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Risks to investors when property has temporary C/O.

A recent court decision may require lenders and investors to change their existing practices, particularly in the case of jurisdictions like New York City that generally issue only a temporary certificate of occupancy ("c/o") whenever a building is constructed or renovated. Whenever a temporary c/o is issued, there is always the risk that it may expire, resulting in a building that cannot be occupied or rented.

Lenders and investors may therefore need to negate, by written agreement, any duty on their part to monitor, post-closing, whether or not a temporary c/o is timely renewed and whether a permanent c/o is ever issued.

Lenders and investors may also require security to be deposited for the performance of this duty. Further, these parties should also confirm that the actual and proposed uses of the property are permitted by its c/o. Finally, all parties involved in the construction and renovation of buildings in these jurisdictions should also be aware that the New York City Department of Buildings might be enjoined in the near future from issuing any temporary c/o, at least for residential properties.

In Howard v. Berkman, Henoch (N.Y. Civ. Ct., Richmond Cty.), N.Y.L.J., Nov. 17, 2004, p. 20, the court granted partial summary judgment, on the issue of liability, to the plaintiff/purchaser of a home, and against the defendant/law firm which represented him in connection with the purchase, for failing to obtain, at the closing, a written copy of a temporary or permanent c/o.

This result might be expected, assuming the law firm had failed to advise the plaintiff/purchaser at the closing that there was no c/o. However, the court then wrote a very bold opinion, with various assertions that may be appealed and subsequently reversed by an appellate court. The court stated, "If, in fact, the plaintiff-client insisted that the closing take place, then, in order that it not be malpractice the defendant would have to have had the plaintiff execute a detailed release informing the plaintiff of the law, the legal implications of closing without a certificate of occupancy, that the closing was going forward against the advice of counsel, and advising the client to consult another attorney....

"[W]hen an attorney permits a client to close title and enter into possession of a premises that lacks a valid certificate of occupancy reflecting the actual use of the premises, that attorney is assisting in violating the [NYC Administrative Code]. Likewise, a lender or lender's counsel that closes knowing that the premises either lacks a valid certificate of occupancy or has an actual use, not in conformity with the valid certificate of occupancy, is also in violation of the statute.....

"An argument can be made that a purchaser's attorney who permits the closing to go forward with a temporary certificate of occupancy has a continuing obligation to monitor the situation; advise the client that no final certificate of occupancy has been obtained; and that the client is not only subject to being evicted by the Buildings Department but also potentially to civil and criminal penalties.....

"[A]n argument can be made that the mortgagee ... should be precluded from collecting principal and interest payments during the period there was no certificate of occupancy..... [O]nce the lender is aware that there is an escrow being held until a final certificate of occupancy is issued by the municipality, the lender has an obligation to insure that the final certificate of occupancy is issued or, in the City of New York, that the temporary certificate of occupancy is extended until the final certificate of occupancy is issued. It must be concluded that lenders issuing mortgage loans in New York have a legal obligation not to close the loan unless there is a final certificate of occupancy or, if a temporary certificate of occupancy is in effect, that enough money is held in escrow to insure the outstanding work can be completed and paid for within the time set forth in the temporary certificate of occupancy."

The court also ordered the NYC Department of Buildings to show cause why an order should not be issued permanently enjoining the NYC Department of Buildings from issuing temporary c/os. The judge has not yet issued his decision regarding such an injunction, but is expected to do so this month. If such injunction is issued, it may cause further delays in the approval process.
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Title Annotation:certificate of occupancy
Author:Boyd, Brook
Publication:Real Estate Weekly
Geographic Code:1U2NY
Date:Feb 2, 2005
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