United States: The Realist - Volume 1, Edition 4

A publication of Seyfarth Shaw's New York Real Estate Practice. The ReaList newsletter covers New York real estate news, events, and trends.

Real Estate:

Construction Loan Guarantees

Commercial mortgage loans secured by existing income producing properties are often made on a non-recourse basis to the borrower (and its principals).  These loans generally have the benefit of real property collateral producing sufficient cash flow to service the lender's debt and cover operating expenses for the property.  Construction loans, however, present a different risk profile for the mortgage lender due to, among other things, no cash flow being generated from the property during the course of construction, the possibility of the project not being completed within budget (or at all) and the increased risk of liens for labor and materials being filed against the property.  In addition, even after construction is completed there is often a period of time prior to stabilization when there is insufficient cash flow to pay debt service on the loan and operating expenses for the property. 

In order to minimize payment and performance risks associated with construction loans, lenders typically require guarantees from creditworthy parties.  One such guarantee that is usually required is a completion guaranty, which guarantees the prompt and complete performance by borrower with respect to the design, construction and lien-free completion of the improvements.  In addition, construction lenders may require other guarantees for the project, including carry guarantees covering interest and other payments to lender and the costs of operations of the property, and payment guarantees (partial or full).  The lead article in the July/August 2017 Edition of The Banking Law Journal which was written by Mitchell S. Kaplan discusses in greater detail the foregoing guarantees, as well as others that may be required by construction lenders. 

If you have any questions, please contact Mitchell S. Kaplan.

Litigation:

Owners of Development Rights May Be Able To Compel Their Sale

Sections 1602 and 1604 of the New York Real Property Actions and Proceedings Law ("RPAPL") allow the owner of an interest -- including a future interest -- in real property that has multiple owners to force the sale of the "real property, or a part thereof" if such a sale would be "expedient" -- e.g., the property does not generate enough income to cover taxes and upkeep.  A recent decision by the New York Appellate Division, Second Department holds that "real property, or a part thereof" includes development rights for the property, and that an owner of development rights can therefore compel their sale over the objection of the other owners if he or she can demonstrate that the sale would be "expedient."

In Hahn v. Hagar, 2017 N.Y. Slip Op. 05710 (2d Dep't July 19, 2017), a dispute arose regarding a farm that had been in the litigants' family for more than 240 years.  Three family members, who had either a life estate or remainder interests in the farm property, sought to sell the development rights for the property in order to permanently restrict the use of the property to farming.  A fourth family member, who held a remainder interest in the property, refused to agree to such a sale.  The other three family members sued to force the sale of the property's development rights under the RPAPL.

A unanimous panel of the Second Department held in Hahn that development rights constitute "real property, or a part thereof" for purposes of the RPAPL.  The Second Department found that the definition of "real property" in New York's General Construction Law includes "intangible rights" in the property, and that development rights are part of the "bundle of rights" included in an ownership interest in real property.  The Second Department concluded that development rights are at least "a part" of real property for purposes of the RPAPL, and are therefore subject to a forced sale if that sale would be "expedient." 

In Hahn, however, the Second Department held that the plaintiffs were not entitled to compel a sale because they had not demonstrated that such a sale would be "expedient" within the meaning of the case law.  The plaintiffs based their claimed right to force a sale of the property rights upon their desire to preserve the property for farming use; the Second Department held that a "laudable and moral goal" was not enough to demonstrate that the sale would be "expedient."  

Hahn nevertheless confirms that an owner of development rights may be able to compel the sale of those rights over the objections of other owners if (s)he can effectively demonstrate that the sale would be "expedient."

If you have any questions, please contact Jonathan P. Wolfert or Owen R. Wolfe.

Labor and Employment:

Has Your Website Been The Subject Of An ADA Lawsuit Yet?

If not, it's probably just a matter of time.  Since the beginning of 2015, at least 350 businesses have been sued under Title III of the Americans with Disabilities Act (ADA) in federal court for having allegedly inaccessible websites that cannot be used by blind individuals who use screen readers to access online content.  This litigation surge continues, fueled by a recent ruling by a Florida federal judge who found Winn Dixie to be in violation of the ADA after a full trial about whether Winn Dixie's website could be used by the blind plaintiff. 

The ADA requires public accommodations to provide individuals with disabilities equal access to their goods and services.  To the extent that there are goods, services, and other benefits that are offered on a business's website that are not available through an equivalent channel (e.g., the telephone), plaintiffs with disabilities can claim that they are being denied equal access to such goods, services and benefits.  Most of these lawsuits settle quickly.  However, in the few that have not, defendants have had mixed results.  More often than not, the courts have allowed the cases to proceed to discovery, refusing to dismiss them at the beginning of the lawsuit.

Businesses that open their doors to the public need to start working on making their websites accessible now if they have not already done so, as the lawsuits show no signs of abating.

If you have any questions, please contact Minh N. Vu or Kristina Launey.

Intellectual Property:

Movietime or Paytime?

Ever watch a movie at home on your Blu-ray or DVD player, and notice that ominous FBI warning on the opening screen: 

"Federal law provides severe civil and criminal penalties for the unauthorized reproduction, distribution or exhibition of copyrighted motion pictures, video tapes, DVDs or video discs." 

Pretty scary stuff.  Well, if you're a residential condominium or cooperative, or a senior home or community center, and if you have a "common room" or "event space," or perhaps advertise in your promotional materials and website that you have such rooms, chances are that Hollywood will be knocking on your door.  And when it does, it will be seeking compensation for past and future "exhibition" rights to show films in these non-private areas of your building or facility. 

Many intellectual property rights holders these days, and the movie industry is no exception, are going further and further down the chain to exact licensing fees and other payments for what have been, until now, unenforced copyright infringements by users who believed their conduct to have been innocent. 

When you buy a movie for home viewing, you are not buying the movie itself.  Instead, you are buying a license to view the movie in the privacy of your home.  Using that disc or tape to show a movie outside of your home is likely a public performance and therefore a likely copyright infringement.  Without a prior license to show that movie in a public space, the movie studio owning the rights can seek to enforce a payment for such a showing through a demand and, if necessary, litigation.

Because the amounts recovered for these public performances have usually been relatively low, most copyright owners have not previously sought to enforce their rights.  In other words, the cost of enforcement usually outweighed the likely recovery.  But copyright owners of all stripes are changing their tune, seeking to squeeze every last possible penny out of the works they own while they still have some value.

As a result, licensing companies representing movie studios and production companies are actively demanding that condos, coops, senior homes, community centers and the like buy a license that allows the public showing of a vast library of films.  These licenses do not cover every single film, but instead only those that the licensing company has rights to license out.  It is possible that several licenses may be needed to cover the gamut of movies that may be of interest.  The license price is usually based on the number of potential viewers as determined by the number of units in a building, the number of occupants of a facility, the number of members of a community center and other similar viewer approximations.  The cost of the licenses are often added to the common charges of a building. 

So next time you want to have a movie night in your building's common space, ask whether you have the right to exhibit the movie.  You will want to breathe easily when that FBI warning screen pops up.

If you have any questions, please contact Ed Maluf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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