Real Estate Insights

The April 13, 2017, decision of the appellate division in Mill Pointe Condominium Association v. Rizvi, sought to address a condominium association’s efforts to obtain rental income, during the pendency of a foreclosure lawsuit involving an empty condominium unit. By way of background, the association had obtained a judgment against the unit owner who had failed to pay both his residential loan mortgage payments and common expense assessments, and then filed a motion before the Law Division seeking the appointment of a rent receiver, during the pendency of the mortgage lender’s foreclosure lawsuit. The association’s proposed remedy would apply the rent payments to the outstanding judgment in its favor leading up to the foreclosure. The Law Division judge denied the association’s motion, which was opposed by the mortgage lender on the basis that the commencement of a leasehold with a third-party tenant would interfere with the completion of the foreclosure suit, and that it would force the lender to become a landlord. Unfortunately, the Appellate Division was unable to rule on this issue, which became moot because the foreclosure judgment was granted before the court could address the issues. It’s important to note, however, that the court found that the association had “raised interesting and novel legal issues that could have widespread importance.” The court went so far as to recommend that future appellants file a motion to accelerate the appeal, advising the court of the time factors involved.

While the guidance from the Appellate Division in Mill Pointe Condominium Association is certainly no guaranty that another appellate panel will favorably view an association’s request for the appointment of a rent receiver in order to obtain rental income from an otherwise vacant condominium unit, it certainly presents an indication that the court is interested in investigating the possibility of a remedy for similarly situated associations facing lengthy foreclosures.

There are positive and negative considerations involved in the appointment of a rent receiver, even without the potential for contested litigation with a mortgage lender, as was the case in Mill Pointe. Generally speaking, the appointment of a rent receiver by a condominium association is more typical in the context of a foreclosure action commenced on the association’s behalf. On the positive side, rent receivers are able to collect income and apply it to monthly assessments, fees, and arrears owed on a condominium unit as set forth in the order of appointment, and they have a responsibility to avoid waste and disrepair. On the negative side, rent receivers are court-appointed professionals who are answerable only to the court, and do not take direction from the association, once appointed. Furthermore, a rent receiver is only permitted to remain in place for a limited amount of time, from the date of appointment, to the conclusion of the foreclosure case. In order to gain the most benefit, smart associations will consider moving for the appointment of a rent receiver in conjunction with initiating foreclosure proceedings.

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The New Jersey Appellate Division’s decision in Matejek v. Watson, issued on March 3, 2017, compelled the owners of condominium units to share in the cost of environmental investigation under the New Jersey Spill Compensation and Control Act (the Spill Act), without proving liability. This remedy, not previously available to private parties, will likely give rise to an increase in Spill Act litigation due to this advantage over the Comprehensive Environmental Response, Cleanup and Liability Act (CERCLA), which is the federal counterpoint to the Spill Act.

The environmental contamination in Matejek v. Watson dates from 2006, when oil was discovered on the surface of a tributary to Royce Brook in Hillsborough. In response, New Jersey Department of Environmental Protection (NJDEP) removed underground storage tanks from each of five adjoining condominium units that were near the location of the tributary. Other than visiting the site a few months after the removal of the underground tanks in order to confirm the absence of oil in the tributary, the NJDEP took no further action and its file remained open, leaving, as the trial judge later found, a cloud on the title to all five units, given that the presence of the oil would have to be disclosed if any of the properties were to be sold.

Seven years after the removal of the tanks, the owners of one of the impacted condominium units sued the owners of the other four units under the Spill Act, in order to require the owners of the impacted units to participate in and equally share in an investigation, and if necessary, remediation of the property. The Association was joined to the lawsuit in order to compel access to any portions of the common elements required for investigation, testing or remediation.

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The Appellate Division has recently issued a decision clarifying the applicability of the time of application rule. Effective May 5, 2011 the New Jersey Legislature enacted a change to the Municipal Land Use Law (“MLUL”) that provided the ordinances that would be applied to a development application are those that were in existence at the time a development application is filed. This was a significant change from the prior law under which the development application was subject to any changes in the applicable ordinances that was enacted up until the time when the local board made a decision with respect to the application. Known as the “time of decision” rule, this principle had great potential to work hardship and injustice upon an applicant. Essentially, an applicant could expend significant time and money pursuing a development application, including engineering, planning and legal expenses and numerous appearances before the reviewing board, only to have the rules of the game changed at the last instant.

In order to provide some predictability to applicants and ensure that the application review process was fair, the Legislature provided that the ordinances in effect “on the date of submission of an application for development” govern its review. N.J.S.A. 40:55D-10.5. Naturally, debate emerged about what the constitutes the “submission of an application.” This issue was resolved by the Appellate Division on Dunbar Homes, Inc. v. The Zoning Board of Adjustment of the Twp. of Franklin, 2017 N.J. Super. LEXIS 18.

In Dunbar the applicant had submitted an application to develop a 6.93 acre property with 55 garden apartment units. The applicant submitted its application one day before the existing ordinance was amended to delete garden apartments as a conditionally permitted use in the applicable zoning district. The zoning officer determined that the application submitted was deficient in that it did not contain several documents required to be submitted as a part of the application, including a copy of a submittal letter to the Department of Transportation. As a result it was determined that the application could not proceed as a d(3) variance application for a conditional use variance, but had to instead proceed as an application for a d(1) variance for a non-permitted use. The Board’s decision was founded on the premise that to obtain the protection of the time of application rule the application submitted must be a “complete” application under the MLUL.

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A New Jersey Supreme Court decision in 2015 settled the uncertainty regarding whether the statute of limitations was a valid defense to liability under the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11, et seq. (the “Spill Act”). The Court in Morristown Assoc. v. Grant Oil Co., 220 N.J. 360 (2015) concluded that the statute of limitations did not act to bar such claims. This was based upon the fact that the statute of limitations was not one of three permissible enumerated defenses to Spill Act liability set forth in the Act itself. N.J.S.A. 58:10-23.11g(d). The Spill Act specifies that the only permissible defenses to liability are: 1) an act of God, 2) war, and 3) sabotage. Id.

This Supreme Court decision gave parties seeking contribution for cleanup costs under the Spill Act a powerful weapon in that they could bring their contribution claim against other responsible parties at any time, even many years later. A recent trial court decision, however, provides hope that despite the limiting and strict language of the Spill Act, various equitable defenses may still be applied to defeat a claim for contribution under the Spill Act under certain circumstances. 22 Temple Ave., Inc. v. Audino, Inc., BER-L-9337-14, 2016 N.J. Super. UnPub. LEXIS 2226 (Law Div. Oct. 5, 2016).

In 22 Temple, the trial court ruled that the plaintiff’s Spill Act contribution claim against the defendant was barred by the doctrine of laches, notwithstanding the fact that laches is not one of the three permissible defenses enumerated in the Spill Act. Id. The doctrine of laches is an equitable defense that is a creation of the common law used to bar claims when the claimant has unreasonably delayed asserting its claim and that delay has prejudiced the defendant, most commonly by making it difficult or impossible for the defendant to mount a fair defense through the loss of evidence and/or witnesses.

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Why in the aftermath of a chemical accident does the government seek enormous cash penalties for accident prevention, when instead they could do more to reap the benefits of improving the environment and the communities surrounding an incident, and at the same time the government could be more proactive in avoiding future environmental problems?

The EPA has provided the ideal vehicle to address the avoidance of environmental harm in the guise of Supplemental Environmental Projects (SEPs).  A SEP is an environmentally beneficial project or activity that is not required by law, but that a defendant agrees to undertake as part of the settlement of an enforcement action.  A violator may pay a reduced cash penalty amount, but rather than simply writing a big check, they invest the would–be penalty amount in the affected community.  The SEP shifts the focus toward a model where the offender works to right the harm caused by their actions.   Environmental violators are encouraged to consider SEPs in communities where there are environmental justice (EJ) concerns.  EJ is defined as the equitable distribution of environmental risks and benefits.  EPA has always been keen to address harms done to communities disproportionally burdened by exposure to pollutants.

After a chemical accident, it makes logical sense to seek to repair the harm done to the community and to obtain measurable benefits ― by seeking to facilitate quicker and more efficient responses associated with emergency events; by seeking to provide technical support to the impacted community; by developing plans to respond to releases associated with emergency events and by working to enhance local coordination with emergency responders.  If using a SEP can be viewed as a vehicle designed to make an aggrieved community whole, and if a particular SEP can enable a community to feel better equipped to handle an impending disaster, then why shouldn’t a SEP be the premier mitigation tool in the enforcement arsenal, and the preferred tool to a large cash penalty.

But Can Also Be Used As An Effective Tool To Enhance The Desirability And Market Value Of Other Developments

Many people believe that restrictive covenants are antiquities not to be seen in their lifetime, however, a recent unpublished Appellate Division case, Welch v. Chai Ctr. for Living Judaism, Inc., Nos. A-4088-13T1, A-4163-13T1, 2016 N.J. Super. Unpub. LEXIS 1906 (App. Div. Aug. 15, 2016), should serve as a reminder of their effects.

Restrictive covenants are restrictions contained in a deed which run with the land and either restrict the use of the land or prohibit specified uses. Thus, restrictive covenants can have critical impacts on proposed development of the land. On one hand, they can thwart proposed development, as in the Welch case, but alternatively, they can be used to enhance the desirability and market value of some developments, particularly residential developments.

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November 1 is an important date for non-profit corporations and associations seeking exemption from real property taxation for their owned real estate.  An application for exemption in the first instance with respect to a particular property is made by filing an Initial Statement (on the State prescribed form) with the municipal Tax Assessor on or before November 1 of the pretax year.  Under New Jersey law, tax exemption is based on the actual use and ownership of the property on October 1 of the pretax year.  In order to be eligible for tax exemption in 2017, property must be owned and actually used by an organization entitled to exemption for an exempt purpose on October 1, 2016.  The deadline is a real one; the Assessor has no obligation to honor an Initial Statement filed after November 1.

Once exemption is granted pursuant to the filing of an Initial Statement, the owner must update the filing on or before November 1 of the third year after filing the Initial Statement, and every three (3) years thereafter, by filing a Further Statement (also on a State prescribed form).  Again, the November 1 deadline is important and an owner can lose its exemption by failing to meet the filing deadline.

Once an Initial Statement is filed and approved, most Tax Assessors routinely send owners of exempt property a request for a Further Statement every three (3) years.  However, failure to receive notice from the Assessor does not excuse the owner from filing.  Accordingly, owners of exempt property should take care to diary and keep track of this important filing deadline.

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Are you a non-profit or other community oriented organization looking to expand or relocate your facilities? The law may give you a distinct advantage in obtaining the necessary zoning approvals. The dynamics of growth, evolving missions and changing communities can lead to a need for expansion to meet current demand for services; in some cases the organization may need to relocate facilities where there is insufficient room to expand, or when changes in communities make relocation appropriate to continue the mission of the organization.

Non-profit agencies and other community based organizations often have facilities which have existed for long periods of time, predating current zoning requirements. Existing locations often no longer permit the organization’s use, rendering the organization a “prior non-conforming use” under the law. Even if the organization seeks to relocate its facilities, there are often few locations in any town where such uses are permitted, making the availability of such locations limited and expensive.

Whenever a non-conforming use seeks to expand, or where an owner seeks to construct a use not permitted in a zone, a use variance is required under N.J.S.A. 40:55D-70(d). Such variances require a five vote super-majority of the Board of Adjustment to be approved. The applicant must affirmatively prove “special reasons” justifying grant of the variance, the so-called “positive criteria” under the statute.  In addition, the applicant must also prove the “negative criteria” under the statute by showing that the variance can be granted without substantial detriment to the zone plan, zoning ordinance or public good.

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Downzoning of lands at the municipal level as a way of limiting development and preserving open space and agricultural land has been taking place in New Jersey for years. Downzoning is the practice of increasing the required lot size for the development of a single family home or, in other words, reducing the density of development permitted under the existing zoning ordinances. These zoning ordinances are typically “hot button” issues which often spawn litigation regarding their validity under the Municipal Land Use Law (N.J.S.A. 40:55D-1 et seq.). Most downzoning litigation does not involve a challenge to the validity of the ordinance as a whole (although that certainly does occur), but in most instances involve a challenge to the validity of the ordinance as applied to one or more specific parcels of property. While a zoning ordinance may be valid in general terms that does not preclude a judicial determination that the ordinance in question is not valid as applied to a specific and distinct parcel of property.

New Jersey law on this issue began to coalesce with the case of Bow & Arrow Manor v. Town of West Orange, 63 N.J. 335 (1973) in which the New Jersey Supreme Court found that although zoning ordinance changes regarding the uses permitted in various zones were valid in general, they were nevertheless invalid as applied to specific properties that were the subject of the lawsuit. Fourteen years later, in Zilinsky v. Zoning Bd. of Adj. of Verona, 105 N.J. 363 (1987), the New Jersey Supreme Court sustained the validity of an ordinance imposing off-street parking requirements in a residential zone and, more particularly, the requirement that one of the two required off street parking spaces had to be provided in a garage. While these two cases did not directly deal with downzoning issues, the legal principles developed in these cases regarding whether or not a zoning ordinance provision was sustainable formed the foundation for the later review of zoning ordinances involving downzoning.

In Riggs v. Long Beach Township, 109 N.J. 601 (1988) the New Jersey Supreme Court invalidated a zoning ordinance that changed the permitted density from 1 unit per five thousand square feet to 1 unit per ten thousand square feet. The court reasoned that the zoning ordinance was enacted for the purpose of depressing the value of the plaintiff’s land so that the municipality could acquire it cheaply. In doing so, the court developed a four part test for analyzing the validity of a zoning ordinance that is challenged:

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You have a commitment from your Lender; certainly you should be able to close in one week, Right? Wrong. When closing a loan, there are many areas that can derail you from a timely closing. One area of particular concern and which often delays closing, is with respect to the Lender’s insurance requirements. To reduce discrepancies or issues leading up to closing, and to ensure that closing occurs as expeditiously as possible, it is important to understand the Lender’s insurance expectations and requirements at the outset; specifically, as set forth in the Lender’s commitment letter.

For commercial mortgage transactions, Lenders typically require a) property insurance on a “special form of loss” policy, previously referred to as an “all risk” policy, and b) commercial general liability insurance. For the property insurance, the lender will require the property to be insured at least in the amount of the loan and it will require a standard mortgage clause that names it as the mortgagee. Prudent lenders also typically require that the policy must be endorsed as “lender’s loss payable,” which gives the lender the right to receive the loss payment on a claim even if the insured has failed to comply with certain terms of the policy or because the loss was occasioned by the insured’s wrongful acts. The liability insurance policy should name the Lender as an additional insured and should waive all rights of subrogation against the mortgage lender. Often times, an insurance broker will claim that the lender has no insurable interest, and therefore cannot be added as an additional insured on the commercial general liability policy. The lender is concerned that if its borrower suffers an uninsured loss that is beyond its ability to absorb, the borrower’s continued viability is at stake. Furthermore, even though the likelihood of a claim against a mortgagee for injuries incurred at the mortgaged property is small, the lender wants to reduce its chance that its own insurance will be required to pay a claim that would be covered by the borrower’s required insurance. As an additional insured, the lender is entitled to the benefits of the policy but is not charged with the obligations of the named insured, moreover, the insurer cannot exercise subrogation rights against its own insured.

To prove you have the correct insurance in place, the Lender typically requires specific types of insurance proofs to be produced and approved prior to closing. In the past, certificates of insurance were provided to Lenders in the form of an ACORD 27 (for residential property) or ACORD 28 (for commercial property) as evidence of property insurance, and an ACORD 25, as evidence of commercial general liability insurance. In 2006, the ACORDs were revised to indicate that they do not grant any rights in coverage to the policy holder or to the mortgagee, additional insured, certificate holder, lender, etc. Essentially, these certificates are often prepared by insurance brokers as a summary of what coverage is purported to exist, but they do not prove that there is coverage under a particular policy and they do not grant coverage. This essentially makes these certificates or evidences of insurance ineffective in the risk management arena. They are merely for informational purposes only and their validity and accuracy cannot be verified without the underlying policy documents. As a result, many lenders now require, in addition to the ACORD forms, that as part of the normal due diligence process, a copy of the policy be produced and reviewed by the lender and the lender’s insurance advisor. In order to avoid delays, the ACORD forms and policy documents should be provided to the lender well in advance of closing so that the lender has sufficient time to process and review the insurance.

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