United States: Real Estate Newsletter - Second Quarter 2000

The "TCO" is a formal document issued by the Buildings Department which essentially acknowledges that the apartments are ready for residential occupancy (i.e. bathrooms and kitchens have been installed, etc.) Apartments in some buildings have been completed but because a TCO has not been issued, the closing cannot occur. This can result in delays which can ultimately cause a purchaser’s loan commitment or interest rate to expire. For building’s where construction is just commencing, please take note that the construction process is generally long and complicated and inevitably there will be delays caused by unavailability of materials, accidents, contractor delays and even strikes.

Kane Kessler, P.C. represents numerous co-op corporations as general counsel. Recently, we have been called upon to review the form of Proprietary Lease and Alteration Agreement currently being used by these corporations. These documents were usually drafted many years ago and may not be up to date with recent amendments to the law or public policy. We have suggested amendments and modifications to make them more applicable to today’s issues.

Kane Kessler, P.C. handled over seven commercial loans made by Bank of America, N..A. over the last three months, all in excess of $1 Million.

In addition to our everyday loan closings for one to family homes, condominium units and co-op apartments, we will assist Wells Fargo in co-op title modifications. Hundreds of co-op apartment owners desire to amend their stock certificates and proprietary leases to reflect the recent modification to the law that allows shareholders to own their apartment as "tenants by the entirety." This type of ownership not only is useful for estate planning purposes but it also provides additional protection for married couples.

Many new leases require modifications to the proposed space to accommodate the tenant’s business. Generally, the burden to build out the premises is on the tenant unless negotiated otherwise.

Customarily, the lease will provide that the tenant submit plans and specifications for the build-out of the premises to the landlord for review and written consent. In our representation of tenants, we recommend that the tenant have the plans approved by the landlord at the time the lease is signed. This will prevent any delays caused by the landlord’s review after the lease has been signed. In addition, the tenant will not have to pay rent while the landlord’s consent to the build-out is pending.

With this minor modification to the lease, the tenant can secure a building permit, if necessary, and commence the construction or alterations immediately after the lease is signed.

In the event the Landlord will not approve plans and specifications simultaneously with the execution of the lease, have your architect in place and be ready to submit plans as soon as the lease has been signed.

Kane Kessler, P.C. represented several purchasers of large condominium apartments that have not been completed due to a variety of unforeseen delays. Contracts for these apartments were entered into over a year ago and the value of these apartments have increased dramatically over the last 12 months. The Purchase Agreements contain clauses that prohibit the assignment of the contract to a third party. Accordingly, the sellers cannot sell the apartment unless they take title and then transfer the apartment. This results in the payment of two transfer taxes since most sponsor purchase agreements require the purchaser to pay these taxes when purchasing a sponsor apartment. Nevertheless, the profit in selling the apartment after taking title is so large that many purchasers have agreed to pay the transfer taxes twice and still make a substantial profit.

1. In January 2000, Kane Kessler P.C. concluded the sale of a brownstone in the east 80’s for a price of $7.5 million. The closing, handled by Eric P. Gonchar, was complicated by a variety of financing and title issues and was concluded in over 10 HOURS!
2. In several transactions involving two apartments that are being purchased separately to be later combined by the purchaser, Kane Kessler P.C. was instrumental in obtaining a letter from the condominium, co-op corporation or managing agent stating that the units could be combined after closing. This letter was provided in lieu of the contract being contingent upon approval of the combination which could have caused months of delays and would have given the purchaser a way to cancel the contract in the event such approval was not secured.
3. The condominiums located at Battery Park City are generally built on landfill. Accordingly, the condominiums rent the land from the city. In reviewing the terms of the land lease, many purchasers are frightened off by the terms of the lease because of large increases in rents and a maturity not too far in the near future. After much due diligence, Kane Kessler has learned that, while there may be some inherent risks in purchasing a condo located in a building that rents the land, there are numerous provisions made by the Condominiums to resolve these rent increases. Our clients have agreed to purchase these properties based upon our full written analysis of these land leases.

Frequently, a seller of a property may request that they remain in possession of their home after the closing. Generally, this is due to the fact that that the seller may be purchasing a new home and needs the proceeds of the sale to complete the purchase. In order to avoid moving out of the sale premises several days before the closing, the seller may request that they remain in possession until their purchase is concluded. Sometimes the seller will be renovating their new home and may want to remain in possession of the old home while the work is being completed. In other instances, sometimes a purchaser may ask to close before the seller is ready so that the purchaser does not lose a favorable interest rate with the purchaser’s lender.

What ever the reason for a possession agreement, please remember the following:

1. Always have a written possession agreement signed at the closing prepared or reviewed by your lawyer. This document will set forth time limitations that the seller can remain in possession and what happens if the seller fails to vacate the premises.
2. The possession agreement should provide that either the seller’s or the purchaser’s attorney will hold a sum of money in escrow pending delivery of the premises. This amount will depend on the length of the holdover. For example, as little as $1,000 may be sufficient if the possession is a few days but $5,000 to $10,000 may be required for an extended possession period. The deposit will cover, among other things, any expenses associated with any damages caused to the premises during the possession period and expense associated with retaining a lawyer to evict the seller if they fail to vacate the premises when they were supposed to.
3. The possession agreement should provide that the seller will pay for the purchaser’s carrying costs during the occupancy period (ex. Interest on the mortgage, real estate taxes, common charges, maintenance, etc.). The seller should keep all utilities in the seller’s name until the apartment is delivered to the purchaser and should keep the homeowners insurance in effect as well.
4. If the seller remains in possession of a co-op apartment after the closing, it is wise to confirm that the co-op corporation does not need to approve the post closing occupancy by the seller (this may be deemed a sublet and against the co-op policies).

All in all, a possession agreement can work fine if the parties are reasonable and act in good faith. However, problems can arise when the purchaser inspects the premises after the seller vacates and finds damage. This can tie up the escrow deposit until the parties agree to a reasonable adjustment for such repairs.