Howard v Berkman, Henoch, Peterson & Peddy, P.C.
Annotate this CaseDecided on November 5, 2004
Civil Court of the City of New York, Richmond County
MICHAEL HOWARD, Plaintiff,
against
BERKMAN, HENOCH, PETERSON & PEDDY, P.C., Defendant.
034411/04
Attorney for Plaintiff:
Munzer & Saunders, LLP
609 Fifth Avenue, Suite 600
New York, NY 10017
(212) 755-0008
Attorney for Defendant:
Joseph E. Macy, Esq.
Berkman, Henoch, Peterson & Peddy, P.C.
100 Garden City Plaza
Garden City, NY 11501
(516) 222-6200
Philip S. Straniere, J.
Plaintiff, Michael Howard, commenced this action against the defendant, Berkman, Henoch, Peterson & Peddy, P.C. alleging that owing to the defendant's legal malpractice the plaintiff has suffered damages. Currently before the Court is a motion for partial summary judgment only on the issue of liability. Defendant opposes the motion. Both sides are represented by counsel, although the defendant is representing itself.
Certain facts are not in dispute. Plaintiff retained defendant law firm to represent him in regard to the purchase of the premises 40 Union Court, Staten Island, New York. Plaintiff apparently selected the defendant as his counsel since defendant was part of a referral list maintained by the labor union of which the plaintiff was a member. A written contract was entered into between plaintiff and the seller TPZ Corporation on July 26, 2001. The contract had an anticipated closing date of September 15, 2001. Paragraph 13 of the rider to the contract provided: "The seller agrees [*2]to deliver a final Certificate of Occupancy for the premises. However, the purchaser agrees to close with a Temporary Certificate of Occupancy or without any Certificate of Occupancy if Seller has not yet obtained same by the scheduled closing date." This paragraph was amended in writing at the time of contract to say: "The seller agrees to deliver a final certificate of occupancy for the premises and any improvements as they exist. However, the purchaser agrees to close with a Temporary Certificate of Occupancy by the scheduled closing date." The paragraph went on to provide that the sum of $2,500.00 would be deposited by the seller in escrow to guarantee the delivery of a final certificate of occupancy. It should be pointed out that the paragraph does not specify who would be the escrow agent under this agreement.
A review of the contract submitted as an exhibit by the plaintiff reveals that the first few pages of the rider are not included, as the rider starts at the middle of paragraph 11. Also the contract does not contain a legal description. There is no metes and bounds description attached and the spot for the block and lot number contains a block but no lot. The rider to contract at paragraph 12 and part of paragraph 11 points out in detail that the property being sold is a foreclosure property acquired by the seller and that there may be title and certificate of occupancy problems that are not resolvable. Paragraph 12 gives the purchaser the right to cancel the contract and receive a refund of any down payment in those situations.
In September 2001 the purchaser's attorney asserts that he was orally notified by the seller's attorney that they had a temporary certificate of occupancy and that a closing could be scheduled. Defendant admits that it never received a copy by facsimile transmission, regular mail or overnight mail. Defendant states that based on this representation a closing was set. It should be pointed out that neither party has produced an affirmation from the seller's attorney to confirm this fact. In any case, the closing took place on September 26, 2001 at seller's attorney's office. It is unclear whether the closing took place at the Staten Island, New York office or the Sparta, New Jersey office of the seller's attorney since no RESPA statement (HUD -1) is attached as an exhibit.
No temporary or final certificate of occupancy was produced at the closing, yet the matter closed. Seller's attorney agreed to hold $2,500.00 in escrow as provided by the contract. The purchaser apparently waived any right to cancel the transaction that existed under the terms of the contract when he agreed to accept title without either a temporary or final certificate of occupancy. It should be pointed out that the failure to have a certificate of occupancy is not an objection to title and does not affect the marketability or insurability of title. The issue of whether a premises can be legally occupied is not a title issue. Although this status is provided in most title reports, it is provided for "information purposes only."
On July 31, 2002 an inspection of the premises by the New York City Department of Buildings led to the issuance of a notice of violation against Michael Howard and Jean Howard. The violation was described as follows: "Building occupied without a valid certificate of occupancy. Noted: Department of Buildings records shows that this building have (sic) no C of O. Remedy: Obtain valid certificate of occupancy." The notice of violation alleged that the premises was in violation of New York City Administrative Code section 27-214. The section states: "New buildings: [*3]sidewalk requirements. a. Except as permitted under the provisions of section 27-218 of this article, no building hereafter constructed shall be occupied or used, in whole or in part, unless and until a certificate of occupancy shall have been issued certifying that such building conforms substantially to the approved plans and the provisions of this code and other applicable laws and regulations." Paragraph "c" of that section provides: "No certificate of occupancy or temporary certificate of occupancy (excluding amendments to previously issued certificates of occupancy) shall be issued on or after April First, Nineteen Hundred Eighty-Seven for any existing building which has not fully complied with all requirements of this code applicable to such existing building." Since neither side presented any information as to when the premises was originally constructed, when it was foreclosed and its status when it was foreclosed, it is impossible to determine if on the date the plaintiff purchased the premises it even qualified for a temporary certificate of occupancy; the age of the building may have made issuance of a final certificate of occupancy as the only option upon compliance with all of the requirements of the building code for an existing premises.
On the return date of the violation at the Environmental Control Board, the notice of violation was dismissed because Michael Howard produced gas, electric and water bills for several months prior to the date of the notice of violation which showed that no one was living in the building since the usage was billed at a minimum rate.
On March 6, 2003, the Building Department issued a final certificate of occupancy for the premises.
Plaintiff commenced this action for damages incurred alleging that because he had not received a temporary or final certificate of occupancy he could not occupy this premises and rent his then current home. He alleges that he had to make payments for mortgage principal and interest, taxes and insurance and utility bills at the premises in question but could not occupy it. He is seeking these items as damages directly flowing from the defendant's legal malpractice.
This is just another example of the problems created for homeowners, attorneys, lenders and ultimately the Court system because of the questionable, if not absurd system, of allowing temporary rather than final certificates of occupancy to be issued in the City of New York and especially on Staten Island. An analysis of the system leads to the conclusion that if a rational basis existed for its initial imposition, that reasoning has long ago disappeared into a morass of problems that would have never existed had the City of New York devoted sufficient resources to the Department of Buildings so that final certificates of occupancy issued at the closing of title would be the rule and not the exception. It is incomprehensible that an industry such as the building industry which generates so much revenue for the City should be treated as if it were a victim of a natural disaster in need of eleemosynary relief. If more personnel is needed and the current system does not generate enough income to hire sufficient staff, then the Buildings Department should raise the fees; a cost that would ultimately be passed along to the home buyer. The real "malpractice" in this and other similar actions is the failure of the City of New York to abide by its statutory obligation to protect the consumer, attorneys, lenders and the building industry by issuing timely certificates of occupancy. It is incomprehensible that practically every other municipality in this state and perhaps [*4]the United States has figured this out, yet the greatest city in the world cannot do so. In fact, some places even have the ability to inspect premises on resale and issue certificates of continuing occupancy.
LEGAL ISSUES PRESENTED:
A. Is It Malpractice To Close Without A Certificate of Occupancy?
There can only be one answer to this question. It is malpractice to permit a client to purchase a premises without a valid certificate of occupancy or under the current questionable system without a valid temporary certificate of occupancy. To represent a client in the purchase of residential real property to be occupied by that person as a dwelling place and to permit that client to enter into title without a certificate of occupancy is a clear breach of an attorney's obligation to that client. Blanche DuBois in Tennessee Williams' "Streetcar Named Desire" may be able to depend on the "kindness of strangers;" however, such a standard does not apply to our adversarial system, especially when it comes to representing clients in the purchase and sale of real property, the biggest investment most persons ever make in their lives. The failure to have a certificate of occupancy makes occupancy of the premises illegal. Whether it is a final certificate of occupancy or a temporary one, if such a standard is permitted under local building codes, the failure to have that document means that any subsequent occupancy violates the law and attorneys cannot be engaged in practices that lead to the violation of statutes.
Certificates of occupancy are not issued as items to be framed for wall decoration; they are issued to insure that the wall is sturdy enough to support the hanging of such an ornamentation. Without the issuance of a certificate of occupancy, it is impossible to determine if a structure is built to code and safe for human habitation. As stated above, it is designed to insure that "such building conforms substantially to the approved plans and the provisions of this code and other applicable laws and regulations" (NYCAC 27-214(a)). The lack of a certificate of occupancy leads to the presumption that the premises is not constructed in conformity with the applicable code. A Court faced with this issue only knows that the certificate has not been issued. It is impossible to determine if the reason for that is the failure of the builder to pay the architect, a ministerial error, or that the premises is about to collapse faster than the Yankees in the 2004 American League Championship Series.
Although the state legislature has never specifically addressed the necessity of certificates of occupancy in the construction of one and two family homes, it has found that they are required for multiple dwellings (Multiple Dwelling Law Article 8), that is, residential dwellings of three or more units (MDL 4(7)). The certificate of occupancy rules under the NYCAC cover all dwellings from one family to multiple dwellings and because, under the Municipal Home Rule Law, the legislature has given the authority to local government to set these standards, these local regulations have the same weight as a state statute. The MDL states that: "It shall be unlawful to commence the construction or alteration of a multiple dwelling...until the issuance of a permit by the department upon compliance with all of the following requirements:..."(MDL 300). It also provides: "No [*5]multiple dwelling shall be occupied in whole or in part until the issuance of a certificate by the department that said dwelling conforms in all respects to the requirements of this chapter, to the building code and rules and to all other applicable law,..."(MDL 301). The clear thrust of these statutes is that certificates of occupancy are designed to insure the safety of the inhabitants of dwellings in this state and to protect them from unsafe structures.
There is one instance where it would not be malpractice to close in this situation and that is if the client or anyone else was not going to occupy the premises because the premises was either going to be demolished or renovated. However, that is not the situation in this case. The facts establish that the plaintiff was purchasing either for his own personal use or for use as a rental property. The fact that there was neither a temporary nor permanent certificate of occupancy makes the actions of the defendant in allowing the closing to take place, negligence. The defendant cannot deny it had this knowledge since it asserts that the plaintiff only qualified for representation under the union legal services plan if the purchase was for personal residential use. It should be pointed out that neither side has submitted a copy of this agreement as an exhibit.
If, in fact, the plaintiff-client insisted that the closing take place, then, in order that it not be malpractice the defendant would have to have had the plaintiff execute a detailed release informing the plaintiff of the law, the legal implications of closing without a certificate of occupancy, that the closing was going forward against the advice of counsel, and advising the client to consult another attorney. In this case such a course would seem to have been almost mandatory by the defendant since paragraph 12 of the contract of sale served as notice to the plaintiff-purchaser that the seller could convey title without a certificate of occupancy and that in such case the plaintiff could either accept or reject title. The contract provided that if the purchaser rejected title, damages would be limited to a refund of the deposit; but if the purchaser, as he did in this situation, accepted title, the purchaser would be taking title "as is" without any further remedies against the seller. Acceptance of title with these restrictions is of such import that in order to not commit legal malpractice, defendant would have to produce some documentation that the plaintiff was fully aware of the implications of closing with this cloud on his right to occupancy. No such documentation has been produced. In fact the defendant has not produced any documentation to indicate whether a temporary certificate of occupancy was ever issued to this premises or if one were issued and expired, what were the open items that prevented the issuance of the permanent certificate of occupancy.
B. Does The NYCAC Address The Issue Of Closing Without A Certificate of Occupancy?
A review of the NYCAC reveals that the plaintiff, defendant, seller, counsel to the seller, the lender and counsel to the lender all face potential liability under the law.
NYCAC 26-125(a) provides: every person who shall violate any provisions of any laws, rules,
or regulations enforceable by the department or who shall knowingly
take part or assist in any such violation shall be guilty of an offense and
upon conviction thereof shall be punishable by a fine of not more than [*6]
five thousand dollars. Such person shall also be subject to the payment
of a penalty of not more than five thousand dollars to be recovered
in a civil action brought in the name of the city in any court of record
in the city.
In addition, NYCAC 26-248(a) provides:
the owner of any structure, or part thereof, or land, where
any violation of this subchapter or chapter one of title twenty-
seven of the code shall be placed, or shall exist, and any person
who may be employed or assist in the commission of such
violation, and any and all persons who shall violate any of
the provisions of this subchapter or chapter one of title twenty-
seven of the code or fail to comply there with, or any such require-
ment thereof,...shall severally, for each and every such violation
of non-compliance, respectively, be punished by a fine of not more
than five thousand dollars.
Occupying a premises without a certificate of occupancy is a violation of NYCAC 27-214 which is a section included in Chapter One of Title Twenty-Seven. This means that not only is the plaintiff-owner subject to liability, but defendant as counsel to the purchaser has "assisted" in committing the violation by permitting the plaintiff to close title with an intent to occupy the premises in violation of the administrative code. Applying these statutes to the practice of real estate law, can only lead to the conclusion that when an attorney permits a client to close title and enter into possession of a premises that lacks a valid certificate of occupancy reflecting the actual use of the premises, that attorney is assisting in violating the NYCAC. Likewise, a lender or lender's counsel that closes knowing that the premises either lacks a valid certificate of occupancy or has an actual use, not in conformity with the valid certificate of occupancy, is also in violation of the statute.
The existence of the temporary certificate of occupancy not only complicates the process but also exposes sellers, purchasers, attorneys and lenders to liability. This is because the NYCAC 27-218 states that in regard to the J-3 occupancy group a temporary certificate is issued for a period between 90 and 180 days and it may be renewed for additional 90 day periods. In the event the final certificate of occupancy is not obtained within the time set forth in the initial temporary certificate of occupancy or any extension thereof, the occupancy then becomes illegal and therefore all of the above parties are technically assisting in violation of the NYCAC by permitting the purchaser to continue occupancy after that date. What is the obligation of each party to continue to check the Buildings Department records? An argument can be made that a purchaser's attorney who permits the closing to go forward with a temporary certificate of occupancy has a continuing obligation to monitor the situation; advise the client that no final certificate of occupancy has been obtained; and that the client is not only subject to being evicted by the Buildings Department but also potentially to civil and criminal penalties. Although this obligation is not spelled out in the statute and perhaps the necessary follow through is not done by many attorneys in actual practice, the current system of [*7]issuing temporary certificates of occupancy is a trap for the unwary and a potential source of liability for malpractice if strictly interpreted.
It should however, be pointed out that there will be no additional liability attaching to the defendant since the plaintiff was successful in getting the violation dismissed at the Environmental Control Board hearing on September 18, 2002 by establishing that although plaintiff intended to occupy the premises, he had not in fact done so. If the plaintiff-owner is not liable, then the defendant cannot also be liable.
C. Is It A Violation Of The Code Of Professional Responsibility To Close With A Temporary Certificate Of Occupancy?
Since this action involves an allegation of legal malpractice, it is important to examine the Code of Professional Responsibility to see if the system of issuing temporary certificates of occupancy in general, or the facts of this case specifically, lead to a violation of the Code.
Ethical Consideration 6-4 provides: Having undertaken representation, a lawyer should use proper
care to safeguard the interests of the client. If a lawyer has accepted
employment in a matter beyond the lawyer's competence but in
which the lawyer expected to become competent, the lawyer should
diligently undertake the work and study necessary to be qualified.
In addition to being qualified to handle a particular matter, the lawyer's
obligation to the client requires adequate preparation for and appropriate
attention to the legal work, as well as promptly responding to inquires from
the client.
Disciplinary Rule 6-101 provides: A. A lawyer shall not: 1. Handle a legal matter which the lawyer
knows or should have known that he or she is not competent
to handle without associating with a lawyer who is competent to
handle it. 2. Handle a legal matter without preparation adequate
in the circumstances. 3. Neglect a legal matter entrusted to the lawyer."
Ethical Consideration 7-8 states: A lawyer should exert best efforts to insure that decisions of the
client are made only after the client has been informed of relevant
considerations. A lawyer ought to initiate this decision-making process
if the client does not do so. Advice of a lawyer ought not be confined
to purely legal considerations. A lawyer should advise the client of the
possible effect of each legal alternative. A lawyer should bring to
bear upon this decision-making process the fullness of his or her
experience as well as the lawyer's objective viewpoint. In assisting [*8]
the client to reach a proper decision, it is often desirable for a lawyer
to point out those factors which may lead to a decision that is morally
just as well as legally permissible. The lawyer may emphasize the
possibility of harsh consequences that might result from assertion of legally
permissible positions. In the final analysis, however, the lawyer should
always remember that the decision whether to forego legally available
objectives or methods because of non-legal factors is ultimately for the client
and not the lawyer. In the event that the client, in a non-adjudicatory matter,
insists upon a course of conduct that is contrary to the judgment and advice
of the lawyer, but not prohibited by Disciplinary Rules, the lawyer may
withdraw from the employment.
Ethical Consideration 7-9 states: In the exercise of the lawyer's professional judgment on those decisions
which are for the lawyer's determination in the handling of a legal matter,
a lawyer should always act in a manner consistent with the best interest
of the client. However, when an action in the best interest of a client seems
to the lawyer to be unjust, the lawyer may ask the client for permission to
forego such action.
Disciplinary Rule 7-101 states: "A. A lawyer shall not intentionally:...3. Prejudice or damage the client during the course of the professional relationship...."
Although enforcement of the Code of Professional Responsibility is beyond the jurisdiction of this Court, it is obvious that in addition to all the other problems caused by the system of issuing temporary certificates of occupancy, exposure to a grievance is one of the possible results. In this case, the problem of course is: did the defendant give proper advice to the plaintiff so that the plaintiff could make his own decision in regard to closing without the existence of the temporary or final certificate of occupancy? At a minimum, the defendant was required to inform the plaintiff of all the potential problems that could occur by closing in this situation beyond monetary concerns, including being prohibited from occupying the premises, and facing civil and criminal penalties. By closing without even a temporary certificate of occupancy, the plaintiff, if going into occupancy, would be violating the applicable law. How does an attorney give such advice without being able to document that all disclosures were given to the client and that the client elected to close in spite of and against the advice of counsel? If never having received a temporary certificate of occupancy, how can the attorney advise the client as to whether or not a final certificate of occupancy will ever be issued since a temporary certificate of occupancy would list all items considered incomplete by the Buildings Department?
What is troubling about Ethical Consideration 7-8 is the sentence "advice of a lawyer to the client need not be confined to purely legal considerations." Does this mean the client can expect the lawyer to give financial advice, serve as a structural engineer, accountant, physician, spiritual advisor, home improvement contractor and auto mechanic? I am sure that the attorney's malpractice [*9]insurance carrier would be happy to cover an attorney who was sued for giving improper non-legal advice (please note the sarcasm). For instance, when a seller when faced with having to complete the Property Disclosure Act Statement(Real Property Law Article 14) notifies the attorney that he or she has no idea how to answer the questions, the attorney not only can advise the client how to complete the questions but might be expected or even required to do so under this ethical consideration. Would this not make the attorney a defendant in any suits that arose concerning defects in the premises arising after closing? Or, if the attorney advises the client not to complete the form but to give the $500.00 credit (RPL 465) and the seller later gets sued, would the attorney also be a proper party? I would think that bar associations around this state may want to re-word this Ethical Consideration so that it does not have this potential for mischief.
D. Is The Plaintiff Entitled To Damages?
Plaintiff is only seeking partial summary judgment on the issue of liability, however, a summary judgment motion permits the Court to search the record and examine the sufficiency of the complaint (CPLR 3212). One problem is that the plaintiff has not produced a copy of the deed which would establish that the plaintiff is the owner of the premises. This may be an issue since the notice of violation is issued in the name of "Michael and Jean A. Howard." The contract and the pleadings are only in the name of Michael Howard. Although not admitted in the answer, defendant apparently is not challenging that the closing took place and that the plaintiff is the only proper party.
Although the issue of damages is not specifically raised in this motion, there are certain aspects of that portion of the case that require analysis and comment. Defendant asserts that initially the plaintiff stated that he intended to rent 40 Union Court and that because it could not be occupied he lost rental income. Defendant claims that when the plaintiff realized this, he changed his allegation to the fact that he attempted to move into the premises but could not do so because there was no certificate of occupancy and that if that was his intention defendant would not have represented him under the legal service plan agreement. Plaintiff later was successful in defeating the violation that was issued at the ECB hearing by establishing that no one was occupying the premises. If no one was in the premises one must question why a notice of violation was issued in the first place. According to the contract, this was a foreclosure property. If it was empty, why a violation? The mere fact that title changed would not have caused a violation to be issued. The history of the property would lead to the conclusion that no certificate of occupancy was in effect and the premises was unoccupied since the building was first constructed, so why was a notice of violation issued? Interestingly, nowhere in the summons and complaint is the address of the plaintiff listed. On the summons the plaintiff's address is "care of" his attorney's office. When this is taken into account with a letter to defendant from plaintiff's prior attorney claiming lost "rent" of $1,300.00 a month along with other charges incurred at the premises, one must question what was the plaintiff's true intent concerning the premises. If his claim is for rent lost at the premises, then he cannot collect it as a matter of law. A landlord cannot collect rent from a premises being rented in violation of a certificate of occupancy (MDL 302). Although this statute applies only to multiple dwellings, this Court has consistently held it applies to all illegal occupancies. The Court will not permit a landlord to benefit financially from the rental of a premises being occupied in violation of [*10]the law. The law will not enforce an illegal contract.
Plaintiff is claiming that the assertion that he intended to rent the premises is not correct. He is claiming that he intended to rent his current home and occupy 40 Union Court. This claim is questionable. Plaintiff's address in the contract of purchase is listed as 40 Union Court; the premises to be purchased. There is no proof of ownership of any other premises, nor is there an explanation of why he has not revealed any other address, although the checks he submitted as an exhibit have 10 Union Court as his address. This is possibly an adjacent property making the defendant's contention that the plaintiff knew he was closing without a certificate of occupancy and knowingly waived any objection to that fact more believable. This, of course, would not relieve the defendant of its malpractice and its failure to take any steps to reduce this understanding and waiver to a writing, but it might be relevant to the issue of damages if it can be established that the plaintiff was aware of the risk.
If plaintiff is claiming that he lost income from the premises he currently lives in and could not rent because he could not move out, he is going to have to prove ownership, a valid certificate of occupancy, either a lease to a tenant which he could not honor, or expert testimony as to the fair market rental value of the premises.
It should also be pointed out that an argument can be made that the mortgagee for 40 Union Court, ABN AMRO Mortgage Group, Inc., should be precluded from collecting principal and interest payments during the period there was no certificate of occupancy. A mortgagee who loans money knowing that the mortgagor intends to occupy the premises as a primary residence cannot close the loan knowing full well that legal occupancy is prohibited. The lender would know the borrower's intent from the application submitted and would have the borrower execute a document at closing indicating that the borrower intended to occupy the premises as his primary residence within thirty days of closing, and if that does not occur the lender can call the loan. Such a form, if not a federally required one, is standard for almost all lenders. The lender should have known the occupancy status from the title search where a municipal search in this regard would have been provided for "information only." If this lender is "out of state" and not familiar with local practices, it should either hire local counsel to protect its position or not lend money in New York City. The lender cannot plead ignorance and place a borrower in a situation where they owe the money and cannot live in the premises. If the lender wants to close, ignoring the law in regard to occupancy status, then it should be precluded from collecting the mortgage payments due it during that period of time.
The State of New York has found it necessary to license lenders including mortgage bankers (Banking Law Article 12-D). Banking Law 589 sets forth the legislative purpose for licensing, It states: The activities of lenders and their agents offering financing for residential
real property have a direct and immediate impact upon the housing
industry, the neighborhoods and communities of this state, its homeowners [*11]
and potential homeowners. The legislature finds that it is essential for the
protection of the citizens of this state and the stability of the state's
economy that reasonable standards governing the business practices of
mortgage lenders and their agents be imposed. The legislature further
finds that the obligations of lenders and their agents to consumers in
connection with making, soliciting, processing, placing or negotiating of
mortgage loans are such as to warrant the uniform regulation of
the residential mortgage lending process, including the application, solicitation,
making and servicing of mortgage loans. Consistent with the purposes of
promoting mortgage lending for the benefit of our citizens by responsible
providers of mortgage loans and services and avoiding requirements is
consistent with legitimate and responsible business practices in the mortgage
lending industry, the purpose of this article is to protect New York
consumers seeking a residential mortgage loan and to ensure that the
mortgage lending industry is operating fairly, honestly and efficiently,
free from deceptive and anti-competitive practices.
In light of this legislative purpose and the fact that Banking Law 595(1)(a) permits the superintendent of banking to revoke a license if a licensee violates "any other law, rule or regulation of this state or the federal government" it can only be concluded that lenders in the State of New York have the obligation to insure that a final certificate of occupancy is delivered on any building purchases they finance. The New York State Constitution Article IX grants to local governments certain powers including the power to regulate the use of property within that local subdivision. The Municipal Home Rule Law (10)(1) permits local governments, like the City of New York, to enact local laws concerning property. Since these local laws are authorized by the state constitution and statute, these local regulations become a "law, rule or regulation of the state" to which the licensed lender must adhere. The failure of a lender to insure that a mortgagor borrowing money so as to purchase a residential property for human occupancy, becomes an act that may lead the superintendent of banking to revoke that lender's license. Likewise, once the lender is aware that there is an escrow being held until a final certificate of occupancy is issued by the municipality, the lender has an obligation to insure that the final certificate of occupancy is issued or, in the City of New York, that the temporary certificate of occupancy is extended until the final certificate of occupancy is issued. As a licensee, a lender cannot advance the money for purchase and then stick its head in the sand and ignore the strong public purpose of the State of New York to provide safe housing and consumer protection.
There is said to be a "golden rule" in real estate; that is, "he who has the gold, makes the rules." As the mortgagee is the entity that is providing the most "gold" when it comes to the purchase of residential, or for that matter, any improved real estate, it has the ability, if not the best opportunity to insure that no closing takes place in the absence of a final certificate of occupancy or if a temporary certificate of occupancy is produced, that sufficient money is withheld at the closing and placed in escrow to insure that there is a fund available to remedy any violations that would prevent the issuance of the certificate of occupancy. [*12]
It must be concluded that lenders issuing mortgage loans in New York have a legal obligation not to close the loan unless there is a final certificate of occupancy or, if a temporary certificate of occupancy is in effect, that enough money is held in escrow to insure the outstanding work can be completed and paid for within the time set forth in the temporary certificate of occupancy.
If the plaintiff intends to seek damages, the plaintiff must deal with the issues set forth above.
E. What Is The Function Of A Temporary Certificate Of Occupancy?
In 1985 the New York City Council amended the NYCAC to add section 27-218 which provides for the issuing of a "temporary certificate of occupancy." Initially, it was enacted to end the crisis that had occurred in the construction of residential housing because of the Department of Buildings' inability to issue timely final certificates of occupancy. In many cases it was argued that the premises had been constructed in accordance with all regulations and was safe for human occupancy. The only items that remained to be completed might be things like sodding of the lawn or pavement of the street to the curb in front of the house. It was felt that since such items were more "cosmetic" than safety related and completion of them might be delayed because of adverse weather conditions, especially in the winter, it was not fair to postpone the closing owing to items beyond the control of the parties. The temporary certificate of occupancy was advocated, developed and subsequently enacted to permit occupancy when only "cosmetic" items remained to be completed. It was predicated on the belief that the builder would act in good faith and a timely manner to secure the final certificate of occupancy.
What was anticipated to be a sporadically used procedure has become the rule rather than the exception. In new construction cases, real estate attorneys and lenders in Richmond County can probably count on their hand the number of times they have closed title with a final certificate of occupancy. In fact, it is more likely that you will see a yeti crossing the West Shore Expressway wearing a Mets Hat than a final certificate of occupancy at a closing. This has resulted in an aggregate of "agita" for attorneys who represent these parties, primarily purchasers, at the closing of title. The standard real estate contract calls for the sum of $2,500.00 to be held in escrow at closing to insure the seller produce a final certificate of occupancy. On Staten Island this is the "accepted" amount to be held; it often is totally unrelated to the actual cost of completing the items the Buildings Department lists as open on the temporary certificate of occupancy and is almost never negotiated by the purchaser or lender. As a result of this practice hundreds of attorneys are holding millions of dollars in escrow accounts awaiting the seller or someone else to produce a final certificate of occupancy.
One must question whether or not such an amount ($2,500.00) is enough to compel a seller to complete the work, especially when fully attached houses in 2004 are selling for close to $300,000.00. This escrow number is so artificially low that on many occasions the seller never completes the work, forfeits the $2,500.00 and leaves the homeowner the task of obtaining the certificate of occupancy. This Court has even had cases when the purchaser having obtained the final certificate of occupancy seeks to have the escrow released to him or her and the seller opposes [*13]that because the escrow agreement does not clarify that the purchaser is entitled to the money if the seller fails to obtain the document. Usually, the seller completes the house or the housing development; does not deliver the final certificates of occupancy and moves on to another project. Since the seller is probably a corporation that ceases to exist after the last home is sold, buyers are often left to fend for themselves in obtaining the final certificate of occupancy, and may find themselves without a real legal remedy. This apparently is the situation in this case. The buyer might even face a vacate order from the Buildings Department because the temporary certificate of occupancy has not been issued. In order to correct the situation the buyer will have to expend time and money: money to complete the work, money for architects, money for lawyers, money for expediters to process the papers through the appropriate City agencies, etc.
There are several remedies to this situation. First, if there is going to be a system of temporary certificates of occupancy, then require an amount be held in escrow that will compel the seller to obtain the document, such as ten percent of the sale price, or a number that represents the profit margin on the sale. The amount being held has to be enough to force the seller to live up to its contractual obligation. Second, do not permit corporations to receive building permits. Have the permits issued to individuals and preclude that individual from obtaining any new permits until all of the houses in previously approved projects have received a final certificate of occupancy. The actual construction could be done by a corporation so that the individuals would not have unlimited personal liability.
Another problem with this system is the amount of litigation that is produced. These actions can be a purchaser suing the seller for the costs incurred in obtaining the final certificate of occupancy, in which the attorney holding the money is named as a stakeholder; or they can be an attorney bringing a stakeholder action asking the Court to decide who should be paid the escrow; or it can be the seller seeking to have the funds released having produced the final certificate of occupancy albeit a substantial time after the date set forth in the escrow agreement, the release of which is opposed by the purchaser. All of this litigation would be unnecessary if the City of New York would do its job and protect its residents with a rational policy.
There is an additional reason for abandoning this system of temporary certificates of occupancy; that is, that the language of the statute does not create a standard that is readily determinable by reading the statute and provides no guidance from which it can be determined whether or not the commissioner has abused his or her discretion.
NYCAC 27-222 "Issuance of certificates of occupancy" has been part of the NYCAC since 1968. It provides: (a) All applications for certificates of occupancy and accompanying
papers shall be examined promptly after their submission. If the building
is entitled to a certificate of occupancy applied for, the application shall be
approved and the certificate of occupancy issued by the commissioner
within ten calendar days after submission of the application. Otherwise, the
application shall be rejected and written notice of rejection, stating the [*14]
grounds of rejection, shall be given to the applicant within ten calendar
days of the submission of the application....
NYCAC 27-214 "New buildings; sidewalk requirements" provides:
no building hereafter constructed shall be occupied or used, in whole or
in part, unless and until a certificate of occupancy shall have been issued
certifying that such building conforms substantially to the approved
plans and the provisions of this code and other applicable laws and
regulations.
NYCAC 27-218 "Temporary occupancy" states::
The commissioner may, upon request, issue a temporary certificate of
occupancy for a part or parts of a building before the entire work covered
by the permit shall have been completed, provided that such part or
parts may be occupied safely prior to completion of the building and will
not endanger public safety, health, or welfare,...
A comparison of these sections leads to the conclusion that a standard is in existence for the issuance of a final certificate of occupancy, that is, substantial conformity to the approved plans and the provisions of the code, law and regulations (NYCAC 27214 (a)) whereas there is no such requirement for a temporary certificate of occupancy since one can be issued if the commissioner determines that occupancy will not be unsafe or endanger the public. The statute provides no standard for the commissioner to follow and no minimum requirements are set forth to govern his determination. The wording of the statute means that the commissioner has the sole discretion as to whether or not a final certificate can be issued. The commissioner alone determines what is meant by a safe building. There is no requirement to certify compliance with the plans or the law before requesting a temporary certificate of occupancy equivalent to those that exist for a final one. There is no definition of what constitutes a "safe" building. This difference in requirements is also set forth in NYCAC 26-645(d) and (f). It should also be pointed out that the term "conform substantially to the approved plans" used for issuance of a final certificate of occupancy is nebulous at best. Since Judge Cardozo created the doctrine of "substantial performance" in Jacobs & Youngs v Kent, 230 NY 239, the real estate construction industry has never been the same. It too is problematical, but it is more guidance than exists for issuance of temporary certificates of occupancy.
All of these issues lead to the conclusion that the continued practice of issuance of temporary certificates of occupancy must be ended.
CONCLUSION:
The plaintiff has established that it is entitled to a judgment in its favor on the issue of liability. Defendant has committed legal malpractice in closing without the benefit of either a temporary or final certificate of occupancy. [*15]
Judgment for plaintiff on the issue of liability. Upon the payment of the appropriate fees and the filing of the necessary papers, the matter will go forward on the issue of damages only.
Pursuant to the grant of jurisdiction in regard to the enforcement of provisions of the multiple dwelling law, housing maintenance code, building code and the health code given to the Civil Court in the Civil Court Act 110 (c) and 203(k)through 203(o), the Department of Buildings, the Building Industry Association of NYC, Inc., and the Richmond County Bar Association will appear before this Court in Part 56 on Monday November 29, 2004 at 9:30 AM at the Courthouse, 927 Castleton Avenue, Staten Island, New York and show cause why an order should not be issued permanently enjoining the Department of Buildings from issuing temporary certificates of occupancy; directing the Department of Buildings to hire enough personnel to issue only permanent certificates of occupancy for new construction; requiring that a system be put into place which prohibits the issuance of new building permits to any individual or entity which has not obtained final certificates of occupancy on prior permits.
The foregoing constitutes the decision and order of this Court.
Court attorney to notify all parties and added parties.
Dated: November 5, 2004
Staten Island, NY PHILIP S. STRANIERE
Judge, CIVIL COURT
ASN by on
Attorney for Plaintiff:
Munzer & Saunders, LLP
609 Fifth Avenue, Suite 600
New York, NY 10017
(212) 755-0008
Attorney for Defendant:
Joseph E. Macy, Esq.
Berkman, Henoch, Peterson & Peddy, P.C.
100 Garden City Plaza
Garden City, NY 11501
(516) 222-6200
Contact Person:Helene Donlan Sacco, Esq.
Principal Court Attorney
(718) 390-5425
Hsacco@courts.state.ny.us
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