Real Property Law

Supreme Ct., N.Y. Cty

(Lippman, J.)

In an article 78 proceeding, contract vendee sought an injunction requiring HPD to issue a letter of no objection in response to its request to dissolve or reconstitute Tivoli Towers Housing Co., Inc., developer of a limited-profit rental housing project organized under the Mitchell-Lama Law (article ii of the Private Housing Finance Law[PHFL]). The court denied the petition and dismissed the proceeding, holding that a restrictive covenant in the deed to Tivoli Towers Housing precluded conversion of the building to market-rate housing.

Under ' 35(2) of the PHFL, a limited-profit housing company can dissolve without the consent of a supervising agency, once 20 years have elapsed since the occupancy date. In 1969, the HPD Commissioner forwarded to the City Planning Commission a plan and project for Tivoli Towers, which indicated that the project would be for 'middle income families.' In 1972, the city issued a deed to the lots to Tivoli Towers Housing. By acceptance of the deed, Tivoli Towers Housing co-venanted, for itself and its assigns that it would 'devote the land to the uses specified in the plan for the area approved by the Board of Estimate ' Said covenant is to run for a period of 50 years from the completion of the clearance, replanning and reconstruction and neighborhood rehabilitation of the area.' In 1974, a certificate of occupancy was issued. In 2005, Tivoli Towers Housing sought approval for the transfer of stock and for transfer of beneficial ownership of the housing project. HPD initially approved the stock transfer, but then, after objections from the tenants association, informed contract vendee that the restrictive covenant in the 1972 deed required that the premises be used for middle-income housing for a period of 50 years. As a result, HPD would not issue a letter of no objection. Without the letter, contract vendee cannot obtain the financing to fund the acquisition. Hence, contract vendee brought this article 78 proceeding.

In dismissing the proceeding, the court held that the restrictive covenant imposed limitations on the developer separate and apart from those in the PHFL. The court then concluded that the covenant required not merely residential use for 50 years, but also uses specified in the plan, which were limited to residential use for middle-income families. HPD's determination not to waive the covenant to permit a change in use was not arbitrary and capricious. As a result, the court held, HPD was not required to issue the letter of no objection. Hence, the court dismissed the petition.

Business Judgment Rule Bars Challenge to Homeowners Association Action

Lattingtown Harbor Property Owners Association v. Agostino

NYLJ 11/20/06, p. 37, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action by homeowners association to enjoin landowner from building fences, piers and gates on his land in violation of restrictive covenants, landowner appealed from Supreme Court's grant of a preliminary injunction. The Appellate Division affirmed, relying on the business judgment rule.

The subject premises is located within a single-family residential community. All of the homes are encumbered by restrictive covenants which require landowners to obtain permission from the homeowners association for constructive of 'any structure' and 'fences of any kind.' When landowner sought approval for the construction of piers, fences and gates, the association's board voted to reject the improvements, concluding that they were out of context in scope with the remainder of the community. When landowner then began building the structures anyway, homeowners association brought this action. Supreme Court granted a preliminary injunction, and landowner appealed.

In affirming, the Appellate Division emphasized that the board's decision was authorized and made in good faith and in furtherance of the legitimate interests of the corporation. As a result, the court declined to second-guess the decision. The court also rejected landowner's argument that service was improper, noting that landowner's wife had denied being served, but holding that the hearing court's determination on credibility of witnesses was entitled to great weight on appeal. As a result, the court declined to disturb the finding that the process server was more credible than landowner's wife.

COMMENT

Although New York courts generally apply the business judgment rule to decisions made by condominiums and homeowners associations, they will not sustain actions taken against individual homeowners when neither language in the by-laws nor rules promulgated by the association would put homeowners on notice that the homeowner's activities violate association rules. For example, in Blumberg v. Albicocco, 12 Misc.3d 1045 (2006), the court nullified a fine imposed by the condominium homeowners association on a homeowner who conducted a garage sale. The Board based its decision on a nuisance provision in the condominium declaration that prohibited practices 'which [are] a source of annoyance to residents or which interfere with the peaceful possession and proper use of the property by its residents.' In granting the owner's summary judgment motion, the court explained that while the board would have been within its authority to enact a by-law prohibiting garage sales based on the nuisance provision in the declaration, it did not have the power to impose a fine on residents when no such by-law existed. Therefore, its decision was not protected by the business judgment rule. By contrast, in Captain's Walk Homeowners Ass'n v. Penney, 17 A.D.3d 617 (2005), the Appellate Division, Second Department granted an injunction against the homeowner to change the color of her walkway. In that case, the defendant's decedent painted the walkway pink without obtaining approval of the association's Board of Directors. The court reasoned that the Board acted within the scope of its authority when it demanded that the defendant restore the walkway to its original color because prior approval by the Board was required under the association's architectural guidelines.

The business judgment rule does not insulate from attack decisions by condominium or homeowners associations that are contrary to public policies articulated in state statutes, particularly those favoring the establishment of facilities for children and the mentally disabled. For example, in Quinones v. Board of Managers of Regalwalk Condominium I, 242 A.D.2d 52 (1998), the Second Department overturned the board's decision demanding that the homeowners cease operating a day care facility in their condominium. In that case, the board had interpreted a residential use restriction in the condominium declaration to prohibit operation of the day care facility. Although the court concluded that the interpretation was not made in bad faith, the interpretation contravened the policy embodied in Social Services Law '390(12) which provides that no local municipality may enact regulations that would prohibit the use of a single family home for group family day care. The court held that the provision also applies to privately imposed restrictive covenants on the theory that the legislature enacted the law to address the shortage of child-care facilities throughout New York State.

Filing of Notice of Pendency Comes Too Late to Bind Subsequent Purchaser

Avila v. Arsada Corp.

NYLJ 11/27/06, p. 32, col. 1

AppDiv, Second Dept

(memorandum opinion)

In an action by contract vendees for specific performance of contracts for the sale of real property, subsequent purchaser of the property appealed from Supreme Court's order preliminarily enjoining purchaser from leasing, renting, or otherwise encumbering the property. The Appellate Division reversed and denied the motion, holding that contract vendees' filing of a notice of pendency did not negate subsequent purchaser's status as a good faith purchaser without notice.

In 2001, contract vendees entered into contracts to purchase two residential parcels from Arsada Corp. Contract vendees never recorded the sale contracts. Disagreements arose between the parties, and the contracts never closed. On Sept. 11, 2003, Arsada conveyed the parcels to subsequent purchaser. On Sept. 26, subsequent purchaser delivered deeds to the City Register for recording. On Oct. 13, contract vendees filed a notice of pendency on the subject properties and brought this action for specific performance. Subsequent purchasers' deeds were formally recorded in December 2003. When contract vendees sought a preliminary injunction preventing Arsada and subsequent purchaser from leasing or renting the property, Supreme Court granted the injunction and subsequent purchaser appealed.

In reversing, the Appellate Division first held that contract vendees' filing of a notice of pendency did not serve as a substitute for the recording of the sale contract. The court then noted that for recording act purposes the deeds submitted by subsequent purchaser are treated as recorded when delivered to the city register. Because subsequent purchaser delivered the deeds before contract vendees filed the notice of pendency, filing did not negate subsequent purchaser's status as a good faith purchaser without notice. As a result, contract vendees could not demonstrate a likelihood of success on the merits, and were not entitled to a preliminary injunction.

COMMENT

If a taker of a deed files a notice of pendency before a subsequent taker records his or her interest in the same property, the subsequent taker will be bound by the action against the property, so long as the prior taker did not have notice of the subsequent taker's interest at the time he filed the notice of pendency. For example, in Goldstein v. Gold, 106 A.D.2d 100, affd 66 NY2d 624, the court held that a subsequent purchaser was bound by an action for satisfaction of a lien since the mortgagor had filed a notice of pendency before the purchaser recorded his deed. More recently, in Jenkins v. Stephenson, 293 A.D. 2d 612, the court held that a subsequent purchaser was bound by an action to set aside the transfer to his predecessor on the grounds of undue influence and fraud because a notice of pendency had been filed before the purchaser recorded his deed. The rule established in cases like Goldstein and Jenkins was not applicable in Avila because in that case, contract vendees did not file the notice of pendency until after the subsequent taker had delivered the deed for recording.

New York courts have not determined whether a subsequent purchaser who files a notice of pendency before a prior purchaser has recorded its interest enjoys priority over that prior purchaser. Under New York's 'race-notice' statute, if a subsequent taker, in good faith and for valuable consideration, acquires an interest in the same property as a prior taker, the subsequent taker prevails if he or she records first. See NY CLS Real P ' 291. The unresolved question is whether a subsequent purchaser's filing of a notice of pendency satisfied the requirement that the subsequent purchaser record first within the meaning of the statute

However, if at the time a first-in-time taker files a notice of pendency, the filer has actual notice of a subsequent interest, the first-in-time taker must record before the subsequent taker in order to prevail against that subsequent taker. In La Marche v. Rosenblum, 50A.D.2d 636, the court held that the plaintiff could not file a notice of pendency two days after learning of a subsequent contract and prevail over the subsequent purchaser's interest when the subsequent purchaser recorded before the plaintiff did. More recently, in Gerenstein v. Williams, 282 A.D.2d 813, the court held that a subsequent mortgagee who recorded several weeks after filing of a notice of pendency would not be bound by the notice of pendency because the filer of the notice had learned of the mortgagee's not-yet-recorded interest four days prior to filing the notice.

Restrictive Covenant Bars Conversion of Mitchell-Lama Project

Matter of Tivoli Stock LLC v. New York City Department of Housing Preservation and Development (HPD)

NYLJ 11/29/06, p. 18, col. 1

Supreme Ct., N.Y. Cty

(Lippman, J.)

In an article 78 proceeding, contract vendee sought an injunction requiring HPD to issue a letter of no objection in response to its request to dissolve or reconstitute Tivoli Towers Housing Co., Inc., developer of a limited-profit rental housing project organized under the Mitchell-Lama Law (article ii of the Private Housing Finance Law[PHFL]). The court denied the petition and dismissed the proceeding, holding that a restrictive covenant in the deed to Tivoli Towers Housing precluded conversion of the building to market-rate housing.

Under ' 35(2) of the PHFL, a limited-profit housing company can dissolve without the consent of a supervising agency, once 20 years have elapsed since the occupancy date. In 1969, the HPD Commissioner forwarded to the City Planning Commission a plan and project for Tivoli Towers, which indicated that the project would be for 'middle income families.' In 1972, the city issued a deed to the lots to Tivoli Towers Housing. By acceptance of the deed, Tivoli Towers Housing co-venanted, for itself and its assigns that it would 'devote the land to the uses specified in the plan for the area approved by the Board of Estimate ' Said covenant is to run for a period of 50 years from the completion of the clearance, replanning and reconstruction and neighborhood rehabilitation of the area.' In 1974, a certificate of occupancy was issued. In 2005, Tivoli Towers Housing sought approval for the transfer of stock and for transfer of beneficial ownership of the housing project. HPD initially approved the stock transfer, but then, after objections from the tenants association, informed contract vendee that the restrictive covenant in the 1972 deed required that the premises be used for middle-income housing for a period of 50 years. As a result, HPD would not issue a letter of no objection. Without the letter, contract vendee cannot obtain the financing to fund the acquisition. Hence, contract vendee brought this article 78 proceeding.

In dismissing the proceeding, the court held that the restrictive covenant imposed limitations on the developer separate and apart from those in the PHFL. The court then concluded that the covenant required not merely residential use for 50 years, but also uses specified in the plan, which were limited to residential use for middle-income families. HPD's determination not to waive the covenant to permit a change in use was not arbitrary and capricious. As a result, the court held, HPD was not required to issue the letter of no objection. Hence, the court dismissed the petition.

Business Judgment Rule Bars Challenge to Homeowners Association Action

Lattingtown Harbor Property Owners Association v. Agostino

NYLJ 11/20/06, p. 37, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action by homeowners association to enjoin landowner from building fences, piers and gates on his land in violation of restrictive covenants, landowner appealed from Supreme Court's grant of a preliminary injunction. The Appellate Division affirmed, relying on the business judgment rule.

The subject premises is located within a single-family residential community. All of the homes are encumbered by restrictive covenants which require landowners to obtain permission from the homeowners association for constructive of 'any structure' and 'fences of any kind.' When landowner sought approval for the construction of piers, fences and gates, the association's board voted to reject the improvements, concluding that they were out of context in scope with the remainder of the community. When landowner then began building the structures anyway, homeowners association brought this action. Supreme Court granted a preliminary injunction, and landowner appealed.

In affirming, the Appellate Division emphasized that the board's decision was authorized and made in good faith and in furtherance of the legitimate interests of the corporation. As a result, the court declined to second-guess the decision. The court also rejected landowner's argument that service was improper, noting that landowner's wife had denied being served, but holding that the hearing court's determination on credibility of witnesses was entitled to great weight on appeal. As a result, the court declined to disturb the finding that the process server was more credible than landowner's wife.

COMMENT

Although New York courts generally apply the business judgment rule to decisions made by condominiums and homeowners associations, they will not sustain actions taken against individual homeowners when neither language in the by-laws nor rules promulgated by the association would put homeowners on notice that the homeowner's activities violate association rules. For example, in Blumberg v. Albicocco, 12 Misc.3d 1045 (2006), the court nullified a fine imposed by the condominium homeowners association on a homeowner who conducted a garage sale. The Board based its decision on a nuisance provision in the condominium declaration that prohibited practices 'which [are] a source of annoyance to residents or which interfere with the peaceful possession and proper use of the property by its residents.' In granting the owner's summary judgment motion, the court explained that while the board would have been within its authority to enact a by-law prohibiting garage sales based on the nuisance provision in the declaration, it did not have the power to impose a fine on residents when no such by-law existed. Therefore, its decision was not protected by the business judgment rule. By contrast, in Captain's Walk Homeowners Ass'n v. Penney, 17 A.D.3d 617 (2005), the Appellate Division, Second Department granted an injunction against the homeowner to change the color of her walkway. In that case, the defendant's decedent painted the walkway pink without obtaining approval of the association's Board of Directors. The court reasoned that the Board acted within the scope of its authority when it demanded that the defendant restore the walkway to its original color because prior approval by the Board was required under the association's architectural guidelines.

The business judgment rule does not insulate from attack decisions by condominium or homeowners associations that are contrary to public policies articulated in state statutes, particularly those favoring the establishment of facilities for children and the mentally disabled. For example, in Quinones v. Board of Managers of Regalwalk Condominium I, 242 A.D.2d 52 (1998), the Second Department overturned the board's decision demanding that the homeowners cease operating a day care facility in their condominium. In that case, the board had interpreted a residential use restriction in the condominium declaration to prohibit operation of the day care facility. Although the court concluded that the interpretation was not made in bad faith, the interpretation contravened the policy embodied in Social Services Law '390(12) which provides that no local municipality may enact regulations that would prohibit the use of a single family home for group family day care. The court held that the provision also applies to privately imposed restrictive covenants on the theory that the legislature enacted the law to address the shortage of child-care facilities throughout New York State.

Filing of Notice of Pendency Comes Too Late to Bind Subsequent Purchaser

Avila v. Arsada Corp.

NYLJ 11/27/06, p. 32, col. 1

AppDiv, Second Dept

(memorandum opinion)

In an action by contract vendees for specific performance of contracts for the sale of real property, subsequent purchaser of the property appealed from Supreme Court's order preliminarily enjoining purchaser from leasing, renting, or otherwise encumbering the property. The Appellate Division reversed and denied the motion, holding that contract vendees' filing of a notice of pendency did not negate subsequent purchaser's status as a good faith purchaser without notice.

In 2001, contract vendees entered into contracts to purchase two residential parcels from Arsada Corp. Contract vendees never recorded the sale contracts. Disagreements arose between the parties, and the contracts never closed. On Sept. 11, 2003, Arsada conveyed the parcels to subsequent purchaser. On Sept. 26, subsequent purchaser delivered deeds to the City Register for recording. On Oct. 13, contract vendees filed a notice of pendency on the subject properties and brought this action for specific performance. Subsequent purchasers' deeds were formally recorded in December 2003. When contract vendees sought a preliminary injunction preventing Arsada and subsequent purchaser from leasing or renting the property, Supreme Court granted the injunction and subsequent purchaser appealed.

In reversing, the Appellate Division first held that contract vendees' filing of a notice of pendency did not serve as a substitute for the recording of the sale contract. The court then noted that for recording act purposes the deeds submitted by subsequent purchaser are treated as recorded when delivered to the city register. Because subsequent purchaser delivered the deeds before contract vendees filed the notice of pendency, filing did not negate subsequent purchaser's status as a good faith purchaser without notice. As a result, contract vendees could not demonstrate a likelihood of success on the merits, and were not entitled to a preliminary injunction.

COMMENT

If a taker of a deed files a notice of pendency before a subsequent taker records his or her interest in the same property, the subsequent taker will be bound by the action against the property, so long as the prior taker did not have notice of the subsequent taker's interest at the time he filed the notice of pendency. For example, in Goldstein v. Gold, 106 A.D.2d 100, affd 66 NY2d 624, the court held that a subsequent purchaser was bound by an action for satisfaction of a lien since the mortgagor had filed a notice of pendency before the purchaser recorded his deed. More recently, in Jenkins v. Stephenson, 293 A.D. 2d 612, the court held that a subsequent purchaser was bound by an action to set aside the transfer to his predecessor on the grounds of undue influence and fraud because a notice of pendency had been filed before the purchaser recorded his deed. The rule established in cases like Goldstein and Jenkins was not applicable in Avila because in that case, contract vendees did not file the notice of pendency until after the subsequent taker had delivered the deed for recording.

New York courts have not determined whether a subsequent purchaser who files a notice of pendency before a prior purchaser has recorded its interest enjoys priority over that prior purchaser. Under New York's 'race-notice' statute, if a subsequent taker, in good faith and for valuable consideration, acquires an interest in the same property as a prior taker, the subsequent taker prevails if he or she records first. See NY CLS Real P ' 291. The unresolved question is whether a subsequent purchaser's filing of a notice of pendency satisfied the requirement that the subsequent purchaser record first within the meaning of the statute

However, if at the time a first-in-time taker files a notice of pendency, the filer has actual notice of a subsequent interest, the first-in-time taker must record before the subsequent taker in order to prevail against that subsequent taker. In La Marche v. Rosenblum, 50A.D.2d 636, the court held that the plaintiff could not file a notice of pendency two days after learning of a subsequent contract and prevail over the subsequent purchaser's interest when the subsequent purchaser recorded before the plaintiff did. More recently, in Gerenstein v. Williams, 282 A.D.2d 813, the court held that a subsequent mortgagee who recorded several weeks after filing of a notice of pendency would not be bound by the notice of pendency because the filer of the notice had learned of the mortgagee's not-yet-recorded interest four days prior to filing the notice.