayer Issue formal notice and confi rma- What about an early negotiated identifi cation number immediately. tion of delivery of the premises. termination of the lease based on a Consider incorporating the tenant’s Memorialize the commencement date change in the tenant’s fi nancial condi- W-9 Form certifi cations into the body with a document fi led in such a way tion? Try to negate any further pay- of the lease, as a backup for a sepa- that someone will be able to fi nd it in ment obligations to the broker in any rate form. fi ve years. such event.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 43 43.05 Estoppels. 43.09 Insurance. 2. See, e.g., Gary Goldman, Drafting a Fair The landlord may wish to request pe- Monitor expiry dates of insurance. Offi ce Lease, A.L.I.-A.B.A. Comm. on Continuing Prof’l. Education (2d ed. riodic estoppel certifi cates simply to Update coverage limits and require- 2000). try to prevent future issues from aris- ments as markets change. 3. Landlords often include such an ing. Request an estoppel certifi cate obligation within the defi nition of (or include equivalent language in 43.10 Letters of Credit. operating costs for escalation purposes. the documentation) for any amend- Monitor expiry dates. Typically, draw That is fi ne, provided that the inclusion ment, consent, waiver, favor, or other at the earliest possible opportunity, if applies only during the adjustment years and not for purposes of any base year. concession of any kind. Include “reli- necessary. ance” language to support enforce- 4. Ideally, the base year would disregard 43.11 Preemptive Rights. capital expenditures—even their partial ability. Consider requiring an estop- Give the tenant notices of available amortization. In that case, unusual pel certifi cate upon completion of capital expenditures in the base year or space, and other notices, under any build-out as well. preceding years would not raise an issue. right of fi rst refusal or other preemp- 5. “ACORD” is the universally used 43.06 Future Amendments. tive rights in the lease. acronym for Association for Cooperative If the landlord and the tenant amend Operations Research and Development, 43.12 Tickler Reminders. the lease, the landlord should obtain a nonprofi t standard-setting body for the If the tenant persuaded the landlord world-wide insurance industry. For more guarantor consent (even if the guar- to remind the tenant of certain mat- information, visit www.acord.org. anty waives such a requirement); ters (such as restoration obligations, amend any recorded memorandum option exercise deadlines), establish S.H. Spencer Compton and Josh- of lease; and take other steps to pro- appropriate reminders in the land- ua Stein, the main authors of this tect the landlord’s interests. lord’s calendar. Counsel may also checklist, also Co-Chair the Silent 43.07 Future Deliveries. wish to make appropriate “tickler” Lease Issues Subcommittee. Joshua To the extent the lease requires the entries, but should avoid assuming Stein initiated and edited both the tenant to make future or periodic responsibility to remember. landlord’s checklist and the tenant’s deliveries of documents (such as checklist. With this publication, fi nancial statements, certifi cate of Endnotes each of those two checklists has now reached its second edition. Changes, ownership structure, estoppel certifi - 1. “The Tenant’s Checklist of Silent Lease cates), remember to ask for them. If Issues” appeared in the New York State additions, and other improvements the landlord fails to enforce a tenant Bar Association Real Property Law to this checklist are welcome. They obligation long enough, that might Section’s New York Real Property Law will be taken into account as appro- Journal (Fall 1999), and was modifi ed priate when this checklist is updated create a waiver. and republished in The Practical Real Estate Lawyer (May 2000) and elsewhere. and republished, and if it ever 43.08 Future Events. A second edition of the “Tenant’s reaches its third edition. If you have Memorialize any exercise of an op- Checklist” appeared in New York State suggestions, please send email to: tion, delivery of additional space, Bar Association’s New York Real Property shcompton@fi rstam.com or joshua@ Law Journal (Fall 2002) and The Practical and the like, and any resulting rent or Real Estate Lawyer (March 2003 and joshuastein.com. base year adjustments. Keep a copy May 2003) and in a wide range of other Copyright © 2008 New York State Bar of any resulting documentation in the publications. Association. lease fi le, in a place where someone will fi nd it when they want “all” the lease documents.

44 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Cooperatives and Condominiums in the New York City Housing Court By Gerald Lebovits and James P. Tracy

I. Introduction vest decision-making power with tion of the cooperative, and so have proprietary lessees rather than with a voice in managing the building. Cooperatives and condomini- 6 ums are unique forms of valuable the board of directors. Many coop- The shares allocated to a particular property ownership that engender eratives also include in their articles unit might appreciate in value. The of incorporation powers necessary to shares and leasehold interest may be special legal issues. In New York City, 13 residential landlord-tenant issues are manage a cooperative, such as the au- leveraged. thority to buy property and buildings litigated in the Civil Court’s Hous- The proprietary lease establishes in fee simple, to lease the apartments ing Part, commonly called “Housing many of the rights and duties held by in property the corporation owns, Court.” Residential landlord-tenant the cooperative and the proprietary and to mortgage buildings.7 disputes arising in cooperatives and lessee. The most important of these is condominiums are referred to special- A cooperative corporation is the proprietary lessee’s duty to pay to ized parts. This article reviews the bound by the articles of incorpora- the cooperative maintenance charges, legal concepts and disputes litigated tion and the by-laws, the propri- often called rent.14 Typically, the in the New York City Housing Court etary leases, and the cooperative’s proprietary lease provides an amount Coop and Condo Part. rules and regulations.8 Cooperative that may be amended by the direc- shareholders have the right to com- tors, depending on the building’s II. Cooperatives mence a derivative action against the needs.15 Cooperatives typically en- A. The Basics corporation.9 cumber the property as a whole with a mortgage, and real-estate taxes are Cooperatives are unique owner- As with all corporations, co- levied on the entire property. Coop- ship regimes in which three differ- operative corporations owe their eratives depend on the shareholders ent property interests are created. shareholders fi duciary duties. These to satisfy those obligations.16 The fi rst interest is created when the responsibilities sometimes confl ict cooperative corporation secures the with duties the corporation, acting Other provisions in the propri- property in fee simple. The second is as landlord, owes to a proprietary etary lease deal with the right to sub- created when the shareholders pur- lessee. let, the right to make alterations, the chase the corporation’s shares, which cooperative’s house rules, the duty to are personal property. The third is Shareholders do not own a unit make repairs, and the shareholders’ created when the corporation enters in fee simple. They own a portion of rights if they default on the lease.17 into long-term leases, called propri- a corporation that owns the entire etary leases, with those shareholders, property in fee simple. Thus, share- Real Property Law Article 7 ap- entitling each shareholder to occupy holders do not pay taxes on their plies to cooperatives and governs the a particular unit. individual unit. Instead, real-estate landlord-tenant relationship between taxes are levied on the property as a the cooperative and proprietary Cooperative corporations, which whole, and the corporation assesses lessees.18 This relationship confers own the building and its land in fee the proprietary lessees according to Housing Court’s jurisdiction on dis- simple, may be formed in New York their ownership shares.10 Similarly, putes between these parties. State under the New York Business cooperatives may encumber the en- Corporation Law,1 the Not-for-Profi t tire property with a mortgage, which B. Other Types of Cooperatives 2 Corporation Law, or the Cooperative the shareholders satisfy.11 1. Low- and Middle-Income 3 Corporation Law. Creating the coop- Housing Cooperatives erative corporation involves choosing In entering into a proprietary a corporate name, fi ling articles of lease with the cooperative, share- New York State law allows for the incorporation, and drafting by-laws.4 holders enter into a landlord-tenant creation of special cooperatives dedi- relationship with the cooperative cated to providing low- and middle- The articles of incorporation for corporation.12 This relationship is income housing. These cooperative cooperatives are tailored for coopera- similar to a conventional landlord- developments receive aid from the tives. Because corporations formed tenant relationship. It confers on a state, in the form of low-interest loans under the Business Corporation Law proprietary lessee some benefi ts of or tax-exempt status, in exchange for might include in their articles of in- fee simple ownership. Proprietary restrictions on the rent charged and corporation any provision consistent lessees, as shareholders, own a por- the process by which tenants may be with state law,5 many cooperatives evicted.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 45 a. Housing Development Fund dent’s apartment as rent-stabilized income housing. Under the Public Company does not confer protection under the Housing Finance Law, private devel- One special cooperative is the Rent Stabilization Law in contraven- opers are eligible for government- housing development fund com- tion of the explicit statutory exemp- funded mortgages, tax abatements, pany (HDFC), created under Private tion for housing accommodations or- and other incentives. In exchange for Housing Finance Law Article XI.19 ganized as a cooperative corporation this aid, the housing projects must 28 To qualify as an HDFC, the entity or operated for charitable purposes” limit their profi ts and rent increases must dedicate itself to serving low- The effect was that the tenant was a and are subject to DHCR regulation. income tenants20 and use all “income month-to-month tenant. Mitchell-Lama housing projects are required to submit fi nancial informa- and earnings of the corporation” for Because the government is “en- tion to the DHCR, which determines corporate purposes rather than for twined” in HDFCs, those companies the allowable rent increases for the “the benefi t or profi t of any private must accord their tenants due pro- project.38 individual, fi rm, corporation or as- cess required under the Fourteenth 21 sociation.” HDFCs are authorized to Amendment to the U.S. Constitution Before evicting a tenant for receive a “temporary loan or ad- before effecting an eviction.29 In fi nd- reasons other than not paying rent, vance” from funds established by the ing this “entwinement,” the Appel- a Mitchell-Lama development must statute in exchange for submitting to late Division, First Department, in fi rst obtain a “certifi cate of eviction” Department of Housing and Commu- Grimmet noted that because HDFCs from the New York Department of nity Renewal (DHCR) oversight and perform an important government Housing Preservation and Develop- 22 regulation. service by housing the poor, they are ment (HPD) before commencing a 39 HDFC buildings are established subject to strict government regula- proceeding in Housing Court. To after they fall into New York City’s tion and may revert to City owner- appeal HPD’s determination on a cer- hands, for instance, due to tax fore- ship if the HDFC fails to comply with tifi cate of eviction, a party must com- 30 closure. Instead of administering the the restrictions placed on it. This mence an Article 78 proceeding. A building or evicting the residents and “signifi cant and meaningful govern- party may not collaterally attack that 31 leaving the building vacant, the City mental participation” triggers due determination in a Supreme Court 40 will invite the residents to form an process guarantees, including notice ejectment action or in a summary 41 HDFC. The deed restricts the build- to the tenant of the reason for an evic- Housing Court proceeding. ing’s use to low-income housing, tion. These protections apply only to the tenant of record.32 Practitioners should keep in mind with a provision that the property the Landaverde rule and its applica- will revert to City ownership if that Due-process protections ensure tion to Mitchell-Lama cooperatives. restriction is violated. This arrange- that an HDFC tenant may not be In ATM One LLC v. Landaverde,42 the ment furthers the City’s goal of creat- evicted merely because a lease has Court of Appeals interpreted DHCR ing low-income housing while not expired.33 Rather, the HDFC may regulations implementing the Emer- requiring the City to manage large evict only for cause,34 although little gency Tenant Protection Act (ETPA) 23 amounts of real estate. case law defi nes “cause” and in how to require a landlord to give a tenant HDFCs are exempt from rent much particularity it must be plead. 10 days’ written notice to cure and regulation because they are coop- Thus, an HDFC is unable to evict a another fi ve days to cure if the notice eratives24 and because they are non- month-to-month tenant after issuing is mailed. That rule was applied 35 profi t organizations.25 In 546 West a 30-day notice of termination. On to Mitchell-Lama cooperatives in 43 156th Street HDFC v. Smalls,26 a tenant the other hand, an HDFC successfully Southbridge Towers v. Frymer because raised as a defense in a nonpayment evicted a tenant who, in violation of the Mitchell-Lama law’s purpose and proceeding that she was entitled to her lease, did not use the unit as her language is similar to the ETPA’s. 36 rent-stabilized status, despite the stat- primary residence. In that case, the 2. Condoperatives (Condops) utory exemptions. The tenant alleged notice to cure provided the tenant that the HDFC had bestowed perma- with suffi cient notice of the alleged A condoperative, or condop, 37 nent rent-stabilized status upon her default. combines condominium and cooperative ownership. Condops are build- tenancy in a stipulation resolving an b. Limited Profi t Housing ings divided into one large residential earlier nonpayment proceeding and Companies (Mitchell-Lama condominium unit and one or more had then offered a series of leases Housing) on rent-stabilized lease forms.27 The commercial condominiums. The resi- Appellate Division, First Department, Limited profi t housing compa- dential condominium is then trans- noted that the parties’ beliefs regard- nies, often known as “Mitchell-Lama” ferred to a cooperative corporation. ing the tenant’s rent-regulated status cooperatives, so-called because of the The cooperative corporation divides were not dispositive and held that the sponsoring legislators, must be dedi- the residential condominium into “subject agreement to treat respon- cated to providing low or middle- separate units allocated to the various

46 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 proprietary lessees. In other words, A property becomes a condo- In contrast to a cooperative’s “hy- the cooperative owns the units under minium upon the fi ling of a declara- brid” nature, in which shareholders a condominium regime, rather than tion.55 The declaration must contain own shares of the cooperative but owning the entire building in fee information for prospective purchas- also enter into a landlord-tenant rela- simple.44 ers and contractors, including that tionship, condominium unit owners the property will be submitted to the own their unit in fee simple absolute. Condops receive tax advantages provisions of the Condominium Act; Thus, cooperative shareholders are over the conventional cooperative. a description of the land on which entitled to the protections of the war- Cooperative shareholders may the building is located; a description ranty of habitability implied in their deduct their proportionate share of of the building; a description of the proprietary lease, but condominium the cooperative’s mortgage interest units; a description of the common el- unit owners do not receive these expenses and real-estate taxes if the ements; a description of the common protections. cooperative derives 80 percent of its interest of each unit owner; and how annual gross income from the share- 56 Because condominium unit own- 45 the declaration may be amended. holders. Separating the commercial Floor plans of each unit must be fi led ers do not enter into a landlord-ten- space from the cooperative may allow with the declaration.57 ant relationship with the condomin- shareholders to benefi t from that tax ium association, condominiums do treatment.46 The Mortgage Forgive- Condominiums must have by- not appear in Housing Court unless a ness Debt Relief Act of 2007, recently laws that govern its administration unit owner leases a unit to a market- signed into law by President Bush, and which must be fi led with the dec- rate or rent-regulated subtenant or amends this tax provision by provid- laration. The by-laws must provide if, as shown below, a tenant remains ing two additional ways to qualify for the method of electing a board of in occupancy after a rental building for the tax treatment. Cooperatives managers and offi cers, the conduct converts to condominium ownership. may also now qualify if 80 percent of of meetings, and how condominium the corporation’s property is used for rules and regulations are made.58 IV. Housing Court residential purposes or if 90 percent The declaration, the by-laws, and the Housing Court has jurisdic- of the corporation’s expenditures are house rules govern the condominium tion over landlord-tenant disputes, to acquire or maintain the property and its unit owners. including nonpayment proceedings for the shareholders’ benefi t.47 Although the by-laws must (nonpayment of rent or maintenance), holdover proceedings (lease expira- III. Condominiums provide for the election of a board of managers to administer the building, tion or termination), lockout proceed- A condominium divides a in practice the board often delegates ings, Article 7-A proceedings (receiv- property into units owned in fee that authority to a management erships for distressed buildings), and simple and common elements owned HP proceedings (code violations). 48 company through a management in common-fee ownership. Unit agreement.59 owners hold title to their units in fee Disputes between cooperative simple absolute and an undivided, Condominium unit owners must boards and proprietary lessees ap- proportionate common interest in the pay “common charges” for the build- pear in Housing Court because of the common elements, which are owned ing’s maintenance, similar to coop- landlord-tenant relationship. Among with all other unit owners.49 erative shareholder’s maintenance.60 a great many examples, in Jones v. 63 In contrast to cooperatives, in which Surrey Co-op. Apartments, Inc., a A condominium association, shareholders contribute to the coop- cooperative board brought a nonpay- composed of the unit owners, may erative’s tax assessment, New York ment proceeding against a tenant for be incorporated pursuant to the City condominium unit owners pay failure to pay monthly maintenance Business Corporation Law or the charges. Also among a great many 50 their real estate taxes for their units Not-for-Profi t Corporation Law but directly to the New York City Depart- examples, in Gouverneur Gardens 51 64 may also remain unincorporated. ment of Finance.61 Also in contrast to Housing Corp. v. Lee, a cooperative If incorporated, the statute under cooperatives, no “blanket mortgage” board brought a holdover proceeding which it is formed will govern, unless may encumber an entire condomini- against a tenant after issuing a notice the governance violates the Condo- um building,62 and so condominium of termination in accordance with ap- 52 65 minium Law. Many provisions of unit owners need not contribute to a plicable lease provisions. these statutes, such as Business Cor- shared mortgage. Condominium unit poration Law § 717, which governs No landlord-tenant relationship 53 owners are not as bound together as exists between a condominium asso- fi duciary obligations, also apply cooperators. to unincorporated condominium ciation and its unit owners. Housing associations. A derivative action may Real Property Law Article 7 Court does not hear condominium be brought against an unincorporated landlord-tenant provisions apply to nonpayment and holdover disputes association.54 cooperatives but not condominiums. involving associations and unit owners.66

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 47 Cases involving cooperatives by the parties and that the occupants of the warranty of habitability. . . .”77 were a part of Housing Court’s gen- of such premises shall not be subject- This special application of the war- eral docket until 1997, when the New ed to any conditions which would be ranty of habitability allows coopera- York State Unifi ed Court System cre- dangerous, hazardous or detrimental tives to act with the entire building’s ated a separate part for cooperative to their life, health or safety.”70 The best interests in mind.78 Ultimately, and condominium cases. Proceedings warranty is implied in all residential the abatement court must look to the involving units in cooperative or con- leases. Any waiver violates public proprietary lease to decide whose re- dominium buildings are heard in the policy. This protection for lessees is sponsibility it is to repair or maintain Coop and Condo Part,67 called Part C effectuated through rent abatements a condition that plausibly affects the in New York County. Every borough when a court fi nds that the premises’ warranty of habitability. has a separate coop and condo part condition violates the warranty. except Staten Island, which hears all No landlord-tenant relationship Cooperative shareholders are Housing Court cases in its All Pur- exists between a condominium unit cooperative “owners” represented by pose Part Y. owner and a condominium associa- the board, but the “proprietary lease tion. The warranty of habitability is Petitioners must identify a given to the tenant is not different inapplicable.79 A condominium unit proceeding involving units in coop- from any other type of lease and it owner may not withhold common erative or condominium buildings creates a landlord-tenant relationship charges to the condominium associa- by using a green “legalback.” If the between the stockholder and the co- tion because of building violations in petitioner fails to do so and the pro- operative corporation.”71 Thus, share- either the common areas or within a ceeding is referred to another judge, holders, as tenants, are entitled to unit.80 A landlord-tenant relationship that judge must refer the proceeding the warranty of habitability’s protec- is created when a unit owner leases to Part C upon determining that it tions.72 One court noted that “[w]hile a unit to a tenant. That tenant may involves a dispute in a cooperative or there is thus created the anomalous enforce the warranty of habitability condominium building. situation that one who is essentially against that unit owner.81 That tenant an owner (by virtue of his purchase does not have this relationship with Housing Court instituted the of shares) is in a sense suing himself, the condominium association and Coop and Condo Part in response to the situation is not vastly different cannot enforce the warranty of habit- signifi cant pressure from important from any stockholder who has occa- ability against it.82 real-estate interests that want Hous- sion to sue the corporation of which ing Court to handle cooperative and he is a pro rata owner by purchase of VI. HP Proceedings condominium cases effi ciently. The stock.”73 decision to create a separate court for The New York Legislature created cooperatives and condominium re- If the conditions in a tenant- the Housing Court in 1973 to adjudi- fl ects several considerations. It allows shareholder’s unit are “dangerous, cate actions and proceedings enforc- these cases to escape an otherwise- hazardous or detrimental to their life, ing federal, state, and local housing busy Housing Court docket. And it health or safety,” 74 that shareholder standards to assure a safe, habitable, allows, indeed compels, the presiding may be entitled to relief. Second-hand and plentiful housing stock in New judge to develop a special expertise in smoke infi ltrating a leased unit has York City. The Housing Court’s ju- cooperative and condominium law.68 been found to violate the warranty of risdiction includes nonpayment and As Vickie Chesler, executive editor of habitability.75 Excessive noise might holdover proceedings, which make The Cooperator, explained, “[C]o-op lead to a warranty-of-habitability up nearly the entire calendar, but and condominium issues are being violation if the noise deprives the ten- the primary mission of the Hous- developed on a case-by-case basis. In ant of “the essential functions that a ing Part (HP), a Part of the Housing co-ops, you’re dealing with securities, residence is supposed to provide.”76 Court (whose formal name is itself corporate boards and business issues. the Housing Part), is to hear housing The warranty of habitability ap- Sometimes, the housing court judges code proceedings, referred to as “HP plies to the landlord-tenant relation- 83 try to fi t those issues into landlord- proceedings” or “HP actions.” An ship created in a cooperative, but the tenant laws and precedents. And occupant, a tenant, a group of ten- cooperative’s hybrid nature requires usually, they just don’t fi t.”69 ants, or the New York City Depart- that the warranty apply slightly ment of Housing Preservation and V. The Warranty of differently than in a conventional Development (HPD) may bring an Habitability landlord-tenant relationship. For HP proceeding. The goal of the pro- instance, if “the conditions within the ceeding from the petitioner’s perspec- The warranty of habitability, cod- respondents’ apartments are a direct tive is to urge the court to exercise its ifi ed in Real Property Law § 235(b), result of a building-wide renovation equitable, injunctive jurisdiction to guarantees to a tenant that a leased project that the board of directors compel a property owner, broadly de- premises be “fi t for human habitation voted on and approved, it does not fi ned, to correct housing violations in and for the uses reasonably intended fall within the purview of a breach dwellings, to hold recalcitrant owners

48 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 in civil and criminal contempt, and to proceeding. Those receiving govern- usual ken of the judiciary, at the least impose civil penalties on them.84 ment assistance, such as Social Ser- board members will possess experi- vices or Section 8 voucher recipients, ence of the peculiar needs of their The Housing Part’s subject-mat- face diffi culties withholding their building and its residents not shared ter jurisdiction includes cooperative rent. The indigent benefi t from the by the court.”95 The Court of Appeals apartments, including the coopera- court’s waiving fi ling fees89 and from believed that this rule appropriately tive’s common areas.85 Proprietary HPD attorneys’ help with cases they allows cooperative boards to manage lessees may bring an HP proceeding deem viable. Wealthier tenants also buildings effectively and effi ciently, against the cooperative to force the benefi t from suing for repairs. They while still protecting residents from cooperative to make repairs and cure might want to avoid withholding board decisions that do not rea- violations of the Housing Mainte- rent or maintenance due to potential sonably relate to the cooperative’s nance Code and similar safety codes. damage to their credit rating and the business.96 Most proprietary leases assign stigma attached to defending a non- In the Levandusky case, a share- responsibility for repairs to the pro- payment proceeding. holder had sought to make alterations prietary lessees if the problem arises to his unit, including moving a steam from within and remains within the VII. The Business-Judgment riser. The shareholder’s proprietary subject apartment, and to the coop- Rule lease required him to receive the erative corporation if the problem A. Generally cooperative board’s consent before comes from outside the apartment. making any alteration affecting the If a proprietary lessee brings an HP The business-judgment rule, building’s heating system. Despite proceeding against the cooperative, which applies to cooperatives, “pro- the shareholder’s contention that the cooperative may not assert as a hibits judicial inquiry into actions of the alteration would not harm the defense that the proprietary lease al- corporate directors ‘taken in good building’s plumbing, the board, after locates responsibility to the lessee to faith and in the exercise of honest consulting with an architect, decided fi x the complained-of condition. The judgment in the lawful and legiti- to deny the application. The parties HP judge will order the cooperative mate furtherance of corporate pur- 90 eventually litigated the dispute, with to make the repairs.86 If the share- poses.’” Business Corporation Law the shareholder asking the Court to holder is responsible for the costs § 717, also applicable to cooperatives, overturn the board’s refusal. of the repairs, the cooperative may states the rule somewhat differently, requiring directors to act “in good recover its costs in a plenary action. The Court of Appeals applied the faith and with that degree of care business-judgment rule.97 The Court The Housing Part also has juris- which an ordinarily prudent person found that the board acted within the diction over condominium common in a like position would use under procedures set forth in the propri- areas87 and to condominium units similar circumstances.”91 Cooperative etary lease in examining the share- that a unit owner leases. A condomin- boards’ actions and decisions need holder’s alteration plans. The share- ium unit owner may not bring an HP not be optimal. They must be made holder was unable to show that the proceeding against its condominium in accordance with the procedures board did not rely on its architect’s association for conditions within set forth in the governing documents advice or that any board member har- the condominium unit, because no and be made in good faith. Absent bored animosity against him. Even landlord-tenant relationship exists be- this showing, “judicial review is not if the shareholder had shown that tween the parties, and thus the war- available.”92 the building’s heating system would ranty of habitability is inapplicable.88 not be harmed and that the board’s A City code-enforcement agency may The business-judgment rule was decision was unreasonable, the Court bring a proceeding against a unit developed in the context of corporate would not intervene.98 owner or the condominium associa- governance. The Court of Appeals decided in Levandusky v. One Fifth tion to correct violations, even if no The Levandusky Court stressed Avenue Apartment Corp.93 to apply landlord-tenant relationship exists. that the business-judgment rule’s that rule to cooperatives. The Court application to cooperatives might Although every part of the Hous- developed a rule to review corpo- differ from its application to more ing Court has code-enforcement rate behavior judicially because “a conventional corporations. The Court jurisdiction—for instance, a tenant- cooperative corporation is—in fact anticipated this difference because respondent may invoke code viola- and function—a corporation, acting the rule’s development in the conventions as a defense to paying rent in through the management of its board tional corporate context responded a nonpayment proceeding and as a of directors, and subject to the Busi- to “self-dealing and fi nancial self- defense to paying use and occupancy ness Corporation Law.”94 The Court aggrandizement,” which, in its in a holdover proceeding—there are also found that although “decisions view, would not be a major problem a number of advantages for tenants of a cooperative board do not gener- among directors of not-for-profi t or proprietary lessees to bring an HP ally involve expertise beyond the cooperatives.99

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 49 One motive to apply the busi- defendants’ membership in a club applies in Housing Court in holdover ness-judgment rule to cooperative in which shareholders used summer proceedings when a shareholder’s board actions is to protect hon- cottages was terminated due to rule lease is terminated for objectionable estly made decisions from lengthy violations. Because they were unable conduct. litigation. New York courts have to show that the board “deliberately helped effectuate that purpose by singled them out for harmful treat- B. Objectionable Conduct not hesitating to grant summary- ment or selectively enforced West Most proprietary leases allow judgment motions to resolve these Oak’s bylaws and regulations,” the a cooperative board to terminate a disputes quickly. In Sherry Associ- business-judgment rule applied, and proprietary lease for objectionable ates v. Sherry-Netherland, a group of summary judgment was awarded.106 conduct. Although RPAPL § 711 minority shareholders sued their requires a landlord to prove with The business-judgment rule cooperative corporation, a dual- competent evidence that the occu- might help shield cooperative boards purpose residence and hotel, alleging pant’s conduct was objectionable, from some litigation, but it will not that it discriminated against share- courts apply the business-judgment shield actions taken in confl ict with a holders who owned hotel units.100 rule when cooperative shareholders contract, such as a proprietary lease The Appellate Division held that the challenge lease terminations. As long or the by-laws. In Whalen v. 50 Sutton governing documents entrusted the as the shareholder is unable to show Place South Owners, Inc., after con- management of the hotel units to the the board acted outside its authority, cluding an alteration agreement with board and that the plaintiffs did not in bad faith, or without honest judg- a resident, the board revoked its con- overcome the presumption that the ment, a board’s determination that an sent to the renovations.107 In refusing board acted in good faith and in the occupant’s conduct was objectionable to apply the business-judgment rule, exercise of honest judgment.101 The will stand.113 the court wrote that “while it may plaintiffs alleged that the hotel units be good business judgment to walk could have been more profi table. That The seminal Pullman case arose away from a contract, this is no de- allegation did not defeat the business- when one shareholder circulated fl y- fense to a breach of contract claim.”108 judgment rule.102 ers throughout the building accusing one long-time resident of being a Similarly, the business-judgment Courts have also been quick to “psychopath,” alleging that his wife rule will not protect a board that grant summary judgment in cases had intimate relations with the board violates a proprietary lease’s express challenging the promulgation of president and had cut his telephone provision.109 The business-judgment rules clearly within the board’s wire.114 The problem shareholder rule is inapplicable if a board acts authority. In Jacobs v. 200 East 36th performed renovations in his apart- without express authority in a pro- Owner’s Corp., a resident challenged ment without the board’s consent prietary lease, for instance in impos- the “promulgation of a rule prohibit- and on weekends. In accordance with ing a sublet surcharge. In one case, ing deliveries of food by placing the the proprietary lease, the coopera- the board acted outside its authority food packages on the fl oor of the tive board convened, with proper and instead should have followed elevator and sending the elevator to notice, a special meeting, where more “the proper procedures to effectuate shareholders’ fl oors and requiring than the necessary two-thirds of the an amendment of the Proprietary residents to pick up food deliveries shareholders voted to terminate the Lease authorizing such a sublet in the lobby.”103 Finding the record shareholder’s lease due to his objec- surcharge.”110 devoid of proof that the action did tionable conduct. not further safety and cleanliness, the The business-judgment rule will The Court of Appeals in Pullman court granted the managing agent’s not insulate actions taken contrary 104 applied the business-judgment rule summary-judgment motion. Simi- to public policy or law. Unreason- to the shareholder’s challenge and larly, a cooperative’s summary mo- able restraints on alienation, such as held that the shareholders terminated tion was granted when the plaintiff, a requirement that shareholders end his proprietary lease in accordance challenging the adoption of a rule by litigation against the board111 or to with the procedures set forth in the the cooperative board expanding the sell their shares above a minimum set cooperative’s governing documents. hours of usage of the common roof price to gain the board’s consent to Although the Court found RPAPL garden adjacent to a penthouse apart- transfer their shares,112 violate public § 711’s requirement for “competent ment, could not “establish that the policy and render the business-judg- evidence” relevant, it deferred to the board was not acting for the purposes ment rule inapplicable. of the cooperative, within the scope shareholder vote and “stated fi ndings of its authority and in good faith.”105 Most issues involving coopera- as competent evidence that the tenant tives and the business-judgment rule is indeed objectionable under the stat- Courts have also granted sum- arise in Supreme Court, not Housing ute.”115 Under Pullman, to challenge mary judgment to challenges against Court. We discuss the concept here a lease termination for objectionable enforcing cooperative rules. In because the business-judgment rule conduct successfully, the shareholder W.O.R.C. Realty Corp. v. Carr, the

50 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 must show that the board’s decision not require such a meeting, the court pet openly and notoriously for three does not deserve the business-judg- found.123 months, and the owner or its agent ment rule’s protections.116 knows of it and does not commence The Appellate Division, First a summary proceeding against the In 13315 Owners Corp. v. Ken- Department, recently applied the tenant, the owner waives its right to nedy, a cooperative board, rather business-judgment rule and affi rmed enforce a no-pet lease provision. The than the shareholders, sought to a Supreme Court decision to termi- Pet Law imputes to the owner the terminate a lease on objectionable nate a proprietary lease for objec- knowledge of employees, such as a conduct grounds.117 Without decid- tionable conduct.124 In 1050 Tenants superintendent, doorman, or guard. ing whether the Pullman framework Corp. v. Lapidus, the shareholder had If a building employee knows for was appropriate for a board decision, violated a stipulation entered into three months that the resident had the court found on the facts that the with the cooperative and installed an a pet, the cooperative may not force board would not have been entitled air-conditioning system that malfunc- the tenant to move or to get rid of to deference.118 The board had acted tioned and damaged a neighboring the pet. The Pet Law’s purpose is to outside its authority; it had not been apartment. The shareholder then force owners to enforce promptly a properly elected. The board also refused to remove the system.125 no-pets-allowed rule or to waive the acted in bad faith when it silenced the The board of directors notifi ed the rule.128 shareholder’s attorney at the meeting shareholder of a special meeting to held to determine whether the share- consider a resolution to terminate Many cooperatives and condo- holder had acted objectionably.119 his lease. The shareholder’s attorney miniums prohibit residents from The court did not apply the business- appeared on his behalf. The board of harboring pets in the unit.129 The Pet judgment rule. It denied the coopera- directors voted unanimously in favor Law applies to cooperatives seeking tive’s summary-judgment motion of terminating the lease. Sharehold- to terminate a tenant’s proprietary and adjourned the case for trial to ers later overwhelmingly ratifi ed the lease for violating a no-pet clause.130 determine whether the board could decision.126 The court applied the The Second Department applies the prove by competent evidence that the business-judgment rule and upheld Pet Law defense to condominiums,131 shareholder’s conduct was objection- the Supreme Court’s fi nal judgment while the First Department does able.120 The preceding immediately of possession.127 not.132 settled after that ruling. Whether a board or shareholder IX. The Martin Act That same court decided in determination is entitled to business- London Terrace Towers, Inc. v. Davis judgment deference is relevant The Martin Act governs the what it declined to decide in Kennedy: only if the board seeks a possessory offering for sale of condominium 133 that a board decision to terminate a judgment under business-judgment and cooperative units. Sponsors lease due to objectionable conduct deference. If a cooperative seeks to of conversions are required to sub- deserves Pullman deference. Finding evict for objectionable conduct or mit to the state Attorney General the Court of Appeals’ dicta in Pull- some other lease or statutory viola- an “offering plan” that provides man persuasive, the court granted the tion and goes to trial with proof of information about the contemplated board summary judgment after it ap- that conduct or violation, a share- offering, including “detailed terms of plied the business-judgment rule to a holder may not defend on the ground the transaction; a description of the board decision made within its scope that the cooperative acted in bad faith property, the nature of the interest, of authority, in good faith, and after or outside its authority, or without and how title thereto is to be held; the offering the shareholder notice and giving the shareholder notice and an gross and net income for a reason- an opportunity to be heard, the twin opportunity to be heard before the able period preceding the offering pillars of due process.121 proceeding began. The only issue in where applicable and available; the a non-Pullman holdover proceeding current gross and net income where 134 In determining whether the brought by a cooperative corporation applicable and available.” The board has acted within its author- against a shareholder is whether the Act authorizes the Attorney General ity, courts look to the cooperative’s board can prove the conduct or viola- to promulgate disclosure through 135 governing documents. The court in tion with competent evidence and regulation. Carnegie Hill 87th Street Corp. v. Heller what defenses the shareholder can The offering plan is submitted to refused to vacate a default judgment bring to bear. against a tenant unable to present the Attorney General, but the At- 122 torney General does not necessarily a meritorious defense. Although VIII. The Pet Law the tenant had not been allowed an review and approve plans. Rather, the opportunity to defend herself in a Under New York City Admin- Attorney General accepts the plans special meeting of the board, the co- istrative Code § 27-2009.1, known for fi ling and reviews the plans to operative’s governing documents did as the Pet Law, if a tenant harbors a ensure that the required disclosures

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 51 are provided. Generally, if an offer- thermore, “an owner of a unit or of of reasonable access to the owner, or ing plan is defi cient, the sponsors the shares allocated thereto may not a similar breach by the tenant of his are merely required to disclose that a commence an action to recover pos- obligations.”154 Senior citizens and defi ciency exists rather than to correct session of a dwelling unit from a non- disabled tenants are protected from that defi ciency.136 The Martin Act purchasing tenant on the grounds unconscionable rent increases.155 does not provide a private cause of that he seeks the dwelling unit for the actions for parties injured by defi cient use and occupancy of himself or his As in non-eviction plans, non- offering plans, although a common- family.”145 However, non-purchasing purchasing tenants under an eviction law fraud action might lie.137 tenants may be evicted “for non-pay- plan who were previously subject ment of rent, illegal use or occupancy to rent regulation remain subject to 156 A. Conversion to Condominium of the premises, refusal of reason- them. or Cooperative Ownership able access to the owner or a similar 2. Tenants in Occupancy Under the Martin Act breach by the non-purchasing tenant The Martin Act provides ad- of his obligations to the owner of the Because tenants in occupancy are ditional requirements to convert dwelling unit or the shares allocated afforded an insider’s purchase op- a rental building to condominium thereto.”146 tion and protections against eviction, or cooperative ownership.138 The it is crucial to determine who falls Non-purchasing tenants subject purpose of those requirements is to within that group. Much litigation to rent regulation before an offering provide for an orderly conversion has revolved around the question, plan is fi led continue to enjoy regula- of those buildings while seeking to and numerous cases have sought to tions after fi ling.147 The Martin Act preserve affordable housing and ame- answer it. protects free-market non-purchasing liorate the disruption of conversion tenants from “unconscionable in- In De Kovessey v. Coronet Proper- on the lives and welfare of affected creases beyond ordinary rentals for ties Co., the Court of Appeals ad- tenants.139 comparable apartments during the dressed who qualifi es as a tenant 148 in occupancy.157 In that case,158 the 1. Non-Eviction Plan or Eviction period of their occupancy,” which sponsor of a cooperative conversion Plan has been interpreted by the Appel- late Division, Second Department, as plan offered tenants an insider price. If a sponsor seeks to convert a prohibiting landlords from demand- Before accepting, one tenant died, building from rental units to con- ing above-market rents from non- and the estate sought to exercise the dominium or cooperative owner- purchasing tenants.149 This protection right. The court held that to uphold ship, the offering plan must include is not a form of rent-regulation and the estate’s right to exercise an option whether the conversion is being done does not prevent large rent increases would violate the purposes of the pursuant to an “eviction plan” or a consistent with market conditions.150 Martin Act, which protects tenants “non-eviction” plan.140 against dislocation while allowing A non-eviction plan may not be owners to develop their property. The A non-eviction offering plan will amended into an eviction plan.151 Court saw no reason to encumber not be deemed effective until “writ- further an owner’s rights to give an ten purchase agreements have been On the other hand, an eviction estate a valuable purchase option, executed and delivered for at least plan is not effective until 51 percent while not protecting an actual tenant fi fteen percent of all dwelling units in of the development’s units are pur- from eviction.159 the building”141 by “bona fi de tenants chased by a “bona fi de tenant” under in occupancy or bona fi de purchasers a good-faith, non-discriminating In Manolovici v. 136 East 64th who represent that they intend that offer.152 Street Associates,160 the Court of Ap- they or one or more members of their peals interpreted the phrase “tenant As suggested by its name, evic- immediate family intend to occupy in occupancy.” In that case, Mr. and tion plans offer few protections the unit when it becomes vacant.”142 Mrs. Manolovici were undergoing against eviction to non-purchasing Tenants in occupancy when the marital problems, and Mr. Manolovici tenants. The Martin Act prohibits Attorney General accepts the offer- voluntarily vacated the apartment, in eviction proceedings against eviction ing plan are entitled to a good-faith, which his wife remained with their plan non-purchasing tenants until the non-discriminatory offer to purchase children. During this arrangement, later of the expiration of the tenant’s their unit.143 the Attorney General accepted an lease agreement or a three-year pe- offering plan for conversion for fi ling. A non-eviction plan is so-called riod after the offering plan becomes The offering plan provided a favor- because sponsors may not commence effective.153 Non-purchasing tenants able “insider’s price” for the tenant eviction proceedings “against non- who are senior citizens or disabled in occupancy of the Manolovici’s purchasing tenants for failure to pur- are not subject to eviction, except for apartment. Mrs. Manolovici sued for chase or any other reason applicable “non-payment of rent, illegal use or declaratory relief to be named the to expiration of tenancy.”144 Fur- occupancy of the premises, refusal sole tenant in occupancy.161

52 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 The Court of Appeals denied that their 1992 lease. The parties disputed possession of the shares. That relief is relief, holding that Mr. Manolovici whether the tenants were entitled to unavailable in Housing Court, which was entitled to share the purchase “non-purchasing tenant” status and, awards possession of the premises, option. The Court found that the thus, to protections against eviction. rent, and use and occupancy but has “critical date” to determine who is The landlord, while conceding that no jurisdiction to allocate shares. the “tenant in occupancy” is the date those tenants had not purchased the offering plan was accepted for shares of the cooperative, argued that Cooperatives and condominiums fi ling.162 The Court determined that they were not entitled to “non-pur- have a number of mechanisms that although he was not actually living chasing tenant” status because they might afford relief. in the apartment, Mr. Manolovici took possession after the 1987 conver- First, the proprietary lease might maintained a “suffi cient nexus with sion of the building and so could not require the proprietary lessee to sell 170 the apartment as of the critical date,” be tenants in occupancy. its shares to the cooperative upon qualifying him to a share in the pur- 173 The Appellate Term, Second termination of the lease. chase option.163 Department, found in Paikoff that the Second, the share certifi cates In 322 West 57th Owner v. Pen- tenants were entitled to the Martin might provide that the cooperative hurst, the Housing Court applied the Act’s protections. According to the may obtain a lien over the shares “suffi cient nexus” test to determine court, that statute protects tenants should the tenant fail to pay main- whether tenants were entitled to from dislocation as building owners’ tenance.174 The cooperative does not statutory protections against evic- economic incentives change. When automatically obtain a lien. 175 New 164 tion. In that case, a number of ten- operating a rental building, an owner York law does not recognize a “land- ants’ leases expired after the owner’s has an incentive to retain an unobjec- lord’s lien.” Rather, a lien must be offering plan for conversion to con- tionable market-rate paying tenant. created under an agreement between dominium ownership was submitted Sometimes the unit is worth more the parties.176 If properly created, to the Attorney General but had not as a condominium or cooperative, and if the cooperative complies with yet been accepted for fi ling. When and the owner is then incentivized to U.C.C. Article 9, the shares may be the owner began summary holdover evict the tenant and sell the unit. The foreclosed upon in a nonjudicial proceedings against the tenants, the Martin Act protects the tenant from sale.177 tenants claimed protections as non- this economic change and, thus, ac- purchasing tenants under a presently cording to the court, there can “be no Many shares are also pledged as accepted offering plan.165 valid distinction between tenants in security for a loan taken to purchase possession at the time of the conver- the shares. Often, a cooperative seek- The Penhurst Court held that, sion and those who rent from spon- ing maintenance and a bank seeking despite the expiration of their leases, sors after the conversion.”171 mortgage payments both seek to the tenants were entitled to protection enforce their respective liens. In ALH under the Martin Act as non-purchas- Courts have extended the Mar- Properties Ten, Inc. v. 306-100th Street ing tenants. The tenants were occu- tin Act’s non-eviction protections to Owners Corp.,178 a cooperative issued pying the units and so had a “suf- family members of deceased rent- shares stating “Corporation, by the 166 fi cient nexus” to the apartments. stabilized tenants. In Langdale Owners terms of said By-laws and the pro- 172 Because the owner had not yet been Corp. v. Lane, due to the statute’s prietary lease, has a fi rst lien on the granted a judgment of possession, the purpose of protecting families from shares represented by the certifi cate landlord-tenant relationship had not dislocation and to similar interpreta- for all sums due and to become due 167 been extinguished. Even though tions of prior conversion statutes not under said proprietary lease.”179 The the respondents were “holdover ten- addressed legislatively in the Martin Court of Appeals held that even if the ants,” they were afforded the status Act, the Appellate Term, Second De- cooperative’s “fi rst lien” were valid, it of non-purchasing tenants, and the partment, held that a family member applied only to the maintenance due 168 proceedings were dismissed. The of a deceased tenant was entitled to a under the lease.180 The Court gave Penhurst case is currently on appeal rent-stabilized lease renewal. priority to the mortgagor’s lien for before the Appellate Term. A decision the non-maintenance obligations.181 is anticipated shortly. X. Recovery of Unit and Shares Similarly, in Bankers Trust Co. v. Some courts have further extend- Board of Managers of Park 900 Condo- Should a cooperative board suc- ed the Martin Act’s protections to ten- minium,182 a condominium asserted cessfully pursue a summary pro- ants who come in possession after the that it had a “fi rst lien” on unpaid ceeding in Housing Court and evict “critical date” of the offering plan’s common charges. The First Depart- 169 a tenant for its default in paying of fi ling. In Paikoff v. Harris, a landlord ment held that the bank’s mortgage maintenance, or after the expiration commenced a holdover proceeding held priority over the asserted lien on or termination of a lease, the coopera- to evict tenants after the expiration of the common charges.183 tive does not automatically regain

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 53 Third, upon receiving a money against present or former directors, money disputes involving coopera- judgment for nonpayment of main- offi cers, or shareholders, or if the tives and condominiums. Coopera- tenance, a cooperative may obtain a action is brought for equitable relief, tives and condominiums are unique judicial lien under CPLR 5234. The a six-year statute of limitations ap- forms of property ownership; dis- judgment may be satisfi ed upon fore- plies.192 If the action is brought for putes over cooperatives and condo- closing the former tenant’s shares.184 money damages, a three-year statute miniums involve unique and heavily of limitations is applicable.193 If the litigated legal issues, distinct from XI. Miscellaneous Topics action seeks to challenge a board those arising in more conventional A. Succession Rights in determination in an Article 78, the ownership and leasing arrangements. Cooperatives statute of limitations is a mere four This article has described issues that months.194 A rent claim or counter- arise often in the Coop and Condo Upon the death of a proprietary claim for abatement is subject to a Part. lessee, disputes often arise about six-year contracts statute of limita- who may properly take possession tions, although the doctrine of laches Endnotes of the apartment. Possession of the can affect the possessory portion of a decedent’s shares does not necessar- judgment against a shareholder. 1. N.Y. BUS. CORP. LAW §§ 401-409. ily create an entitlement to occupy 2. N.Y. NOT-FOR-PROFIT CORP. LAW §§ the apartment.185 One must examine C. Attorney Fees 401-406. the proprietary lease and by-laws to Although most proprietary leases 3. N.Y. COOP. CORP. LAW §§ 10-19. determine succession rights. require a shareholder to pay the coop- 4. VINCENT DILORENZO, NEW YORK CONDOMINIUM AND COOPERATIVE LAW § 3:9 In Chapman v. 2 King Street Apart- erative’s attorneys’ fees in the event (2d ed. 2007). 186 of a dispute, courts enforce those ments Corp., the proprietary lease 5. Id. at § 3:10; N.Y. BUS. CORP. LAW § 402(c). provided that the cooperative board provisions only when the cooperative 6. DILORENZO, supra note 4, at § 3:10. could not unreasonably withhold is the prevailing party.195 A further its consent to an assignment of the consequence of the Real Property 7. Id. lease and shares to a “fi nancially Law’s application to cooperatives 8. EVA TALEL & DALE DEGENSHEIN, 2006-2007 is that attorney-fee provisions in LEGAL UPDATE FOR COURT ATTORNEYS: responsible” family member of the COOPERATIVES AND CONDOMINIUMS— 187 decedent. The Court reviewed the proprietary leases are made recipro- SIGNIFICANT DECISIONS AND LEGAL board’s decision to refuse the de- cal. Shareholders may collect attorney PRINCIPLES 1 (unpublished CLE cedent’s daughter’s application on fees if they are the prevailing party.196 manuscript for N.Y.S. Judicial Inst.). the ground that she was not fi nan- Shareholders are also protected in 9. N.Y. BUS. CORP. LAW § 626; TALEL & cially responsible and found that the many leases by language requiring DEGENSHEIN, supra note 8, at 1. board acted reasonably.188 In Joint the shareholder to be in “default” 10. DILORENZO, supra note 4, at § 1:2. Queensview Housing Enterprise, Inc. of the lease for the cooperative to 11. Id. 197 v. Balogh, the cooperative’s by-laws recover for attorneys’ fees. 12. DANIEL FINKELSTEIN & LUCAS A. FERRARA, provided that an inheritor of shares LANDLORD AND TENANT PRACTICE IN NEW D. Possessory Judgments was required to receive permission YORK (2008). from the board before occupying In the rent-regulated context, 13. DILORENZO, supra note 4, at § 1:2. the apartment.189 After inheriting the general rule is that a possessory 14. CARLYN MILLAR ROSS, CONDOMINIUMS AND shares and taking possession of the judgment may not include additional COOPERATIVE APARTMENTS § 148 (2d ed. 2007). apartment, the defendant applied to charges above the legal regulated the board for permission to do so.190 rent, such as attorney fees or other 15. DILORENZO, supra note 4, at § 3:13. After the board refused permission costs.198 In cooperatives, a possessory 16. Id. at § 1:2. and the defendant refused to vacate judgment may include attorney fees 17. Id. at § 3:13. the apartment, the board sued. The and other costs, if they are defi ned 18. TALEL & DEGENSHEIN, supra note 8, at 2.

Court applied the business-judgment as added or additional rent in the 19. N.Y. PRIV. HOUS. FIN. LAW § 573. proprietary lease. A cooperative may rule and refused to order the board to 20. Id. § 573(3)(a). accept the defendant’s application.191 not secure a possessory judgment, or 21. Id. § 573(3)(b). even bring a summary proceeding, B. Statute of Limitations to replenish a security deposit or an 22. Id. § 573(3)(c). Considerations escrow account.199 23. See E. 11th St. HDFC v. Grimmet, 181 A.D.2d 488, 489, 581 N.Y.S.2d 24, 25 (1st Claims involving cooperatives XII. Conclusion Dep’t 1992) (mem.); 50 W. 11th St. HDFC are subject to a range of different v. Ali, 13 Misc. 3d 1237(A), 831 N.Y.S.2d statutes of limitations, depending on The New York City Housing 353, 2006 WL 3342679, N.Y. Slip Op. the claim’s nature. When the action is Court’s Coop and Condo Part han- 52150(U) (Hous. Part Civ. Ct. N.Y. County 2006). brought on the corporation’s behalf dles a broad array of possessory and

54 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 24. RENT STABILIZATION LAW (N.Y.C. ADMIN. 43. 4 Misc. 3d 804, 809, 781 N.Y.S.2d 207, 210 64. 2 Misc. 3d 525, 526, 769 N.Y.S.2d 829, 830 CODE) § 26-504(a); 546 W. 156th St. HDFC (Hous. Part Civ. Ct., N.Y. County 2004) (Hous. Part Civ. Ct., N.Y. County 2003) v. Smalls, 43 A.D.3d 7, 11, 839 N.Y.S.2d 62, (Gerald Lebovits, J.). (Gerald Lebovits, J.). 66 (1st Dep’t 2007). 44. See generally RICHARD SIEGLER, The 65. See ROSS, supra note 14, at § 149. 25. N.Y. COMP. CODES. R. & REGS. tit. 9, § Feasibility of Co-Op to Condo Conversion, 66. DILORENZO, supra note 4, at § 11:9; 2520.11(j). N.Y.L.J., Mar. 5, 1997, at 3, col. 1; RICHARD FINKELSTEIN & FERRARA, supra note 12, § SIEGLER, Techniques for the 80/20 Test of 26. 43 A.D.3d at 9, 839 N.Y.S.2d at 64. 2:133, at 2-49. IRC § 216—Part I, N.Y.L.J., May 5, 1999, 27. Id. at 8-10, 839 N.Y.S.2d at 64-66. at 3, col. 1 [hereinafter “Techniques for 67. Report of the Civil Court of the City of 28. Id. at 12, 839 N.Y.S.2d at 66. the 80/20 Test”]; STUART SAFT, Commercial New York, Jan. 1, 1997–Dec. 31, 2006, A Real Estate Forms 27:8 (3d 2007); Xamaka, Decade of Change and Challenge in “The 29. Grimmet, 181 A.D.2d at 489; Ali, 13 Misc. Inc. v. 166 E. 61st St. Assocs., N.Y.L.J., People’s Court” 1997-2006, at 9. 3d 1237(A), 831 N.Y.S.2d 353, 2006 WL Nov. 17, 1999, at 26, col. 3 (Sup. Ct. N.Y. 3342679. 68. JAY ROMANO, Your Home; Co-op Cases Are County). Getting Own Court, N.Y. TIMES, Oct. 26, 30. Grimmet, 181 A.D.2d at 489, 581 N.Y.S.2d 45. See 26 U.S.C. § 216; TALEL & DEGENSHEIN, 1997, at S. 11, at 3. at 25. supra note 8, at 1; see RICHARD SIEGLER 69. Id. 31. Id., 581 N.Y.S.2d at 26. & EVA TALEL, Dealing with the 80/20 Test, N.Y.L.J., July 5, 2006, at 3, col. 1. 70. N.Y. REAL PROP. § 235(b). 32. W. 149th St. HDFC v. Rodriguez, 5 Misc. 3d 1020(A), 799 N.Y.S.2d 165, 2004 46. See generally RICHARD SIEGLER, Cooperatives 71. Suarez v. Rivercross Tenants Corp., 107 WL 2752468, at *2 2004 N.Y. Slip Op. and Condominiums: Dealing with the 80/20 Misc. 2d 135, 137, 438 N.Y.S.2d 164, 166 51471(U), *2 (Hous. Part Civ. Ct., N.Y. Test, N.Y.L.J., July 5, 2006, at 3, col. 1; (1st Dep’t 1981) (per curiam). County Sept. 29, 2004) (Gerald Lebovits, SIEGLER, Techniques for the 80/20 Test, supra 72. Id. at 139, 438 N.Y.S.2d at 167. J.); 757 E. 169th St. HDFC v. Haney, 171 note 44. 73. Id., 438 N.Y.S.2d at 167. Misc. 2d 965, 966, 656 N.Y.S.2d 92, 93 47. PUB. L. 110-142, § 4(a), 121 STAT. 1804. (Hous. Part Civ. Ct., N.Y. County 1996). 74. Id. at 138, 438 N.Y.S.2d at 166. 48. DILORENZO, supra note 4, at § 3:1. 33. Grimmet, 181 A.D.2d at 489, 581 N.Y.S.2d 75. Poyck v. Bryant, 13 Misc. 3d 699, 701, 820 at 24. 49. Id.; TALEL & DEGENSHEIN, supra note 8, at N.Y.S.2d 774, 766 (Civ. Ct., N.Y. County 29. 2006). 34. Id. at 489, 581 N.Y.S.2d at 26. 50. N.Y. BUS. CORP. LAW § 401 et seq.; N.Y. 76. Kaniklidis v. 235 Lincoln Place Hous. Corp., 35. Id. at 489, 581 N.Y.S.2d at 25; Marcus NOT-FOR-PROFIT CORP. L. § 401 et seq.; 305 A.D.2d 546, 547, 759 N.Y.S.2d 389, 389 Garvey Park Homes Hous. Dev. Fund Corp. DILORENZO, supra note 4, at § 3:2. (2d Dep’t 2003). v. Franco, 12 Misc. 3d 840, 815 N.Y.S.2d 807 (Hous. Part Civ. Ct., N.Y. County 51. DILORENZO, supra note 4, at § 3:2; TALEL & 77. 315-321 Eastern Parkway Dev. Fund Corp. 2006). DEGENSHEIN, supra note 8, at 28. v. Wint-Howell, 9 Misc. 3d 644, 648, 802 N.Y.S.2d 892, 895 (Hous. Part Civ. Ct., 36. 167-169 Allen St. HDFC v. Ebanks, 22 52. DILORENZO, supra note 4, § 3:2. Kings County 2005). A.D.3d 374, 375, 802 N.Y.S.2d 650, 651 53. Id.; see also, e.g., Bd. of Managers v. (1st Dep’t 2005) (mem.). Fairway at N. Hills, 193 A.D.2d 322, 324, 78. Id. at 648, 802 N.Y.S.2d at 896. 37. Id. at 375, 802 N.Y.S.2d at 652. 603 N.Y.S.2d 867, 869 (2d Dep’t 1993) 79. Frisch v. Bellmarc Mgmt., 190 A.D.2d 383, (noting that although the Condominium 385, 597 N.Y.S.2d 962, 963 (1st Dep’t 38. See Davis v. Starr, 88 Misc. 2d 210, 213, 387 Act is silent, fi duciary duty akin to that 1993); Linden v. Lloyd’s Planning Service, N.Y.S.2d 351, 354 (Sup. Ct., N.Y. County imposed in B.C.L. § 717 is imposed on 299 A.D.2d 217, 218, 750 N.Y.S.2d 20, 1975) (noting that N.Y.C. Administrative the initial board of managers); Schoninger 21 (1st Dep’t 2002) (mem.), lv. denied, 99 Code requires only a “public hearing” for v. Yardarm Beach Homeowners’ Assoc., N.Y.2d 509, 790 N.E.2d 274, 760 N.Y.S.2d rent increases). 134 A.D.2d 1, 2, 523 N.Y.S.2d 523, 524 100 (2003). 39. Wong v. Gouverneur Gardens Hous. Corp., (2d Dep’t 1987) (business judgment 80. Bd. of Managers of First Ave. Condo. v. 308 A.D.2d 301, 304, 764 N.Y.S.2d 53, rule applies to actions of board of Shandel, 143 Misc. 2d 1084, 1087, 542 57 (1st Dep’t 2003) (mem.) (holding unincorporated condominium); TALEL & N.Y.S.2d 466, 468 (Hous. Part Civ. Ct., that HPD has primary jurisdiction DEGENSHEIN, supra note 8, at 28. N.Y. County 1989). over eviction of Mitchell-Lama tenant); 54. Caprer v. Nussbaum, 36 A.D.3d 176, 187, 81. Sneddon v. Greene, 17 Misc. 3d 1, 4, 844 Gouverneur Gardens Hous. Corp. v. Lee, 825 N.Y.S.2d 55, 64 (2d Dep’t 2006); TALEL N.Y.S.2d 575, 577 (App. Term 2d Dep’t 2 Misc. 3d 525, 527, 769 N.Y.S.2d 829, & DEGENSHEIN, supra note 8, at 28. 831 (Hous. Part Civ. Ct., N.Y. County 9th & 10th Jud. Dists. 2007) (mem.). 55. DILORENZO, supra note 4, at § 3:3. 2003) (Gerald Lebovits, J.) (HPD issued 82. McCarthy v. Bd of Managers of Bromley certifi cate of eviction); ANDREW SCHERER, 56. Id. at § 3:3; N.Y. REAL PROP. § 339-n. Condo., 271 A.D.2d 247, 247, 706 N.Y.S.2d RESIDENTIAL LANDLORD-TENANT LAW IN 57. Id. at § 3:4; N.Y. REAL PROP. § 339-p. 104, 105 (1st Dep’t 2000) (mem). NEW YORK § 6:12, at 366 (2007-2008 ed.). 58. DILORENZO, supra note 4, at § 3:5. 83. See Mark C. Rutzick & Richard L. Huffman, 40. Bedford Gardens Co., LP v. Jacobowitz, 29 The New York City Housing Court: Trial A.D.3d 501, 502, 815 N.Y.S.2d 149, 151 (2d 59. Id. at § 3:7. and Error in Housing Code Enforcement, 50 Dep’t 2006) (mem.). 60. SCHERER, supra note 39, at 388, § 6:75. N.Y.U. L. Rev. 738, 749-58 (1975). 41. Lindsay Park Hous. Corp. v. Grant, 190 61. TALEL & DEGENSHEIN, supra note 8, at 29. 84. Civ. Ct. Act § 110(a)(7) (giving Housing Misc. 2d 777, 777, 740 N.Y.S.2d 552, 552 Court jurisdiction to order violations 62. N.Y. REAL PROP. § 339-r (when fi rst (App Term 2d Dep’t 2d & 11th Jud. Dists. corrected); HMC (Admin. Code) §§ conveyed); N.Y. REAL PROP. § 339-1 2001) (mem.); Yorkville Towers Assocs. v. 27-2115(i), (j). Mourino, N.Y.L.J., June 9, 1997, at 29, col. (subsequent liens); DILORENZO, supra note 3 (App Term 1st Dep’t) (per curiam). 4, at § 1:2. 85. Kahn v. 230-79 Equity Inc., 32 H.C.R. 233A, 2 Misc. 3d 140(A), 784 N.Y.S.2d 921, 63. 263 A.D.2d 33, 35, 700 N.Y.S.2d 118, 120 42. 2 N.Y.3d 472, 475, 812 N.E.2d 298, 299, 2004 N.Y. Slip Op. 50302(U), *2, 2004 WL (1st Dep’t 1999). 779 N.Y.S.2d 808, 809 (2004). 869746, at *2, 2004 N.Y. Misc. LEXIS 409,

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 55 at *1 (App. Term 1st Dep’t Apr. 8, 2004) 102. Id. at 15, 708 N.Y.S.2d at 106. 129. See, e.g., Bd. of Managers v. Lamontanero, (per curiam) (cooperative corporations); 103. Jacobs v. 200 E. 36th Owners Corp., 281 206 A.D.2d 340, 341, 616 N.Y.S.2d 744, 745 McMunn v. Steppingstone Mgt. Corp., 131 A.D.2d 281, 281, 722 N.Y.S.2d 137, 137 (2d Dep’t 1994) (mem.) (condominium Misc. 2d 340, 343, 500 N.Y.S.2d 219, 221 (1st Dep’t 2000) (mem.). by-laws prohibit pets); Linden Hill No. (Hous. Part Civ. Ct., N.Y. County 1986) 1 Co-Op Corp. v. Kleiner, 124 Misc. 2d (same). 104. Id., 722 N.Y.S.2d at 137. 1001, 1002, 478 N.Y.S.2d 519, 520 (Hous. 86. Kahn, 2004 WL 869746, at *2; McMunn, 105. Rubinstein v. 242 Apt. Corp., 189 A.D.2d Part Civ. Ct., Queens County 1984) 131 Misc. 2d at 343, 500 N.Y.S.2d at 221. 685, 685, 592 N.Y.S.2d 378, 378 (1st Dep’t (proprietary lease prohibits pets in 1993) (mem.). cooperative). 87. Pershad v. Parkchester S. Condo., 174 Misc. 2d 92, 94-95, 662 N.Y.S.2d 993, 995-96 106. W.O.R.C. Realty Corp. v. Carr, 262 A.D.2d 130. Seward Park Housing Corp. v. Cohen, 287 (Hous. Part Civ. Ct., Bronx County 310 , 311, 691 N.Y.S.2d 104, 105 (2d Dep’t A.D.2d 157, 162, 734 N.Y.S.2d 42, 47 (1st 1997) (incorrectly noted in Offi cial 1999) (mem.). Dep’t 2001) (applying Pet Law to publicly funded cooperatives); Corlear Gardens Reports as New York County) (holding 107. Whalen v. 50 Sutton Place S. Owners, Inc., Hous. Co, Inc. v. Ramos, 126 Misc. 2d 416, condominium association responsible 276 A.D.2d 356, 356-57, 714 N.Y.S.2d 269, 420, 481 N.Y.S.2d 577, 579 (Sup. Ct., Bronx for repairing code violations extending 270-71 (1st Dep’t 2000) (mem.). beyond individual unit), aff’d per curiam, County 1984) (“This Court fi nds that all 178 Misc. 2d 788, 683 N.Y.S.2d 708 108. Id. at 357, 714 N.Y.S.2d at 271. tenants, including cooperative tenants, (App. Term 1st Dep’t 1998); Smith v. 109. Ludwig v. 25 Plaza Tenants Corp., 184 are in need of the protection of the Pet Parkchester N. Condo., 163 Misc. 2d 66, A.D.2d 623, 624, 584 N.Y.S.2d 907, 908 Law.”); Linden Hill No. 1 Co-Op, 124 Misc. 69, 619 N.Y.S.2d 523, 525 (Hous. Part (1st Dep’t 1992) (mem.). 2d at 1007, 478 N.Y.S.2d at 523. Civ. Ct., Bronx County 1994) (fi nding 110. Zimiles v. Hotel Des Artistes, Inc., 216 131. Lamontanero, 206 A.D.2d at 341, 616 HP proceeding available when violation A.D.2d 45, 45, 627 N.Y.S.2d 382, 382-83 N.Y.S.2d at 745. stems from defective conditions (1st Dep’t 1995) (mem.). 132. Bd. of Managers of Parkchester N. in common area in condominium Condominium v. Quiles, 234 A.D.2d 130, association’s exclusive control); Gazdo 111. Chemical Bank v. 635 Park Ave. Corp., 155 130, 651 N.Y.S.2d 36, 36 (1st Dep’t 1996) Props. Corp. v. Lava, 149 Misc. 2d 828, Misc. 2d 433, 437, 588 N.Y.S.2d 257, 260 (mem.). 831-33, 565 N.Y.S.2d 964, 966-67 (Hous. (Sup. Ct., N.Y. County). Part Civ. Ct., Kings County 1991) 112. Oakley v. Longview Owners Inc., 165 Misc. 133. G.B.L. § 352 et seq.; G.B.L. § 352-e 1(a) (holding condominium managing board 2d 192, 195, 628 N.Y.S.2d 468, 470 (Sup. provides that “it shall be illegal and or agent responsible for common areas), Ct., Westchester County). prohibited . . . to make or take part in a appeal dismissed mem., 150 Misc. 2d 1019, public offering or sale in or from the state 579 N.Y.S.2d 305 (App. Term 2d Dep’t 2d 113. London Terrace Towers, Inc. v. Davis, 6 of New York of securities constituted of & 11th Jud. Dists. 1991). Misc. 3d 600, 602, 790 N.Y.S.2d 813, 815 participation interests in real estate . . . (Hous. Part Civ. Ct., N.Y. County 2004) including cooperative interests in realty, 88. Frisch v. Bellmarc Mgt., Inc., 190 A.D.2d (Gerald Lebovits, J.). unless and until there shall have been 383, 389, 597 N.Y.S.2d 962, 966 (1st Dep’t fi led with the department of law, prior 1993) (fi nding warranty of habitability 114. 40 W. 67th St. Corp. v. Pullman, 100 N.Y.2d to such offering, a written statement . . . inapplicable to condominiums). 147, 150-52, 760 N.Y.S.2d 745, 748-50, 790 N.E.2d 1174, 1176-79 (2003). which shall contain the information and 89. CIV. CT. ACT § 1911(b). representations required by paragraph 115. Id. at 154-55, 760 N.Y.S.2d at 751, 790 (b) of this subdivision. . . .” 90. Levandusky v. One Fifth Ave. Apt. Corp., N.E.2d at 1180. 75 N.Y.2d 530 537, 553 N.E.2d 1317, 1321, 134. Id. § 352-e(1)(b). 554 N.Y.S.2d 807, 811 (1990) (quoting 116. Id. at 153, 760 N.Y.S.2d at 749, 790 N.E.2d 135. For regulations promulgated by the Auerbach v. Bennett, 47 N.Y.2d 619, 629, at 1179. Attorney General, see 13 N.Y.C.R.R. Part 926, 393 N.E.2d 994, 1000, 419 N.Y.S.2d 117. 13315 Owners Corp. v. Kennedy, 4 Misc. 18. 920 (1979)). 3d 931, 932, 782 N.Y.S.2d 554, 556 (Hous. 136. STUART SAFT, Understanding a 91. B.C.L. § 717. Part. Civ. Ct., N.Y. County 2004) (Gerald Lebovits, J.). Condominium Offering Plan, N.Y.L.J., Nov. 92. Levandusky, 75 N.Y.2d at 538, 553 N.E.2d 29, 2004, at 1, col. 4. at 1322, 554 N.Y.S.2d at 812. 118. Id. at 950-51, 782 N.Y.S.2d at 570-71. 137. Vermeer Owners v. Guterman, 78 N.Y.2d 93. Id. at 537, 553 N.E.2d at 1321, 554 119. Id., 782 N.Y.S.2d at 570-71. 1114, 1116, 578 N.Y.S.2d 128, 129, 585 N.Y.S.2d at 811. 120. Id. N.E.2d 377, 378 (1991) (mem.); CPC Int’l v. McKesson Corp., 70 N.Y.2d 268, 275, 519 94. Id. at 538, 553 N.E.2d at 1321, 554 121. London Terrace Towers, 6 Misc. 3d at 603, N.Y.S.2d 804, 806, 514 N.E.2d 116, 118 N.Y.S.2d at 811. 790 N.Y.S.2d at 816. (1987). 95. Id. at 539, 553 N.E.2d at 1322, 554 122. Carnegie Hill 87th St. Corp. v. Heller, 9 138. G.B.L. §352-eeee. N.Y.S.2d at 812. Misc. 3d 1106(A), 806 N.Y.S.2d 444, 2005 96. Id. at 540, 553 N.E.2d at 1323, 554 WL 2205724, 2005 N.Y. Slip Op. 51417(U), 139. 322 W. 57th Owner LLC v. Penhurst N.Y.S.2d at 813. *2 (Sup. Ct., N.Y. County 2005). Productions, Inc., 15 Misc. 3d 1105(A), 836 N.Y.S.2d 504, 2007 WL 824105, 2007 N.Y. 123. 2005 N.Y. Slip Op. 51417(U), at *3. 97. Id. at 535, 553 N.E.2d at 1320, 554 Slip Op. 50515(U) , at *2 (Hous. Part Civ. N.Y.S.2d at 810. 124. 1050 Tenants Corp. v. Lapidus, 39 A.D.3d Ct. N.Y. County 2007). 379, 835 N.Y.S.2d 68 (1st Dep’t), lv. denied, 98. Id. at 540, 553 N.E.2d at 1322, 554 140. G.B.L. § 352-eeee. N.Y.S.2d at 813. 9 N.Y.3d 807, 875 N.E.2d 29, 843 N.Y.S.2d 536 (2007). 141. Id. § 352-eeee(1)(b). 99. Id. at 538, 553 N.E.2d at 1321, 554 N.Y.S.2d at 811. 125. Id. at 380-82, 835 N.Y.S.2d at 70-71. 142. Id. 100. Sherry Assocs. v. Sherry-Netherland, Inc., 126. Id. at 382, 835 N.Y.S.2d at 71. 143. Id. 273 A.D.2d 14, 15, 708 N.Y.S.2d 105, 106 127. Id., 835 N.Y.S.2d at 71-72. 144. Id. § 352-eeee(2)(c)(ii). (1st Dep’t 2000) (mem.). 128. N.Y.C. ADMIN. CODE § 27-2009.1. 145. Id. 101. Id. at 14, 708 N.Y.S.2d 106.

56 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 146. Id. 167. Id. at *7. N.Y.S.2d 659, 662 (Sur. Ct., N.Y. County 147. Id. § 352-eeee(2)(c)(iii). 168. Id. at *11. 1989). 148. Id. § 352-eeee(2)(c)(iv). 169. 185 Misc. 2d 372, 374, 713 N.Y.S.2d 109, 186. 8 Misc. 3d 1026(A), 806 N.Y.S.2d 444, 2005 110 (App. Term 2d Dep’t, 2d & 11th Jud. N.Y. Slip Op. 51294(U), 2005 WL 1961330 149. Paikoff v. Harris, 185 Misc. 2d 372, 378, Dists. 1999) (mem.). (Sup. Ct. N.Y. County 2005). 713 N.Y.S.2d 109, 113 (App. Term 2d Dep’t 2d & 11th Jud. Dists. 1999) (mem.) 170. Id. at 374-75, 713 N.Y.S.2d at 111. 187. 2005 N.Y. Slip Op. 51294(U). *2. (“We do not read this provision, as do 171. Id. at 377-78. 713 N.Y.S.2d at 113. 188. 2005 N.Y. Slip Op. 51294(U), *8. the tenants, as focusing on the size of the 189. Joint Queensview Hous. Enterprise, 174 increase. Rather, its clear meaning is that 172. 166 Misc. 2d 439, 441, 636 N.Y.S.2d 577, A.D.2d at 605, 571 N.Y.S.2d at 313. the rent may not be increased beyond 578 (App. Term 2d Dep’t, 2d & 11th Jud. the rents being charged for comparable Dists. 1995) (mem.). 190. Id. at 606. 571 N.Y.S.2d at 313. apartments. Contrary to what tenants 173. DILORENZO, supra note 4, at § 11:8. 191. Id., 571 N.Y.S.2d at 313. may believe and the Housing Court may have indicated, the purpose of the statute 174. Berkowners, Inc. v. Dime Savings Bank 192. CPLR 213(7). of N.Y., FSB, 286 A.D.2d 695, 696, 730 was not to institute a system of rent 193. Yatter v. William Morris Agency, Inc., 256 N.Y.S.2d 339, 341 (2d Dep’t 2001). regulation for ‘non-purchasing tenants’ A.D.2d 260, 261, 682 N.Y.S.2d 198, 199 but to prevent sponsors from charging 175. Saada v. Master Apts. Inc., 152 Misc. 2d (1st Dep’t 1998) (mem.). these tenants above-market rents as a 861, 863, 579 N.Y.S.2d 536, 538 (Sup. Ct., 194. CPLR 217 & 7802; Buttitta v. Greenwich means of forcing them out.”). N.Y. County 1991); DILORENZO, supra note House Cooperative Apts., Inc., 11 A.D.3d 4, at § 11:9. 150. Id., 713 N.Y.S.2d at 113. 250, 251, 783 N.Y.S.2d 26, 27 (1st Dep’t 151. G.B.L. § 352-eeee(2)(c)(v). 176. McMillan v. Park Towers Owners Corp., 225 2004) (mem.). A.D.2d 742, 743-44, 640 N.Y.S.2d 144, 145 195. Excelsior 57th Corp. v. Winters, 227 A.D.2d 152. Id. § 352-eeee(2)(d)(i). (2d Dep’t 1996) (mem.); Saada v. Master 146, 147, 641 N.Y.S.2d 675, 676 (1st Dep’t Apts. Inc., 152 Misc. 2d 861, 863, 579 153. Id. § 352-eeee(2)(d)(ii). 1996) (mem.). N.Y.S.2d 536, 538 (Sup. Ct., N.Y. County 154. Id. § 352-eeee(2)(d)(iii). 1991). 196. RPL § 234. 155. Id. 177. DILORENZO, supra note 4, at § 11:6. 197. Rubinstein v. 242 Apt. Corp. 189, A.D.2d 685, 685, 592 N.Y.S.2d 378, 378 (1st Dep’t 156. Id. § 352-eeee(2)(d)(ii); G.B.L. § 352-eeee 178. 86 N.Y.2d 643, 658 N.E.2d 1034, 635 1993) (mem.). (2)(d)(iii). N.Y.S.2d 161 (1995). 198. Silber v. Schwartzman, 150 Misc. 2d 1, 2, 157. 69 N.Y.2d 448, 454, 515 N.Y.S.2d 740, 742, 179. Id. at 648, 658 N.E.2d at 1036, 635 575 N.Y.S.2d 226, 227 (App. Term 1st 508 N.E.2d 652, 654 (1987). N.Y.S.2d at 163. Dep’t 1991) (per curiam). 158. The opinion covered four similar cases, 180. Id., 658 N.E.2d at 1036, 635 N.Y.S.2d at 199. 930 Fifth Ave. Corp. v. Shearman, 2007 N.Y. consolidated and decided together. 163. Slip Op. 52153(U ), 2007 WL 3353570, at 159. De Kovessy v. Coronet Props., 69 N.Y.2d at 181. Id. at 649, 658 N.E.2d at 1036, 635 **1-4 (Hous. Part Civ. Ct. N.Y. County 458, 515 N.Y.S.2d at 744, 508 N.E.2d at N.Y.S.2d at 163. 2007) (Gerald Lebovits, J.). 656. 182. 81 N.Y.2d 1033, 1034, 616 N.E.2d 848, 848, 160. 70 N.Y.2d 785, 787, 521 N.Y.S.2d 414, 415, 600 N.Y.S.2d 191, 191 (1993) (mem.). 515 N.E.2d 1212, 1213 (1987) (mem.). Gerald Lebovits, a judge of the 183. Id. at 1036, 616 N.E.2d at 850, 600 New York City Civil Court, Hous- 161. Id at 786. 521 N.Y.S.2d at 414, 515 N.E.2d N.Y.S.2d at 193. at 1212. ing Part, and an adjunct professor at 184. In re State Tax Com. v. Shor, 43 N.Y.2d 151, St. John’s University School of Law, 162. Id. at 787, 521 N.Y.S.2d at 415, 515 N.E.2d 400 N.Y.S.2d 805, 371 N.E.2d 523 (1977); at 1213. Cibro Petroleum Products, Inc. v Fowler presided over New York County’s 163. Id., 521 N.Y.S.2d at 415, 515 N.E.2d at Finishing Co., 92 Misc. 2d 450, 450-51, 400 Coop and Condo Part from 2003 to 1213. N.Y.S.2d 322, 322-23 (Sup. Ct., Albany 2005. James P. Tracy is an associate County 1977); DILORENZO, supra note 4, at 164. Penhurst Productions, 15 Misc. 3d at at Finkelstein Newman Ferrara LLP. § 11:9. 1105(A), 836 N.Y.S.2d 504, WL 824105, The authors thank New York Law N.Y. Slip Op. 50515(U), *5. 185. See Joint Queensview Hous. Enterprise, Inc. v. Balogh, 174 A.D.2d 605, 606, 571 School student Stephanie L. Torre 165. Id. at *2. N.Y.S.2d 312, 314 (2d Dep’t 1991); Will for her research assistance. 166. Id. at *5. of Katz, 142 Misc. 2d 1073, 1076, 539

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NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 57 Due to a formatting error, only the ﬁ rst page of this chart was published in the Winter 2008 issue of the N.Y. Real Property Law Journal. The chart appears below in its entirety. Detailed Chart Comparing Provisions of Current Bankruptcy Bills Dealing with Modiﬁ cation of Home Mortgages, as of 12/13/2007 Prepared by Mark S. Scarberry, Professor of Law, Pepperdine University School of Law (who served as the Robert M. Zinman Scholar in Residence at the American Bankruptcy Institute from Sept. to Dec. 2007)1

Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 as introduced H.R. 3609 in the Nature (identical except as of a Substitute (ap- noted in row for “Allows proved 17-15 by House strip down …”) Judiciary Committee) Has sunset provi- No sunset provision. Would apply only to No sunset provision. Would apply only sion, orlimitation No limitation based on chapter 13 cases, and No limitation based to chapter 13 cases. based on time of time of mortgage orig- only to such cases fi led on time of mortgage Provisions dealing with mortgage origina- ination. Some provi- before the sunset date, origination. Provisions mortgage modifi cation tion, or limita- sions apply to chapters seven years after the apply only in chapter would (1) be subject to tion to particular other than chapter 13. date of enactment. 13 cases. seven year sunset provi- chapter of Code Provisions dealing with sion (thus applying only modifi cation of mort- to cases fi led during gages would apply only period beginning with to mortgages “initiated date of enactment of bill before September 26, and ending seven years 2007.” later), and (2) apply only to mortgages securing debts incurred during period beginning Jan. 1, 2000 and ending on date of enactment. Eliminates Yes. Modifi cation Yes. In certain cases Deletes prohibition in Yes. In certain cases the or limits would be permitted if the bills would permit § 1322(b)(2). bill would permit modi- § 1322(b)(2) pro- debtor has insuffi cient modifi cation, but only in fi cation. If permitted, hibition on modi- current income to specifi ed ways described modifi cation could take fi cation of mort- make mortgage pay- below. Uses same ap- specifi c forms described gage on principal ments and cure arrear- proach as § 1322(d) below. Only “nontradi- residence ages, after deducting to determine relevant tional mortgages” and other “expenses” per- median income for “subprime mortgages,” mitted under § 707(b) comparison. Mortgage as defi ned in the bill,2 (2)(A) & (B) (as modifi cation permitted could be modifi ed, and incorporated in if debtor’s and spouse’s only if debtor has insuf- § 1325(b)(3)). current monthly income fi cient current monthly (whether or not case is income to make mort- joint case) times twelve gage payments and cure is less than 150% of rel- arrearages, after deduct- evant median income. ing “amounts”3 (other (Bill could be read to than payments to be apply 150% multiplier made on the mortgage at only to debtors in house- issue) set forth in § 707(b) holds of one person.) (2)(A) & (B). To confi rm Modifi cation is limited plan, court must fi nd that to mortgages “initiated “modifi cation is in good before September 26, faith.” 2007.”

58 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 H.R. 3609 Allows strip Yes, if modifi cation of Specter Bill: Yes, if modi- Yes. Strip down is not Yes, if modifi cation of down of mort- mortgage is permit- fi cation of mortgage is addressed specifi cally mortgage is permitted. gage lien to value ted. Strip down is not permitted, but only if but would be permit- Allows “claim for a debt of home in chap- addressed specifi cally debtor and mortgagee so ted under the general … secured by” the mort- ter 134 but would be permit- agree in writing. authorization to mod- gage to be reduced to val- ted under the general ify the mortgagee’s ue of property. Provides, authorization to mod- claim. on completion of plan, ify the mortgagee’s Chabot Bill: Yes, if modi- for lien to be retained claim. fi cation of mortgage is only for unpaid amount permitted with no re- of that reduced claim. quirement of agreement Might be interpreted by mortgagee. to reduce overall claim rather than simply secured claim, which could prevent mortgage holder from having unsecured claim for defi ciency. Allows payment Yes. Unclear whether Apparently yes, if modi- Yes. Provides express- Yes. See row immediately of modifi ed mort- it provides exception fi cation of mortgage ly for mortgagee to below. Provides expressly gage beyond du- to § 1325(a)(5)(B)(i) is permitted, because retain lien after debtor for mortgagee to retain ration of chapter (I)(bb) to allow mort- allowed modifi cations receives discharge lien after discharge of 13 plan gagee to retain lien do not include changes despite provisions of § other debts until reduced after debtor receives in payment schedule. 1325(a)(5)(B)(i)(I)(bb). and modifi ed mortgage discharge. Does not Unclear whether it Also provides express- claim is paid, despite provide expressly for provides exception to ly for discharge not to provisions of § 1325(a) discharge to be grant- § 1325(a)(5)(B)(i)(I)(bb) be delayed until com- (5)(B)(i)(I)(bb). Also ed on completion of to allow mortgagee to pletion of mortgage provides expressly for payments other than retain lien after debtor payments, and for discharge not to be de- mortgage payments. receives discharge. Does mortgage obligation layed until completion of Does not expressly not provide expressly for not to be discharged. mortgage payments, and provide for mortgage discharge to be granted for mortgage obligation not to be discharged on completion of pay- (as possibly reduced by as personal liability of ments other than mort- modifi cation) not to be debtor. gage payments. Does discharged. not expressly provide for mortgage not to be discharged as personal liability of debtor. Allows chapter 13 Yes, if modifi cation of No. Yes, without any ex- Yes, if modifi cation of plan to provide mortgage is permitted. press limitation on mortgage is permitted. for extension of Mortgage term can term. Language is ambiguous mortgage pay- be extended to thirty but apparently allows ments beyond years from origination modifi ed mortgage to be term of mortgage of mortgage. paid over term ending thirty years from origination of mortgage or over any longer period provided by original payment schedule.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 59 Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 H.R. 3609 Allows or re- Yes, if modifi cation of No. Yes. Ordinary rules for Yes. Not clear whether, if quires court to mortgage is permit- determining interest plan modifi es mortgage, determine mort- ted. Court must set rate needed to provide plan must include all gage interest rate mortgage rate at most full present value of modifi cations specifi ed in for home mort- recent annual Fed secured claim appar- bill. Probably debtor may gage modifi ed in fi gure for yield on con- ently would apply. No choose to include in plan chapter 13 plan ventional mortgages further guidance given only those modifi cations plus risk premium. in bill. desired by debtor. Thus Debtor might have plan may set interest rate option of leaving con- at most recent annual Fed tractual provisions fi gure for yield on con- regarding interest rate ventional mortgages plus unchanged. risk premium, but probably need not do so. If plan does so, then court would determine amount of risk premium. Allows chapter 13 No, except to extent Yes, to a limited degree. No, except to extent Yes, if modifi cation plan to determine that plan proponent If modifi cation permit- that plan proponent permitted. Combines home mortgage must include appro- ted, plan may modify must include an inter- elements of Durbin and interest rate. priate interest rate in right of holder of adjust- est rate that court will Specter/Chabot ap- plan. able rate mortgage by fi nd to be suffi cient to proaches. If plan sets “prohibiting or delaying provide full present interest rate at Fed fi g- adjustments to the rate value of secured claim ure plus risk premium, of interest applicable to per § 1325(a)(5)(B)(ii). then plan will include the debt on and after the proposed risk premium date of fi ling of the plan but court will then de- or voiding any such ad- termine the needed risk justments that occurred premium. Alternatively, during the 2-year period with respect to adjustable preceding that date of rate mortgage, plan may fi ling.” Apparently debt- modify interest rate by or could lock in below- “prohibiting, reducing, or market teaser rate for delaying adjustments to life of mortgage. Voiding such rate of interest ap- of increases might entitle plicable on and after the debtors to refunds of date of fi ling of the plan.” some interest paid pre- Debtor with below-mar- petition.5 ket teaser rate apparently can opt to keep it and prevent rate increases for life of mortgage.

60 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 H.R. 3609 Limits post- Only lawful and rea- Not clear. Same treat- Requires timely notice Only lawful and reason- petition fees and sonable fees provided ment as interest in cases of fees to debtor and able fees provided for in charges imposed for in the mortgage of substantial failure to trustee. the mortgage agreement by oversecured agreement may be disclose material terms may be added, and only home mortgagee added, and only if regarding fees. See foot- if mortgagee gives court where debtor is in mortgagee gives court note 5 below. notice. Only oversecured chapter 13 notice. mortgagee may add fees. Fee limitation appears to preclude not only allowance of fees (beyond those permitted) in chapter 13 but also any form of liability for such fees incurred during chapter 13 case regardless of whether chapter 13 plan is confi rmed or successfully completed. Allows waiver of Yes, whether or not Yes, in chapter 13 plan, Yes (not specifi cally Yes, in chapter 13 plan, prepayment pen- mortgage may be but only if modifi ca- but as part of general but only if modifi cation alty in chapter 13 modifi ed otherwise, tion of mortgage is authorization to mod- of mortgage is permitted. plan and without regard to permitted. ify mortgagee’s claim income and expenses. in chapter 13 plan). Disallows mort- Yes. Applies generally No. No. No. gage claim for to allowance of claims violations of law under all chapters of Bankruptcy Code. Entire mortgage claim is disallowed (and mortgage lien is void- ed) if mortgage is subject to any damages or rescission claim for any violation of TILA or any other state or federal consumer protection law in effect when noncompliance occurred, even if mortgagee obtained foreclosure judgment.

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 61 Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 H.R. 3609 Waives pre-fi ling Yes, if mortgage fore- Yes, as a pre-fi ling re- Yes, if mortagee has Yes, as a pre-fi ling re- credit counsel- closure sale has been quirement, but debtor initiated judicial or quirement (in cases com- ing requirement scheduled, and regard- must obtain such coun- nonjudicial foreclosure menced within seven where home is in less of which chapter seling after the fi ling, on debtor’s principal years of enactment of foreclosure of the Bankruptcy apparently in addition residence. Waiver ap- bill), on certifi cation that Code the fi ling is to the required pre- plies only in chapter debtor received notice made under. discharge fi nancial man- 13 cases. that mortgage holder agement course. Waiver “may commence a fore- applies only in chapter closure.” Debtor must ob- 13 cases. tain such counseling after the fi ling, apparently in addition to the required pre-discharge fi nancial management course. Waiver applies only in chapter 13 cases. Allows debtor Yes. Defendant can- No. No. No. (or trustee, upon not avoid liability by timely interven- claiming that debtor tion) to pursue is not real party in claims (or de- interest or by assert- fenses) held by ing judicial estoppel. debtor but not Applies generally, scheduled as as- not just in chapter 13 set of debtor (or cases. as defense, pre- sumably by way of scheduling creditor’s claim as disputed). Allows court to Yes. Applies generally, No. No. No. refuse enforce- not just in chapter 13 ment of arbitra- cases. tion agreement in core matters involving consumer debtor Creates $75,000 Yes. Applies generally, No. No. No. federal bank- not just in chapter 13 ruptcy homestead cases. A $75,000 ex- exemption for emption is added to § debtors over 55 § 522(b)(3) and 522(d). Could be read to be in addition to whatever homestead exemption is provided under state law, where state law exemptions are used.

62 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Durbin Bill, S. 2136 Specter Bill, S. 2133 Miller Bill, H.R. 3609 Conyers Amendment to Chabot Bill, H.R. 3778 H.R. 3609

Requires study to No. Yes. Comptroller No. Yes. Comptroller General be performed General must conduct and Director of Executive a study “to determine Offi ce for United States the impact of allowing Trustees each must bankruptcy judges to conduct a study “to de- restructure principal termine the impact of residence mortgages on the amendments made the secondary market for by sections 2 through mortgages”and submit 7 of this Act” and each a report to Congress must submit a report to within 180 days of Congress within 180 days enactment. of enactment. Endnotes 1. The “Detailed Chart Comparing Provisions of Current Bankruptcy Bills Dealing with Modifi cation of Home Mortgages, as of October 17,2007,” which appeared on page 38 of the Winter, 2008 issue, was prepared solely by Professor Mark S. Scarberry, who is a Professor of Law at Pepperdine University, School of Law and was then serving as the Robert M. Zinman Scholar in Residence at the American Bankruptcy Institute. 2. A nontraditional mortgage is one which at any time provides for periodic payments that are interest-only or that would cause negative amortization. Perhaps unclear whether common practice of paying pro-rated interest only for partial month at beginning of mortgage would make almost all mortgages “nontraditional.” Defi nition could cause mortgage to become “nontraditional” if mortgage holder permits fi nancially distressed debtor to temporarily make reduced payments. Subprime mortgages are fi rst mortgages with interest rates more than 3% over yield on comparable Treasury securities (under detailed provisions in bill for determining interest rate and choice of comparable Treasury securities) or subordinate mortgages with interest rates more than 5% over yield on comparable Treasury securities. 3. Use of term “amounts” in Conyers Substitute H.R. 3609 rather than term “expenses” as in S. 2136 makes clear that under Conyers Substitute payments on other secured debts must be included in calculation. 4. Note that if chapter 13 case is “dismissed or converted without completion of the plan,” the full amount of the lien under nonbankruptcy law would be restored. See § 1325(a)(5)(B)(II), which would not be amended by any of the bills. A debtor who cannot complete a plan may qualify for a chapter 13 hardship discharge under § 1328(b), in which case the strip down would not be reversed, because the chapter 13 case would not be dismissed or converted. 5. The bills also explicitly allow court to order recovery (in chapter 13 cases only) of pre-petition interest payments as fraudulent transfers if there was a substantial failure to disclose material terms regarding interest. Under § 548(a), up to two years of pre-petition interest could be recoverable. Section 548(a) apparently would not allow recovery of post-petition interest paid by debtor during the plan (though this is not clear), and the bills do not characterize the obligation to pay interest going forward as a fraudulently incurred obligation

NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 63 Says the Borrower to the Lender: “Now Here’s What I Want You to Do . . .” By Bruce J. Bergman

This is he says the lender was supposed to The bottom line: A supposed the story of a pay. (Other examples of conditions a tender of all the sums due which conditioned borrower might demand are legion imposes a condition can properly be tender—and and lender clients can probably fi ll rejected and interest continues to ac- why a lender or in their tales of borrowers’ fl ights of crue nevertheless. servicer need fancy.) not accept it Endnote and why reject- What to do with a conditional tender? The law is clear in New York. 1. Not surprisingly, the nuances attendant ing it creates no to the concept of tender are far more problem. It can be rejected. The simple fact is that a tender of money submitted extensive than this discussion. For considerably further review, see Mortgage lenders and servicers conditionally (albeit the full amount 1 Bergman on New York Mortgage should be familiar with the scenario. due) is not a tender.1 Hence, it can be Foreclosures § 4.08 (Matthew Bender & A borrower is seriously in arrears. sent back. Such a rejection often gets Co., Inc., rev. 2004). He claims to disagree with the sum a borrower’s attention and certainly owed. He protests late charges. He disposes of any issues about the Mr. Bergman, author of the doesn’t want to pay for inspections condition. three-volume treatise Bergman on or legal fees or much of anything for New York Mortgage Foreclosures But this leads to another issue. that matter. Diligence by the lender or (Matthew Bender & Co., Inc., rev. If a wily borrower remits all sums servicer fi nally persuades the borrow- 2004), is a Partner with Berkman, necessary to reinstate or pay off the er that he had best reinstate now or Henoch, Peterson & Peddy, P.C., mortgage (as the case may be), but the property will be lost. So the check Garden City, New York; an Adjunct nevertheless imposes some unaccept- arrives, but the borrower imposes a Associate Professor of Real Estate able or untoward condition resulting condition. with New York University’s Real in its rejection of the payment, could Estate Institute, where he teaches For example, he conditions pay- the borrower argue that because all the mortgage foreclosure course; and ment upon a reduction in the tax es- the money was sent, interest must a special lecturer on law at Hofstra crow, which he avers is just too large. cease upon the day the money ar- Law School. He is also a member of Or, as in a recent case [Cardella v. rived? The new case confi rms the the USFN and the American College Giancola, 297 A.D.2d 618, 747 N.Y.S.2d answer as “no.” The controlling of Real Estate Lawyers. 31 (2d Dep’t 2002)], he demands that principle is that to stop the running of a portion of the money submitted interest a tender of payment must be © Copyright 2008 Bruce J. Bergman be held in escrow to settle a dispute unconditional. about some real estate transfer taxes

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64 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 From the NYSBA Bookstore Real Estate

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NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 65 Real Property Law Section Annual Meeting Program and Luncheon Thursday, January 31, 2008 New York Marriott Marquis

66 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 67 Section Committees & Chairs The Real Property Law Section encour ag es members to participate in its programs and to volunteer to serve on the Commit- tees listed below. Please contact the Section Ofﬁ cers or Committee Chairs for further information about the Committees.

Attorney Opinion Letters Continuing Legal Education Low Income and Affordable Gregory P. Pressman Joseph M. Walsh Housing Schulte Roth & Zabel LLP Walsh & Walsh, LLP Richard C. Singer 919 Third Avenue 42 Long Alley Hirschen Singer & Epstein LLP New York, NY 10022-4728 Saratoga Springs, NY 12866-2116 902 Broadway, 13th Floor [email protected] [email protected] New York, NY 10010 [email protected] Charles W. Russell Lawrence J. Wolk Harris Beach PLLC Holland & Knight, LLP Steven J. Weiss 99 Garnsey Road 195 Broadway Cannon Heyman & Weiss LLP Pittsford, NY 14534 New York, NY 10007 726 Exchange Street, Suite 516 [email protected] [email protected] Buffalo, NY 14210 [email protected] Awards Land Use and Environmental Law John G. Hall John M. Wilson II Membership The Law Firm of Hall & Hall, LLP Boylan, Brown, Code, Vigdor & Karen A. DiNardo 57 Beach Street, 2nd Floor Wilson, LLP Phillips Lytle, LLP Staten Island, NY 10304 2400 Chase Square 1400 First Federal Plaza [email protected] Rochester, NY 14604 Rochester, NY 14614 [email protected] [email protected] Commercial Leasing Bradley A. Kaufman John C. Armentano Not-for-Profi t Entities and Concerns Pryor Cashman LLP Farrell Fritz, PC Leon T. Sawyko 410 Park Avenue 1320 RexCorp Plaza Harris Beach PLLC New York, NY 10022 Uniondale, NY 11556-1320 The Granite Bldg. [email protected] [email protected] 130 E. Main St. Rochester, NY 14604 David J. Zinberg Landlord and Tenant Proceedings [email protected] Ingram Yuzek Gainen Carroll & Edward J. Filemyr IV Bertolotti, LLP 11 Park Place, Suite 1212 Mindy H. Stern 250 Park Avenue New York, NY 10007 Schoeman Updike & Kaufman, LLP New York, NY 10177 fi [email protected] 60 East 42nd Street, 39th Floor [email protected] New York, NY 10165-0001 Gerald Lebovits [email protected] Condemnation, Certiorari and Real New York City Civil Court Estate Taxation 111 Centre Street Professionalism Karla M. Corpus New York, NY 10013-4390 Alfred C. Tartaglia Hiscock & Barclay, LLP [email protected] 720 Milton Road One Park Place Rye, NY 10580 300 South State Street Legislation [email protected] Syracuse, NY 13202-2078 Kathleen A. Lynch [email protected] Western New York Law Center Heather C. M. Rogers 237 Main Street, Suite 1030 Davidson Fink Cook Kelly & Condominiums & Cooperatives Buffalo, NY 14203 Galbraith LLP Dennis H. Greenstein [email protected] 28 East Main Street, Suite 1700 Seyfarth Shaw Rochester, NY 14614 620 Eighth Avenue S.H. Spencer Compton hrogers@davidsonfi nk.com New York, NY 10018 First American Title Insurance [email protected] Company of NY Public Interest 633 Third Avenue Michael L. Hanley Ira S. Goldenberg New York, NY 10017 Greater Upstate Law Project, Inc./ Hoffman, Wachtell, Koster, Maier, Rao SHCompton@fi rstam.com Empire Justice Center & Goldenberg, LLP 1 West Main Street, 2nd Floor 399 Knollwood Road, Suite 112 Rochester, NY 14614-1403 White Plains, NY 10603 [email protected] [email protected]

68 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 Raun J. Rasmussen Jr. Real Estate Financing Thomas J. Hall Legal Services for New York City Steven M. Alden The Law Firm of Hall & Hall, LLP 350 Broadway Debevoise & Plimpton LLP 57 Beach Street New York, NY 10013 919 Third Avenue Staten Island, NY 10304-2729 [email protected] New York, NY 10022 [email protected] [email protected] Publications Joseph D. DeSalvo Vincent Di Lorenzo Heather C. M. Rogers First American Title Insurance St. John’s University School of Law Davidson Fink Cook Kelly & Company 8000 Utopia Parkway Galbraith LLP 633 Third Avenue, 17th Floor Belson Hall, Room 4-46 28 East Main Street, Suite 1700 New York, NY 10017 Jamaica, NY 11439 Rochester, NY 14614 jdesalvo@fi rstam.com [email protected] hrogers@davidsonfi nk.com Unlawful Practice of Law William P. Johnson Real Estate Workouts and George J. Haggerty Nesper Ferber & DiGiacomo, LLP Bankruptcy George Haggerty & Assoc., PC 501 John James Audubon Pkwy Robert M. Zinman 500 North Broadway #128 One Towne Centre, Suite 300 85 Midland Avenue Suite 580 Amherst, NY 14228 Tarrytown, NY 10591 Jericho, NY 11753 [email protected] [email protected] [email protected] William A. Colavito Richard S. Fries Nancy M. Langer Liberty Title Agency, LLC DLA Piper US LLP Law Offi ces of Nancy Langer 515 Reckson Plaza 1251 Avenue of the Americas, 115 Woodbridge Avenue Uniondale, NY 11556 Suite 2900 Buffalo, NY 14214-1623 [email protected] New York, NY 10020-1104 [email protected] [email protected] Marvin N. Bagwell 5408 Post Road Title and Transfer Bronx, NY 10471 Gerard G. Antetomaso [email protected] Gerard G. Antetomaso, PC 1674 Empire Boulevard, Suite 200 Webster, NY 14580 [email protected]

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NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 69 Section Officers N.Y. Real Property Law Journal Chair Co-Editors Karl B. Holtzschue Law Offices of Karl B. Holtzschue William A. Colavito 122 East 82nd Street Liberty Title Agency New York, NY 10028 515 Reckson Plaza [email protected] Uniondale, NY 11556 [email protected] 1st Vice-Chair Peter V. Coffey William P. Johnson Englert Coffey & McHugh, LLP Nesper Ferber & DiGiacomo, LLP 224 State Street 501 John James Audubon Parkway Schenectady, NY 12305 One Towne Centre, Suite 300 [email protected] Amherst, NY 14228 [email protected] 2nd Vice-Chair Joel H. Sachs Marvin N. Bagwell Keane & Beane, P.C. 5408 Post Road 445 Hamilton Avenue Bronx, NY 10471 15th Floor, Suite 1500 [email protected] White Plains, NY 10601 Prof. Vincent Di Lorenzo [email protected] St. John’s University School of Law Secretary 8000 Utopia Parkway Anne Reynolds Copps Jamaica, NY 11439 Law Office of Anne Reynolds Copps [email protected] 126 State Street, 6th Floor Albany, NY 12207 Student Editorial Assistance [email protected] St. John’s University School of Law Budget Ofﬁ cer Editorial Board Edward Baer Editor-in-Chief Belkin Burden Wenig & Goldman, LLP Gurpreet “Ray” S. Walia Staff Editors 270 Madison Avenue Jonathan Bartov Managing Editors Thomas Bailey New York, NY 10016 Matthew M. Dolan [email protected] Jonathan Corbett Kelly Glass Molly Corcoran N.Y. Real Property Law Journal Associate Managing Editors Allan Jacobs Christopher Baum Ashley Laurie Submission Guidelines Liel Hollander Kevin Rutkowsky The Journal welcomes the sub mis sion of ar ti cles of Executive Articles Robert Seewald timely interest to members of the Section in addition to & Notes Editor Ryan Shaffer comments and sug ges tions for future is sues. Articles Benjamin Turshen Linda Wang-Lee should be submitted to any one of the Co-Editors whose names and addresses appear on this page. Research Editor Nili Farzan For ease of publication, articles should be sub mit ted Articles & Notes Editors via e-mail to any one of the Co-Editors, or if e-mail is not Michael T. Rozea available, on a disk or CD, pref er a bly in Microsoft Word Daniel Sanchez or WordPerfect (pdfs are NOT acceptable). Accepted Katherine Jewell articles fall generally in the range of 7-18 typewritten, Michael G. Vigliotta double-spaced pages. Please use endnotes in lieu of footnotes. The Co-Editors re quest that all sub mis sions for con sid er ation to be pub lished in this Journal use gen- der-neutral terms where ap pro pri ate or, al ter na tive ly, the Cite as: N.Y. Real Prop. L.J. mas cu line and fem i nine forms may both be used. Please This Journal is published for mem bers of the Real Property Law contact the Co-Editors re gard ing further re quire ments Section of the New York State Bar Association. for the sub mis sion of ar ti cles. We reserve the right to reject any advertisement. The New York Unless stated to the contrary, all pub lished ar ti cles State Bar Association is not re spon si ble for typographical or represent the viewpoint of the author and should not be other errors in advertisements. regarded as rep re sent ing the views of the Co-Editors, Copyright 2008 by the New York State Bar As so ci a tion. Board of Editors or the Section or sub stan tive approval ISSN 1530-3918 (print) ISSN 1933-8465 (online) of the con tents there in.

70 NYSBA N.Y. Real Property Law Journal | Spring 2008 | Vol. 36 | No. 2 NEW YORK STATE BAR ASSOCIATION Real Estate Titles Third Edition

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