Enforcing City-Imposed Covenants Against Successor Landowners

The City of New York acquired the subject building, located at 330 West 86^th Street in Manhattan, in a tax foreclosure proceeding. The city set out to sell the building to existing tenants pursuant to the UDAAA, and proceeded to obtain the requisite determination from the City Council. In requesting City Council approval, the city department of Housing Preservation and Development (HPD) represented that the project consisted solely of rehabilitation or conservation of existing dwellings or the construction of one to four unit dwellings, thus avoiding the need for ULURP review. The City Council made the requisite findings, and approved the project on the terms and conditions submitted by HPD.

The Deed

The deed executed by the city to 330 West 86 Oaks Corp. ' the entity formed by the tenants to take title to the property ' included a representation that 'the project to be undertaken by Sponsor … consists solely of the rehabilitation or conservation of existing private or multiple dwellings or the construction of one to four unit dwellings.' The habendum clause of the deed does not include this restriction, but does set forth two other affirmative obligations of the sponsor, and provides that the 'agreements and covenants set forth in this Deed shall run with the land and shall be binding to the fullest extent permitted by law and equity.'

The Litigation

Once the sale took place, 330 West 86 Oaks Corp. decided not to rehabilitate the building, and instead sold the building to 330 West 86^th Street, LLC, which planned to demolish the building and build a high-rise sliver apartment building in its place. In anticipation of the sale, the adjacent landowner brought this action against the city and the initial purchaser seeking a declaratory judgment that successors-in-interest are subject to the restrictions imposed on the original project sponsor. A notice of pendency was filed, and after the sale, current owner was named as a defendant. The city joined with the adjacent owner to contend that successor-in-interest were bound by the one-to-four dwelling unit restriction. Supreme Court agreed, but the Appellate Division reversed, holding that the covenant did not bind successors. Adjacent landowner and the city appealed to the Court of Appeals.

In a 6-1 decision, the Court of Appeals reversed. In an opinion by Judge Carmen Ciparick, the court conceded that the deed was 'not a model of draftsmanship,' but focused both on the intent of the instrument as a whole, and on the circumstances surrounding the transaction. In particular, the court emphasized that the benefits the purchaser received from the transaction ' including exemption from competitive bidding and from the ULURP process ' were directly related to the city's intent to restrict the use of the land for particular purposes. To allow the initial purchaser to circumvent the restrictions by selling the premises would, the court noted, be 'clearly antithetical to the purpose of article 16 of the General Municipal Law.' The court then proceeded to conclude that the restriction satisfied the common law requisites for enforcement of a restrictive covenant ' intent, touch and concern, and privity.

Judge Eugene Pigott, dissenting, focused on the absence of any language purporting to bind successors-in-interest to the restriction limiting use to one-to-four unit dwellings. He also emphasized that on the majority's construction, this restriction would remain in force in perpetuity ' a result he found at odds with the UDAAA ' which requires effectuation of a project within a reasonable period of time . He argued that the legislature did not intend to freeze forever the current use of property sold by the city pursuant to the UDAAA.

There is merit to both arguments. The problem lies with the preparation of the deed, which: 1) did not specify a period of time during which the restrictions were to remain in force; and 2) did not explicitly indicate whether the restriction would be binding on successors. The litigation in 328 Owners should provide a warning, both to municipalities and to prospective purchasers, about how not to draft the language in a deed. And the warning should be heeded not merely by lawyers effectuating transfers under UDAAA, but by lawyers preparing restrictive covenants in any setting.

Finally, the court's opinion does not address another question of significant importance: Does an adjacent landowner have standing to enforce a covenant entered into between the city and a landowner? In 328 Owners Corp., the court noted that because the city itself was seeking to enforce the restriction, the 'privity' question was 'immaterial.' In a case, however, where the city does not seek to enforce the restriction ' or where the city seeks to relieve the landowner of the burden of the restriction over the objection of an adjacent landowner ' the question would require an answer. Meanwhile, adjacent landowners should be cautious about relying on restrictions imposed by the city ' even though the court has now held that these covenants can be enforced against successors.

Stewart E. Sterk is Editor-in-Chief of this newsletter.

When the City of New York sells property subject to statutorily authorized conditions, what language in the deed is necessary to ensure that the conditions bind subsequent purchasers? That question confronted the Court of Appeals in 328 Owners Corp. v. 300 West 86 Oaks Corp. (NYLJ 4/4/07, p. 18, col. 1), in which the Court of Appeals held that successor purchasers were bound by deed language restricting the original purchaser to use of the property for rehabilitation or conservation of the existing building or construction of one to four unit dwellings.

Background

Article 16 of the General Municipal Law, known as the Urban Development Action Area Act (UDAAA), authorizes municipalities to sell municipally owned land in order to provide incentives for correction of blighted and deteriorated conditions. (General Municipal Law, sec. 691). Within New York City, property acquired by the city through tax foreclosure proceedings is land eligible for treatment as an Urban Development Action Area. (General Municipal Law, sec. 692(3)). Before the city may approve a proposal for designation of an Urban Development Action Area, the City Council must determine, inter alia, that 'the present status of the area tends to impair or arrest the sound growth and development of the municipality.' Generally, Urban Development Action Area Projects must proceed through ordinary land use review procedures, which in the City of New York, means the ULURP process. But the statute permits the City Council to waive ULURP review for specified projects: '[I]f the proposed urban development action area project consists solely of the rehabilitation or conservation of existing private or multiple dwellings or the construction of one to four unit dwellings without any change in land use permitted by local zoning, the governing body … may waive any such standards and procedures required by local law or charter.

The City of New York acquired the subject building, located at 330 West 86^th Street in Manhattan, in a tax foreclosure proceeding. The city set out to sell the building to existing tenants pursuant to the UDAAA, and proceeded to obtain the requisite determination from the City Council. In requesting City Council approval, the city department of Housing Preservation and Development (HPD) represented that the project consisted solely of rehabilitation or conservation of existing dwellings or the construction of one to four unit dwellings, thus avoiding the need for ULURP review. The City Council made the requisite findings, and approved the project on the terms and conditions submitted by HPD.

The Deed

The deed executed by the city to 330 West 86 Oaks Corp. ' the entity formed by the tenants to take title to the property ' included a representation that 'the project to be undertaken by Sponsor … consists solely of the rehabilitation or conservation of existing private or multiple dwellings or the construction of one to four unit dwellings.' The habendum clause of the deed does not include this restriction, but does set forth two other affirmative obligations of the sponsor, and provides that the 'agreements and covenants set forth in this Deed shall run with the land and shall be binding to the fullest extent permitted by law and equity.'

The Litigation

Once the sale took place, 330 West 86 Oaks Corp. decided not to rehabilitate the building, and instead sold the building to 330 West 86^th Street, LLC, which planned to demolish the building and build a high-rise sliver apartment building in its place. In anticipation of the sale, the adjacent landowner brought this action against the city and the initial purchaser seeking a declaratory judgment that successors-in-interest are subject to the restrictions imposed on the original project sponsor. A notice of pendency was filed, and after the sale, current owner was named as a defendant. The city joined with the adjacent owner to contend that successor-in-interest were bound by the one-to-four dwelling unit restriction. Supreme Court agreed, but the Appellate Division reversed, holding that the covenant did not bind successors. Adjacent landowner and the city appealed to the Court of Appeals.

In a 6-1 decision, the Court of Appeals reversed. In an opinion by Judge Carmen Ciparick, the court conceded that the deed was 'not a model of draftsmanship,' but focused both on the intent of the instrument as a whole, and on the circumstances surrounding the transaction. In particular, the court emphasized that the benefits the purchaser received from the transaction ' including exemption from competitive bidding and from the ULURP process ' were directly related to the city's intent to restrict the use of the land for particular purposes. To allow the initial purchaser to circumvent the restrictions by selling the premises would, the court noted, be 'clearly antithetical to the purpose of article 16 of the General Municipal Law.' The court then proceeded to conclude that the restriction satisfied the common law requisites for enforcement of a restrictive covenant ' intent, touch and concern, and privity.

Judge Eugene Pigott, dissenting, focused on the absence of any language purporting to bind successors-in-interest to the restriction limiting use to one-to-four unit dwellings. He also emphasized that on the majority's construction, this restriction would remain in force in perpetuity ' a result he found at odds with the UDAAA ' which requires effectuation of a project within a reasonable period of time . He argued that the legislature did not intend to freeze forever the current use of property sold by the city pursuant to the UDAAA.

There is merit to both arguments. The problem lies with the preparation of the deed, which: 1) did not specify a period of time during which the restrictions were to remain in force; and 2) did not explicitly indicate whether the restriction would be binding on successors. The litigation in 328 Owners should provide a warning, both to municipalities and to prospective purchasers, about how not to draft the language in a deed. And the warning should be heeded not merely by lawyers effectuating transfers under UDAAA, but by lawyers preparing restrictive covenants in any setting.

Finally, the court's opinion does not address another question of significant importance: Does an adjacent landowner have standing to enforce a covenant entered into between the city and a landowner? In 328 Owners Corp., the court noted that because the city itself was seeking to enforce the restriction, the 'privity' question was 'immaterial.' In a case, however, where the city does not seek to enforce the restriction ' or where the city seeks to relieve the landowner of the burden of the restriction over the objection of an adjacent landowner ' the question would require an answer. Meanwhile, adjacent landowners should be cautious about relying on restrictions imposed by the city ' even though the court has now held that these covenants can be enforced against successors.

Stewart E. Sterk is Editor-in-Chief of this newsletter.