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Loft Board rejects fixed fixture prices.

Under Article 7-C of the New York State Multiple Dwelling Law (more commonly known as the Loft Law) a protected tenant is entitled to sell the tenant installed fixtures to an incoming tenant for the fair market replacement value of such fixtures and improvements. An owner is permitted to object to the proposed sale on several grounds including a claim that the price is too high or that the proposed sale is not a bona fide arms-length transaction. In a recent case before the New York City Loft Board, the agency ruled, for the first time, that a proposed fixture sale should be rejected based upon a finding that the sale did not constitute a bona fide arms-length transaction.

The dispute initially arose when the owner commenced a summary proceeding against a loft tenant predicated upon the tenant's non-primary residence. The tenant had apparently relocated to Arizona, where he resided with his common-in-law wife. The tenant's common-in-law stepson commenced residing in the subject loft unit.

The tenant proposed to sell his fixtures and improvements to the stepson for the sum of $44,767.00. The owner objected, asserting that the transaction was a sham, because the fair market replacement value of all fixtures and improvements was not $44,767.00, but only $9,192.00. The owner claimed that a fixture sale for a sum that was five times the actual value of the items being purchased was a transaction that should be enjoined by the Loft Board.

The rationale for permitting an owner to challenge a tenant's proposed fixture sale is to protect the owner against facing an offer which artificially inflated the presumptive value of the improvements by failing to all of its terms (e.g., a side agreement to pay back part of the sum offered) or which is actually a sham transaction which the never intended to fully perform. In either case, an owner would effectively be denied its statutory right to purchase the improvements itself at fair market value, thereby obtaining a market rent for the subsequently vacant unit.

Hearings were conducted before the Loft Board, at which the owner was represented by Joseph Burden of Belkin Burden Wenig & Goldman. Ruling in a case of first impression, the Loft Board found that the offer was not bona fide and ruled that the sale could not take place.

Among the factors relied upon by the Board in ruling:

* Inadequate financial resources of the incoming tenant.

* The relationship of the out-going and in-coming tenant

* The complete lack of any negotiation or bargaining relating to the proposed purchase price and

* The apparent attempt by the tenant to conceal from the owners the tenant's departure date and his intent to sell improvements

Ultimately, the board found that the in-coming tenant had: Readily agreed to pay the price because he knew that he would never actually have to pay it. He was unconcerned because he knew that his stepfather would not actually demand payment of the purchase price

By strongly asserting a challenge to the fixture sale this owner reasserted its rights and thereby maintained some control over the destiny of the property. Similarly situated owners should take note of the Loft Board's apparent willingness to enforce both the letter and spirit of the Loft law in barring fixture sales which evidence some subterfuge or bad faith by the tenant. Owners should carefully review the sale, paying particular attention to the relationship between the parties, the underlying negotiations leading to the terms of the offer and the ultimate sales price to determine whether or not the offer truly reflects the fair market replacement value of the fixtures and treatments. If these criterion are not met, a successful challenge to the sale may be interposed.
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Title Annotation:New York City Loft Board ruling
Publication:Real Estate Weekly
Date:Mar 17, 1993
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