Inside This Issue

BBWG Lawyers Named “Super Lawyers” for 2014 .............................1 LITIGATION UPDATE Deemed Renewal Lease Update ......................2 TRANSACTIONAL UPDATE Fear of Commitment: Understanding the Commercial Loan Commitment Letter ............3 ADMINISTRATIVE LAW UPDATE Substantial Rehabilitation: Still a Way Out of Rent Regulation ..........................5 BBWG IN THE NEWS ........4 TRANSACTIONS OF NOTE ...........................4 LAWRENCE T. SHEPPS JOINS BBWG’S TRANSACTIONAL DEPARTMENT AS OF COUNSEL .....................4 CO-OP / CONDO CORNER ....................... 6, 7

E D I T O R S

Magda L. Cruz

Aaron Shmulewitz

Kara I. Rakowski

UPDATEJUNE 2014 | VOLUME 32

Belkin Burden Wenig & Goldman, LLP | 270 Madison Avenue | New York, NY 10016 | Tel 212 .867 .4466 | Fax 212 .867 .0709 Attorney Advertising 1

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Effective January 2014, BBWG has discontinued

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BBWG LAWYERS NAMED “SUPER LAWYERS” FOR 2014

Sherwin Belkin, Jeffrey Goldman, Steven Kirkpatrick, Aaron Shmulewitz, and Howard Wenig have again been named “New York Super Lawyers for 2014” by the Thomson Reuters rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement.

Daniel Altman has been named “Super Lawyer for 2014.”

Daniel Altman

Sherwin Belkin Jeffrey Goldman Steven Kirkpatrick Aaron Shmulewitz Howard Wenig

Craig Price has again been named as a “New York Rising Star for 2014.”

Craig Price

David Brand, Nicholas David, Alexa Englander, Seth Liebenstein, Scott Loffredo, and Noelle Picone have also been named as “New York Rising Stars for 2014.”

David Brand Nicholas David Alexa Englander Seth Liebenstein Scott Loffredo

Congratulations to our Super Lawyers!

Noelle Picone

L IT IGATION UPDATE

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DEEMED RENEWAL LEASE UPDATE

By Brian Clark Haberly

There have been several articles over the past year (including in the BBWG Newsletter) discussing “deemed” Rent Stabilized

renewal leases. Until the recent changes to the Rent Stabilization Code, the Code had previously stated that when a landlord had properly offered a renewal lease and the tenant remained in possession of the apartment, but failed to sign the renewal lease offer within the 60 day period provided under the Code, the landlord was allowed to “deem” the lease renewed and charge the guidelines rent increase.

The Appellate Division, Second Department in a February 2012 case, struck down the deemed renewal lease section in the Code. In Samson Management v. Hubert, the Appellate Division stated that the procedure laid out by the Rent Stabilization Code to deem leases renewed is invalid. The Appellate Court found that in an action by a landlord for unpaid rent, the landlord could not deem a lease renewed and denied the landlord’s motion for a judgment for unpaid rent.

Since Samson was issued by the Second Department (which covers Brooklyn, Queens, Staten Island, Nassau, Westchester

and Rockland counties) it was originally not clear if the First Department (which covers Manhattan and Bronx counties) would follow the ruling in Samson.

This ambiguity has now been resolved as the legislature has amended the Code to state that landlords will no longer be able to “deem” Rent Stabilized leases renewed under the Rent Stabilization Code. Basically the legislature has followed the reasoning in the Samson Management case and removed the “deemed” renewal lease provision from the Code.

Specifically the new section in the Rent Stabilization Code states:

9 NYCRR §2523.5(c)(2):

Where the tenant fails to timely renew an expiring lease or rental agreement offered pursuant to this section, and remains in occupancy after expiration of the lease, such lease or rental agreement may be deemed to be in effect, for the purpose of determining the rent in an overcharge proceeding, where such deeming would be appropriate pursuant to Real Property Law section 232-c. In such event, the expiring lease will be deemed to have been renewed upon the same terms and conditions at the legal regulated rent, together with any guidelines adjustments that would have

been applicable had the offer of a renewal lease been timely accepted. The effective date of the rent adjustment under the “deemed” renewal lease shall commence on the first rent payment date occurring no less than 90 days after such offer is made by the owner.

In light of the changes to the Code (along with the Samson case), where a Rent Stabilized tenant has failed to sign a renewal lease, it would seem the most effective (and quickest) solution for a landlord is to serve a Notice of Termination and bring a holdover proceeding in Housing Court based upon the tenant’s failure to sign the offered renewal lease. This would force the tenant to either sign the renewal lease or be evicted. Since these changes to the Code have just been enacted by the legislature, landlords should consult with an attorney to determine the appropriate course of action where a Rent Stabilized tenant has refused to sign a renewal lease.

Brian Clark Haberly (bhaberly@bbwg.com) is a partner in BBWG’s Litigation Department.

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TRANSACTIONAL UPDATE

FEAR OF COMMITMENT: UNDERSTANDING THE COMMERCIAL LOAN COMMITMENT LETTER

By Seth J. Bell

Whether you are financing the acquisition of a new investment property or refinancing your current mortgage

loan, the first document that a lender will ask you to sign once your loan application is approved is a loan commitment letter. The commitment letter essentially sets forth the basic terms of the loan as well as any conditions and/or requirements which must be satisfied by the borrower in order for the lender to fund the loan.

For obvious reasons, the best time to negotiate the terms of a loan is prior to the execution of a commitment letter. Unfortunately, borrowers often do not involve their attorney until after a commitment letter is signed, at which point it is usually too late to negotiate certain terms which are already locked in to the commitment letter. Once the commitment letter is signed, lenders and their counsel are less willing to negotiate the terms of the final loan documents if they were not included in the commitment letter. While loan terms contained in the average commitment letter may appear to be fair and relatively straightforward, there are many issues that are often overlooked by borrowers. For this reason, it is highly recommended that the commitment should be reviewed by an attorney with experience in commercial real estate finance, prior to its being signed.

Some of the more commonly overlooked points that could be negotiated are as follows:

Prepayment: Most commercial mortgage loans will contain some sort of prepayment

premium or penalty in the event that the loan is prepaid prior to maturity. The terms of the prepayment are usually difficult to negotiate as banks tend to have strict prepayment policies from which they will not deviate. However, a borrower should always insist that any such prepayment penalty shall not apply to the prepayment from the application of insurance proceeds in the event of a casualty or condemnation.

Due on Sale: Virtually all commercial mortgage loans will contain a due on sale clause—that the borrower’s sale of the collateral property without the consent of the lender is deemed a default and the loan becomes due and payable. While this term is generally not negotiable when the loan is secured by a single property, in the case of a loan that is collateralized by multiple properties it is common for borrowers to negotiate release prices for each collateral property in the event they wish to sell one or more of the properties during the term of the loan without triggering the due on sale clause. Additionally, borrowers may want to negotiate an assumption provision which would grant the purchaser of the collateral property the ability to assume the mortgage loan upon the payment of an assumption fee (generally 1% of the loan amount) and provided the new purchaser meets the underwriting requirements of the lender.

Permitted Transfers: The provisions concerning the transfer of interests in the borrower are usually a highly negotiated term. This lender’s primary concern is the control of the borrowing entity. One of the many factors involved with the lender’s issuance of a loan is the relationship and comfort with the principals of the borrowing entity. A

lender generally wants to ensure that those principals will maintain control of the borrowing entity throughout the term of the loan. While this is understandable, the principals should generally be free to take on another equity partner and/or make a transfer of their membership interest in the borrowing entity for estate planning purposes provided that they maintain control of borrower.

Closing Costs: While the borrower generally does not have much leverage in the negotiation of the lender’s fees, it is always a good idea to have all of the fees detailed in the commitment letter if only to avoid surprises at closing. Also, it is prudent to carve out which fees are refundable in the event that the loan does not close through no fault of borrower. Additionally, while you may not be able to avoid payment of the closing fees and costs, you may be able to persuade the lender to allow you to pay certain costs and fees from the proceeds of the loan at closing rather than up front.

While the terms of the loan will ultimately be set forth in greater detail in the loan documents, a borrower can save time, legal fees and stress if it negotiates as many terms as possible in the commitment letter.

Seth J. Bell is an associate in BBWG’s Transactional Department, and handles all types of commercial transactions, including sophisticated commercial loans for borrowers as well as lenders. Seth can be reached at sjbell@bbwg.com.

BBWG IN THE NEWS

SHERWIN BELKIN, a partner in BBWG’s Administrative Law and Appeals Departments, and DIANA R. STRASBURG, an associate in the Administrative Law Department, authored an article entitled “Owner Success At The Tenant Protection Unit,” which appeared in the March edition of The Mann Report.

JEFFREY L. GOLDMAN, co-head of BBWG’s Litigation Department, was quoted in an article in The Daily News on March 16 that reported on a new discovery demand filed on behalf of long-time firm client Donald Trump in his litigation against the New York State Attorney General.

MAGDA L. CRUZ, a partner in BBWG’s Litigation and Appeals Departments and a long-time member of the New York City Rent Guidelines Board, was cited in the May edition of RSA Reporter as being the sole member of the Board to vote against the preliminary guidelines proposed by the Board at its May 5 meeting.

MATTHEW BRETT, a partner in BBWG’s Litigation Department, was quoted in an article in the March 13 edition of The New York Law Journal, discussing the anticipated impact of the newly appointed Commissioner of the City’s Department of Housing Preservation & Development.

TRANSACTIONS OF NOTE

CRAIG INGBER, a partner in BBWG’s Transactional Department, represented an institutional investor in the sale of an Upper East Side multifamily apartment building with ground floor retail for a sale price in excess of $225,000,000. MR. INGBER had also handled the sale of another similar property for the same investor at the end of 2013, which also had a sale price in excess of $225,000,000.

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LAWRENCE T. SHEPPS JOINS BBWG’S TRANSACTIONAL DEPARTMENT AS OF COUNSEL

Belkin Burden Wenig & Goldman, LLP is pleased to announce that Lawrence T. Shepps has joined the Firm’s Transactional Department as Of Counsel.

Mr. Shepps has extensive experience in representing and advising clients

in all aspects of transactions involving the acquisition, disposition, financing, leasing and licensing of commercial real estate properties, including but not limited to, shopping centers, office buildings, multifamily and mixed use properties throughout the US, as well as, in the purchase and sale of

development rights in New York City.

Prior to joining the firm, Mr. Shepps was Of Counsel to Wachtel Missry LLP (f/k/a Wachtel Masyr & Missry LLP).

Lawrence T. Shepps

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ADMINISTRATIVE LAW UPDATE

SUBSTANTIAL REHABILITATION: STILL A WAY OUT OF RENT REGULATION

By Alexa Englander

In the current rent regulatory environment, where DHCR has chipped away at most landlord protections

beyond recognition, there are few mechanisms for deregulation that remain largely intact.

However, the provision of the Rent Stabilization Code (“RSC”) that provides for exemption from Rent Stabilization when a building has been “substantially rehabilitated,” as defined under RSC § 2520.11(e) and DHCR Operational Bulletin 95-2, still remains available to owners.

In order to be eligible for this exemption, a building must have been completed or “substantially rehabilitated as family units on or after January 1, 1974.” A “substantial rehabilitation” requires that 75% or more of “building-wide and individual housing accommodation systems must have been replaced.” Lastly, “the rehabilitation must have been commenced in a building that was in a substandard deteriorated condition.” If the building was vacant at the time the work was performed, then it is presumed to have been in substandard condition.

The relevant DHCR Operational Bulletin cites seventeen (17) “building-wide and individual housing accommodation systems” which must be replaced, including, inter alia, plumbing, heating, gas supply, electrical wiring, interior and exterior surfaces, kitchens and bathrooms, as well as intercom and elevator replacement. In buildings that do not contain all seventeen (17) of the systems listed in the Operational

Bulletin, the owner need only replace 75% of the systems pre-existing in the building in order to be eligible for the exemption. (For example, in a building that did not have an elevator, the owner would only have to replace 75% of the remaining number of systems.)

In a recent proceeding before DHCR, a landlord, represented by Kara Rakowski and Alexa Englander of BBWG’s Administrative Law Department, obtained an order from DHCR finding that his building had been substantially rehabilitated, and is therefore deregulated.

The landlord had purchased the building in 1981, at a time when a Department of Health Vacate Order was in effect. Over the next few years, the landlord substantially rehabilitated the building and obtained a new Certificate of Occupancy in 1987. Since 1987, the landlord treated the building as deregulated in reliance on the substantial rehabilitation exemption.

The landlord initially filed a substantial rehabilitation application with DHCR on his own, at DHCR’s instruction, in response to a tenant’s claims of a rent overcharge and the landlord’s failure to renew his lease, filed in 2009 and 2010, respectively. In order to establish entitlement to the exemption in its 2010 application, the landlord had to prove that he had satisfied the requirements of RSC 2520.11(e) and OB 95-2, over twenty (20) years after the substantial rehabilitation was completed. After DHCR sat on his application for nearly three (3) years, the landlord retained BBWG to represent him in the proceeding.

Fortunately, the landlord had maintained volumes of records, including invoices

and receipts from large-scale purveyors of appliances and fixtures, as well as local hardware stores. BBWG was able to parse through the documentation and present it to DHCR in such a manner as to demonstrate that the building had been substantially rehabilitated. BBWG also worked with the landlord’s architect to rebut the tenant’s architect’s opinion that the building was not substantially rehabilitated over twenty (20) years prior.

Less than one year after retaining BBWG, DHCR issued an Order determining that the building was exempt from rent stabilization by virtue of the substantial rehabilitation, thereby finding that the building is deregulated, and eliminating the threat of significant overcharge liability and susceptibility to additional tenant complaints.

The landlord was represented in this matter by Kara I. Rakowski (krakwoski@bbwg.com) and Alexa Englander (aenglander@bbwg.com) of BBWG’s Administrative Law Department.

CO-OP HOLDER OF UNSOLD SHARES CAN ONLY DESIGNATE ITS ALLOTTED BOARD REPRESENTATIVES, AND CANNOT SIMULTANEOUSLY VOTE FOR OTHER (RESIDENT) BOARD SEATS

420 W. 206th Street Owners Corp. v. Lorick Supreme Court, New York County

COMMENT | This co-op’s bylaws stated that the HUS “shall not elect” more than a stated number of Directors, in contrast to other cases that held the opposite way, but which were based on a “shall not control” prohibition.

CO-OP ENTITLED TO EVICT OBJECTIONABLE SHAREHOLDER AND FAMILY, UNDER “PULLMAN”

1855 7th Avenue Housing Development Fund v. Wigfall Civil Court, New York County

COMMENT | The Court noted that the co-op had followed its own procedures scrupulously, including documenting more than 700 instances of objectionable conduct.

TENANT’S MOLD-RELATED CLAIMS AGAINST LANDLORD DISMISSED, BECAUSE TENANT AND HER EXPERT FAILED TO PROVE ACTUAL CAUSATION BY MOLD OF HER INJURIES

Cornell v. 360 W. 51st St. Realty, LLC New York State Court of Appeals

COMMENT | While not involving a co-op or condo, this decision is still very instructive, as it sets the standards that must be satisfied for mold (and, presumably, other toxic substance) claims to survive dismissal.

CONDO BOARD CANNOT SUE SPONSOR OVER CONSTRUCTION DEFECTS

Board of Managers of Soho North 267 W. 124th Street Condominium v. NW 124 LLC Appellate Division, 1st Department

WATERPROOFING CONTRACTOR MUST INDEMNIFY CO-OP FOR PERSONAL INJURY CLAIM BY CONTRACTOR’S EMPLOYEE

Guzman v. 170 West End Avenue Associates Appellate Division, 1st Department

COMMENT | The Court held that, since the co-op was only vicariously liable due to the “Scaffold Law,” indemnification by the contractor did not violate public policy.

WRONGFULLY-EVICTED CO-OP SHAREHOLDER NOT ENTITLED TO $89,000 IN ATTORNEYS FEES SOUGHT, SINCE THAT SUM EXCEEDED THE COURT’S JURISDICTIONAL LIMIT

Saccheri v. Cathedral Properties Corp. Appellate Term, 2nd Department

CONDO PURCHASER NOT ENTITLED TO RESCIND CONTRACT BECAUSE WINDOW LAYOUT DIFFERED FROM FLOOR PLAN DEPICTION

Rozina v. Casa 74th Development LLC Appellate Division, 1st Department

COMMENT | The Court relied on disclaimers in the purchase agreement. The Court also awarded the sponsor attorneys’ fees under the contract.

CO-OP BOARD ORDERED TO PERMIT SHAREHOLDER TO INSTALL SMALL EXTERIOR HVAC SYSTEM AND RELOCATE CONDUIT IN BATHROOM

Kaplan v. Park South Tenants Corp. Supreme Court, New York County

COMMENT | The Court held that this cardiac-condition shareholder’s proposed installations were de minimis and would not adversely affect any other resident in the building, so the Board’s attempt to stop them was unreasonable, and not protected by the business judgment rule.

CO-OP | CONDO CORNERBy Aaron Shmulewitz

Aaron Shmulewitz heads BBWG’s co-op/condo practice, consisting of more than 300 co-op and condo Boards throughout the City, as well as sponsors of condominium conversions, and numerous purchasers and sellers of co-op and condo apartments, buildings, residences and other properties. If you would like to discuss any of the cases in this article or other related matter, you can reach Aaron at 212-867-4466 or (ashmulewitz@bbwg.com).

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CO-OP SHAREHOLDER ENTITLED TO ALL SHAREHOLDERS’ NAMES AND ADDRESSES, TO REVIEW BOARD MEETING MINUTES, AND TO REVIEW CORPORATE BOOKS AND RECORDS

In Re Goldstein v. Acropolis Gardens Realty Corp. Appellate Division, 2nd Department

COMMENT | While a shareholder’s entitlement to names and addresses is nothing new, the order for access to Board minutes and books and records was expansive.

CONDO BOARD CANNOT SUE SPONSOR’S ARCHITECT OR ENGINEER OVER CONSTRUCTION DEFECTS

Board of Managers of The Sevenberry Condominium v. N7B LLC Supreme Court, Kings County

COMMENT | The Court held that there was no privity of contract between the condo and these professionals, the condo was not a third-party beneficiary of the agreements between the sponsor and these professionals, and the condo’s claims were pre-empted by the Martin Act. The condo had previously reached a settlement with the sponsor.

CONDO LIEN VALID DESPITE UNIT OWNER’S CHALLENGE TO MANNER OF VERIFICATION/NOTARIZATION

Board of Managers of 34-44 82nd Street Condominium v. Roman Appellate Division, 2nd Department

CONDO BOARD CAN SUE SPONSOR AND PRINCIPALS FOR BREACH OF CONTRACT AND FALSE ADVERTISING, OVER CONSTRUCTION DEFECTS

Board of Managers of 550 Grand Street Condominium v. Schlegel LLC Supreme Court, Kings County

COMMENT | Although these two claims survived dismissal, most claims against the sponsor and its principals were dismissed; all claims against the sponsor’s architect were dismissed. The Court held that the sponsor’s principals could be sued based on the certification they signed as part of the offering. As can be seen from other decisions reported above, this decision contrasts somewhat with the prevailing body of law on this subject.

Belkin Burden Wenig & Goldman, LLP270 Madison Avenue | New York, NY 10016

Please Note: This newsletter is intended for informational purposes only and should not be construed as providing legal advice. This newsletter provides only a brief summary

of complex legal issues. The applicability of any or all of the issues described in this newsletter is dependent upon your particular facts and circumstances. Prior results do not

guarantee a similar outcome. Accordingly, prior to attempting to utilize or implement any of the suggestions provided in this newsletter, you should consult with your attorney.

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