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Are you buying or selling a house, apartment, condominium, building or even a shopping center? Are you getting a new mortgage or loan secured by property? If so, there are a few basics you should know. This is geared to readers in New York. The practice is different from state to state.
The “Closing” refers to the transaction where the property and the money actually change hands. Frequently people talk about hiring an attorney for a closing, but the attorney almost always does a lot more than show up when the deed is signed.
Start with the buying or selling of property. Normally the first step, which usually does not involve an attorney, is the buyer and seller coming to a handshake agreement on the sales price and basic terms. At that point, they normally will talk to their attorneys (or hire an attorney) to deal with the legal issues.
The first thing the attorney should do is to see if the transaction is advisable. That does not mean overriding the clients’ own business judgment as to what a good deal is – what it does mean is that the attorney will look at the transaction to see if there are any issues that a lay person might not understand. In a simple house closing, there is not much for the attorney to review. If the client is buying a cooperative apartment in New York City, there could be all kinds of issues, and that attorney will typically review the offering plan and the past few years’ financial statements and often the minutes of the past few years’ board meetings.
Assuming that after the review there are no serious problems, the next step is the drafting of the contract of sale. For houses and cooperative and condominium apartments, the contracts are largely “boilerplate” but often times a rider is attached to the contract to add additional terms. In many cases, the contract permits one party or the other to back out of the deal with no penalty under some conditions. Individual purchasers will often want a “financing contingency” that allows them to back out if they cannot get a mortgage or coop loan to help pay for the purchase; otherwise, the buyer is in default if the buyer cannot close due to lack of funds. Sellers often want provisions that allow them to back out if there are title problems that cannot be easily or cheaply cured. For house purchases, there are often provisions that permit cancellation of the contract if the house is found to have termites or serious hidden defects. One of the important reasons to have an attorney draft or review the contract is to make sure that the proper provisions to protect you are in the agreement.
When the contract is signed, the buyer usually pays a deposit; often 10% of the purchase price. That amount is held in escrow, usually by the seller’s attorney, until the closing. Under New York law and most contracts of sale, if the buyer does not close, that deposit is forfeited and the seller has to take that amount as the full damages for failure to close; the contract can make other provisions, however.
After the contract is signed, there are several things that have to be done, mostly by the buyer or the buyer’s attorney. They may include obtaining financing, having an engineer inspect the property, having a title search done to make sure that the seller can give a clear title, or seeking approval of the coop board or condominium governors if approval is needed for the purchase and sale. There is often a “due diligence” period for the buyer to investigate to determine if certain specified conditions exist.
In most cases, the buyer will get title insurance. When purchasing a building, house, or condominium (coops are a little different), title insurance is a very, very good idea because if someone later claims to have a lien or other interest in the property, the insurance company will defend any lawsuit brought to enforce that interest, and will pay any damages (within the limits of the policy terms) that are incurred. So if you pay $1,000,000 for a house, and it turns out that the seller’s ex-wife actually is a 50% owner because of a divorce decree, the title company may have to pay $500,000 to clear the title. The title insurance company is almost always the company that does the title searches to find out if there are liens or encumbrances on the property, before the actual closing. The buyer’s attorney is almost always the one who arranges for the title insurance and the title search, and if there is a lender financing the purchase, they will insist on reviewing the title search reports.
In coop closings, sometimes there is no title insurance. The reasons are that most of the time, the coop corporation cancels the old proprietary lease and issues a new lease and new share of stock and also that a cooperative apartment under New York law is not real property but is personal property – so judgments and tax liens are not automatically liens on the apartment. Those things are both true; but there are still lawsuits to set aside sales of cooperative apartments and they can be expensive and can potentially be won by the persons challenging ownership, depending on the circumstances. If there is a lawsuit about ownership, the buyer will regret not buying the insurance because the amount saved by not getting insurance will be spent on legal fees very quickly.
On very important aspect of title insurance is that the title insurance company pays the legal fees for the defense of the court case challenging ownership.
After the buyer obtains any needed financing and approvals, it is time to do the actual closing.
The attorneys for the buyer, the seller, the lender, any lender who is being paid off at closing, and possible the coop board attorney, the various brokers and sometimes other people as well, have to be consulted. There may be a dozen people necessary at the closing, and the closing has to be scheduled so they all can be present.
Additionally, the attorneys will have to work out the financial details because it is almost always the case that several certified checks will have to be brought to the closing, and the amounts of the checks have to be known a day or two ahead of the actual closing. If the property being sold is subject to a mortgage or other loan, the lender will have to compute the amount that has to be paid at closing – which usually involves computing interest on a daily basis. There are always fees and other payments that have to be made. Lenders who are financing the purchase will charge for things such as their attorneys’ fees, origination fees (points), loan application fees, interest until the first payment date, tax or maintenance escrow, credit check fees, document preparation and messenger fees, filing fees for financing documents, and so on, which are usually taken out of the loan proceeds in a financed purchase. If the seller has a mortgage, the seller’s lender will also charge various fees of that nature. The real estate broker(s) will be there to collect their commissions. The cooperative corporation will charge fees for their attorneys, document preparation fees, and possibly fees for “moving in” costs and so on. There are transfer taxes that will have to be paid. If one of the parties is a non-resident alien, there may have to be withholding payments taken.
All of these financial details are the things that can make a closing a headache. That is one of the major things that you are paying for when you hire an attorney to represent you at a closing.
Refinancing closings have many of the same features – but there is only one owner of the property, instead of a buyer and a seller.
The types of questions that clients want to know are usually “How long?” and “How much money?” questions. The answers depend on the type of closing. Here are some rough estimates, based upon typical charges in the New York City area.
For a simple cooperative apartment, cooperative apartment, or single-family house where there are no unusual problems, where there is financing involved, it almost never is less than 30 days between the handshake deal and the actual closing. It is sometimes less than 90 days, but 90 days is about average. In most cases, no matter what the buyer’s lender advertises, it takes about 30 days for the bank to give the approval for the loan and process the paper work. Sometimes it is less, and sometimes it is more. If approval of the coop board is needed, that can take longer than 30 days – a lot of boards only meet once per month, and the buyer may have to wait 30 days to be interviewed.
Actual preparation of a simple contract of sale should not take more than a few hours once the details of the deal are set, but occasionally they last longer for unforeseen reasons. Review by the buyer’s attorney of any documents depends on what the documents are and what issues may come up.
The cost also depends on the details of the transaction. For simple, straight forward, no problem closings, in New York City, the buyer’s and seller’s legal fees are unlikely to come in much under $2,000, and are probably going to be less than $4,000 – but that assumes there are no problems. The closing costs for the buyer are usually more than the buyer expected when the handshake deal was reached. For a typical mid priced apartment or house, the costs are usually in the range of a few thousand dollars. For whole buildings, much more.
After the closing, the buyer’s and seller’s attorneys will prepare a closing statement, which is a document that summarizes the transaction. It should explain where the money came from and where it went and why, which is important in preparing tax returns, and will be needed in computing any capital gains when the buyer sells the property in the future.
The foregoing was about a simple closing the can get more complex. If the property is income generating property, like an apartment building, there will be further legal work involved in transferring the rights to unpaid rent, rights under leases, assigning warranties for repairs or equipment that may be extant, negotiating any agreements between the buyer and seller that are going to be enforceable after the closing, and further documents that have to be filed with various agencies.
You As a Loft Tenant
As residential space—and particularly residential space that includes artists’ work space—becomes harder to find, New York is undergoing another wave of “illegal” conversions of commercial and manufacturing buildings to residential or “artists’ loft” usage. There is a great deal of this occurring in the Williamsburg area of Brooklyn, much as there was in SOHO and Tribeca in the late 1970’s and early 1980’s. These conversions have cropped up along Canal Street in lower Manhattan and in formerly commercial areas of Harlem, as well.
The earlier conversions, when artists such as Claus Oldenburg and Larry Rivers were prominent in SOHO, lead to a great deal of litigation and eventually to legislation that sought to regularize the conversions of commercial or industrial space to residential use.
Eventually, Articles 7B and 7C were added to the Multiple Dwelling Law (MDL) by the state legislature, and there are a number of buildings that were legalized for residential occupancy and a few that have not yet been legalized under those laws. The laws provided a framework for the conversions and legalization and rent regulation, including the rights to continued occupancy by the tenants, and the New York City Loft Board was created to oversee the legalization process. The units covered by Article 7B generally are those that are occupied by “Artists in Residence” and the units covered by Article 7C can be occupied by non-artists, and are called Interim Multiple Dwellings—IMD’s for short.
However, these laws do not apply to recently converted lofts; if there was not a coverage determination made in the 1980’s, it is exceedingly unlikely that one could be obtained. Courts are now dealing with the legal issues raised anew by this wave of conversion.
The Loft Law has been repeatedly changed over the years. Coverage provisions are in part based upon residential use during a “window period” and that period has been extended from time to time by the regulators.
There are several factual and legal issues that may affect your right to remain in your loft, both after your lease expiration and even during the lease term. As a tenant, you need to worry about whether you can be removed from your home by either New York City agencies or the landlord. In Williamsburg, the Housing Court has been faced with situations where the landlord has been blatantly converting commercial space to residential space, and then using that “illegality” as an excuse to evict “troublesome” tenants —those who want heat in the winter, for example.
What is it that makes the conversion of space to residential use “illegal?”
Note that the term “illegal” is in quotes—conversion of commercial buildings to residential is not a crime under the Penal Law, but it can cause the owner and sometimes the tenant to be the subject of various types of violations issued by City agencies and possible civil litigation such as eviction proceedings.
For residential use to be fully “legal” in any building, there are three basic legal issued to be considered. First, the residential use must be permitted by the applicable zoning. Secondly, the residential use must be in conformity with the Certificate of Occupancy issued by the Department of Buildings, and the building should also conform with whatever plans for alterations or construction have been filed with the DOB. Finally, if there is a lease or other agreement between the landlord and the tenant, the residential usage should be permitted by the lease. What rights and remedies of the landlord, the tenant and the City have depends on which of these three requirements is violated.
In New York City, zoning is determined by the New York City Department of City Planning, although non-compliance with zoning can result in violations being issued by other agencies, notably the Department of Buildings. A detailed explanation of zoning, including the full text of the zoning resolution and zoning maps, can be found at the DCP web page, but a short explanation will help explain why zoning is important in loft conversion.
Zoning is a designation of the permissible use of a plot of land; zoning is geographically determined. The zoning itself does not change by virtue of an actual change in use or ownership of property, or if lots are merged or broken up—although what may be built on a plot may be affected. In New York City, individual blocks have been designated block numbers, and within each block, there are lot numbers. The lot numbers often, but not always, represent the footprint of buildings and associated yard and sidewalk space on a one building/one lot basis.
These blocks and lots are shown on a “tax” map—real property taxes are assessed on a block by block basis, but the block and lot designations are used by the Department of Buildings and Department of Housing Preservation and Development, and are the index used to record deeds and various types of liens or land in New York. Zoning areas frequently, but again, not always, cover an area of contiguous blocks and lots, so that most of the time a building is on a plot of land covered by a single deed and the plot of land has the same zoning. As you can imagine, as buildings are torn down and rebuilt, lots are often merged or broken up, this one to one congruence has eroded. There are also small areas—called overlays—within larger zoning areas with changes in zoning; a typical example would be that there would be a small commercial area at one end of a city block that is otherwise purely residential, to permit stores at the end of the block.
There are three basic types of zoning designation that are important in New York City. They are “R” or residential; “C” or commercial; and “M” or manufacturing (including warehouse use). Each of these major categories has sub categories that determines such things as the maximum floor area compared to the lot area that is permitted, the height of the buildings that is allowed, how close the back of the building can be to the lot line behind the building and so on. These sub designations look like “R6” or “M1-1.” As a general rule, in R areas, the permitted use is residential. In C areas, both residential and commercial use—stores and offices—is generally permitted as of right. In M districts, with certain exceptions, residential use is not permitted as of right. For a more detailed explanation the DCP web page on zoning. There are dozens of subcategories, and they specify or limit the use of the area in great detail.
If a particular use is not permitted by the zoning, it may be possible to obtain a variance for DCP. Additionally, if there is a pre-existing use that becomes improper because of a change in the zoning, it is possible that the pre-existing use will be “grandfathered” and could be lawfully continued. Needless to say, zoning issues can get to be very complicated, and a building may straddle areas of different zoning, or a building with grandfathered use may be physically combined with a new structure.
From the standpoint of a tenant, if the tenant’s occupancy or use of the premise is contrary to the zoning, the tenant has a potentially serious problem. If space in a building located in a purely residential area is used commercially, or if there is residential use of a building in an M zoned area, it is possible that the City can come in and force the tenants out. This can be quite sudden, as it was for more than 200 tenants at 1717 Troutman Street in the fall of 2007.
MDL Articles 7B and 7C do legalize certain residentially used buildings in M zoning districts.
The next issue is the Certificate of Occupancy (CO). Under the MDL §§301 and 302, a building may not be residentially occupied unless a certificate of occupancy is issued permitting that use. If there is no residential certificate of occupancy then, not only can either the DOB or HPD issue violations, but technically the landlord cannot maintain a court case to collect rent and any lender with a mortgage of the property can call the entire mortgage due. While this is exactly what the law provides, courts are reluctant to enforce a forfeiture of the rent, and various judicial exceptions have been carved out of the plain meaning of the statute.
There are also a great many buildings in New York that do not need to have a CO because they were built before April 18, 1929, when one was first required. However, if new residential units are created in these older buildings or if there are other significant alterations, a CO is required. This is certainly the case where a commercial or manufacturing building is converted in whole or in part to residential use.
You can view a PDF copy of a building’s certificate of occupancy at the DOB web site.
The situation of a tenant in a building with no residential CO but in a C or R zoned area is much better than a residential tenant in a building that has an M zoning. It may be possible to legalize the residential use, and if the landlord caused, participated or permitted the change to residential use, the landlord may be forced to undertake the legalization. The legalization may be as simple as only making filings with the DOB, or it might involve construction to ensure proper fire egress and compliance with the Building Code. Depending on the circumstances, the residential occupant may be in the enviable position of remaining in the premises rent-free indefinitely.
The fact that the residential occupancy is contrary to the CO does not exempt the residential units from the Rent Stabilization Law. If the building has six or more residential units and was constructed prior to July 1974, then the Rent Stabilization Law will apply unless there are specific applicable exceptions. While a substantial rehabilitation of a building can cause such an exemption, merely changing the building to commercial usage does not count. This, by the way, represents a change in the law that started with DHCR Operational Bulleting 95-2 and RSC §2520.11(e). Now, for the substantial rehabilitation exception to apply, 75% of a list of specified building systems must be completely replaced under OB 95-2. In the typical conversion from commercial to residential use, this is not done.
But, what about the use being “illegal?” In 81 Bowery Realty Corp. v. Chen, New York Law Journal, July 16, 2008, p26, Col 1., the Court stated, “It is well settled that a landlord may not remove a tenant on the ground of illegal occupancy where:
- The landlord created the illegality, or
- Where the landlord took title with notice of an illegality created by a predecessor in title, and
- The illegality is susceptible of cure without undue expense or difficulty.” The third item is one that may give a court trouble, especially where the landlord intentionally undertook an illegal conversion.
The law in this area is far from settled. If a tenant moves into a unit that was created by illegally converting the building to residential use, then it is not clear what a court will do even if the zoning permits residential occupancy. The Court of Appeals held in a case where the zoning did not permit residential use—the building was zoned in an M zone—that the tenants could be evicted and were not covered by rent stabilization. Wolinsky v. Kee Yid Realty Corp., 2 NY 3d 487 (2004). Courts in the First Department, which includes Manhattan, are generally more favorable to loft tenants than courts in the Second Department, which includes Brooklyn.
The final item is the issue of the lease. Leases generally specify the use of the rented premises, and they are generally specific as to whether residential use is permitted. It is not surprising that where there has been an “illegal” conversion to residential use that a landlord will issue a lease that purports to prohibit residential use. Use of a commercial or “loft” lease is common, even where it is clear that both the landlord and the tenant knew and intended that the rented space would be used residentially.
Keep in mind that the lease is an agreement between the landlord and the tenant—only they can enforce the lease. A landlord could bring an eviction case based upon a violation of the provisions of the lease, but the City cannot.
A landlord’s rights to bring an eviction case may also be limited, even if there is a technical violation of the use provision of the lease. If the tenant is rent stabilized, then the tenant may be evicted only on grounds that are permitted by the Rent Stabilization Code, and the Code specifically prohibits evasion of the code—and issuing a commercial lease for residential, rent regulated space would probably be considered such an evasion.
Further, if the landlord has failed to enforce the terms of the lease for a period of time, the landlord may waive that right.