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Real Estate & Construction Law Monitor

Monitoring the Latest Developments in Real Estate & Construction Law

Another Item on the Closing Checklist – Purchasers Should Take Caution as NYC Department of Finance Cracks Down on Late and Non-Filing of RPIE Forms

By Joanna K. Slusarz on Posted in New Rules and Legislation, Real Estate

Owners of most income-producing properties in New York City have an obligation to file an annual Real Property Income & Expense (“RPIE”) form with the NYC Department of Finance (“DOF”). (For more information about the purpose of the RPIE forms and which owners are obligated to file same, see article written by colleague, Christopher Caslin.) For many years, whether an owner filed the RPIE form late, or not at all, was not available from the DOF nor made available on the public record.  Last November, however, the DOF began issuing penalties for the failure to file the RPIE form in a timely manner (by early September of each calendar year), ranging from three to five percent of the assessed value of such income-producing property, depending on the type of the infraction.  The penalty is entered as a charge on the tax records of the real property and becomes a lien on the property.

Currently, there is a two-year lag between the time the penalty accrues and/or is assessed and the time that the penalty is entered on the tax records. As an example, the penalties for 2010 RPIE non-compliance were added to the November 30, 2012 tax bills. Therefore, a purchaser who closed on a property prior to that date would not have known about the penalties which now constitute a lien against the property.

In these instances, the DOF has advised submitting an Innocent Purchaser Affidavit, on the DOF’s form, to the RPIE Unit.  The form requires the address of the property at issue, the date on which the applicant took title to such property, the sales price and the amount of the penalty (as listed on the tax bills).  In the affidavit, the applicant requests the City of New York to waive payment by the applicant of the RPIE non-filing fees assessed against the property and cancel any lien on the property relating to such charges. The applicant must certify that, to the best of its knowledge, at the time of the closing of title to the property at issue, the DOF’s records did not show that the charges were unpaid or the prior owner did not file the RPIE, and the applicant was not aware that payment of any of the charges was due. Further, the applicant must certify that the purchase and sale was an arms-length transaction and the consideration paid for the property was based on its market value.

Upon receipt of the affidavit, the RPIE Unit will independently research the transaction to determine if the RPIE penalty can be waived.  We have been advised this could take as long as eight weeks.  Fortunately, while waiting for a response, purchasers are not obligated to pay the RPIE penalties (but should nonetheless pay the remaining assessments in a timely manner).  Interest will also not be added to the RPIE penalties during the period the RPIE Unit is performing its review.

Considering these implications, prudent purchasers (or their attorneys) should be proactive and ascertain, prior to closing, whether all RPIE forms for the property of interest have been filed. The purchaser can require the seller to represent to the purchaser that all RPIE forms have been filed, and that true, correct and complete copies of same have been provided to the purchaser (sellers can print their submitted forms here. A contingency can also be added to the purchase and sale agreement, making the transaction dependent upon the seller’s handling of any RPIE-related issues, and can include the obligation of placing money in escrow by the seller in an amount determined by the parties to be sufficient to cover any RPIE penalties. The purchaser may also want to expand the seller indemnity to include any fines and charges related to the seller’s failure to file all required RPIE forms.

For advice on how to structure your transaction to best protect your interests with respect to the RPIE penalties, contact attorneys in the firm’s real estate department.

New Jersey Adopts FEMA Flood Maps; DEP Releases FAQs on the Stringent Requirements for Rebuilding Along the Shore

By Joanna K. Slusarz on Posted in New Rules and Legislation, Real Estate

On January 24, 2013, Governor Chris Christie adopted the advisory flood maps released last December by the Federal Emergency Management Agency, which establish new, tougher standards for rebuilding along the Jersey Shore, including higher elevations of homes and buildings located in such flood-prone areas. The New Jersey Department of Environmental Protection acted quickly to amend New Jersey’s Flood Hazard Area Control Act regulations in light of the latest information contained in the FEMA flood maps.

On Monday, the DEP released a frequently asked questions page to assist property owners in determining whether the rules apply to them and what their obligations are. You can access the FAQ page here.  For the Governor’s outline of the regulations, click here.  A more comprehensive blog article to follow.

Suppliers Must Take Affirmative Steps to Determine Source of Payments to Protect Construction Lien Claim Rights

By Peter James Herrigel on Posted in Construction, Construction Liens

In L&W Supply Corp. v. Joe DeSilva, et al., (Docket No. A-2960-10T2, December 19, 2012) (“L&W Supply”), a decision recently approved for publication, the Appellate Division provides guidance to material suppliers seeking to file construction lien claims.  The court held that, in certain circumstances, a material supplier must make further inquiry and attempt to determine the source of payments it has received from a particular contractor, so that it can allocate those payments to the correct project.  A supplier that fails to fulfill this duty may forfeit its rights under the Construction Lien Law, N.J.S.A. 2A:444-1 to 38 (the “Lien Law”).

In L&W Supply, L&W Supply Corporation (“L&W”), a supplier of drywall, studs and related materials, sold building materials on credit to a now-bankrupt subcontractor, Detail Contractors, Inc. (“Detail”), in connection with the construction of an assisted living facility in Wall Township (the “Project”).  Detail was one of several entities owned and operated by defendant Joe DeSilva.  DeSilva had open accounts with L&W for building projects other than the Project. 

Detail owed L&W $231,794.34 for materials supplied and delivered to the Project. L&W received payments totaling $217,000 from DeSilva and allocated $103,959.45 to the Project and the remaining $113,040.55 to other DeSilva project accounts.  This left a balance due and owing, by L&W’s calculations, of $127,834.89 for materials L&W delivered to the Project.  L&W then filed a construction lien for $127,834.89 against the Project and, subsequently, filed a complaint against Detail, DeSilva, the project owner, the general contractor and a bonding company seeking to enforce its lien claim.

The trial court granted summary judgment against the general contractor, the owner and the bonding company (collectively, the “Defendants”) for the full amount of L&W’s lien claim.  Defendants appealed.

In analyzing a material supplier’s duty to allocate the payments, the Appellate Division noted that the Supreme Court previously held in Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56, 63  (2004) that a materials supplier that seeks to file a construction lien has a duty to apply payments correctly against several open accounts of a materials purchaser, such as a subcontractor, if the supplier has “reason to know” that the payments came from a particular construction project.  The focus of the Appellate Division in L&W Supply was the obligation of the materials supplier “to ascertain the source of . . . payments and to apply them accordingly.”

In Craft, the Supreme Court held that a lien claimant has a “statutory duty to allocate [the materials purchaser’s] payments to the accounts from which they were derived.”  Here, Defendants contended that L&W was owed only $12,143.05 relating to the Project, far less than the $127,834.89 reflected in L&W’s lien claim.  Defendants claimed that L&W improperly applied the payments to other, non-Project accounts of DeSilva, thereby improperly increasing the size of the lien fund on the Project.  The Appellate Division found that the trial court did not adequately consider whether a dispute existed regarding the accuracy of L&W’s accounting and allocation of the payment funds.

The primary legal issue involved the lengths to which a supplier must go to fulfill its duty to allocate payments accurately.  Prior to Craft, the general rule was that a creditor may apply payments from a debtor in any manner it chose when payments were not specifically designated by the payor to be applied to a particular project.  After Craft, a supplier became obligated to inquire about the source of a contractor’s payments to the supplier.  A failure to do so may warrant a finding that the supplier should have known the source of the payment.  The supplier’s failure to take affirmative action to ascertain the source of funds does not affect the supplier’s right to collect all balances due, but rather only affects its right to encumber the real property of a project owner under the Lien Law.

The court held that “when the purchaser of materials has not provided specific, reliable instructions as to the allocation of its payment, or when the circumstances are such that a reasonable supplier would suspect the purchaser has not used an owner’s funds to pay for materials supplied for that owner, then the supplier must make further inquiry and attempt to ascertain the source of the payment funds so that it can allocate them to the correct accounts.  A supplier that fails to fulfill this duty sacrifices its right under the Construction Lien Law.”

Although L&W’s witnesses stated in a conclusory manner that the funds were properly allocated, L&W did not provide calculations or other details to show how those witnesses arrived at their conclusions.  The Appellate Division found that Defendants should have the opportunity to prove at a trial that L&W failed to make any inquiry about the source of funds, or that it had reason to suspect that L&W was not properly allocating DeSilva’s payments.

The lesson here is that to protect its construction lien claim rights, a supplier must take affirmative steps, and be prepared to substantiate those efforts at trial, to determine the project that was the source of the funds that the supplier received from a contractor purchasing on an open account.  The failure to take steps to determine the proper allocation of payments, to arbitrarily allocate payments or to not inquire as to a questionable allocation from the material purchaser, may result in a forfeiture of the supplier’s lien rights.

Damage From Superstorm Sandy Means Substantial Real Property Tax Relief May Now Be In Order

By Carl A. Rizzo on Posted in Real Estate, Tax

When Superstorm Sandy hit New Jersey on the evening of October 29, many local residents and businesses did not expect the devastation that followed.  Numerous suffered substantial business and residential property losses as a result of the storm.  While many have been busy and perhaps overwhelmed with filing insurance claims and claims with the Federal Emergency Management Agency (FEMA), property owners should not overlook another critical component of their available relief lifeline — real property tax relief. 

New Jersey law is clear that when real property, containing any building or structure, has been destroyed or altered in such a way that the real property’s value has materially depreciated after October 1, the property owner may be entitled to tax relief.  Specifically, the law provides that the value of a property depreciated as a result of a storm like Sandy can support an adjustment to the property’s tax assessment. 

However, notice to the tax assessor must be provided before January 10, 2013.  The relevant statute expressly provides: When any parcel of real property contains any building or other structure which has been destroyed, consumed by fire, demolished, or altered in such a way that its value has materially depreciated, either intentionally or by the action of storm, fire, cyclone, tornado, or earthquake, or other casualty, which depreciation of value occurred after October first in any year and before January first of the following year, the assessor shall, upon notice thereof being given to him by the property owner prior to January tenth of said year, and after examination and inquiry, determine the value of such parcel of real property as of said January first, and assess the same according to such value.

Because significant real property value has been lost in certain storm ravaged areas, the time to act is now to ensure that real property tax assessments are properly adjusted and property taxes reduced.  There is simply no reason why the crippling losses suffered by so many should be further compounded by municipal overassessments on these same properties. 

The devastation realized by our State’s shore communities represents just one example of an opportunity for application of the relief available under the law.  For example, a property owner’s ocean front estate or business property is literally washed away from its foundation.  In fact, even the foundation remains buried in a dune of eroded beach sand.  In this instance, not only would the property owner’s building value be lost, but the real prospect exists that the land itself may have been permanently altered (reduced in size).  A portion of the victimized property may have been consumed by the ocean and the physical square footage of the lot both physically reduced in size and in value. 

Furthermore, with the obvious publicity surrounding the plain degradation of the local infrastructure, heightened prospect for similar events in the future, a compelling case can be made for a more generalized reduction in value for all similarly situated properties as well — especially when coupled with the new stigma likely attaching to these neighborhoods.  The marshalling of facts and evidence supporting an appropriate reduction in the property assessment is therefore critical. 

By providing the proper and timely notification of this material loss to local property tax assessors, prior to January 10, 2013, a property owner can ensure that a reassessment of the impacted property is undertaken.  Taking such action also enables the property owner to later have standing to contest any inadequate adjustments made by the assessor through the filing of timely real property tax appeals.  It must be recognized, that a failure to provide timely notice will likely result in the 2013 tax assessment remaining at its pre-storm level.  As a result, such property owners could be saddled with assessments and tax bills on property that no longer exists.  The property owners’ diligence is therefore essential to ensure that those properties impacted are assessed to reflect true value and not some higher value that may have existed prior to the devastation caused by the storm. 

Significant real property tax relief is thus now available to many and should be included at the top of any list of actions to be taken during these most difficult times.

Contractors on Public Projects Beware – Verbal Waiver Of Prior Written Approval Requirement For Extra Work Not Enforceable

By Peter James Herrigel on Posted in Construction, Construction Contracts

The New Jersey Appellate Division, in Contract Applicators, Inc. v. Borough of Park Ridge, Docket No. A-6080-10T3 (October 2, 2012), recently affirmed a trial court decision that denied a contractor’s attempt to obtain payment for extra work on a public project because the contractor did not comply with the express terms of the contract by obtaining prior written approval authorizing the performance and payment of the extra work.  The contractor claimed it was entitled to payment because he was given verbal approval by the municipality’s engineer to perform the extra work.  The Appellate Division rejected that argument and affirmed the trial court’s decision to deny payment to the contractor for the extra work. 

Contract Applicators, Inc. (“Applicators”) was the lowest responsible bidder for the mechanical and structural rehabilitation and waterproofing of the Mill Road Powerhouse Museum project (the “Project”) in Park Ridge, New Jersey (“Park Ridge”).  The contract awarded provided: “Any proposed changes or deviations from the contract documents during the construction phase of this project must be submitted to [Park Ridge] in writing.  Written approval from [Park Ridge] must be obtained prior to the execution of the proposed change.  The contractor proceeding without receipt of this approval does so at his own risk.”  Park Ridge engaged an engineer (“Engineer”) to supply information regarding engineering related to the Project and separately designated the municipal Director of Operations (the “Director of Operations”) as the contact person for issues relating to the contract.

After the Project work was completed, Applicators submitted an itemized request to the Engineer for payment for additional work at the Project.  Applicators claimed that the Engineer waived the requirement in the contract that extra work must be approved in writing when the Engineer told him to wait until the work was done before submitting claims for extra work.  Despite the lack of prior written approval, Park Ridge approved some, but not all, of the extra work claims submitted.  Applicators then filed a legal action against Park Ridge seeking payment for all of the extra work.

At trial, Applicators claimed that the Engineer had authority to and did waive the requirement that there must be prior written approval for any extra work.  The trial judge disagreed, finding that Applicators did not comply with the contract, failed to obtain prior written approval for the extra work and found Applicators was not entitled to relief.

On appeal, the Appellate Division also rejected Applicators’ argument based on certain statutory procedures relating to the adoption of municipal budgets, taxes and approving budgeted funds for specific purposes.  The Court also noted although the Engineer could provide expert opinions and recommendations regarding change order requests, “nothing supports the proposition he held authority to waive [Park Ridge’s] prior approval of any changes, especially those resulting in increased costs.”  Those areas presumably came under the control of the Director of Operations, not the Engineer.

In refusing to find a waiver of the requirement that any extra work must be the subject of prior written approval, the Court explained that the applicable statutes reflect a policy to assure the protection of public funds.  In addition, the Court found nothing to support Applicators’ claim that the Engineer held authority to waive the prior written approval of any changes/extra work requirement.  The question remains whether anyone, even the Director of Operations in the Contract Applicators, Inc. v. Borough of Park Ridge case, may verbally waive the prior written approval requirement in a contract or whether the applicable statutes still will prohibit such a waiver even if given by the appropriate person appointed by the municipality or public entity to deal with contract issues.

The lesson here is that contractors on public projects should be diligent in obtaining prior written approval for extra work from the public body rather than relying on verbal assurances of payment for extra work performed from municipal or other public entity representatives.

Superstorm Sandy Damage Means Substantial Real Property Tax Relief May Now be in Order:

By Carl A. Rizzo on Posted in Real Estate, Tax

Many of our local residents and businesses have no doubt suffered substantial business and property losses as a result of the recent devastating storm.  While the filing of claims with insurance companies and perhaps even with the Federal Emergency Management Agency (FEMA) are clearly of paramount importance, property owners should not overlook another critical component of their available relief lifeline — real property tax relief. 

New Jersey law is clear that when real property, containing any building or structure, has been destroyed or altered in such a way that the real property’s value has materially depreciated, whether as a result of storm, fire or other casualty, the tax assessor shall, upon timely notice, determine the value of the parcel of real property in question as of January 1 of the next tax year and adjust the assessment accordingly.  [N.J.S.A. 54:4-35.1].  Because significant real property value has undoubtedly been lost in certain storm ravaged areas, the time to act is now to ensure that real property tax assessments are properly adjusted and property taxes reduced.  There is simply no reason why the crippling losses suffered by so many should be further compounded by municipal overassessments on these same properties. 

The proper and timely notification of local property tax assessors concerning this material depreciation of value and the filing of appropriate tax appeals ensures that affected property owners are not saddled with an even greater financial burden than those foisted upon them by Superstorm Sandy.  Significant real property tax relief is available and should therefore be included at the top of any list of actions to be taken during these most difficult times.

Emergency Contact Information: Attorneys’ Cell Phone Numbers

By Joe Koshar on Posted in Uncategorized

We apologize, but our New Jersey telecommunication systems remain adversely affected and are currently not functioning.  This includes phone, voicemail and fax communication.  Thus, if you need to contact anyone at our NJ office, please click here for an attachment containing all of our attorneys’ mobile phone numbers. 

You may also access our attorneys’ phones numbers on our website.

Alternatively, you may also dial 212-752-8000 for our New York main line, where our Client Service Representative will direct your call accordingly.

All of our offices are open and operational.

Again, and most importantly, we truly wish our best to everyone.

Perhaps We Can Help During These Difficult Times

By Joe Koshar on Posted in Uncategorized
Dear clients, friends and neighbors,

We realize that in this difficult aftermath of the storm, many of our clients, friends and neighbors are dealing with issues where we may be able to present some relief.

We are very fortunate to have power and Internet in our New Jersey, New York, Delaware and Maryland offices.  For anyone who needs it, we would like to offer you the ability to use our conference rooms to charge your devices, check email or other important areas of your life that you are unable to access.

We very much realize that these are tumultuous times.  It is our utmost hope that we may be able to help alleviate some of the pain and trouble experienced by the people and families we care about.  Please do not hesitate to contact Gayle Englert, Director of Human Resources, at genglert@coleschotz.com or 201-320-2766, if you would like to make use of our facilities.  We will do our very best to accommodate everyone we possibly can.

Also, we hope that you may find the below list of important numbers and services to be helpful.

Lastly, we realize that many of you may have been trying unsuccessfully to contact us over the previous several days.  We deeply apologize for this as our systems were adversely affected and were not restored until today.

Again, we wish our absolute best to everyone affected.  During these times, we are reminded of the paramount importance of health, safety and family and hope that all are as strong for you as possible.  We hope you know that you are in our thoughts and we hope to help you as we surmount the obstacles ahead of us.

Cautionary Tale For The New Jersey Home Improvement Contractor

By Adam J. Sklar on Posted in Construction Contracts, Construction Litigation, Recent Cases

Earlier this month, the Appellate Division, in the unpublished decision Chaykowski v. Marut, A-2901-10T2 (N.J. App. Div. September 7, 2012), upheld a substantial judgment entered by a trial court against a landscape contractor and one of its principals under New Jersey’s Consumer Fraud Act (the “NJCFA”).  This case clearly illustrates the perils of a home improvement contractor’s failure to comply with the very specific home improvement regulations promulgated under the NJCFA.

In Chaykowski, the defendant landscape contractor entered into an oral contract with the plaintiff property owner to perform substantial exterior improvements to a several acre lot containing a main residence and a guest house, for the price of $750,000.  Ultimately, based on invoices presented by the contractor, the property owner paid substantially more than the quoted $750,000, and when the contractor requested even more money to complete the job, the property owner terminated the contractor’s services. 

Two years later, the property owner commenced an action against the contractor which included a claim that the contractor had violated the NJCFA by, among other things, failing to enter into a written contract containing certain enumerated provisions required by the regulations promulgated under the NJCFA for home improvement contracts in excess of $500.  The trial court determined that the property owner had suffered compensatory damages in the total amount of $802,774, consisting of $366,307 to correct work improperly performed by the contractor, $245,000 to be incurred in completing the contractor’s work, and another $191,467 in overpayments above the quoted contract price.  Because, however, the contractor had violated the Consumer Fraud Act, and the trial court determined that these compensatory damages resulted from the technical violation of the NJCFA in failing to have “a written agreement with a ‘clearly stated contract price,’ describing the work to be performed and the material to be used,” the court tripled the compensatory damage award.  Thus, the trial court, as affirmed on appeal, added another $1,605,548 to the substantial actual damages incurred, resulting in a total damage award of $2,408,322.  The trial court also added an award of attorneys’ fees, to which the property owner is entitled under the NJCFA, though the Appellate Division sent that award back to the trial court for findings on whether the fees and costs requested were reasonable. 

The lesson from this case and others like it, which should be obvious, is that contractors performing home improvement work must ensure that they comply with the provisions of the NJCFA and its associated regulations.  Even a technical violation of those provisions, such as failing to enter into the requisite written contract for the work, could result in a tripling of any damages suffered by the homeowner, an imposition of attorneys’ fees and costs incurred by the homeowner in prosecuting its NJCFA claim, and, critically, potential individual liability for any of the contractor’s principals who were directly involved in committing the NJCFA violation resulting in damages to the homeowner.  What in this case would have been an $802,774 judgment against the contractor corporation absent the NJCFA violation, is instead a $2,408,322 judgment, plus substantial attorneys’ fees to be determined, against the contractor corporation and at least one of its principals individually.  Big difference.

Second Circuit Clarifies Copyright Protection for Architectural Works and Drawings

By Adam J. Sklar and David M. Kohane on Posted in Construction & Design Agreements

Until 1990, federal law extended copyright protection to original architectural drawings, but generally did not extend such protection to actual buildings, even buildings constructed from protected drawings.  The drawings were protected from copying as “pictorial” or “graphic” works, just like any sketch or painting.  The drawings only had to have a minimal degree of originality to enjoy protection.

Except for purely ornamental features separable from the structure, buildings did not enjoy the same protection.   Buildings were considered functional works excluded from protection under the Copyright Act.  In 1990, Congress passed the Architectural Works Copyright Protection Act of 1990 (“AWCPA”), amending the Copyright Act to fill that gap.  The AWCPA explicitly extended copyright protection to “architectural works,” so as to include completed buildings themselves registered with the Copyright Office.

Last week, the Second Circuit Court of Appeals clarified that the pre-existing protection of architectural drawings as “pictorial” works survived enactment of AWCPA.  In Scholz Design, Inc. v. Sard Custom Homes, LLC, Docket No. 11-3298 (2d Cir. August 15, 2012), the court considered a design firm’s claim for infringement of front elevation drawings showing the appearance of the front of three houses, surrounded by lawn, bushes and trees.  There was no dispute the defendants had published exact copies of the drawings.  The lower court had held, however, that these drawings were not protected under the Copyright Act, as amended by AWCPA.  The court interpreted previous decisions as holding that architectural drawings only could be protected if they contained sufficient detail from which a building could be constructed.  That interpretation sought to reconcile the extension of copyright protection to architectural works, through AWCPA, with the long-established principle that copyright law does not protect ideas, only the particular expression of ideas.

The Second Circuit disagreed.  The court held that regardless of whether the drawings were protectable as “architectural works” under AWCPA, they remained protectable as “pictorial” works under pre-existing law.

Scholz Design confirmed that AWCPA’s extension of copyright protection to buildings did not result in a contraction of protection for the underlying drawings.  Thus, according to the Second Circuit, the unauthorized publication or reproduction of original architectural drawings, even where lacking in detail needed for actual construction, has been and remains unlawful.