Category Archives: Real Estate

Can A Third Mortgage Have Priority Over A First Mortgage?

By Louis Pashman, Esq.
lpashman@pashmanstein.com

Perhaps surprisingly, the answer is yes, at least under certain circumstances.

Rosenthal & Rosenthal entered into a factoring agreement with a borrower. That agreement allowed Rosenthal to make optional advances in its sole discretion.  On August 21, 2000 the lender recorded its first mortgage.  On April 12, 2005 it recorded its second mortgage.

A law firm providing legal services to the borrower recorded its mortgage on the same property, the third mortgage on the property, on April 13, 2007.  In August 2007 Rosenthal sent an email to the law firm and demanded that the law firm subordinate its mortgage to any new Rosenthal mortgages.  The law firm refused.  Rosenthal continued to make optional advances and the law firm continued to provide legal services.

When the borrower defaulted on its loan obligation Rosenthal filed a foreclosure action naming the law firm as a defendant.  The law firm disputed the priority claimed by Rosenthal.

The trial court granted summary judgment against the law firm.  The appellate division reversed and the case was appealed to the New Jersey Supreme Court.

That court held, in  Rosenthal & Rosenthal v. Benun, 226 NJ 41 (2016) that

When a lender holds a mortgage that secures optional future advances the prior lien loses priority for advances made after actual notice of an intervening mortgage.

Rosenthal had actual notice of the law firm’s intervening lien (indeed requested subordination) yet continued to make optional advances.  Its mortgage securing those optional future advances was subordinated to the law firm’s intervening lien.

 

 

Bergen County Clerk Goes Electronic for Land Use Records

By Scott R. Lippert, Esq.
slippert@pashmanstein.com

Digital technology is having profound effects upon all areas of the law.  Real estate practice is no exception.

As of this past May, the Bergen County Clerk’s office permits individuals, attorneys and title companies to file and record land transaction records electronically. The electronic recording system functions through the website: http://www.bergencountyclerk.org.  Land transaction records were required to be mailed or hand delivered to the Bergen County Clerk’s office prior to the implementation of the electronic recording system. While the Bergen County Clerk’s office will still accept hard copies of land transaction records, there is now an alternative method. Electronic recording, or e-recording, will be conducted through the use of Corporation Service Company, a third party vendor.

In addition to the ability to file and record land transaction records electronically, Bergen County now offers users the ability to search land transaction records online.  Users can go to the website, www.bergencountyclerk.org and access an online database that contains images of deeds dating back to 2004 and images of mortgages dating back to 2007. The Bergen County Clerk’s office is in the process of uploading more images from earlier years to enhance the depth of the database.

These new electronic functions will enable documents to be processed faster than the Bergen County Clerk’s office was previously capable of, and will hopefully provide for fewer errors in documentation filed with the land transaction department. Additionally, it will now be easier to locate land transaction records, and will save time and money typically associated with attempting to locate such documents in the actual books in which they were originally recorded.

This new practice is in the process of being adopted throughout New Jersey.  Eventually, all recording and searching will be done electronically, which will be a great convenience for all real property transactions.

 

Beware of New Wire Transfer Dangers in Real Estate Transactions

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

I attended a real estate closing recently for a cooperative development and had a shocking story told to everyone by the buyer.  The buyer had her gmail account hacked by someone overseas, and they sent emails that resembled her attorney’s account.  The email actually had a slightly different email address that included the firm name of her attorneys, and had the look and feel of the real emails she had previously received from them.  They copied her attorney’s firm logo as well.  The final act was the email to her to wire transfer her closing funds to an account in Miami, Florida.  All the details required for the wire were included, even the phone number to verify the information.

The buyer initiated the wire of funds that was required for the closing later that day.  The buyer did not realize that the trust account of her NJ attorney had to be in a NJ bank.  Only due to her bank calling the attorney’s office was the hacking revealed, saving this buyer from a mistake of more than $500,000.  She also called the number on the wire sheet, and someone answered, but obviously not from the attorney’s office.

In this transaction, the hackers did not stop, still falsifying emails to the buyer’s attorney.  The personnel at the attorney’s office eventually wired out funds intended for the sellers, but wired the money to the hackers based upon another fake email with wire instructions.

This is a new hacking method being reported in real estate related transactions.  The fraud targets wire transfers in real estate transactions, including wires of earnest money deposits and, as shown, closing proceeds.  Apparently, these criminals hack into and intercept emails by searching for wire transfer requests and the emailing of the 13 digit number that makes up the digits in bank accounts.  The hackers then start their process of “invading” the communications and intercept the lawful ones.  The fake emails have the same attributes as the real ones they are meant to resemble.  They may keep communicating with the target victim, so that there is no suspicion that a third party has hacked into the stream of emails.

The hackers may even use the same bank and just change the last numbers for the account to be credited.  If the funds get wired, the money will be gone and wired out overseas before the fraud is even noticed.

In order to ensure the safety of wire transfers, far more caution is needed.  Here are a few precautions to be taken, including one very simple one.  If you are sending a wire, you should contact the party who sent the instructions by phone to confirm the account numbers verbally prior to sending the funds.  Another precaution is to send wire instructions via encrypted email or fax only.  Beware.

If you have any questions about this topic, please contact Bruce Ackerman at backerman@pashmanstein.com or at 201.488.8200.

 

Negotiating an Office Lease; Top Issues to Consider

By Jennifer Lifschitz, Esq.

jlifschitz@pashmanstein.com

When negotiating an office lease as a tenant there are several important issues to be aware of during the negotiation process. The first thing every tenant should keep in mind is to get its attorney involved early in the process, especially prior to signing a letter of intent.  While the letter of intent is merely a springboard for drafting the lease and lease negotiations, it will be more difficult for a tenant to re-negotiate an issue that it agreed to with the landlord at the time of signing a letter of intent. An attorney can help identify the important issues at the time of the execution of a letter of intent and save the tenant the aggravation of having to renegotiate issues that have already been put in writing in the letter of intent.

While conducting due diligence is typically associated with the purchase of a property, potential tenants under a lease should conduct a modified investigation of the property they are interested in leasing. Tenants should aim to determine the state of the building – Are its common areas well maintained? Are its systems (i.e. HVAC) in good working order? Is the landlord reputable? Does the landlord own and manage other properties? Is the landlord responsive? Tenants should also confirm that the zoning of the property permits the purpose for which the tenant intends to utilize the property. These are issues that can potentially have a large impact on the tenant’s use and enjoyment of the property.

Once the letter of intent has been signed and due diligence has been completed, the tenant can focus on the actual negotiation of the lease. The two basic types of leases are gross leases and net leases.  In a gross lease the landlord will pay the taxes, insurance and miscellaneous operating expenses and the tenant will know exactly what its rent expenses will be each month. In a net lease, in addition to the “fixed” or “basic” rent, the tenant is responsible for a share of certain additional costs that are associated with the leased property.

The term of the lease also needs to be considered, including any options that the tenant may have to renew and/or cancel the lease. The ability to install signs on the property and the amount of parking spaces allotted to a particular leased property are also terms that need to be negotiated. A tenant may also attempt to obtain a right of first offer.  In the event that additional space contiguous to the leased property becomes available, or additional space in the building becomes available, it would be advantageous to the tenant if the tenant had a right of first offer to lease or purchase such additional space. In the event that such space became available, the tenant would have the opportunity to lease the space before any other tenants in the building or any prospective tenants.  A tenant may also try to obtain a right of first refusal on the leased property. In the event that a third party approaches the landlord about purchasing the leased property, the tenant would have the ability to purchase the leased property on the same terms as the third party offer.

The tenant will also need to consider the relationship with any existing and potential lenders of the landlord. Lenders require subordination language in leases which provides that the lease is subordinate to any mortgage on the property. As such, tenants will want to make sure that they obtain protection in the event of a default by the landlord on the landlord’s loan.  Without such protection, the tenant risks termination or modification of its lease by the landlord’s lender upon a default by the landlord under its loan. A Subordination, Non-Disturbance and Attornment Agreement, known as an “SNDA”, will provide important protections to a tenant in the event a landlord defaults under its loan. An SNDA is a three-party agreement between the landlord, the tenant and the landlord’s lender.  The SNDA will require the tenant to acknowledge the landlord’s lender as its landlord in the event of default by a landlord but will also provide that upon a landlord default, and a lender take-over of the lease, the lease will remain in effect and the terms of the lease will remain the same, so long as the tenant is not in default.

A tenant will also want to consider its relationship with its own lender.  Under New Jersey law, a landlord has a right of distraint which enables the landlord, in an event of failure to pay rent by a tenant, to take control of any personal property and equipment of tenant at the leased premises.  The lender can then sell the personal property and equipment and use the proceeds to cover the delinquent rent.  A lender will often require that when a borrower enters into a lease, the landlord waive its rights of distraint. The landlord should not have an issue agreeing to this waiver. The landlord will have other ways to protect itself in the event of delinquent rent (i.e. guaranty of the lease, security deposit), the right of distraint is not an easy one for the landlord to exercise (i.e. absent extenuating circumstances a landlord must obtain a court order to proceed with its rights) and the tenant will need the landlord’s cooperation so that the tenant can obtain financing to operate its business successfully.

These represent a few of the many issues that are involved in negotiating a lease from a tenant’s perspective. While these provide a good starting point for the negotiation of any lease, there are numerous other issues and terms that need to be considered by a tenant.

Update on 1031 Exchanges

By Scott R. Lippert, Esq.
slippert@pashmanstein.com

If you are considering any transactions utilizing Section 1031 of the Internal Revenue Code for a tax-deferred exchange, you would be well-advised to close these transactions before December 31, 2014.  The Federal Budget issued for 2015 by the U.S. Treasury Department contains a proposal to limit the amount of deferred capital gains under Section 1031 to $1,000,000, indexed for inflation, effective January 1, 2015.  While this proposal has not yet become law, momentum appears to be gathering in the direction of this or some other constraint on the use of 1031 exchanges.

1031 exchanges have been used by investors for decades.  They can make otherwise marginal transactions much more attractive by deferring the capital gain that would otherwise have been incurred on the sale of the property.  In general, a Seller has up to 45 days from a sale of property within which to identify as many as three properties as potential exchange properties.  The closing or closings with respect to the acquisition of the exchange properties must occur within 180 days of the sale of the property.  Typically, the funds from the sale are held by a disinterested party, called a “qualified intermediary” and are then used to acquire the exchange properties.

This Blog will keep you informed as to the progress of this potential change in the law.

Negotiating Commission Agreements for Commercial Leases

By Scott Lippert, Esq.
slippert@pashmanstein.com

Recent experience negotiating commission agreements with commercial brokers served as a reminder to set forth fundamental principles in clear and concise fashion.  Typically, the broker will propose its form agreement, which may not deal with all the issues and, of course, will be broker-friendly.  While this is not intended to be an exhaustive list, the following issues should always be considered:

1. Calculation of Commission: Make sure the commissionable rent is defined precisely.  Items such as rent concessions and tenant electric, for example, should generally be excluded.

2. Term: At some point, the right to receive commissions should terminate.

3. Payment: Try to provide for a pay out over a reasonable amount of time.  The landlord would hate to be in a position of having paid a full commission on a long term deal where the tenant ends up defaulting early on in the term.  Also, the right to payment should accrue only upon the execution of a lease.

4. Marketing: The broker’s efforts to market should be clearly described.

5. Exclusions: Be sure to list any prior contacts that will not be subject to a commission.

6. Co-Brokerage: Set forth the circumstances under which the landlord’s obligation to pay co-brokerage fees will arise.

Most experienced commercial brokers will be receptive to reasonable modification of their standard agreement.  If you are getting an unusual amount of pushback, the landlord may want to consider doing business elsewhere.

Conflicting Decisions Regarding Premises Liability Create Uncertainty for Commercial Shopping Center Tenants

By Louis Pashman, Esq.
lpashman@pashmanstein.com

You are a tenant in a commercial shopping center.  Someone visiting your store is injured in a fall outside your store.  As is common in shopping center leases, the landlord is responsible to maintain all common areas.  Are you responsible for the injury to the person who visited your store?  Two recent appellate decisions reached different results.

In Kandrac v. Marrazzo’s Mkt., a 2012 decision, a customer who had been at defendant’s store fell on a hump in the parking lot.  The court found the tenant not liable.  While refusing to rule that such a tenant is automatically relieved of liability, it cited three reasons for its decision.  First, the accident did not occur on a route fixed by the tenant.  Second, it was not in close proximity to the defendant’s store and, third, the area where the accident occurred was not in defendant’s control.  The lease provision imposing maintenance responsibility on the landlord was a “significant” factor.

In a 2013 decision, Nielsen v. Wal-Mart Store # 2171, an independent contractor at Wal-Mart to perform exterminating services alleged he slipped and fell in loose sand and gravel in an area outside the store.  The lease imposed on the landlord the same duty to maintain the common areas, which included the area where the plaintiff fell.  The court could have distinguished the Kandrac case.  The route the independent contractor took was prescribed by Wal-Mart.  It was in closer proximity than Kandrac.  Neilsen, however, did not rest on any of those distinctions.  Rather, the court in Nielsen disagreed with Kandrac.  Although Wal-Mart had no contractual obligation to maintain the area, nothing prevented them from doing so.  While in Kandrac the court found that the duty imposed on the landlord was a “significant” factor, in Nielsen it carried little weight.  Neither ownership nor control, the Nielsen court said, is determinative.  The language used by the parties is not of great import.  Basic fairness and public policy considerations are paramount.

If this leaves you uneasy about your responsibility if you are a tenant in a commercial shopping center—it should.