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Article - Pitfalls Of Closing Without Certificates Of Occupancy
Pitfalls Of Closing Without Certificates Of Occupancy
Recent decisions alert mortgage lenders, purchasers, sellers and their counsel to the pitfalls of closing on a real estate transaction in New York without having obtained a final certificate of occupancy. In each instance, the courts addressed issues raised by New York's Multiple Dwelling Law section ("MDL") 301 which requires owners of property used for multiple dwelling units to obtain a residential certificate of occupancy, and Section 27-214 of the New York City Administrative Code which provides that, unless a temporary certificate of occupancy is issued, no building may be occupied until a final certificate of occupancy is issued certifying that such building conforms substantially to the approved plans and applicable laws and regulations. The Buildings Department may issue, upon request, a temporary certificate of occupancy, usually for a period of 90 days, renewable for additional 90 day periods, if the building may be occupied safely prior to completion without endangering public safety, health or welfare.
In DiVita v. Decker & Decker Partnership (Civil Court, New York County, Small Claims Division) (New York Law Journal, December 22, 2004, p. 27, col. 1), the Court characterized closing with a temporary certificate of occupancy as a "trap for the unwary," warning that a lender who permits a borrower to occupy premises without having obtained a final certificate of occupancy, or requiring that a temporary certificate of occupancy be extended until the final certificate is issued, may be sanctioned for its conduct. The Court stressed that where a closing occurs with a temporary certificate of occupancy in effect, sufficient money should be held in escrow to insure that the work necessary to obtain the final certificate of occupancy is completed in a timely manner. In the DiVita case, since the lender was a party to the escrow agreement, it had an affirmative obligation to obtain the certificate of occupancy.
The DiVita Court also warned that both parties and their counsel may be subject to possible civil and criminal penalties for failing to insure that the final certificate of occupancy is obtained prior to the expiration of the temporary certificate of occupancy. The Court, noting that the temporary certificate of occupancy in that case listed "final electrical" as an open matter, suggesting that the property subject to the mortgage loan may have been unsafe, questioned how the loan had been permitted to close and recommended that the Buildings Department investigate the matter and impose appropriate punishment.
In Howard v. Berkman, Henoch, Peterson & Peddy P.C., (Civil Court, Richmond County) (New York Law Journal, November 17, 2004, p. 20, col. 1), the Court held that it was a violation of an attorney's professional obligations to allow his client to purchase premises for the purpose of occupying same without the seller delivering a final certificate of occupancy, or, at minimum, a temporary certificate of occupancy with funds escrowed to insure completion of outstanding items. Conversely, the Court noted it would not be malpractice to allow the closing to proceed without any certificate of occupancy if the premises were to be renovated or demolished. Recognizing that instances may arise where clients insist on closing without any certificate of occupancy, the Court advised attorneys t (1) secure a detailed written release from their client, which sets forth the law, the implications of closing without such a certificate, and states that the closing is taking place against the advice of counsel, and (2) advise the client to consult with another attorney.
In Howard, the Court further warned that an argument could be made that a mortgagee who loans money knowing that the mortgagor intends to use the premises as the primary residence should not be permitted to collect "principal and interest payments during the period where there was no certificate of occupancy." The Court concluded that a "lender cannot plead ignorance and place a borrower in a situation where they owe the money and cannot live in the premises", stressing that lenders have a "legal obligation" not to close without a final certificate of occupancy, or a temporary certificate of occupancy with sufficient funds escrowed to complete outstanding items.
Closing without a certificate of occupancy may also impose financial risks on the mortgagor and mortgagee who anticipate that rent will cover debt service. In Mazal Group LLC. v. Anthony Clay & Webmerge, (New York City Housing Court, New York County) (New York Law Journal, November 24, 2004, p. 22, col. 3), the Court, citing MDL Section 302, held that the landlord was not entitled to recover unpaid rent for the period during which there was no temporary or final certificate of occupancy in effect. If the lender is willing to permit the closing to occur with a temporary certificate of occupancy, the parties could attempt to minimize potential exposure by: (1) satisfying themselves that the open conditions in the temporary certificate do not affect the safety of the premises for occupancy, (2) escrowing sufficient funds to satisfy the open conditions in the temporary certificate of occupancy, (3) monitoring the expiration of the temporary certificate of occupancy and requiring the mortgagor in the mortgage loan documents to obtain the necessary extension until the final certificate is obtained, and (4) requiring the mortgagor in the mortgage loan documents to obtain, or cause to be obtained, the final certificate of occupancy prior to expiration of the temporary certificate of occupancy. If the mortgagor fails to do so, the agreement could permit the lender to use the escrowed funds to obtain a final certificate.
As seen in the Mann Report, May 2005.