CONSTRUCTION & REAL ESTATE BLOG

What Constitutes Constructive Eviction For A Commercial Tenant?

When has a landlord materially deprived its commercial tenant of an expected and intended use of a premises, as required for constructive eviction?  The Supreme Court of New York, Appellate Division for the First Department recently addressed this question.  Pacific Coast Silks, LLC v. 247 Realty, LLC, 76 A.D.3d 167 (N.Y. App. Div. 2010).

In that case, a commercial tenant could not use the premises because the elevator was not functioning  for a seven week period. The court recognized that under certain circumstances, an elevator outage for that long could result in a constructive eviction.

The court set forth the elements necessary to establish constructive eviction as follows:

A tenant need not prove physical expulsion, but must prove wrongful acts by the landlord that substantially and materially deprive the tenant of the beneficial use and benefit of the premises. [citation omitted]

Id. at 172

In its holding in favor of the landlord and against the tenant, the court noted that no evidence was submitted concerning the deleterious effect it had on the tenant. The mere fact that the elevator was not functional was inadequate; there had to also be a showing that it impaired the tenant’s use of the building in a manner that was sufficient to establish a constructive eviction. In other words, that the tenant was unable to access the premises as it needed to during that seven week period. Id. at 173.

Comments/Questions: gdn@gdnlaw.com

2012 Nissenbaum Law Group, LLC

What Is The Statute Of Limitations For Undisclosed Defects In A Real Estate Sale?

The common law doctrine of nullum tempus occurrit regi roughly translates to “no time run against the king.” In the past, that doctrine was enforced when courts determined whether government agencies were barred by the same statutes of limitations as private citizens when bringing claims for undisclosed defects in a real estate sale. However, this principle has since been limited by the statute of limitations for governmental bodies to bring claims.

N.J.S.A. 2A: 14-1.1 (“the statute”) was enacted in the 1960s to limit the potential liability to which architects and building contractors, among others, were increasingly subject. Rosenberg v. North Bergen, 61 N.J. 190, 194 (1972). Its purpose was to define substantive rights for these professionals, such as the right not to have to have to defend ancient claims or obligations. Cyktor v. Aspen Manor Condominium Ass’n¸359 N.J. Super. 459 (App. Div. 2003). The statute was designed so as to provide “repose” for such professionals from all claims arising out of construction or design defects of a hazardous nature ten years after the work was completed.

In 1995, the court found that the nullum tepus doctrine did not apply to the state or its agencies. State v. Cruz Constr. Co, 279 N.J. Super. 241 (App. Div. 1995). Cruz, as well as other similar decisions, prompted the state legislature to amend the statute in order to clarify that it was meant to apply to claims by both private citizens as well as government agencies.

The statute reads: “No action, whether in contract, tort, or otherwise, to recover damages for any deficiency…shall be brought against any person performing or furnishing the design…to real property, more than 10 years after the performance or furnishing of such services and construction. This limitation shall serve as a bar to all such actions, both governmental and private, but shall not apply to actions against any person in actual possession and control as owner, tenant, or otherwise, of the improvement at the time the defective and unsafe condition of such improvement constitutes the proximate cause of the injury or damage for which the action is brought.” N.J.S.A. 2A: 14-1.1

The amendment also enumerates four governmental actions that the statute does not bar. Id. at 14-1.1(b). The statute does not bar an action by a governmental unit:

1) on a written warranty, guaranty or other contract that expressly provides for a longer effective period;

2) based on willful misconduct, gross negligence or fraudulent concealment in connection with performing or furnishing the design, planning, supervision or construction of an improvement to real property;

3) under any environmental remediation law or pursuant to any contract entered into by a governmental unit in carrying out its responsibilities under any environmental remediation law; or

4) pursuant to any contract for application, enclosure, removal or encapsulation of asbestos.

Id. at 14-1.1(b).

The statute defines “governmental” as “the state, its political subdivisions, any office, department, division, bureau, board, commission or public authority or public agency of the state or one of its political subdivisions, including but not limited to, a county or a municipality and any board, commission, committee, authority or agency which is not a State board, commission, committee, authority or agency.” Id. at 14-1.1(c).

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What Are the Benefits of Drafting An Indemnification Clause In A Construction Contract?

May contractors limit their responsibility for paying another party’s legal fees in situations where that other party’s fault precipitates the cause of action? Recent court decisions suggest that, if the contractor has a narrow indemnification clause in his contract, courts might be less likely to find him liable in situations where the contractor was not at fault.

In a recent case considered by the Appellate Division of the Second Department of the Supreme Court of New York, a plaintiff was allegedly injured when his motorcycle struck a pothole in a Brooklyn street. Sand v. City of New York, 2011 NY Slip Op 3226, 2 (N.Y. App. Div. 2d Dep’t 2011). The plaintiff brought suit against the City of New York. The City had issued a permit to Verizon New York Inc. (“Verizon”) to open the roadway at that location. Accordingly, it commenced a third-party action for indemnification against Verizon. That company then commenced a fourth-party action for contractual indemnification against S. DiFazio and Sons Construction, Inc. (“DiFazio”), the construction company that had performed the work for Verizon under the permit.     

DiFazio claimed that it was not required to pay Verizon’s legal fees or any other costs of defending the action because it was not at fault. However, the Court determined that the agreement did not include any writing that would make DiFazio’s obligation contingent on fault. The Court held that “[p]ursuant to the contract between DiFazio and Verizon, DiFazio agreed to defend and indemnify Verizon for all claims arising out of DiFazio’s ‘actual or alleged acts or omissions.’ The plain and unambiguous terms of the contract do not condition DiFazio’s obligation for attorneys’ fees and costs on a finding of fault.” Id. at 2.    

The Sand Court might have decided differently if the indemnification provision were limited to a more specific and narrow variety of claims. For example, in a recent Second Department case, the Court held the contractor was not liable because the indemnification clause was narrowly tailored. Farrell v. City of New York¸ 2011 NY Slip Op 2839, 1 (N.Y. App. Div. 2d Dep’t 2011). That case stemmed from a 2002 incident on the Gowanus Expressway where a piece of road debris allegedly went through a windshield and struck the plaintiff driver in the face, rendering her unconscious. At the time, defendants Grace Industries, Inc. and Grace Industries Inc./El Sol Contracting & Construction Inc., J.V. (the “defendants”) were performing re-decking and structural steel replacement work on the expressway pursuant to a contract with the State of New York. The plaintiff sought to recover damages for personal injuries. Importantly, the indemnification clause was a narrow one. As the Court observed, “[T]heir contract with the State was limited and did not entirely displace the State’s duty to maintain the roadway.” Id.

The defendants submitted a motion for summary judgment, which was granted by the lower court and affirmed by the Appellate Division.      

The Farrell Court held that a party who enters into a contract to render services may be said to have assumed a duty of care (and thus be potentially liable in tort to third persons) only where:

1) the contracting party, in failing to exercise reasonable care in the performance of its duties, launches a force or instrument of harm,

2) the plaintiff detrimentally relies on the continued performance of the contracting party’s duties, or

3) the contracting party has entirely displaced the other party’s duty to maintain the premises safely.

Church v. Callanan Indus., 99 N.Y.2d 104 (N.Y. 2002).

However, the Farrell Court determined that, although the contract between the defendants and the State included an indemnity clause, it did not entirely remove the State’s duty to maintain a safe roadway. In other words, it had not “entirely displaced the other party’s duty to maintain the premises safely.” Additionally, the defendants demonstrated that they did not cause the debris to be on the roadway; they did not know how long it had been there; and that they did not have a duty to remove non-construction roadway debris. Hence, they would not have to pay the State’s legal fees and costs of defending the suit.

These two decisions demonstrate the consequences of having a broad versus narrow construction contract indemnification clause. The second decision also indicates the benefits a construction company may enjoy by including a narrow indemnification clause in its contracts because it might enable a company to avoid the obligation of paying for another party’s attorneys’ fees in situations where they are not at fault.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Can the Uniform Environmental Covenants Act (UECA) and the New Jersey Brownfield Act co-exist?

In 2003, the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted and approved the Uniform Environmental Covenants Act (UECA). UECA was enacted to develop a system of recording environmental covenants for contaminated real properties known as Brownfields, when such properties are remediated to a level determined by their use but retain contamination in excess of the level that would permit unrestricted use of the property. Uniform Environmental Covenants Act, N.J. L. Revision Common Reports 1, 2 (2009). Since UECA does not supplant the remediation standards or methods imposed by the regulatory agencies, it is therefore, a complement to the already existing regulatory tools. 

Although, New Jersey lacks a statute that provides for an environmental covenant per se, it has significant legislation in place to regulate Brownfields and other contaminated properties. New Jersey adopted the Brownfield Act (Act) in 1993. N.J.S. 58:10B-1. The Act, which was amended in 1997 and 2002 regulates contaminated sites once used for commercial and industrial purposes but currently abandoned or underused in order to ensure protection to the public and the environment while promoting the cost effective cleanups and reuse of such properties. Id. The Act provides for financial incentives, remediation standards, liability protection and cleanup procedures for innocent parties who clean up Brownfields. Thus, the Act provides for the use of notice and institutional controls as part of the remediation of contaminated properties. Uniform Environmental Covenants Act, N.J. L. Revision Common Reports 1, 3 (2009).

The Act provides, in pertinent part:
when real property is either remediated to a nonresidential soil remediation standard, or engineering or institutional controls are used in lieu of remediation to an unrestricted standard, the Department of Environmental Protection (DEP) shall, as a condition of the use of the standard or control, require the recording of a notice indicating that contamination exists on the property at a level that may statutorily restrict certain uses of or aces to the property.

N.J.S. 58:10B-13(a)(2).

The notice is recorded in the same manner as a deed and includes:

     (1) Delineation of the use restrictions; Id.

     (2) Description of all specific engineering or institutional controls; and Id.

     (3) The property owner’s written consent to the notice. Id.

The notice of the existence of contaminants must be provided to the governing body of each municipality in which the property is located. N.J.S. 58:10B-13(a)(3). The Act also requires DEP to post signs at any site where access is restricted or where areas need to be maintained in a prescribed manner. N.J.S. 58:10B-13(a)(4). Therefore, while the Brownfield Act relies on police power for its enforcement, UECA gives this power to the private parties. The ability of parties other than the State to enforce environmental restrictions of Brownfields sites serves as an improvement to the law of New Jersey. Therefore, the New Jersey Law Revisions Commission recommended adding UECA to the New Jersey laws without displacing the Brownfield Act.

With this new change, the deed notice required by the Brownfield Act will serve as a restrictive covenant and allow enforcement by any person who is injured, or if the DEP fails to enforce the restrictions, by any person. Uniform Environmental Covenants Act, N.J. L. Revision Common Reports 1, 5 (2009). Thus, the amendments go further, in that any person whether or not a party to a restrictive covenant is given the power to enforce the restriction. N.J.S. 2A:35A-4. Also, if the DEP is acting on the problem, a private citizen must defer. N.J.S. 2A:35A-4.

Similar to the DEP’s use of independent business contractors to perform investigation and remediation, this is another aspect of New Jersey’s continuing approach to partnering with business to ameliorate environmental contamination.

Comments/Questions: gdn@gdnlaw.com

� 2011 Nissenbaum Law Group, LLC

What is Inverse Condemnation and How is it Applied When Ownership of the Land Changes?

In a recent case, the Appellate Division of the Superior Court of New Jersey addressed the difficult issues surrounding inverse condemnation. Inverse condemnation is when a property owner is deprived of all or substantially all of the beneficial use of the totality of his property by an action of the government. The reason that this is called an inverse condemnation is that it usually involves action by the government that indirectly, but effectively takes the property, rather than a formal proceeding by the government to openly and directly condemn particular property.
The inverse condemnation concept leaves a number of unanswered questions. One of them is whether a purchaser of land that was not inversely condemned can then seek a determination of inverse condemnation based upon the same circumstances as existed when the previous purchaser owned it. This question was addressed in the context of a situation in which the first owner of the property brought a claim for a hardship variance that was denied, and the new owner brought a claim for inverse condemnation regarding the same property. Was the new owner allowed to bring such a claim, or was it too late to do so?
In  Ciaglia v. West Long Branch Zoning Bd. of Adjustment, 2011 WL 5041329 (N.J.Super.,2011) the plaintiff, Caiglia, was the owner of a vacant lot located on De Forrest Plane in West Long Branch. This lot was a part of a larger tract of land prior to its subdivision in 1957. The subdivision placed the lot in a residential district whose zoning ordinance required each lot to have lot frontage of not less than 100 feet and a depth of not less than 150 feet. Id. at 1. Even though the lot did not comply with these zoning requirements, the West Long Branch Planning Board approved the subdivision and certified that the subdivision map conforms with all the laws of the state and municipal ordinances and requirements applicable thereto. Id. At some point in future, the lot was subjected to even more restrictive regulations, which required minimum lot areas of 22,500 square feet and 150 feet of street frontage. Id  
Borst, Caiglias immediate predecessor in title, obtained the title to the lot through a tax foreclosure in 1988. In 1994, Borst applied for a variance for the lot which was denied by the Board of Adjustment (Board). Borst appealed the denial, and in 1997, the Board once again denied Borst’s application. In response to this, Borst asserted a claim for inverse condemnation against the Board. Finally, in 1998, Borst dismissed the Board from the action with prejudice and six months later, the court dismissed the remainder of the action with prejudice. This is when Caiglia entered into a contingent contract to purchase the lot from Borst, and submitted a variance application seeking permission to construct a single-family home on the lot.  The Board denied the application on the grounds that Ciaglia’s proposal was the same or substantially the same as Borst’s application of 1994. Id. at 3. Ciaglia then submitted amended plans which the Board found to be substantially different from the Borst [a]pplication. Id. In spite of the differences, the Board denied the variances and indicated the possibility of approval of a smaller dwelling. Ciaglia responded by filing a complaint that sought damages for wrongful inverse condemnation from the Borough. The trial court rejected the Boards finding that Ciaglia’s hardship was self-created on the grounds that Ciaglia had met his burden of proving undue hardship and had also attempted to contact the neighboring lot owners regarding the purchase of their lots. However, the trial court affirmed the Boards denial of Ciaglia’s amended variance application on the grounds that the Board did not act arbitrarily, capriciously or unreasonably in reaching their decision.
Following this ruling, Ciaglia submitted another applicant based upon the Board’s earlier indication of the possibility of approval of a smaller dwelling. But the Board denied the variance application. In spite of this denial, Ciaglia purchased the land from Borst and then moved for summary judgment on his claim for inverse condemnation. The Borough filed a cross-motion for summary judgment asserting that:
     (1)   Ciaglias hardship was self-imposed; and
     (2)   The action for inverse condemnation was barred by the statute of limitations. Id. at 4.
The motion judge held that the subdivider’s 1957 application for a substandard lot constituted a self-imposed hardship, and this self-imposed hardship was imputed to the successors of the lot, namely Ciaglia. Id Therefore, Ciaglia was disqualified from inverse condemnation relief. Furthermore, the motion judge held that Ciaglia was not barred by the statute of limitations but later amended his opinion and held that the statue of limitations had expired.
Ciaglia appealed and the Appellate Division held that Ciaglia was entitled to relief for his claim of inverse condemnation. In arriving at its decision, the Court first looked at the underlying constitutional principles that prohibit governmental takings of private property without paying just compensation. The Takings Clause of the Fifth Amendment of the United States Constitution bars taking of private property for public use without paying just compensation. U.S. Const. Amend. V. The Takings Clause is made applicable to the States by the Fourteenth Amendment. Ciaglia, 2011 WL 5041329 at 5. The New Jersey Constitution provides protections against governmental takings of private property without just compensation, coextensive with the Takings Clause of the Fifth Amendment of the United States Constitution. Id. The taking can be physical (e.g., deprivation of access, land seizure) or it can be a regulatory taking (when government regulations deprive the property owner of all economically viable use of land). Id. A property owner who is deprived of all or substantially all of the beneficial use of totality of his property can bring a claim for inverse condemnation. Id.
The Court held that due to the fact sensitive nature of the action for inverse condemnation, its adjudication must be individually tailored to the particular circumstances at the time the claim is presented. Id. at 7. The Court stated that at any time, Borst could have submitted a completely different variance application that would not be barred on land use res judicata grounds. Id. Similarly, Ciaglia could have made subsequent submissions that would not be barred by land use res judicata. Therefore, the Court held that Borst’s dismissal of his inverse condemnation claim with prejudice did not bar Ciaglia from bringing an independent cause of action for inverse condemnation.  The Court also held that the availability of hardship variance depends always on how the hardship was created, not on who suffers from it at the time of application for a variance. Id. at 8. Furthermore, the Court disagreed with the Board’s contention that the hardship was self-created because the Planning Board approved the subdivision map with its eyes wide open and in conformity with existing law. It also imposed more restrictions on the lot, thereby zoning the lot into idleness. Id
Therefore, Ciaglia was entitled to a judgment requiring the Borough to commence procedures for acquisition of the lot pursuant to the Eminent Domain Act of 1971.

Comments/Questions: gdn@gdnlaw.com

2011 Nissenbaum Law Group, LLC

New Jersey Bulk Sales Law: Arguably the Most Important Law You’ve Never Heard of

The New Jersey Bulk Sales Law (Bulk Sale Statute) applies to transactions involving the sale, transfer or assignment in bulk of business assets of any part or whole of the person’s business assets, other than in the ordinary course of business. N.J.S.A. 54:50-38. The Bulk Sale Statute makes no exclusions for sales of real estate that is used for commercial purposes (although that definition is exceedingly broad). For example, when realty, even vacant land that is a business asset, is being conveyed other than in the ordinary course of business, in whole or in part, such transaction is subject to the bulk sale statute.

The law provides, in pertinent part, that the purchaser/transferee/assignee (hereinafter referred to as purchaser) must:
“at least 10 days before taking possession of the subject of the sale, transfer or assignment, or paying therefor, notify the director by registered mail, or other such method as the director may prescribe, of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferor or assignor (hereinafter referred to as seller) has represented to, or informed the purchaser, transferee or assignee that the seller, transferor or assignor owes any State tax and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.”

Id.
This notice should be provided on form C-9600.  Along with the notice, the purchaser is also required to submit a signed copy of the contract of sale, transfer or assignment. If the notice is missing any information, the purchaser must provide the required information in accordance with the 10 day time period. If the purchaser takes possession of the subject of the sale, transfer or assignment in less than 10 day time period, the purchaser will be liable for any State tax liability of the seller. It is very important to note that filing of the notice by the seller does not protect the purchaser in any way and therefore, the purchaser will be held responsible for any State tax liability of the seller. In addition to this, the seller must prepare the Asset Transfer Tax Declaration (Form TTD) and give it to the purchaser. This form helps the director in estimating the gain on the transfer of asset(s) and the estimated tax on the gain.

Once the Division of Taxation receives the notice, [w]ithin 10 days of receiving such notice, the director shall notify the purchaser, transferee or assignee by such means as the director may prescribe that a possible claim for State taxes exists and include the amount of the State’s claim. Id. Then, the purchaser or purchaser’s escrow agent must hold the amount claimed in escrow. If the Division fails to notify the purchaser of escrow obligations in a timely manner, the bulk sale law provides that:
“the purchaser, transferee or assignee may transfer over to the seller, transferrer or assignor any sums of money, property or chooses in action, or other consideration to the extent of the amount of the State’s claim. The purchaser, transferee or assignee shall not be subject to the liabilities and remedies imposed under the provisions of the uniform commercial code, Title 12A of the Revised Statutes of New Jersey, and shall not be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor.”

Id.
Once the Division is assured that all tax obligations of the seller have been met, it will issue a letter of clearance to the purchaser or its agent allowing the purchaser to release the balance of the escrow funds to the seller. Thus, upon receipt of the letter of clearance, the purchaser is relieved of any further liability.

An excellent resource on the Bulk Sales Law is the NJ Division of Taxation’s website’s FAQ page at http://www.state.nj.us/treasury/taxation/emailfaqs.shtml

Comments/Questions: gdn@gdnlaw.com

2011 Nissenbaum Law Group, LLC

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