Real Estate & Construction Law Monitor : Real Estate & Construction Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Development & Building

The Commerical Real Estate Climate Continues to Falter and Warrants Review for the Viability of a Successful Real Property Tax Appeal

With measurable declines in the real estate market persisting, evidenced by the sluggish movement of vacancy and rental rates, a tax appeal is most likely justified in 2012.  Don’t let the fact that you did not explore this option in the past dictate your actions this year.  Just as in the case of refinancing your mortgage, it is never too late to take advantage of real savings opportunities.

Last year, the New Jersey Tax Court was busy docketing an unprecedented level of appeals and municipalities are again bracing for yet another consecutive record appeal season.  Downward adjustments to assessment levels have been generally warranted over the course of the last several years in conjunction with most property classes.  Due to the continued economic malaise and waning consumer confidence, further downward adjustments appear to be in order again in 2012. 

Despite the fact that there may have been recent signs suggesting the bottoming out of the real estate market (such as slow and modest increases in demand for industrial space over the course of the last quarter of 2012), this phenomenon would not affect the relevant real estate value as of the applicable 2012 tax year valuation date (October 1, 2011).  Towns will therefore continue to be forced to recognize that its assessments are subject to real and legitimate challenge and will need to be prepared to negotiate reasonable resolutions.  The process of ensuring that you are only paying your fair share of taxes can, however, only be initiated with the filing of a timely tax appeal.  The 2012 tax appeal filing deadline is April 1, 2012.

In the next several weeks, you will be receiving a Property Tax Assessment Notice (post card) from the municipal tax assessor, that will identify the property tax assessment imposed upon your property for 2012.  The receipt of this notice should prompt you to seek assistance in determining whether a tax appeal is justified.

The assessment number included on this post card can be deceptive, as it does not reflect the true value assigned by the town to your property. Without applying the town specific ratio you could be falsely lulled into believing that your property is being properly assessed when nothing could be further from the truth.  Such a miscalculation could lead to a very expensive mistake. 

Towns employ what is called an average or “equalization” ratio in order to convert the property tax assessment to true value (the so-called “equalization value”). Comparing the equalization value to the actual value of your property will determine whether an appeal has merit.  Reviewing your tax assessment card with your real property tax professional will ensure that you are not paying more than your fair share of the municipal tax burden and that the town is treating you fairly.

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On September 23, 2011, New York Governor Andrew Cuomo signed into law Senate Bill 5203A and Assembly Bill 7358A, codified as the “Private Transfer Fee Obligation Act” in Article 15 of the New York Real Property Law. The new law imposes a ban on all new private transfer fees (“PTFs”), and provides notice, disclosure and remedy procedures for existing private transfer fee obligations. With the passage of this law, New York has joined the majority of states which have enacted legislation that completely bans, limits and/or requires the disclosure of PTFs.

In practice, PTFs have also been dubbed “Wall Street home resale fees,” “private transfer taxes,” “reconveyance fees,” “capital recovery fees,” “residential transfer fees,” and “transfer fee covenants.” These charges, whatever they may be called, usually amount to one percent (1%) or more of the sales price and are automatically inserted into the contract of sale on real property, to be paid by the seller to the original developer of the property or their designee, oftentimes a third party that holds no ownership interest in the property, every time the property is transferred for up to 99 years. They are usually buried within dozens or hundreds of pages of documents, or, in some instances, are found in a separate declaration affecting the property filed by the original developer. Prospective buyers and owners may not be aware of these fees until closing or, worse, when they try to sell the home years later and the fee shows up in a document obtained in connection with a title search of the property. The failure to pay the PTFs at closing typically results in a lien being imposed on the property.

Unlike traditional deed covenants, PTFs run with and burden the land without benefiting it. Although the fees may benefit a homeowners’ association, conservation land bank, non-profit organization, etc., they have been found to not be proportional or related to the purposes for which the fees were to be collected. Furthermore, PTFs are also used by builders and developers to provide themselves with an income stream long after a development is complete. The American Law Institute has described such PTFs as “unconscionable;” the U.S. Department of Housing and Urban Development has publicly opposed the use of PTFs, stating that “PTFs violate HUD’S regulations at 2 C.F.R. 203.41, which prohibit ‘legal restrictions on conveyance,’ defined to include limits on the amount of sales proceeds retainable by the seller.” In addition, the Federal Housing Finance Agency, determining that “such covenants are adverse to the liquidity and stability of the housing finance market and to financial safety and soundness,” has issued a proposed rule, published at 76 F.R. 6702 (Feb. 8, 2011), that would restrict the regulated entities – the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal Home Loan Banks – from investing in most mortgages on properties encumbered by PTFs.

Similarly, the New York State Legislature has determined that PTFs conflict with a preferred state public policy favoring “the marketability of real property and the transferability of interests in real property free of title defects or unreasonable restraints on alienation.” The legislature also declared that “a private transfer fee obligation shall not run with the title to property or otherwise bind subsequent owners of property under any common law or equitable principle.”


Real Property Law Section 472 defines a private transfer fee as “a fee, charge or any portion thereof, required by a private transfer fee obligation and payable, directly or indirectly, upon the transfer of an interest in real property, or payable for the right to make or accept such transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price, or other consideration give for the transfer.” Expressly excluded from this definition are: (a) the purchase price of the real property being transferred; (b) any real estate broker commissions; (c) the interest, fees and charges associated with a loan secured by a mortgage against real property; (d) rent payable under a lease; (e) payments to holders of options to purchase and rights of first refusal or purchase; (f) any taxes, fees, assessments, etc. imposed by governmental authorities; (g) fees paid to homeowners’, condominium, cooperative, mobile home or property owners’ associations that use them to directly benefit owners of the encumbered property; (h) fees payable for the benefit of certain non-profit organizations; and (i) fees pertaining to the purchase or transfer of a club membership relating to real property owned by the member. “Transfer” means “the sale, gift, conveyance, assignment, inheritance, or other transfer of an ownership interest in real property located in [New York] state.” 

The Private Transfer Fee Obligation Act prohibits entering into or recording PTFs after its effective date, and declares all such new PTFs void and unenforceable, not running with the land, and not binding on subsequent purchasers. Anyone who records or enters into an agreement imposing a private transfer fee obligation in their favor after the effective date would be liable for any damages resulting from that obligation, including the PTFs, attorneys’ fees and other costs to quiet title. Notwithstanding this strict prohibition and repercussions, section 475 further underscores the significance of disclosing any  PTFs by requiring the seller to furnish to the buyer, prior to closing, a written statement memorializing their existence, describing the PTFs and referencing the new law.

Moreover, PTFs entered into and/or recorded prior to the new law’s effective date of September 23, 2011, are not to be presumed valid and enforceable. The new law requires the receiver of the PTFs to give notice to subsequent buyers by recording, within six months of the law’s effective date, a document disclosing the existence of PTFs along with the additional information required under section 476, including the PTFs’ amounts and purposes. Failure to record would result in the agreement being unenforceable, and the real property could then be conveyed free and clear of the PTFs.

The Private Transfer Fee Obligation Act also sets up a mechanism by which an individual transferor can free the property of private transfer fee obligations currently burdening his real property. If a receiver of the PTFs does not provide a written statement of their payment within thirty (30) days of the written request asking for such a disclosure, then the transferor, after recording an affidavit describing its efforts to reach the receiver, may convey any interest in the real property to any transferee without paying the PTFs. From that point on, the real property would be free and clear of the PTFs.

Supported by the New York State Association of REALTORS, New York Taxpayers for Economic Justice, Inc., Consumers Union, Consumer Federation of America, and the Coalition to Stop Wall Street Home Resale Fees (formed by the National Association of Realtors and the American Land Title Association), among many others, Private Transfer Fee Obligation Act became effective immediately. 

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The final installment of this three part series describes what employers should expect after an OSHA inspection as well as the employers’ rights.

1.  What happens after OSHA completes its inspection?

Unless your establishment is in full compliance with OSHA’s standards, you will receive a “Citation and Notification of Penalty” from OSHA.  Generally, OSHA has up to six months after it initiates the inspection to issue a Citation.  A Citation includes: the type of violation (classification); the standard, regulation or section of the Occupational Safety and Health Act that was violated; a description of the violation; the abatement date; and the penalty. 

A. The alleged violation could fall into one of the following categories:

Willful - A willful violation is a violation in which the employer knew that a hazardous condition, which violated a standard, regulation or a section of the Occupational Safety and Health Act, existed but made no reasonable effort to eliminate it.  If the willful violation results in a death, OSHA can seek criminal sanctions against an employer.

Serious - A serious violation exists:

if there is a substantial probability that death or serious physical harm could result from a condition which exists, or from one or more practices, means, methods, operations, or processes which have been adopted or are in use, in such place of employment unless the employer did not, and could not with the exercise of reasonable diligence, know of the presence of the violation.

Repeat - OSHA may cite an employer for a repeated violation if:

(A) the employer has been cited previously for a substantially similarviolation;

(B) the previous citation containing the substantially similar violation has become final order of the Occupational Safety and Health Review Commission; and

(C) the current violation occurred within 5 years from the date that the earlier citation became final order or from the final abatement date, whichever is later.

Other-Than-Serious - An other than serious violation exists where an accident or illness that could occur from a violation “would probably not cause death or serious physical harm but would have a direct and immediate relationship on the safety and health of employees.”

De Minimis – A de minimis violation is a “violation of a standard that has no direct or immediate relationship to safety and health.”

In addition, an employer can also be cited for failure to correct a previously cited condition.  The Occupational Safety and Health Act allows OSHA to assess penalties for each day a violation continues past the final abatement date.

B. Section of OSHA Standard Violated and Description of the Violation

The citation must also describe the violation and section of OSHA’s standard that was violated.

C. Abatement Date

The abatement date is the date by which the violation must be corrected.  The abatement period is “the shortest interval within which the employer can reasonably be expected to correct the violation.”  Abatement dates are usually discussed at the closing conference.  In determining the abatement date the inspector generally considers the following factors:

(a) The seriousness of the alleged violation;

(b) the equipment, material and/or personnel needed to correct the alleged violation and their availability;

(c) the time period to obtain the necessary material for correcting the violation;

(d) the time period to construct or install the abatement equipment; and

(e) the time period to train personnel.

If an employer is unable to meet an abatement date because of some uncontrollable circumstance, the employer can petition the OSHA Area Director to modify the abatement date contained in the Citation.

D. Penalty

The Citation also sets forth the penalty assessed by OSHA.  OSHA is authorized to assess the following civil penalties: $70,000 for each willful or repeated violation; $7,000 for each serious or other than serious violation; $7,000 for each violation of the posting requirement; and $7,000 per day beyond a stated abatement date for failure to correct a violation.

Penalties are calculated once a violation is classified.  In calculating penalties OSHA takes into account the following factors:  the seriousness of the violation; the number of employees employed by the employer; the employer’s good faith as demonstrated by the employer’s efforts to comply with the Occupational Safety and Health Act and OSHA’s standards and regulations; and the employer’s past history of compliance.  OSHA can, at its discretion, reduce the maximum penalty that it will impose after considering these factors.

2. If OSHA issues citations to my company, what should I do?

Once you receive a Citation, you must post the Citation at or near the place where each violation occurred so that it will be conspicuous to employees.  The purpose of this is to make employees aware of the hazards to which they may be exposed.  The Citation must remain posted for three (3) working days or until the violation is corrected, whichever is longer.  You are required to comply with these posting requirements even if you subsequently decide to contest the Citation.

You have two choices once you receive a Citation.  The first option is you can comply with the Citation.  That is, you can correct the alleged violations by the date specified in the Citation and pay any penalty that may have been assessed.  If you do not contest the Citation, the Citation will become a final order in fifteen (15) working days after receiving the Citation.  Once the Citation is a final order, it will be binding and not subject to review by any court or agency.

The second option available to you is to contest the Citation.  You have fifteen (15) working days from the date of receipt of the Citation to contest the Citation.

However, before you decide which course to take, you should take advantage of an OSHA process known as the Informal Conference.  You must request and schedule the Informal Conference with the OSHA Area Office that issued the Citation within the fifteen (15) working day contest period.

If you cannot reach a settlement agreement with OSHA at the informal conference, you may wish to contest the Citation.  Generally, a notice of intent to contest all or any portion of the Citation must be submitted in writing to the OSHA Area Office that issued the Citation within fifteen (15) working days after the receipt of the Citation.

3. Should I challenge the OSHA citations?

There is no universal formula to assess whether you should challenge the OSHA Citation.  The decision must be made in good faith and based on the facts, which include consideration of alleged violation, its impact on employee health and safety, the classification of the violation, the method of abatement and the cost involved in abating the alleged violation.

4. If I do challenge an OSHA citation, what should I expect?

Once you file a notice of contest, jurisdiction over the matter vests with the Occupational Safety and Health Review Commission (the “Commission”).  The Commission, sometimes called “OSHRC,” is an independent agency not connected in any way with OSHA.  Its primary purpose is to decide contested cases arising from Citations issued by OSHA.  It does not perform investigations or promulgate standards.

Once the Notice of Contest is filed with the OSHA Area Office that issued the Citation, the OSHA Area Director will forward a copy of the Notice of Contest to the Commission.  The Commission will appoint an Administrative Law Judge who will preside over the hearing and render a decision, which can be appealed by the employer or OSHA.

5. How can I clear my company’s record from any citations issued by OSHA?

There is no method to clear your company’s record of past Citations issued by OSHA.  However, the longer your company operates without OSHA Citations the better.  OSHA can use past Citations as a basis to issue Citations that have a more severe classification with increased penalties.  For instance, if OSHA re inspects your company in the future, it can issue repeated violations for conditions that were violated during the original inspection.

6. Can OSHA re-inspect my facility?  If so, is there any action that I can take to prevent OSHA from inspecting my facility in the future?

Yes, OSHA can re-inspect your facility.  You cannot prevent OSHA from re inspecting your facility in the future, but you can minimize the chances of that occurring by being proactive.  By establishing safety and health programs that incorporate coordination and communication of safety and health issues among personnel; means for planning and implementing needed training and job orientation for employees; and means for identifying and controlling workplace hazardous and monitoring the effectiveness of such program, you can minimize workplace hazards and thus, reduce the chances of OSHA re-inspecting your facility.  In certain situations you may want to utilize the services of a safety and health consultant to assess your workplace and make recommendations to better comply with OSHA’s standards.  Your lawyer can assist you with deciding whether to retain a consultant to evaluate your workplace.

7. If OSHA re-inspects my facility, should I expect the same result as the initial inspection?

The answer to this question is dependent on your company’s response to the initial inspection and your company’s commitment to health and safety.  Only by being proactive and implementing programs that protect employees can you reduce the possibility of future OSHA enforcement actions.

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On Wednesday, September 14, 2011, Governor Christie signed into law amendments to the New Jersey Bulk Sale Law. Enacted as chapter 124 of the Public Laws of 2011, these amendments narrow the scope of N.J.S.A. 54:50-38, signed into law on June 28, 2007 by Governor Corzine, by exempting the sale, transfer or assignment of single- and two-family homes and of seasonal rental property from the bulk sale notification requirements.

The 2007 law expanded the scope of the 1966 New Jersey Sales and Use Tax Act which set forth bulk sale notification requirements designed to provide the N.J. Division of Taxation with notice of asset sales for the purpose of collecting any outstanding tax liabilities owed by a seller. The 1966 law did not, however, apply to commercial real estate transactions unless the transaction was part of the sale of business assets which included real estate, e.g., the sale of an existing hotel business.

The 2007 law dramatically changed the landscape of bulk sale notification requirements by compelling such notice to be a part of all transactions in which a bulk sale was made. Specifically, the pertinent sections of the law provided:  
 

"Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.

Whenever the purchaser, transferee or assignee shall fail to give notice . . . or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, . . . shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act."

For purposes of the 2007 law: (i) “‘Business’ mean[t] any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss,” and (ii) “‘Business assets,’ tangible or intangible, include[d] . . . realty if the primary use of the realty [was] to support a business on its premises.” See N.J. Div. of Tax. Tech. Bull. 60 (July 3, 2008). On the contracting parties’ end, proper notification consisted of inserting a provision into the Contract of Sale that both parties would comply with the statute; the seller preparing and delivering to the purchaser the Asset Transfer Tax Declaration, in which seller was to disclose information that would assist the Director in estimating the gain on the transfer of asset(s) and the estimated tax on the gain; the purchaser preparing Form C-9600, which provided basic information regarding the sale, transfer, or assignment of property; and, finally, submitting both forms and a fully executed and complete purchaser agreement by registered mail to the Director at least ten business days prior to the date of closing.

The 2007 law made it apparent that, with the exception of building contractors who sold houses as inventory in the regular course of their business, single family residences used solely for that purpose, and other unique transactional situations, all real estate transactions required the statutory notification of a bulk sale.  The notice requirements attached to sales of vacant land owned by a business; single-family homes used to obtain rental income; single-family homes used as a home office, if expensed as such on the homeowner’s tax return to receive a tax benefit; and even transactions where the seller was a tax-exempt or non-profit organization.

(Case law also established that bulk sale notification requirements applied to deeds in lieu of foreclosure. For further discussion, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions - Part II).

The 2011 amendments take effect immediately and apply retroactively to sales, transfers and assignments on or after August 1, 2007.

Under the 2011 amendments, the bulk sale notification requirements of N.J.S.A. 54:50-38 will not apply to “the sale, transfer or assignment of a simple dwelling house if the seller, transferrer or assignor is an ‘individual,’ ‘estate,’ or ‘trust’ as those terms are used for the purposes of the ‘New Jersey Gross Income Tax Act,’ N.J.S. 54A:1-1 et seq.” A “simple dwelling house” is defined as a one-family or two-family dwelling unit and includes cooperatives and condominium units. Still subject to the law, however, are structures “containing more than two units of dwelling space or containing, according to the municipal property tax assessor, commercial property including, or in addition to the units of dwelling space.”

Furthermore, the 2011 amendments attempt to resolve the ambiguity of whether the bulk sale law applies to the sale of a residential property that is only being rented for a short period of time. The law as amended now also exempts the sale, transfer or assignment of a “seasonable rental unit” or “of a lease for the seasonable use or rental or real property” if the seller is an individual, estate or trust. For purposes of the law, a “seasonal rental unit” is a timeshare estate (N.J.S.A. 45:15-16.51) or “a dwelling unit rented for a term of not more than 125 consecutive days for residential purposes by a person having a permanent residence elsewhere.”

Again, the above exemptions extend only to sellers who are individuals, estates or trusts. “Business entities,” including but not limited to corporations or partnerships, must continue adhering to the 2007 bulk sale notification requirements.

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This article, the second of a three part series, focuses on OSHA’s procedures during an inspection and outlines what employers should and should not do during an inspection.

1. What should I do or not do during an inspection?

There are certain actions that you should take to protect your interest during an OSHA inspection.  These actions include:

(a)     Check the inspector’s identification to ensure he/she is who he/she says he/she is.

(b)     Ascertain from the inspector the reason for the inspection.  If the inspection is the result of a complaint, you should request a copy of the complaint.

(c)     Have someone from management escort the inspector through the entire inspection process i.e., from opening to closing conference.

(d)     Document the inspector’s activities i.e, areas inspected, interviews, measurements taken, etc..

(e)     If the inspector performs any monitoring i.e., noise or air monitoring, you should consider performing similar monitoring at the same time.  The purpose of the “side by side” monitoring will allow you to document and confirm the results obtained by OSHA.

(f)      Request the results of all monitoring performed by the inspector.

(g)     At the closing conference, if the inspector indicates that violations have been found, determine why certain conditions constitute a violation.  In addition, you should request from the inspector recommended methods to correct any alleged violations.

(h)     Consult your attorney at the time an OSHA inspection is initiated and if at any time you are unsure how to respond to a certain requests made by the inspector.

The following is a list of “don’ts”:

(a)     You should not forcibly interfere with the conduct of an inspection.

(b)     You should not discriminate against or punish any employee who cooperates with OSHA or who may exercise his or her rights under the Occupational Safety and Health Act.

(c)     You should not provide the compliance officer with false or misleading information.  Providing false information to OSHA is punishable as a crime under the Occupational Safety and Health Act.

(d)     You should not argue with or antagonize an inspector during an inspection.

2. How long will OSHA be at my facility?

OSHA will remain at your facility until it completes its investigation.  The inspection could last a couple of hours or up to several months.  The length of time is determined by the scope of the inspection i.e., whether it is confined to one area or the entire facility.  It is also dependent on the type of inspection.  That is, whether the inspector will be required to make subsequent visits to the facility to perform monitoring to establish employee exposure to workplace contaminants or noise.

3. Do I have to let my employees talk to the OSHA inspector?

OSHA inspectors are authorized to use various investigatory techniques, such as observing employees’ activities in the workplace, conducting employee interviews, and taking photographs and measurements in the workplace (i.e., air and noise monitoring).

The Occupational Safety and Health Act authorizes OSHA to interview employees privately to obtain whatever information is necessary or useful for the inspector to perform his or her inspection effectively.  The interviews, however, must be conducted in a reasonable manner and within a reasonable time limit.  If they appear to be unreasonable, you should consult your attorney.  On occasions, interviews may be conducted at locations other than the workplace (e.g., employee’s house or OSHA Area office).  OSHA’s regulations afford any employee the right to bring any alleged violation to the attention of the inspector.

OSHA inspectors are also authorized to take photographs or videos whenever such are deemed necessary.  Generally, an employer cannot prohibit an inspector from taking photographs or videos because a certain process or equipment is a trade secret.  To protect a trade secret, you should inform the inspector of the process or equipment that is proprietary.  Once informed of trade secret status, the inspector is obligated to treat the information obtained from the inspection in a manner assuring confidentiality.

In order for OSHA to document employee exposure to chemical or physical hazards, it is often necessary for the inspector to perform monitoring.  Typically, during the walkthrough phase of the inspection the inspector will identify certain areas where monitoring must be performed.  The inspector may then return on another day to perform the monitoring, which may last for the full term of the work shift.

Monitoring employees for chemical and/or physical hazards usually consists of placing monitoring devices such as air samplers or noise dosimeters on the employees.  The employer may not object to such investigatory procedures.  Once the monitoring devices are placed on the employees, the inspector will observe the employees throughout the day and document their work practices, use of personal protective equipment and other relevant information.

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A significant number of businesses are likely to find themselves face-to-face with an inspector from OSHA, and many will be caught off guard.  We recommend that businesses take a two-pronged approach to OSHA compliance.

First, make every effort to comply with OSHA’s safety and health rules to protect your employees.  Second, be prepared in the event OSHA initiates an inspection at your establishment.  If you have a plan in place that provides guidance to your managers, describe the procedures employed by OSHA and what to expect during an inspection, you can minimize disruption of your business and possibly adverse consequences.

This is a three-part series to assist employers and familiarize them with OSHA and its procedures.  Part One will focus on OSHA’s function, who is subject to OSHA’s requirements and what OSHA looks for during an inspection.

Part Two describes an actual step-by-step inspection and outlines suggested procedures for employers to follow.  The third and final part describes what an employer should expect following an inspection and the employers’ rights and obligations.

1. What is OSHA and what does it do?

OSHA or the Occupational Safety and Health Administration, is an agency within the United States Department of Labor.  OSHA’s primary function to protect employees by inspecting workplaces to ensure that employers comply with the safety and health standards promulgated by OSHA. 

2. Who is subject to OSHA’s requirements?

Most private sector employers and their employees are subject to OSHA’s requirements.  Employees employed by state and local governments are not covered by OSHA.  Likewise, certain private sector workers are exempt from OSHA’s requirements.  Specifically excluded are self employed individuals, farm workers where only immediate members of the farm employer’s family are employed and workers at facilities where safety and health is regulated by other federal agencies under separate federal statutes.

3. If OSHA shows up at my facility, do I have to allow the inspector in my facility?

In most cases, OSHA must either obtain your consent or a valid warrant authorizing an inspection before entering your facility to perform an inspection.  The inspector who arrives at your workplace, may not inform you of your rights.

If denied entry to perform an inspection without a warrant, OSHA has the authority to obtain a warrant by ex parte application to the United States District Court (i.e., OSHA will ask the court to issue a warrant to allow the inspection).  If OSHA seeks a warrant, you will not receive advance notice that OSHA is seeking a warrant or receive copies of any materials supplied to the court by OSHA in applying for the warrant. 

The decision regarding whether to allow OSHA to inspect your facility is not always clear cut.  We recommend that you discuss your options with your lawyer and have a plan in place should an OSHA inspector show up.  That plan should be made as a matter of company policy developed prior to the actual inspection.  Your managers and key employees should be familiar with the plan and who to contact should they have questions.

4. What does OSHA look for?

There are three phases to an OSHA inspection, the opening conference, the walkthrough and the closing conference.

At the opening conference, the inspector will seek general information concerning your business (e.g., name, address, etc.) as well as your safety and health program.  For instance, the inspector may inquire into the following:

• The details of your company’s safety and health program;
• How information on your company’s safety and health program is communicated to employees;
• How your company enforces violations of its safety and health rules;
• The type of safety and health training programs that your company has established and how they are implemented;
• How your company performs an accident investigation and whether your company implements preventative measures as a result of the investigation; and
• Whether the OSHA Notice is posted on site in your facility.

In addition, the inspector will request access to the records that you are required to maintain under the OSHA’s standards (e.g., injury and illness records and Hazard Communication Records, etc.).

The next phase of the OSHA inspections is the walkthrough.  The main purpose of the walk-through is to allow the inspector to identify potential safety and/or health hazards in the workplace.  You and the employee representative will be given the opportunity to accompany the inspector.

During this phase of the inspection the inspector will assess your safety and health program, collect information on your business and document any hazards found in the workplace.

The final phase of the OSHA inspection is the closing conference.  The inspector is required to have a closing conference with you and the employee representative.  At the closing conference the inspector is required to describe any and all alleged violations that were observed during the inspection and identify the applicable sections of the OSHA standards or Occupational Safety and Health Act that were allegedly violated.  The violations that are found by the inspector will be outlined in a Citation.  Citations are not issued at the closing conference, but are issued at a later date under the signature of the Area Director.  In addition, the inspector is required to advise you and the employee representative of your rights following an OSHA inspection.

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Subcontractor’s bids, when coupled with its backlog of uncompleted contracts, must not cause subcontractor to exceed aggregate rating limit in public school projects.  If so, contractor’s bid will be rejected due to subcontractor exceeding its aggregate rating limit.

On June 20, 2011, the Appellate Division decided Brockwell & Carrington Contractors, Inc. v. Kearny Board of Education, Hall Construction, Inc. and Dobco, Inc., Docket No. A-1806-10T4, (“Brockwell”), which may have a significant impact on bidding on public school contracts.  Brockwell involved a bid for a public school contract in which the contractor’s bid, which included a subcontractor’s bid, was rejected because the subcontractor’s bid exceeded the aggregate rating for the subcontractor for public school projects.  As a result, the contract was awarded to the next lowest bidder.

In Brockwell, defendant Kearny Board of Education (“BOE”) sought bids for the Kearny High School – Aircraft Noise Abatement and Renovations Project (the “Project”).  Bids were opened for the Project on September 15, 2010.  Defendant, Dobco, Inc. (“Dobco”), was the lowest bidder, followed by plaintiff, Brockwell & Carrington Contractors, Inc. (“B&C”).  The BOE awarded the contract to Dobco.  Dobco’s bid identified Environmental Climate Control, Inc. (“ECC”) as the heating, ventilation and air-conditioning (“HVAC”) subcontractor for the Project.  The Division of Property Management and Construction (“DPMC”) classifies contractors by permissible aggregate work volume based upon each contractor’s submissions detailing financial ability.  The purpose of this classification is to prevent contractors from taking on more work than they can handle.  At the time the bid was submitted, ECC’s aggregate limit with the DPMC was $15,000,000.  ECC submitted a proposal for its portion of the HVAC work at the Project of $7,250,000.  ECC also submitted a Form 701, which is required by the DPMC, indicating that it had a backlog of uncompleted contracts totaling $3,500,000.  Thus, the total amount charged against ECC’s aggregate limit was $10,750,000.

B&C challenged Dobco’s bid, claiming that it had received a Form 701 from ECC a month earlier on an unrelated contract in which ECC disclosed a backlog of uncompleted contracts exceeding $9,000,000.  As a result, B&C claimed ECC, with its $7,250,000 bid and $9,000,000 backlog, exceeded its $15,000.00 aggregate limit and could not work on the Project.  After an investigation by the BOE, it was determined that ECC exceeded its aggregate limit. 

B&C then filed a complaint seeking to disqualify Dobco’s bid, as it was based on ECC’s improper bid for the HVAC work.  ECC and Dobco claimed that the aggregate limit did not apply to subcontractors and that, even if it did, much of ECC’s backlog of uncompleted work was subcontracted out to others, which did not count against its aggregate limit.  The trial court rejected Dobco’s arguments and found that ECC was subject to the aggregate rating limit set by N.J.A.C. 17:19-2.13(a).  The trial judge concluded that Dobco’s bid was materially defective and denied Dobco the opportunity to correct its bid.  The trial court also ordered BOE to award the contract to B&C, the next lowest responsible bidder. 

On appeal, the Appellate Division rejected Dobco’s arguments and concluded that both the Public School Contracts Law, N.J.S.A 18A:18A-1 to - 59 (“PSCL”), and prior case law, support the conclusion that any subcontractor’s bid on a school project must not exceed the subcontractor’s aggregate rating limit.  The Appellate Division further found that the Educational Facilities Construction and Financing Act, N.J.S.A. 18A:7G-1 to - 48 (“EFCFA”), provides an independent basis for holding that ECC must meet the aggregate rating limit requirements set by N.J.A.C. 17:19-2.13(c).  Thus, the Appellate Division affirmed that ECC’s non-compliance was a material defect that was fatal to Dobco’s bid.

The Appellate Division concluded that the aggregate rating limit applied to both subcontractors and contractors.  The Court noted that when considering the applicable law, “it is clear that the Legislature intended to ‘ensure that only qualified bidders perform the work.’” To differentiate between subcontractors and contractors would not advance this goal.

The Appellate Division also held that any contractor, including a subcontractor, is entitled to the benefit of the eighty-five percent (85%) reduction provision of N.J.A.C. 17:19 2.13(a) and (c), which allows a contractor to reduce the value counted against its aggregate limit by the backlog of uncompleted contracts, provided that the backlog is limited to single prime contracts in which it subcontracted work to others.  Here, ECC did not certify that its backlog included single prime contracts in which it subcontracted work to others.  Thus, ECC was not entitled to the benefit of the eighty-five percent (85%) reduction.  As it included ECC’s improper bid, Dobco’s bid was defective and “permitting a post-bid cure under these circumstances would afford Dobco an unfair advantage.”  The decision of the trial court to reject the award of the contract to Dobco and award the contract to B&C was affirmed.

This decision may have a significant impact on the bidding process for public school projects as it makes clear that not only contractors, but subcontractors too, must comply with the aggregate rating limit of N.J.A.C. 17:19-2.13 and N.J.S.A. 18A:7G-37.  In addition, contractors have to be clear when submitting Form 701 and any related certifications to disclose if they have prime contracts in which a portion of the work is subcontracted to others, thereby getting the benefit of the eighty-five percent (85%) reduction provided in N.J.A.C. 17.19-2.13 (a) and (c) and reducing the amount counted against their aggregate limit.  Lastly, contractors who are the second or third lowest bidder should consider a challenge to a bid result if they have questions as to the aggregate limit rating of the lowest bidder and/or its subcontractors.

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Owners and managers of New York City property should take notice that the City has become more serious about issuing statutory penalties for non-filing or incomplete filings of the annual RPIE (Real Property Income and Expense) statement with the NYC Department of Finance.

What is the RPIE?  Owners of income-producing properties in New York City must file an annual RPIE statement online with the Department of Finance (a property manager can file it on the owner’s behalf). This income and expense information allows the City Assessor to estimate the value of every property in New York City.  The Department of Finance also uses this valuation (based on information provided by owners) to assess income-producing properties such as office and apartment buildings. Since these valuations are annual, assessed property values can, and historically do, change yearly.

An RPIE statement is required for all income-producing properties with an actual assessed value of more than $40,000. This includes commercial properties such as office buildings and retail stores, industrial sites, as well as certain residential properties, including rental apartment buildings, co-ops and condominiums.

Historically, the City has been inconsistent in pursuing penalties against late or non-filers, however, the City has recently stepped up its enforcement efforts. Some property owners that meet the RPIE filing requirement, but did not file an RPIE, have seen dramatic increases of their property assessment.

Owners can also claim an “exemption” but must still submit an RPIE statement indicating the property’s exempt status or penalties can apply. Examples of exempt properties include exclusively residential properties with 10 or fewer apartments, properties with six or fewer residential units and one commercial unit, properties that are owner occupied, and vacant or uninhabitable property.  If a property was recently purchased or operated for less than a full year, an owner can file the RPIE statement showing less than a full year's income and expense.  While a property may qualify for an exemption to the filing requirement, an RPIE statement must still be filed. 

Penalties can be severe. Failure to file, non-compliant filing, or non-timely filing may result in a penalty of up to 3 percent of the assessed value of the property or up to 5 percent for consecutive non-filings. In addition, delinquent filers seeking a reduction in assessments face disqualification from hearings before the Tax Commission.

This year’s RPIE is due on September 1, 2011. The form must be submitted electronically here unless you have been granted a waiver (which had to be requested by August 2, 2011) allowing an owner to file a paper version.

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Join us on November 10, at the NJ office of Cole Schotz or online by webinar, for an in-depth update on New Jersey Construction Lien Law.

Hear the latest on:

• Construction Liens on Commercial Projects
• Construction Liens on Residential Projects
• Proposed Construction Lien Law Revision
• Priority of Construction Liens and Mortgage
• Construction and Permanent Financing
• Title Insurance Issues Relating to Construction Liens

This seminar will be presented live at the NJ offices of Cole Schotz at Court Plaza North, 25 Main Street, Hackensack, NJ, and by live webinar.

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The Occupational Safety and Health Administration (“OSHA”) is responsible for enforcing health and safety standards in workplaces throughout the country. OSHA has promulgated standards covering both general industry and construction sites. The enforcement of these standards is fairly straightforward in the general industry sector. Typically, OSHA inspects the facility and if it finds a violation, cites the employer for exposing his/her employees to a hazardous/violative condition. However, construction sites are vastly different because of the number of contractors, engineers and construction managers working at a site and employee mobility throughout the site. In certain situations, an employer can have employees working in an area where they are exposed to hazardous conditions not created by that employer. To address situations like this, OSHA developed the “multi-employer policy.”

Under the multi-employer policy, in addition to the employer that has employees exposed to the hazardous condition, OSHA may also issue citations to the employer that is responsible for correcting the hazardous condition even if that employer has no employees exposed to the hazardous condition. The legal justification for the multi-employer policy is 29 U.S.C. § 654(a)(2) of the Occupational Safety and Health Act (“OSH Act”), which states that:

Each employer …
(2) shall comply with occupational safety and health standards promulgated under this chapter.

29 U.S.C. § 654(a)(2).

This provision of the OSH Act creates a specific duty for all employers, regardless of whether they have employees exposed to a hazardous condition, to comply with OSHA’s rules and regulations. The purpose of the multi-employer policy is to allow OSHA to hold those employers responsible who either create a hazardous condition or control the site, even if those employers do not have any employees exposed to the hazardous condition.

In 2007, the multi-employer policy was struck down by the Occupational Safety and Health Review Commission (the “Commission”) in the decision Secretary of Labor v. Summit Contractors, Inc., OSHRC No. 03-1622 (April 27, 2007) (“Summit I”). In Summit I, Summit Contractors, Inc (“Summit Contractors”) was the primary contractor on a construction job and only employed four employees whose responsibilities were to coordinate subcontractors and work at the job site.

All Phase Construction, Inc. (“All Phase”) was subcontracted to do brick masonry work. To perform this work, All Phase employees were required to use scaffolding. While performing the masonry work, OSHA observed that All Phase employees were exposed to hazardous conditions, including not being protected from falls, while working on scaffolds. The only employees exposed to these hazardous conditions were All Phase employees. Summit Contractors neither created the hazardous condition observed by OSHA nor had employees exposed to the hazards.

OSHA issued citations to both All Phase and Summit Contractors. OSHA’s rationale for citing Summit Contractors was that Summit Contractors was a controlling employer that could have corrected the hazardous condition and as such was liable pursuant to OSHA’s multi-employer policy. Summit Contractors contested the citations.

The Commission held that the multi-employer policy was contrary to OSHA’s regulation, 29 C.F.R. 1910.12(a), and held that OSHA could no longer issue citations to controlling employers that did not have its own employees exposed to the hazardous condition. The Commission’s decision was based on a narrow reading of 29 C.F.R. 1910.12(a), in which employers are only responsible for his/her employees.

OSHA appealed the decision of the Commission. The Eighth Circuit Court of Appeals vacated the Commission’s decision and remanded it to the Commission for further proceedings. The Eighth Circuit ruled that the “plain language of §1910.12(a) does not preclude” OSHA from citing the controlling employer (even if that employer does not have employees exposed to the hazardous condition). On remand, the Commission applied the law articulated by the Eighth Circuit and determined that Summit Contractors was the controlling employer and affirmed the citations originally issued by OSHA.

On August 19, 2010, in Secretary of Labor v. Summit Contractors, Inc., OSHRC No. 05-0839 (August 19, 2010) (“Summit II”), the Commission again addressed the validity of OSHA’s multi-employer policy and this time upheld the policy. In Summit II, Summit Contractors was a general contractor for the construction of a 90-unit apartment complex. Summit Contractors subcontracted certain work and only had two employees at the construction site. During an inspection, OSHA found certain electrical violations and subsequently issued citations to Summit Contractors. Because Summit Contractors was only the general contractor and its employees were not exposed to the electrical hazard, OSHA issued the citation to Summit Contractors pursuant to the multi-employer policy. Summit Contractors contested the citation.

The Commission, persuaded by the Eighth Circuit’s decision, concluded that the plain meaning of 29 C.F.R. 1910.12(a) permits OSHA to issue citations to controlling employers, such as general contractors, under the multi-employer policy even though the employees of the employer were not exposed to the hazardous condition. In so holding, the Commission overruled its earlier decision in Summit I.

Summit II reinstates OSHA’s multi-employer policy and OSHA can now apply the multi-employer policy nationwide (and not just to the worksites in the states that comprise the Eight Circuit). Construction employers can now be potentially liable for all hazards present on any worksite over which they have control even if none of their employees are exposed to the hazard. Construction employers should be proactive in establishing safety and health programs, which include inspecting, identifying and correcting any safety and health hazards noted on the worksite. Once the employer becomes aware of such conditions, he/she should immediately take steps to correct the hazard. General contractors should also require all subcontractors to comply with OSHA's regulations in the performance of their work at the worksite.

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Last week (on Monday, June 21, 2010), the New Jersey Assembly unanimously passed the long-awaited revisions to the New Jersey Construction Lien Law (N.J.S.A. 2A:44A-1, et seq.) (the “Lien Law”). Next up is the parallel Senate bill which, after its introduction in early May 2010, was referred to the Senate Commerce Committee, where it is expected to remain for review until the Fall. The proposed Lien Law revisions, based almost entirely on the March 2009 final report of the New Jersey Law Revision Commission, seek to fill the gaps in, and improve on the practical application of, the original 1993 Lien Law. Some of the proposed amendments are a codification of decisions of federal and state courts, including the New Jersey Supreme Court, which have sought to interpret the Lien Law since its enactment.

The proposed Lien Law revisions are comprehensive. Among the more critical Lien Law amendments contained in the new legislation are:

1. an increase in the time within which a potential lien claimant may assert a construction lien claim relating to a residential construction contract from 90 days to 120 days from the claimant’s last date of work. The current 90-day period has, in practice, been problematic for prospective lien claimants, who must also file and serve a Notice of Unpaid Balance and Right to File Lien (“NUB”) and a demand for arbitration -- and then obtain an award in arbitration – before they may file lien claims. The extra 30 days provides additional breathing room for the lien claimant to fulfill all of the statutory prerequisites, particularly the arbitration proceeding. Note, however, that the proposed amendment sets a deadline for filing a NUB at 60 days from the claimant’s last date of work and a 10-day deadline thereafter to serve the required demand for arbitration on all parties against whom the lien is asserted. If those deadlines are not met, the extra 30 days to file the lien means nothing, as the lien claimant will be barred from filing its lien;

2. the addition of statutory definitions of “residential construction,” “residential unit,” “real property development,” “community association,” and “dwelling,” and the amendment of the statutory definitions of “residential construction contract” and “residential purchase agreement,” which, together, seek to better reflect the types of construction subject to the residential rules of the Lien Law. For example, settling a contentious issue under the existing Lien Law, the revisions provide that, in general, large-scale residential condominium, coop and townhouse development projects, including, without limitation, mixed-use projects and the common elements of such projects, would be subject to the Lien Law’s residential filing requirements. Projects designed to contain rental units or non-residential units, however, would not be subject to the Lien Law’s residential filing requirements;

3. the clarification of a number of other statutory definitions, as well as the addition of other new definitions, including, without limitation, new definitions of “lien claim” (and the term “value” within the “lien claim” definition), which allow for the inclusion of retainage in the amount of a lien claim, and incorporating within the definition of “contract” the requirement that the lien claimant’s contract be a writing signed by the party in direct privity with the lien claimant and evidencing the consideration to be paid and a description of the improvement subject to the lien;

4. a substantially more thorough description and calculation of the “lien fund” - that is, the amount of money available for distribution among valid lien claimants performing work under any particular line of contracting – and an explanation of how that lien fund is to be distributed among multiple lien claimants at different contracting levels. In fact, the term “lien fund” is not defined or otherwise used in the current Lien Law, so the proposed revisions provide the basic definition of the term. Most of these proposed revisions are a reflection of court decisions interpreting the Lien Law and formulating the concept of the “lien fund.” Among other things, the proposed revisions would make clear for the first time under the Lien Law that the lien fund is not to be reduced by: (i) payments not made according to written contract provisions; (ii) payments made but not yet earned by the time the first lien is filed; (iii) liquidated damages; (iv) collusive payments; (v) the use of retainage to pay a replacement contractor after the filing of the lien claim; or (vi) setoffs or backcharges not agreed to in writing by the claimant or adjudicated in an arbitration;

5. a clarification that the date on which the County Clerk has marked the lien claim as received (rather than when the Clerk has actually indexed the lien claim – which is not within the control of the lien claimant) is to be used to determine whether a lien claim has been timely filed;

6. a much-needed expansion of the existing deficient statutory forms and/or procedures for filing, amending or discharging a lien claim or NUB, and prosecuting a suit to enforce a lien claim; and

7. clarification: (a) of when lien claims may be filed against the owner of real property for tenant improvements (See this article); (b) that work performed on common elements of a real estate development may be filed against “community associations” such as condominium or homeowners’ associations; and (c) that a mortgage takes priority over a lien claim, even when recorded after the filing of that lien claim, where the funds are used for the purchase of and/or improvements to the subject property.

We will likely have to wait until the Fall at the earliest before these proposed revisions, and possibly others the Senate Commerce Committee recommends, are presented for vote in the Senate. In light of the Assembly’s unanimous vote, it is probable that the bill, in its present or slightly modified form, will pass and be sent to the Governor for his review and signature (or improbable veto). The proposed amendments to the Lien Law have been well thought out and debated and are long overdue.
 

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On September 6, 2008, in response to unprecedented economic and financial crisis and as an attempt to protect development permits that were scheduled to expire, then New Jersey Governor John Corzine signed P.L. 2008, c. 78 (N.J.S.A. 40:55D-136.1 et seq.), legislation known as the Permit Extension Act of 2008 (the “Permit Extension Act”). The Permit Extension Act extended the terms of certain governmental development permits and approvals to July 1, 2010, with up to a six-month phase-in period until January 1, 2011. Governor Corzine, as one of his last acts as Governor, signed legislation (Chapter 336, Assembly No. 4347) extending the end of the tolling period under the Permit Extension Act from July 1, 2010 to December 31, 2012.

The primary goal of the Permit Extension Act is to promote development once the economy has strengthened and prevent the abandonment of approved projects and activities. The Permit Extension Act tolls the running of governmental development permits and approvals obtained during the period from January 1, 2007 through July 1, 2010, with up to a six-month phase-in period until January 1, 2011, thus amounting to a maximum four-year permit extension period.

The Permit Extension Act is a compromise between developers and community activists, including environmentalists. As such, it excludes the following categories from eligibility for extension:

1. Permits and approvals issued by the US government or any permit or approval with a duration or fixed expiration date determined by a federal law or regulation;
2. Approvals in “environmentally sensitive areas”;
3. Permits or approvals issued pursuant to the “Pinelands Protection Act” if the extension would result in a violation of federal law or any state rule or regulation requiring approval of the Secretary of the Interior;
4. New Jersey Department of Transportation permits, other than right-of-way permits;
5. Flood Hazard Area Control Act permits, except where work has already commenced; and
6. Coastal centers pursuant to the “Coastal Area Facility Review Act” where (a) an application for plan endorsement was not submitted to the State Planning Commission as of March 15, 2007, and (b) was not in compliance with the Coastal Zoning Management Rules.

The Permit Extension Act does not prohibit the granting of additional permit extensions otherwise provided for under law when its tolling period expires. In addition, the Permit Extension Act does not affect any administrative consent orders issued by the New Jersey Department of Environmental Protection and in effect during the extension period, nor does it extend any approval in connection with a resource recovery facility.

Should you have any questions with regard to the applicability of the Permit Extension Act to any existing project, permits, or approvals, please contact an attorney knowledgeable with New Jersey laws and the Permit Extension Act.
 

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Bulk Sale Notification Requirements Apply To Deed in Lieu of Foreclosure

Based upon the findings of the Tax Court in N.J. Hotel Holdings, Inc. v. Dir., Div. of Taxation, 15 N.J.Tax 428, 437 (Tax Ct. 1996), the New Jersey Division of Taxation is enforcing recent changes in the New Jersey bulk sales notification requirements contained in N.J.S.A. 54:50-38 on the basis that such requirements apply to deeds in lieu of foreclosure (“deeds in lieu”) of real estate accepted by lenders, regardless of the fact that no monetary consideration is being received by the lender. If N.J. Hotel Holdings, Inc. is upheld it will mean that a lender who fails to comply with the bulk sales notification requirements before accepting a deed in lieu will be deemed by statute to have assumed liability for payment of all of the borrower’s outstanding tax obligations to the State of New Jersey. (For a more general discussion of the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

N.J. Hotel Holdings, Inc. v. Director, Division of Taxation

The question before the Tax Court in N.J. Hotel Holdings, Inc. was whether statutory bulk sales notification applied to assets acquired by way of deeds in lieu. The court unequivocally answered in the affirmative:

In this case the court holds that a person who acquires assets by way of a deed in lieu of foreclosure and a bill of sale, and who fails to give notice to the [Director] under N.J.S.A. 54:32B-22(c), is liable for the sales and use tax liability of the person from whom the assets are acquired. [Note: the Tax Court’s analysis is equally applicable to N.J.S.A. 54:50-38 and it is unlikely the case can be distinguished on the basis of the new legislation].

In N.J. Hotel Holdings, Inc., a bank made loans to several entities, secured by mortgages, assignments, and security agreements on three hotels. Following a modification and transfer of the properties and related obligations, the new owners defaulted on their obligations to the bank. Pursuant to a subsequent foreclosure agreement, the bank acquired all of the hotel assets by way of deeds in lieu. Bulk sale notification of this acquisition was not provided to the Director. As a consequence, the Director deemed the bank liable for all taxes relating to the subject property due by the defaulting owner prior to, and following, the transfer. The arguments presented by the bank in appealing the assessments of the Director can be categorically summarized: (1) a deed in lieu is not a transfer within the meaning of the statute, (2) because the State would have not received payment upon foreclosure, it should not receive payment when transfer is made via a deed in lieu, and (3) because no cash is exchanged in a deed in lieu transaction, there was no escrow mechanism to ultimately comply with the statute.

The court spent minimal time, and found little difficulty, dismissing the claim that a deed in lieu was not a transfer within the meaning of the statute: “It is clear that N.J.S.A. 54:32B-22(c) is meant to extend beyond . . . simple sale for cash . . . and beyond the restrictive definitions of the bulk sales act.” In the present case, “the hotel assets were transferred to plaintiff in settlement of the foreclosure action.” This was evidence enough to satisfy the court that the statute should apply.

The court then goes on to address the contention that had the foreclosure been completed, the State would have no remaining lien on the property and, as a result, would have received none of the sales tax due by the transferor. The court thwarts this argument by citing the business decision rule, reminding the transferee that it was their choice to avoid foreclosure through this asset transfer mechanism, and it is in the public interest of the State to allow such independent decision-making:

The principle that a business decision will be given its tax effect according to what actually occurred promotes public interest in tax certainty and thereby conforms with general business expectations. Indeed, planning by individuals and businesses alike would be frustrated if courts failed to give predictable effect in formal legal documents . . . simply because of asserted ignorance of law. . . .

‘As a general proposition, the answer must be that it is for the taxpayer to make its business decisions in light of tax statutes rather than the other way around.’

Finally, the court focused its attention on whether the statute should be deemed inapplicable because no cash is transferred in a deed in lieu transaction, rendering a cash escrow impossible. The court viewed this as a practicality argument of little merit. The fact that a deed in lieu transaction involves other consideration rather than cash does not relieve the transferee of liability based solely on the structure of the transaction. According to the court, the value of the “choses in action, or other consideration[s]” were greater than the sales tax obligations of the transferor, thus rendering the existence of a cash escrow irrelevant when determining the applicability of the notification requirements. Although the bank cites the interpretation of out-of-state statutes by the courts of other jurisdictions, the court rejects these alternative interpretations on the grounds of differing public policy objectives.

Life After N.J. Hotel Holdings, Inc.

The practical consequences of the holding in N.J. Hotel Holdings, Inc. are significant.

The Division’s application of N.J. Hotel Holdings, Inc. in applying the rules to deeds in lieu, when coupled with N.J.S.A. 54:50-38 which applies the bulk sales rules to a wide array of real estate transactions, effectively gives the State of New Jersey a super priority lien for outstanding taxes if a lender, in accepting a deed in lieu, fails to comply with the notification requirements. This is due to the fact that the lender’s deemed assumption of a borrower’s outstanding tax liability to the State of New Jersey will force a lender, who has accepted a deed in lieu without complying, to first pay the State of New Jersey the outstanding tax liability before it allocates any amounts recovered from the property to the debt.

Lenders must notify the Director prior to accepting a deed in lieu for the real estate encumbered by the security instrument. This is so despite the fact that a lender could proceed to foreclosure without complying with bulk sales notification requirements. Failure to provide such notification under these statutory requirements will render the lender personally liable for all taxes, sales or otherwise, that may be due at the time of the transfer, as well as any taxes determined to be due later (for example, following an audit of the subject property). Once the lender has made the notification, if the Director requires an escrow for outstanding taxes then the lender will either have to secure the amount from the borrower, if the borrower in fact has any funds, or put up the escrow itself. Of course, a lender could foreclose and avoid the escrow, but foreclosure involves its own costs and expenses, therefore this is just one more part of the analysis to be made by the lender of the defaulting loan and the lender’s potential remedies. (For a discussion of how to comply with the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

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In an effort to jump start New Jersey's economy, on July 27, 2009, Governor Corzine signed The New Jersey Economic Stimulus Act of 2009, A-4048/S-2299 (the “NJ Stimulus Act”). The NJ Stimulus Act contains a series of incentives to stimulate development in New Jersey including: grants funded by future development, relaxation of and expansion of eligibility for Urban Transit Hub Tax Credit, boosting of construction on college campuses and the temporary suspension of the affordable housing growth share fee requirement for commercial developments of 2.5% of the equalized assessed value.

The NJ Stimulus Act imposes a temporary moratorium on the collection of the 2.5% non-residential development fee imposed by the “Statewide Non-Residential Development Fee Act” for approved projects prior to July 1, 2010; provided that a permit for construction of the building has been issued prior to January 1, 2013. In part, the 2.5% non-residential development fee imposed under the Affordable Housing Reform Statute (P.L.2008, c.46), which made significant changes to the Fair Housing Act, N.J.S.A. 52:27D-301 et seq., also known as the Statewide Non-Residential Development Fee Act, does not apply to:

(1) non-residential property for which either temporary or final site plan approval has been issued prior to July 1, 2010; or
(2) certain non-residential planned development which has received approval or a non-residential development for which the developer has entered into a developer’s agreement pursuant to a development approval prior to July 1, 2010; or
(3) non-residential projects that, prior to July 1, 2010, are referred to a planning board by the State of New Jersey, a governing body or other public agency for review; or
(4) non-residential property for which a site plan has received approval by the New Jersey Meadowlands Commission prior to July 1, 2010; or
(5) individual buildings within a non-residential phased development that received either preliminary or final approval prior to July 1, 2010;

in each case provided that a permit for construction of the building has been issued prior to January 1, 2013.

Additionally, under the NJ Stimulus Act, developers who paid the 2.5% non-residential development fee in connection with certain projects that, prior to July 17, 2008, received approval or were referred to a planning board by the State of New Jersey, a governing body or other public agency for review are entitled to a return of any fees paid that represent the difference between monies committed prior to July 17, 2008 and money paid on or after that date. To obtain a refund of the development fees, the developer must file a claim for refund within 120 day of the effective date of the NJ Stimulus Act.

Developers should act quickly to entitle their projects to avoid the 2.5% non-residential development fee and/or file a claim for refund if a developer has already paid the non-residential development fee under the Statewide Non-Residential Development Fee Act. It may be prudent to consult with an attorney if you have questions regarding eligibility for return of a developer fee payment or any other provision of the NJ Stimulus Act.

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In two recent decisions, the New Jersey Appellate Division made clear that purchasers of homes from the original owners cannot sue the manufacturer of an exterior siding product for the home under the New Jersey Products Liability Act, N.J.S.A. 2A:58C-1 to -11 (“NJPLA”) if they suffer only economic losses. In addition, the purchasers also cannot assert a claim under the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -184 without some evidence of representations or concealments from the manufacturer made to them regarding the product. These two decisions should cause home buyers to be especially diligent when reviewing their home inspection reports, as they now may be precluded from asserting tort claims against the manufacturer of faulty or defective products or systems, and will have to rely primarily on contract claims against sellers for relief.

In Marrone v. Greer & Polman Construction, Inc., 405 N.J. Super. 288 (App. Div. 2009) and Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division addressed similar claims by homeowners regarding the Exterior Insulation Finish System, or EIFS, siding that was applied to each of their houses. EIFS is a system that incorporates foam insulation panels, reinforced mesh and a textured finished coating to the siding of the house. The finished product resembles a stucco finish. In both cases, the Marrones and the Deans purchased their homes from the original homeowner.

Both houses were built in 1995. The Marrones purchased their home in 2003 and the Deans purchased their home in 2002. Each homeowner later developed problems with the EIFS siding. Each party then sued, among others, the EIFS manufacturer, the subcontractor who applied the EIFS, and the general contractor who built the house. Neither the Marrones nor the Deans sued either of the sellers of the homes. The buyers each settled with the general contractor and subcontractor, leaving only the tort claims against the manufacturer of the EIFS product for disposition by the Court.

The Marrones and Deans each ultimately discovered that the EIFS siding on their homes was defective and had caused damage to the EIFS itself, as well as damage to the roof, soffits, sheathing, framing, substrate of the house, windows and doors. Although it is not stated how much the Marrones spent to repair the EIFS on their home, the Deans spent approximately $150,000 replacing the siding and other work to the exterior and interior of the house. Neither the Marrones nor the Deans alleged that the EIFS caused any personal injury or damage to anything other than their homes.

The Appellate Division affirmed the granting of summary judgment on each of the NJPLA claims based on the ‘economic loss’ doctrine. The Court in Marrone defined economic loss as “the diminution in value of the product because it is inferior in quality and does not work for the general purpose for which it was manufactured and sold.” The Appellate Division concluded that actions where a purchaser is claiming damage to the product itself, rather than any personal injury or damage to other property, are better suited for contract claims, rather than tort claims, such as a claim under the NJPLA.

The Appellate Division emphasized the policy decisions underlying tort and contract principles and concluded that “the policy behind contract law ‘operated on the premise that the contracting parties, in the course of bargaining of the terms of the sale, are able to allocate risks and costs of the potential nonperformance.’” The Appellate Division determined that rather than pursue the tort claim under the NJPLA, the Marrones and the Deans had the opportunity to negotiate with each of the sellers over the EIFS siding, by either walking away from the deal or insisting that the sellers remediate the EIFS defect. Each of the sellers did not take that action and they were not then permitted to pursue a claim against the manufacturer in tort.

Each of the Marrones and the Deans argued that the EIFS siding did cause damage to “other property” far beyond just the EIFS itself. They each claimed damage to other parts of their houses, including the roof and soffits, windows, doors, sheathing and wood framing. The Appellate Division in both Marrone and Dean found that these other parts of the house were all component parts of the house and not separate from the EIFS. The Appellate Division concluded that the buyers purchased a house, not the components parts separately, and any damage to the other component parts of the house were still damage to the “product” itself. As a result, those claims did not take the cases outside of the economic loss doctrine and summary judgment was still appropriate.

A consequence of these two decisions is that it is incumbent upon buyers to negotiate with sellers over problems that may arise from EIFS, or any other potential system or product of a house, at the time of the sale, rather than waiting and asserting a tort claim if something later goes wrong.
 

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The U.S. Green Building Council, on April 27, 2009, implemented changes to Leadership in Energy and Environmental Design or LEED, the country’s most popular and recognizable green building rating system. The revised rating system, known as LEED 2009, contains several significant changes affecting developers who previously operated under the old system. LEED 2009 also features many positive improvements to the LEED rating system.

One of the most significant changes in attaining LEED certification now requires newly built, LEED certified buildings to submit electricity bills for at least one year following the building’s completion. The U.S. Green Building Council is attempting to move beyond certifying buildings based solely on their design and projected energy use and only certify buildings that demonstrate actual energy savings. However, buildings that have already been certified under the old system will continue to retain their existing LEED certification and will not have to reapply. 

Under the old system, buildings could attain a maximum of 69 possible points across 5 Classification Categories (i.e., Sustainable Sites, Water Efficiency, Energy and Atmosphere, Materials and Resources and Indoor Environmental Quality) and are ranked from “certified” to “platinum” based on the number of points earned. LEED 2009 enables developers to target a total of 110 possible points across 6 Classification Categories, including a new Classification Category known as Innovation in Design. 

The increase in the total number of possible points is based in part upon re-weighting of credits within the LEED Classification Categories to reward the most important green building goals, namely, energy efficiency and the reduction of carbon dioxide. For example, under the old system, the installation of a bike rack and the implementation of water efficient landscaping with a 50% reduction based on the average size and vegetation were each worth 1 point. Under LEED 2009, water efficient landscaping with a 50% reduction based on the average size and vegetation is now worth 2 points. 

LEED 2009 projects will also be able to earn “bonus points” for implementing green building strategies that address the most important environmental issues facing their region. A project can now be awarded as many as 4 extra points for achieving these regional environmental priorities. In Northern New Jersey, bonus points are awarded for the preservation and restoration of damaged habitats, limiting the harmful effects of stormwater and wastewater and reusing existing building structures. 

The green building process is highly technical and complicated, and simple misunderstandings or lack of green building experience can lead to missed opportunities or failure to achieve the desired rating altogether. Consultation with an experienced attorney will result in more informed decisions in navigating the green building process. 

Watch this blog for updates on green building and green technology.
 

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In two recent decisions, New Jersey’s Appellate Division re-affirmed individuals acting within the scope of their employment can be personally liable under the State’s Consumer Fraud Act (the “CFA”), as well as related regulations governing home improvements, provided they actively participated in the consumer fraud. Lanza v. Secret Gardens, No. A-2613-07T22613-07T2 (App. Div. October 14, 2008) and Anne Milgram v. Comfort Direct, Inc. and Kevin Dyevich, A-0360-07T20360-07T2 (App. Div. October 28, 2008). The plaintiff in Lanza had hired the defendant, Secret Gardens Landscaping, Inc. (“SGL”), to perform remodeling and landscaping work on her property. After completion of the project, plaintiff filed suit against SGL, and SGL’s president and CEO, claiming they had violated the CFA. In reversing the trial court’s decision to dismiss the claims against SGL’s principal, the Appellate Division held there was undisputed evidence the principal, who had prepared the contract, supervised the work, and discussed change orders with the plaintiff, had participated personally in the alleged violations of the CFA, which were committed in connection with the execution and performance of the contract. Based upon those facts, the principal could be liable for any violation of the CFA in which he participated personally.

Placed more firmly in the construction context, these decisions subject a principal to the harsh penalties of the CFA. If the court finds the principal was involved in committing a consumer fraud, it will permit the aggrieved consumer to pursue the assets of the individual principal and those of the company.

What Constitutes a Consumer Fraud Act Violation?
The general standard for a CFA violation is “unconscionable commercial conduct,” which can include affirmative acts and intentional omissions. While there are no bright line rules as to what constitutes unconscionable commercial conduct in a new construction case, courts have held that the substitution of building materials inferior to those specified in the contract and even severe construction defects can constitute CFA violations. Violations of home improvement regulations, which are applicable to everything from minor improvements to significant renovations, are more clearly defined. A violation can include the failure to obtain a signed contract for the work from the property owner, the failure to specify start and end-dates in the contract, and misrepresentations regarding the quality of materials. Notably, the term “consumer” is broadly defined under the CFA and applies to businesses as well as consumers. As such, both residential and commercial projects can be subject to the CFA’s requirements.

Why I Should Care?
The CFA, which was implemented to protect the State’s consumers and punish those engaging in improper commercial practices, mandates the implementation of severe remedies in the event a CFA violation is found to exist. A consumer who can demonstrate it suffered a loss as a result of “unconscionable” conduct is entitled to recover treble damages and counsel fees. In the context of home improvement regulations, New Jersey’s courts have held that even if a consumer was not damaged by a violation of the regulations, the consumer is still entitled to recover its attorney’s fees. As a result, CFA violations can lead to significant exposure, both for the business and the individual -- with what might otherwise be viewed as a minor problem exploding into a major monetary loss.

How Can I Protect Myself?
Although it sounds obvious, the best way to protect yourself from CFA liability is to communicate frequently, openly, and honestly with the owner about the project’s progress and any issues that may arise. If a material specified in the contract is unavailable, do not simply switch the material out for something that may or may not be deemed by the owner or, ultimately, a court to be its equivalent. Instead, advise the owner and have it authorize the substitution in a change order. Avoid overstating the qualities of your products or services and make sure your contracts comply with regulations by having an attorney review them or familiarizing yourself with the regulations’ specific requirements.
 

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A widely held assumption among project owners and construction contractors is that private arbitration is faster and more cost effective than litigation of a dispute in the courts. The inclusion of mandatory arbitration of disputes in all AIA construction contracts since their inception in 1888 was premised on this assumption. Unfortunately, as many owners and contractors have discovered, arbitration is rarely fast or inexpensive. In complex disputes arbitration often proves as costly and time consuming as resolution through the court system. In addition, many consider arbitration inferior to the court system in maximizing the chances of a just outcome. In response to widespread demand within the construction industry, the AIA revised its 2007 form construction contracts, deleting mandatory arbitration and permitting parties to choose arbitration or litigation through the courts.

Arbitration certainly has some distinct advantages over litigation. For example, there is a very limited right to appeal an arbitrator’s decision, thereby reducing the cost of potential appeals and expediting the process of obtaining an earlier binding decision. In addition, arbitration allows the parties to select a decision-maker with considerable expertise in construction matters, eliminating the need to “educate” a judge or jury about construction issues.

The arbitration process, however, has some significant drawbacks. Unlike most trials, arbitrations are not necessarily held on consecutive days until concluded and may be scheduled over several months, particularly when several parties are involved. This requires the parties and their respective attorneys and experts to spend additional time getting up to speed on the case before each arbitration session. Moreover, previously scheduled arbitration hearings are disregarded by most judges if a judge’s schedule for a trial or hearing requires the attendance of one of the attorneys involved in the arbitration. Many arbitrators also permit extensive document production, depositions and other methods of “discovery” similar to those available in the court system, increasing the cost and duration of the arbitration. The parties are responsible for paying the arbitrators their hourly rate for all time spent in the hearings and related study and communications, a potentially substantial cost especially where multiple arbitrators are mandated. Finally, the legal standards governing arbitration strongly favor an arbitrator’s consideration of all evidence offered by a party, even if it is developed during or after the arbitration hearings. This can result in a set of facts and issues that evolves during the course of an arbitration and extends its duration.

Participants in the construction process should carefully consider the pros and cons of arbitration or litigation of their construction disputes, rather then reflexively choosing arbitration. Consultation with an experienced construction attorney will result in an informed choice.

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Under current law a tenant’s contractor cannot file a construction lien against the landlord’s property for amounts unpaid by the tenant unless the landlord provided written authorization of the specific construction contract between the contractor and the tenant. Even where the lease specifically provided for the work in question and the landlord was notified of the commencement of the work as required by the lease, current law prohibits a tenant’s contractor from filing a construction lien against the landlord’s property.

This will all change if a proposed revision to the New Jersey Construction Lien Law is enacted this spring. According to the proposed revision to the law, a tenant’s contractor will be able to file a lien against the landlord’s property for amounts unpaid by the tenant if the landlord has paid or agreed in writing to pay for the majority of the tenant improvement or if the lease provides the property is subject to a lien for the improvement. Accordingly, landlords should review current leases and keep this proposed change in mind for future leases in order to minimize the chances of unwittingly exposing the property to construction liens filed by contractors who have not been paid by the tenant for improvements to the property. 

If and when the revision to the law is enacted, in appropriate circumstances a landlord may wish to consider requiring all tenant improvement work be done by the landlord instead of reimbursing the tenant for the tenant’s cost to perform the work. This alternative will allow the landlord to control the work and pay contractors directly.  Another possibility to consider is for a landlord to provide the tenant with a rent concession, not tied to tenant improvements, while simultaneously providing in the lease all tenant improvements shall be done by the tenant at its sole cost and expense.  This latter approach, however, is not foolproof.  A court may interpret the latter provision as the substantial equivalent of a landlord paying for the improvements, thereby subjecting it to a potential lien against its interest in the property.

Watch this blog for updates on the proposed revisions to the Construction Lien Law.

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