Real Estate Transactions and Finance

March 22, 2013

Corporations and Partnerships: Their Legal Effects

Our firm is often asked by clients who are purchasing real estate or starting a business what type of legal entity, if any, they should form to protect their interests. In order to insulate an individual from personal liability, a corporate or partnership should be formed. In addition, within these categories, there are subcategories, such as limited liability companies (“LLC”) and limited liability partnerships (“LLP”). This post will discuss the basic qualities of such entities, as well as the legal effect that they have on their individual shareholders and partners.

According to New York State, a limited liability company (LLC) is an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business. It combines corporation-style limited liability with partnership-style flexibility. The owners of an LLC are called “members” rather than shareholders or partners. A member may be an individual, a corporation, a partnership, another limited liability company, or any other legal entity. A managing member is to be designated when this type of entity is formed.

Forming an LLC will generally be more expensive than forming a New York corporation. This is because an LLC, upon formation, has a legal obligation to publish a statement of its formation in a publication ordered by the New York Department of State. The cost of such advertisement usually makes the cost of forming an LLC greater than the cost of forming a standard business corporation. An LLC has no restrictions on what it may own, so it can hold legal title to real estate or any other type of property. The members of an LLC are not personally liable for the debts and obligations of the LLC.

March 1, 2013

Beware of Persons Engaging in the Unauthorized Practice of Law

By Weiss & Weiss

Our readers should be wary of persons who may be engaging in the unauthorized practice of law. This issue is defined as a non-lawyer rendering legal advice or drafting legal documents. Section 478 of New York’s Judiciary Law declares that it is unlawful to practice or appear as an attorney for another person, to render legal services or hold oneself out to the public as entitled to practice law, without being duly licensed and admitted to practice law. This blog post will define the unauthorized practice of law, discuss New York laws pertaining to same and describe situations that our readers should avoid.

Common situations comprising the unauthorized practice of law include the following. A real estate broker drafts a contract, lease or mortgage. A “loan modification expert,” claiming to be an attorney, negotiates with a lender and then advises the borrower to enter into a loan modification. A client or customer dealing with such persons should be especially concerned if they are told that the transaction is on the “fast track,” that there is “no time” to consult an attorney and that they are advising them as an attorney. Another red flag is the person’s self- interest. A real estate broker wants to get the deal done to earn his commission and will encourage a simple contract to be signed without attorney objections, which objections may be validly protective of the client.

Real estate brokers and agents are subject to the loss of their license for the unauthorized practice of law. Article 12-A of New York’s Real Property Law governs the licensing requirements of real estate brokers and salespersons. This Article contains the provision requiring real estate brokers and agents to be licensed and the procedure for the potential revocation of their license. The New York Attorney General’s Office prosecutes criminal actions for violations of said Article. In addition, the New York Department of State accepts complaints against licensed brokers and conducts investigations accordingly. Brokers are vulnerable to claims involving the unauthorized practice of law if they draft any document pertaining to real estate such as a contract, lease, mortgage or deed, especially if they are paid to do so. However, if they use one of the forms approved by the bar association or local brokerage association in the county in which they are located, including only ministerial terms such as name, date, property address, they will not be subject to claims of unauthorized practice of law; particularly if they note in boldface type that the document is subject to review by each party’s attorney.

February 22, 2013

Legal Requirements for the Sale, Mortgage and Lease of Properties Owned by New York Religious Corporations

By Weiss & Weiss

Often the most significant asset owned by a religious corporation such as a church, synagogue or mosque in New York is real estate. For a variety of reasons, the religious institution may wish to sell, mortgage or lease its property. New York’s Religious Corporation Law prescribes the procedure to be followed in order to legally complete such a transaction. For the purposes of our discussion in this blog post, we will be discussing a sale by a religious corporation.

New York’s Religious Corporation Law declares that “[a] religious corporation shall not sell, mortgage or lease for a term exceeding five years any of its real property without applying for and obtaining leave of the court…”. In layman’s terms, the New York Statute requires that the religious corporation apply by Petition to the Supreme Court of the county in which the property is located for an order permitting the sale. Without the Supreme Court’s consent, the transaction will be void. The purpose of the statute is to prevent the congregational leadership from dissipating congregational assets.

Prior to submitting the Petition, we will assume that the following steps will have already occurred. The congregation must enter into a contract of sale with the party purchasing the property. The Constitution and By-Laws of the congregation will specifically detail the notice and quorum requirements for voting to approve the transaction as a congregation. Our firm will analyze the organizational documents and draft the required documents to hold the vote to approve the transaction as well as conducts the meetings where such vote takes place. In many cases, the Board of Trustees will be required to vote on the matter before the entire congregation also votes to approve the transaction. Written evidence of the congregational vote to approve the transaction will be submitted with the Petition. The Petition will describe the nature of the transaction and indicate that same was approved pursuant to the congregation’s organizational documents. Attached to the Petition will also be a Verification of the President or other lay leader of the congregation certifying the authenticity of the contents of the documents, our attorney’s Affidavit of Regularity confirming the proper procedures were followed with respect to the congregational vote and other aspects of the transaction, a Certification of Authentication of the organizational and other congregational documents submitted, and the proposed Order.

February 1, 2013

The Legal Distinctions between Cooperative and Condominium Transactions in New York

By Weiss & Weiss

apartment building.jpg New Yorkers who purchase an apartment typically buy what is known as a cooperative (“Co-op”) or condominium (“Condo”). There are important legal distinctions between a cooperative and a condominium that are notable during the purchase process and after the closing of the transaction. This blog post addresses these distinctions.

A cooperative is a corporation formed for the purposes of common ownership, where the New York State Attorney General has accepted the relevant Offering Plan for filing. An owner of a cooperative apartment owns a particular number of shares in the corporation and is also designated a proprietary lease whereby the shareholder may occupy a particular unit in the building. A condominium is also governed by an Offering Plan. However, a condominium is real property, wherein a unit owner obtains a Unit Deed identifying a particular unit to be occupied and a percentage of common interest (i.e. common areas of the building such as the lobby, hallways, roof, etc.) in the building that is owned.

Generally, cooperative boards strictly govern all resident activities, starting with the purchase of an apartment. A detailed application is usually required to be submitted to the board along with all references and financial data requested by the cooperative board, prior to attending a personal interview and obtaining board approval to the transaction. Once approved, the parties in the transaction will attend the closing at the office of the transfer agent for the cooperative to obtain the stock certificate and proprietary lease evidencing ownership of the unit. A purchaser cannot acquire the apartment without the approval and participation of the cooperative board and its transfer agent.

January 25, 2013

Boundary Issues and Their Influence on Real Estate Transactions in New York

By Weiss & Weiss

A purchaser of real estate in New York State typically has plenty to evaluate in determining whether to buy a property. Usually the evaluation is limited to the four corners enclosed by the property line. This blog post addresses the matters that are beyond the property line that should concern a buyer.

Fences can be seen enclosing many properties in New York State, but are often not within the legal property line. When a fence is erected, a property owner should have a staked survey prepared and the fence installed consistent with the property line as shown on said survey. Of course, many people do not know that surveying is a prudent means by which to install a fence or do not wish to incur this expense. As a result, many fences may be installed over another person’s property line. This may not be discovered until a neighbor attempts to sell his property and the neighbor’s buyer conducts a title search and survey, discovering that the selling party is out of possession as to a portion of his property. If the portion that is out of possession is less than six inches, most title companies will insure such an exception to coverage. If the out of possession portion is more than six inches, the selling party will need to request an affidavit from the encroaching neighbor stating that they know their fence encroaches beyond their property line and that they make no legal claim to the encroaching portion. This affidavit will allow the title company to insure as if the encroachment were less than six inches.

Should the out of possession issue not be discovered for some reason or the encroaching neighbor is not willing to sign such an affidavit, the encroaching neighbor may acquire the strip of land by operation of law under the legal principal known as adverse possession. It is not uncommon for the encroaching neighbor to request a fee to sign such an affidavit or to request an easement (right to use) the strip of land in exchange for signing any agreement. The parties to a transaction will need to determine whether it is worthwhile to agree to such terms in order for the transaction to proceed.

January 10, 2013

Legal Issues Relating to the Sale of Businesses and Professional Practices

By Weiss & Weiss

Our firm is often asked by clients to handle the purchase or sale of an ongoing business. This business may also be a professional practice, such as a pharmacy, or medical or dental office. There are many legal aspects of such a transaction, which will be discussed in this blog post.

Such transactions often involve the sale of real estate which is owned by the business being sold. For example, if a pharmacy is being sold, the building in which the pharmacy is located may be owned by the business in question. In such a situation, the sale of the real estate would be part of the transaction in which the actual business is also being sold. For tax purposes, the amount paid by the buyer should be allocated separately to both the real estate (if applicable) and business in question. A further allocation may be made with respect to fixtures and equipment that are part of the transferred items. Therefore, if the total purchase price is $600,000.00, $300,000 may be considered the price for the real estate, and $300,000.00 for the purchase of the actual business. We recommend that all parties consult their accounting professionals to determine the most favorable allocation for tax purposes.

The first legal issue relates to the legal structure of the business being purchased. If the business is an entity such as a corporation, professional corporation (P.C.) or limited liability company (LLC), the entity and its assets can be sold to another party. The first step in this process involves confirming that the corporation is in “good standing” in the State of New York. This involves checking to ensure that the entity has made all necessary filings and is current in paying its franchise taxes. A certificate of good standing should be obtained from the New York State Department of State. In addition, all corporate documentation, including the stock certificates, stock book, and corporate seal should be delivered at the time of the completion of the purchase.

January 3, 2013

New York Law Pertaining to Home Warranties

By Weiss & Weiss

Home purchasers in New York State often request warranties in connection with their home purchase. However, depending upon the type of property purchased, warranties on general construction and mechanical systems will not be obtainable. Without an express and separate warranty, any representations made in the contract of sale with respect to property condition will expire upon the delivery of the deed at closing. As such, the purchaser must generally discover all property defects prior to receiving the deed in order to expect a remedy from the seller. New York is a “caveat emptor” jurisdiction, meaning that buyers generally take title without a seller’s warranty as to condition and without recourse if the buyer discovers unacceptable conditions after the closing.

The most common warranty that is realistic for a New York real estate purchaser to obtain applies to new construction of a home to be used as the primary residence of the purchaser, who is also the first person to live in the home. In this instance, the warranty will have a monetary limit and will expire in stated periods of time depending on the type of item. A standard new home warranty will cover construction defects, flaws in the plumbing, electrical, heating, cooling and ventilation systems servicing the home and material defects. A new home warranty typically excludes appliances, which are covered by the manufacturer’s warranty. However, if the builder installed the appliances improperly, the purchaser can rightfully bring a claim under the new home warranty. A homeowner making a claim must follow the notice deadlines specified in the warranty and afford the builder an opportunity to inspect and correct the defect, as outlined in the warranty.

Most purchasers in New York acquire a home that is “used”, having already been lived in by someone else. The standard contract provision in New York states that all warranties and representations made by the seller expire upon the delivery of the deed, unless they are expressly stated to survive the delivery of the deed. This means that once the deed is delivered at the closing, the purchaser is accepting any conditions that may exist at the property. As such, the purchaser should thoroughly inspect the property immediately before the closing. Any condition that could have been discovered becomes the purchaser’s problem once the closing has concluded. In any event, a purchaser of a used home should receive the benefits of manufacturers’ warranties with respect to appliances.

December 7, 2012

Real Estate Legal Issues Relating to “Super-Storm” Sandy

By Weiss & Weiss

Uprooted Tree.jpg Recent extreme weather conditions in the New York metropolitan area have caused great hardship for many of its residents. We hope that those individuals and families who suffered damage or destruction of their residences are in the process of recovery. This blog post will discuss some of the legal issues which may arise from some of the results of the “super-storm.”

The first issue for many homeowners is when there is property damage which may be covered by their homeowner’s insurance. Most standard homeowner’s policies will pay to repair damage to a house and other physical structures located on the property caused by extreme weather conditions, with the exception of flood damage, which is covered under separate insurance policies that a homeowner may obtain. One example of this may be an uprooted tree which fell on a house and caused damage to a roof. If this occurs, the homeowner should contact their insurance agent and notify them immediately of the damage. The insurance company will then send an insurance adjuster to the property. The adjuster will survey the damage and will then estimate the amount it will take to repair the property. Repairs made before the insurance company has inspected the damages and approved of the cost to repair are unlikely to be reimbursed.

The homeowner may receive a check from their insurance company to pay for the repair work in question. However, where the property is mortgaged, the lender usually must be notified. The reason for this is that most loan documents contain clauses requiring the homeowner to keep the property in good repair and to involve the lender in the event of a casualty. If the homeowner receives a large sum of money from an insurance settlement, the lender has a vested interest in making sure these funds are applied to repair the property, and not spent by the homeowner for other purposes. Most lending documents therefore require that any insurance proceeds in excess of $10,000.00 be endorsed by both the homeowner and a representative of the lender. In practical terms, the check from the insurance company in excess of this amount will be issued to both the homeowner and the lending institution as co-payees. The homeowner must then obtain consent and a written endorsement on the check from their mortgage lender in order to deposit these funds, and must show that the funds are being used to repair the property which is the subject of the mortgage.

November 30, 2012

New York Residential Real Estate Contracts- Legal Issues

By Weiss & Weiss

Residential real estate contracts in New York State are prepared and negotiated by attorneys, rather than by other real estate professionals such as real estate brokers. This custom allows the opportunity for parties to real estate transactions to have professionally prepared contracts, serving as the road map for the entire transaction. There are particular provisions in a typical New York residential real estate contract of which our readers should be aware.

The most common conversation that we have with our real estate clients, whether they are the purchaser or the seller, pertains to the closing date. The standard contract clause will provide that the closing date will be “on or about “x” date”. This has been interpreted by New York courts to be a ” target=”_ date, not a date that either party must absolutely attend a closing and complete the transaction. We advise our clients not to schedule the movers, arrange for contractors to commence renovation projects or set up the closing of another transaction based upon an “on or about” closing date. New York legal custom generally allows thirty days after the target “on or about” closing date before one of the parties may legally expect to hold the closing.

At this point, it would then be appropriate for one of the attorneys to send a “time of the essence” closing date notice. A time of the essence notice must be in writing and will specify the time, date and location when the party sending the notice expects to perform its contractual obligation, deemed “law day”. New York Courts have held that time of the essence notices are to be sent on no less than thirty days notice. The party sending the notice needs to attend the closing on “law day” and to perform the closing, such as by having their client sign closing documents and having other parties such as title closers attend. In fact, it is common practice to have a court reporter attend the time of the essence closing to document a party’s failure to perform, so that a contract downpayment may be seized or another remedy for breach of contract employed.

August 9, 2012

Short Sales of Real Estate in New York

By Weiss & Weiss

The large number of foreclosed properties in New York State has caused a situation where banks may be more willing to compromise when a borrower cannot make their mortgage payments. If a lender proceeds with a foreclosure to its final conclusion, the lending institution will end up taking title to the property. Many lending institutions would rather not be “in the business” of owning, selling, and managing real estate. As a result, there are several alternatives to foreclosure which may be available. The first is a loan modification. As discussed in a prior blog post, courts in New York State are required to attempt to settle foreclosure actions in a separate foreclosure part.

Another alternative is a short sale. A short sale happens when the mortgage balance exceeds the current value of the property. This is an increasingly more common situation in our times, as lenders in the past were overly generous in issuing loans on properties, including second mortgages. Overly optimistic appraisals and credit reports were the foundation of said loans. Combined with a recent decline in real estate values, the result is that many homeowners find themselves unable to pay their mortgage, and also find that the total debt on their property may exceed the current fair market value of the property.

When this occurs, the borrower may ask the lender to allow a “short sale” on the property. A short sale is when a lender allows the property to be sold for less than the amount due on the mortgage, and then forgives the rest of the debt on the property after the sale. The main reason that this may be an acceptable alternative for a homeowner is that they remain personally liable on the Note and Mortgage, even after foreclosure and sale of the property. A lender may seek a deficiency judgment against the borrower if the property is auctioned for less than the amount owed by the borrower. This can result in a large judgment entered against the borrower, and could result in the borrower having their personal credit damaged, or being forced to file for personal bankruptcy.