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Typical New York real estate contracts, for residential and commercial properties contain the all too familiar, “as is” clause. This clause essentially stands for the proposition that the purchaser takes the property as it currently stands in its present physical condition. Also, the “as is” clause in a contract can serve to bar a claim for breach of contract. (Board of Mgrs. of the Chelsea 19 Condominium v. Chelsea 19 Assoc., 73 AD3d 581 [1st Dept 2010])
Purchaser’s attorneys, often in their contract negotiations include additional clauses (by way of a rider) to the standard contract of sale form aiming to extract additional representations from the seller, which will in turn protect the purchaser against any unexpected “surprises” as to the condition of the property. In the residential realm, for example, this could mean a representation that the property is being sold as is, but the seller represents no leaks in the past 12 months. In the commercial setting, where sometimes millions of dollars are at play, the purchaser is often afforded (contractually, of course) a due diligence period, in which they can examine the premises or conduct different tests to their satisfaction prior to purchasing. Furthermore, a typical real estate contract in New York will contain a no-reliance (or non-reliance) clause, which basically states that the purchaser has not relied on any statements (outside the contract) made by the seller as to the condition of the building. This no-reliance clause will usually serve to bar a plaintiff’s fraud claim. However it has been established, in what is known as the “special facts doctrine” that the no-reliance clause bar a fraud claim only when facts relied upon, were “not matters peculiarly within the representing party’s knowledge” and that the relying party has the means available to obtain the truth. Danann Realty Corp. v. Harris, 5 NY2d 317, 320-321 [1959]
Such was the case in TIAA Global Investments, LLC v. One Astoria Square LLC, which involved the purchase of a Queens’s apartment building in the amount of $43 million. The contract contained an “as is” clause as well as a “no-reliance” clause. The purchaser was contractually afforded a period of due diligence during which time the purchaser could conduct tests to determine the condition of the building. Testing was conducted and the reports showed no major immediate problems. The purchaser (after having reviewed some tenant’s complaints about air penetration and high heating costs) wrote an email to the Seller’s principal, and asked a direct question as to the high heating costs of the building. This received an answer stating that everything was up to the building code and a letter from Seller that no problems existed with air penetration. However post-closing, the purchaser began receiving an increased number of complaints from tenants, which sparked the need for another inspection by an architectural firm. This report concluded that the building was built like “Swiss cheese” and was “hollow”. These defects cost the purchaser millions of dollars to fix, and the plaintiff-purchaser sued the defendant-seller for breach of contract and for fraud.
The court held inter-alia that the “as is” clause is not a shield to liability from a claim of fraud, since the “as is” clause pertains to the condition of the building itself, and not the representations made about the building. Additionally, the “as is” clause here was followed by the caveat “except as specifically set forth to the contrary in this agreement”, which allowed for specific facts to trump it. Furthermore the court held that the no-reliance clause did not bar an action for fraud since the defendant made representations that were in fact within their peculiar knowledge, and the only way for the plaintiff to find out the truth would have been to conduct destructive testing (i.e. break walls to find lack of insulation).
This court decision comes as a great reminder to real estate practitioners, that contract clauses, such as the “as is” clause and the “no-reliance” clause, while a great tool in limiting the seller’s liability as to the condition of the property, cannot be used with impunity and as a catch all for any problems that the seller may be avoiding to expose. A basic tenet of fairness in contract negotiation, can be viewed as both sides giving up something they value. So a properly negotiated and drafted “as is” clause causes the buyer to give up some of its ability to complain about conditions of the property that it can determine with some diligence, while it makes the seller give up its ability to simply say “what you see [and don’t see] is what you get”. In the same vein, the no-reliance clause, can be used fairly to limit the buyer’s ability to say that it heard through the grapevine that a problem may exist [albeit that the problem wasn’t described in the contract] and it can limit the seller’s ability to simply bury their head in the ground and say we know nothing, and if we didn’t memorialize it in the contract, you can never rely on it.
At the time of the writing of this article, no final disposition [and therefore no final damages] exists in the case of TIAA Global Investments, LLC v. One Astoria Square LLC.
Mortgage Recording Tax Rate on Multiple Condo Units (Part Deux)
This article comes as a follow up to an article found in our Newsletter of Summer 2013 (click here) regarding the applicable Mortgage Recording Tax applicable to combined condominium units. The crux of the issue is whether the multiple units comprise a “bulk sale”, which is taxed at the highest rate ($2.80 per each $100).
The New York State Department of Taxation and Finance (the administrator of the Mortgage Recording Tax program in New York) is still only considering facts on a case by case basis, but some similarities in some prior case decisions of the NYC Tax Appeals Tribunal (from 2006) have shed some light as to the factors that the Department has considered in making their decisions.
The Matter of Cambridge Leasing (TAT (E) 03-11), involved the sale of three condo units pursuant to one single contract. Two of the units were already combined and the third was a maid’s room. The Tribunal held that since the maid’s room couldn’t be purchased separately and independently, the sale was not considered “bulk sale”. In The Matter of Rosenblum (TAT (E) 2001-31 (RP)) the petitioner purchased a condo unit with a “Suite Unit”, a wine cellar unit and a storage unit. Since these units couldn’t be separately purchased other than by a unit owner, the Tribunal found that the sale was not a “bulk sale”. Lastly, in The Matter of Gruber (TAT (E) 2003-8, 9, 10 (RP)), the taxpayer purchased three condo units for the purpose of combining them into one unit. The Tribunal held that the purchaser “clearly intended to combine the units into one residence” and that no “bulk sale” rate applied.
Recently in 2013, in TSB-A-13(3) R, the purchaser a condo owner purchased the adjoining condo unit in order to combine it with his own. Due to condo restrictions, the purchaser couldn’t combine the units prior to closing. The purchaser sought an Advisory Opinion from the Department of Finance and it was held that the applicable rate was not the “bulk sale” rate but rather the rate applicable to individual residential condominium units, securing debt of $500,000.00 or more. In 2014, in TSB-A-14(1) R, the purchaser under one sales contract purchased three condominium units with the intent of combining them after closing (again since the condominium restricts the alteration of units prior to closing), and sought an Advisory Opinion regarding the applicable Mortgage Recording Tax. The opinion concluded that since the purchaser has evidenced a “clear intent, prior to the closing, to combine the three adjacent units into one primary residence”, the applicable rate would not be the “bulk sale” rate but rather the lower rate for condo units securing debt over $500,000.00.
Taking in consideration the above referenced case work and advisory opinions, two possible alternatives have emerged, which may be followed by purchasers [actual and prospective] of multiple condo units in New York City. The first alternative is to pay the higher mortgage recording tax (applicable under the “bulk sale” bracket) under protest, and then using form MT-15.1, (which can be found by clicking here), request a refund of the overpaid amount. The request must be “filed within two years of the date that the erroneous payment of tax was received by the recording officer”. The second alternative, is to obtain an Advisory Opinion prior to closing, from the New York State Department of Taxation and Finance. The petition to request the advisory opinion can be found by clicking here, and the instructions may be found by clicking here. As of the writing of this article, we have been informed that there are delays in processing the requests for advisory opinions. As a side note, the request to the New York State Department of Taxation and Finance for an Advisory Opinion should not be confused with a request made to the New York City Department of Finance for a Letter Ruling. The Letter Rulings are not applicable to the Mortgage Recording Tax, which is a program administered solely by the New York State Department of Taxation and Finance, under N.Y. TAX. LAW § 263.
For any further questions regarding the forms mentioned herein, or for copies thereof, please feel free to contact us.
On the verge of the new TILA-RESPA regulation…
In previous issues of our Newsletter (here), we’ve addressed the arrival of the new TILA-RESPA Integrated Disclosure (TRID) rule, which was promulgated by the Consumer Financial Protection Bureau (CFPB) and which will take effect on August 1, 2015. Essentially the new regulations require the use of the new the Loan Estimate form (replaces the GFE and TIL) and the Closing Disclosure (replacing the HUD-1). In addition to the new forms, there are critical timing requirements as to the delivery of documents. Since the time of our article, the industry has been flooded with an overwhelming amount of guidance in the form of writings, articles, webinars, seminars, training videos, bulletins and every other medium known to man, all purporting to better explain and detail the requirements of the new regulations. This industry-wide push for compliance has even given rise to new businesses which are monitoring and rating such compliance for a fee. Lastly, large institutional lenders like Wells Fargo and Bank of America, have issued statements to their closing attorneys/settlement agents/title underwriters/title agents etc., addressing their expectations for August of 2015 as well as giving guidance on how each lender is preparing to be compliant.
On March 18, 2015, a total of 17 trade organizations (including the American Land Title Association, American Bankers Association and Mortgage Bankers Association) have petitioned the CFPB, to seek the allowance of a “grace period” beginning on August 1, 2015 and ending on December 31, 2015, which would essentially allow for good faith compliance with the new rules, without any enforceability actions from the CFPB for those acting in good faith. The petition states that this period of “restrained enforcement and liability” is needed since the industry doesn’t have a chance to test the new rules in a “live” environment prior to August. Due to the predicted hurdles and obstacles that will likely result from the new regulations, the petition states that the industry needs to test out the new environment and iron out any wrinkles without fear of penalty or liability from the CFPB. The petition cites other instances, such as the revised RESPA rules that came out in 2010, in which the Department of the Housing and Urban Development (HUD) allowed the industry to test the new rules, and provide feedback without the fear of enforcement for those who tried to comply in good faith. Seeking a similar accommodation herein, these trade organizations state that the ultimate consumer (the purchaser or the borrower of residential properties) shouldn’t have to suffer with the undue burdens that could be placed on them by virtue of lender’s who are scrambling to be compliant in an uncertain compliance environment. The complete letter can be found here.
At the date of the writing of this article, the CFPB has not yet given an answer to this request for a grace period. We will continue to monitor this topic and report back in future issues of our Newsletter.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. (keng@prestitle.com), George Asllani (gasllani@prestitle.com) or Anthony Chiellino at (achiellino@prestitle.com) or (212)651-1200.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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