Scott E. Mollen
Scott E. Mollen ()

Eminent Domain—Claimant Cannot be Compensated for Increase in Value that Resulted From the Plan for Which the Property Was Condemned—City’s Expert Lacked Credibility as to Why Claimant’s Properties Had Been Condemned

This decision involved the issue of which “zoning should be applied to the damage parcels…, for the purpose of determining the value of those parcels on the date they were acquired…through eminent domain.”

The claimants’ properties (properties) had been vested by the City of New York (city) pursuant to an “Urban Renewal Area Plan” (plan). The properties were taken to create a public open space and an “underground parking garage under the site [project].” On the vesting date, the properties “were zoned C6-4.5, which permits development of a floor area ratio (FAR) of 12.” The properties were previously zoned as C6-1, which permitted development of an FAR of 6. They had been rezoned in 2004 to include “creation of an open space and underground parking facility.” The salient issue was “whether the rezoning…to C6-4.5 was part of the [project] for which the [properties] were taken, and therefore should not be considered in valuing the property pursuant to the project influence or Miller rule.” The properties had been rezoned at the same time that the plan had been amended to create the project.

U.S. v. Miller, 317 US 369 (1943), held that when valuing a property for condemnation purposes, “the property should be neither enhanced or diminished by the impact of the project on the value of the property.” Miller explained that:

the “market value” of property condemned can be affected, adversely or favorably, by the imminence of the very public project that makes the condemnation necessary. And it was perceived that to permit compensation to be either reduced or increased because of an alteration in market value attributable to the project itself would not lead to the “just compensation” that the Constitution requires. On the other hand, the development of a public project may also lead to enhancement in the market value of neighboring land that is not covered by the project itself. And if that land is later condemned, whether for an extension of the existing project or for some other public purpose, the general rule of just compensation requires that such enhancement in value be wholly taken into account, since fair market value is generally to be determined with due consideration of all available economic uses of the property at the time of the taking”….

The claimants argued that the project was only the creation of a half block of public open space with an underground parking garage and that the rezoning of surrounding blocks was not part of the project, “but a generic area wide rezoning.” They stated that it was unnecessary to rezone the properties to create the project, and that the creation of the project was not necessary to the rezoning. They further argued that “not valuing their [properties] based on the zoning in place at the time of vesting would constitute a denial of equal protection.”

The city countered that the “project” included not just the open space and parking garage, but also “the entire rezoning of the blocks surrounding [the project], as well as the amendments the text of the zoning resolution, the amendments to the…[plan], and the special permits approved for various parking facilities.” The city contended that “all of these actions were related and were part of a comprehensive plan that was aimed [at] stimulating private development of large office buildings in downtown Brooklyn.”

Following a hearing, the court explained that “the term project can have different meanings in the different contexts.” The court noted that:

New York State Eminent Domain Procedure Law defines a “Public Project” as “any program or project for which the acquisition of property may be required for a public use, benefit or purpose.” EDPL §103(G) The term “program” is not a defined term and is somewhat elastic. However, there are certain characteristics of a program, as the term is commonly used, which can be read into the definition in EDPL §103(G). The use of the term “any program” to define a “public project” indicates that a project can include a series of related actions as opposed to being limited to a single distinct action or development. Also, the term program can encompass series of planned actions where not all of the included actions may be realized. Lastly, it also includes more than physical buildings or structures.

The court stated that “[g]iven the rationale of the project influence rule, a comprehensive land use plan can be considered a ‘program’ within the meaning of the definition of ‘public project’” and “[t]he intent of the project influence rule is to ensure that a condemned property is valued as if the project never occurred.” Appellate court decisions had applied the Miller rule “to exclude the effect of zoning overrides on the value [of] a property taken through eminent domain where the override and the taking were both part of a comprehensive plan.”

The court then found that the city had “rezoned the [properties], as part of the Brooklyn Downtown Plan, which is a comprehensive plan. The rezoning of the…[properties] was part of a larger rezoning of the surrounding blocks.” As part of the same zoning map application, the City Planning Commission (CPC) had “also approved zoning changes [to]…other areas in Downtown Brooklyn.” There were 21 other related items that had been “considered by the [CPC] concurrently with the zoning map application.” The court observed that “[e]ach of the separate actions by themselves were not sufficient to achieve the goal of the plan, which was to encourage the development of large office buildings.”

The claimants attempted to distinguish a prior case by arguing that the subject zoning “was generic, in that it increased the allowable density but did not require that office towers be built.” In fact, “hotels rather than office buildings were built around” the subject area. The court explained that the fact that the city encouraged, rather than required, private development of offices, did not mean that the rezoning and related actions “were not all part of a comprehensive plan.” Rather, it meant that the city “believed, mistakenly as it turned out, that the incentives created by the related actions would be enough to induce developers to build…office buildings.” Moreover, “rezoning either the [properties] or the larger area was not necessary in order to create” the project and the creation of such “was not necessary to the rezoning.”

The court acknowledged that “[i]t was not necessary to rezone the [properties] in order to develop the public open space. Even if the CITY did not want to map the area as a park, in order to have more design flexibility, it could have left the sites zoned as C6-1 and still have developed them as a public open space.” The city “had to approve a special permit for a parking garage whether the sites were rezoned or not” and the project could have been developed even if “the larger surrounding area had not been rezoned.” Although the rezoning was not necessary to develop the project, it did not mean that the rezoning and the project were not part of the same larger project. The evidence established that “the City would not have condemned the [properties] to create [the project] without the rezoning and the other related actions.”

The claimants argued that since it was not necessary to rezone the properties to create the project, the city’s “actual purpose for rezoning them was to create development rights on the [properties] that the CITY could sell after acquiring them.” The city denied that, but the court found that the city’s expert’s assertion that the city included properties in the rezoning “because it was inconsequential whether or not they were rezoned, lacks credibility.” The court found such explanation to also be “at odds with how the CITY dealt with similar situations.”

The court reasoned that the “only logical explanation…as to why the CITY included [the project] in the rezoning, was [the claimant's expert's] contention that the CITY wanted to create additional development rights that it could sell to adjoining property owners. The only result of rezoning the [properties] was to increase the developable floor area of the sites.” However, the court stated that “even if the CITY did rezone the [properties] for the purpose of creating additional developable floor area, that would not require a different result.” “[I]f the CITY had rezoned the [properties]…, in order to create air rights it could sell to owners of adjoining properties, this would evidence that the rezoning and the condemnation were part of the same project.” The court further stated that:

While there is serious question whether it would be a proper use of either the zoning power or power of eminent domain to upzone property that the CITY intends to condemn in order to sell the newly created developable floor area, this question is not before the Court.

The propriety of the CITY’s exercise of its zoning power and eminent domain would have had to have been challenged directly and can not be attacked collaterally in this proceeding. This proceeding is only to determine the amount of compensation to which the owners…are entitled. In this joint hearing, the Court is only called upon to decide if valuing the subject properties as rezoned is barred by the project influence rule.

The court then held that valuing the properties based on the prior zoning, rather than the rezoning, would not violate equal protection. Although an owner “is generally entitled to have his property valued at its highest and best use at the time of taking, the Miller rule carves out an exception where there is an increase in value is a result of the project or plan for which the property was condemned.” Here, there was no evidence that there had been “any other rezoned parcels which the CITY valued, for condemnation purposes, based on the higher C6-4.5 district” and this was not a case “where the CITY left the [properties] out of a larger rezoning because it intended to acquire them.” It was also “not a situation where the CITY refused to approve plans submitted by the owners….”

Thus, the court held that the acquisition of the properties and the rezoning of the properties and the larger area around the properties “were part of a comprehensive plan, together with the other related actions listed in the rezoning application….” Accordingly, “valuing the [properties] based on the rezoning is barred by the project influence rule, and the [properties] must be valued based on the prior zoning of C6-1.”

Matter of NYC Urban Renewal Area, 33132/2008, NYLJ 1202627013288, at *1 (Sup., KI, Decided Oct.11, 2013), Saitta, J.

Condominiums—Interstate Land Sales Full Disclosure Act (ILSA)—Prior Decision Vacated Based on Bacolitsas Decision—Description of Lot Need Not Be Equivalent of Description Required to Convey Unit—Delivery of Property Report to Purchasers’ Attorney Is Not Delivery to the Purchasers

The plaintiffs, purchasers of condominium units, had sued the developer and sponsor of a condominium development (defendant). The court had previously granted the plaintiffs’ motions for summary motion and denied the defendant’s cross-motion for summary judgment. The court held that the defendant’s failure “to include tax lot numbers” in the purchase/sale contracts (contracts) violated the Interstate Land Sales Full Disclosure Act, 15 USC §§1701-20 (2009) (ILSA)” and the plaintiffs could rescind their contracts and recover their deposits (prior decision).

The defendant had moved to vacate the prior decision and for summary judgment, based on the intervening decision in Bacolitsas v. 86th & 3rd Owner, 702 F.3d 673 (2d Cir. 2012). The court granted the motion to vacate “to the extent that [the prior decision] holds that the [contracts] violate 15 U.S.C. §1703(d)(1),” and that certain plaintiffs (“A” plaintiffs) were entitled to summary judgment. The court held that other plaintiffs (“B” plaintiffs) are entitled to summary judgment since they had not been provided with a copy of the condominium property report in violation of 15 U.S.C. §1703(a)(1)(B). The court denied the defendant’s motion for summary judgment on its counterclaims against the “B” plaintiffs, but granted such motion as to the “A” plaintiffs.

Between June 2007 and February 2008, each plaintiff had executed contracts and had paid a deposit. Each contract specified “the number of the condominium unit purchased,” and incorporated by reference the offering plan (plan). The plan set forth “lot numbers for [the condominium] as a whole, describes its location in relation to streets and avenues…, describes the surrounding neighborhood and the condition of the land on which the building is constructed, specifies the number of stories and basement levels in the building, and provides…details about the building’s construction.” The plan also listed, inter alia, the number of units in the building, described the units and their construction materials, and contained a chart showing the number of bedrooms and bathrooms in each unit, the approximate square footage of each unit and the percentage of the condominium’s common elements associated with ownership of each unit. The tax lot numbers for each unit were not specified in the contracts or the plan. Within two years of executing their contracts, the plaintiffs had sought to revoke their contracts based on the sponsor’s alleged failure to comply with ILSA.

Thereafter, the plaintiffs commenced the subject action, which sought revocation of their contracts, return of deposits, attorney fees and costs. In December 2009, the defendant sent to each plaintiff a notice setting a closing date. None of the plaintiffs “closed on the designated closing date,” and their time to close had expired. The defendant counterclaimed against each plaintiff for breach of contract, seeking to retain the deposits and an award of attorney fees and costs.

ILSA requires that contracts contain “a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records in the jurisdiction in which the lot is located….” If a contract fails to contain such description, the contract “may be revoked at the option of the purchaser or lessee for two years from the date of the signing of such contract….” Under New York law, “the conveyance of a condominium cannot be recorded unless accompanied by a report that includes the tax lot information for the unit.”

The prior decision held that the contracts violated ILSA because they “did not contain tax lot information for the individual units,” and were therefore not “in a form acceptable for recording.” Thereafter, Bacolitsas held that under ILSA, “the ‘description of the lot’ in the underlying contract or agreement—and not that contract or agreement itself—must be ‘in a form acceptable for recording’ in the ‘jurisdiction in which the lot is located.’” Bacolitsas further held because “a description of a lot standing alone may not be recordable under New York law [it] does not compel a different construction of §1703(d)(1).” Bacolitsas holds that “reading §1703(d)(1) to require that the description of a lot—and not the agreement or contract—be ‘in a form acceptable for recording’ aligns with ILSA’s underlying purpose,” i.e., if the description of a lot in a contract is “clear and specific enough to satisfy generally the local recording statutes,” then developers have provided potential buyers with the information they need to make an “informed decision.”

In Bacolitsas, purchasers argued that the contract lacked “a form setting forth the ‘liber, page and date of recording of the declaration.’” Bacolitsas found that “nothing in §1703(d)(1) suggests that Congress intended that the description of the lot mandated under ILSA be coextensive with what is required for conveyance of an individual unit in the relevant jurisdiction….” “Congress was concerned with disclosure, not conveyance.”

New York sponsors often enter into contracts before the filing of a condominium declaration. Since condominium declarations usually cannot be filed until new tax lot numbers are assigned to each unit, and because that can only occur once construction is complete, buyers often will sign contracts before the declaration is recorded, i.e., before completion of the development. The plaintiffs’ position “would prohibit this common and long-standing practice.”

If a lot description “must be in a form acceptable for recording the deed,” a contract for a unit “could be executed only after construction was finished” because it is only then that the declaration would be recorded, and thus that the ‘liber, page and date of recording of the declaration’—required for a deed,…would be obtainable.” Since Bacolitsas held that “the ‘lot description need not be equivalent to the type of description required to convey the unit,’ and that the description of the unit…in the Bacolitsas…[contract]” complied with ILSA, the court found that its prior decision had to be vacated.

Although the plaintiffs argued that the issue of tax lot numbers were not squarely presented in the subject case, the court opined that Bacolitsas’ reasoning “applies with equal force to unit-specific tax lot numbers.” Thus, the court held that the plaintiffs’ contracts did not violate §1703(d)(1) of ILSA and “[P]laintiffs are not entitled to rescission” based on inadequate disclosure under such provision. The court further held that the contract’s liquidated damages clauses and attorney fees did not violate ILSA. However, the court found that the defendant had violated §1703(a)(1)(B) with respect to the “B” plaintiffs and they are entitled to rescind their contract. The defendants had not provided such plaintiffs with a copy of the condominium property report before they had signed their contract.

The defendant had argued that it sent the property report to “B” plaintiffs’ attorney and that delivery to an agent constitutes delivery to the principal. However, ILSA provides that the report must be “‘furnished to the purchaser.’” The definition of “purchaser” did not “reference agents.” Although ILSA had repeatedly used the term “agent” when it defined the “obligations of developers,” it did not refer to the term “agent” with respect to “the rights and obligations of purchasers.” The court opined that “[r]equiring developers to ensure that purchasers—as opposed to their agents—receive property reports makes it more likely that ‘potential buyers [will actually receive] the information they need to make an informed decision about their purchase.’”

Thus, as to the “B” plaintiffs, the defendants’ motion to vacate was granted, but its motion for summary judgment was denied and the “B” plaintiff’s motion for summary judgment was granted. The “B” plaintiffs contract was revoked and they were entitled to return of their deposit, other damages, attorney fees and costs in an amount to be determined.

The court then explained, “[w]hen a party to a contract repudiates, the non-repudiating party may ‘(a) elect to treat the reputation as an anticipatory breach and seek damages for breach of contract, thereby terminating the contractual relation between the parties, or (b)…continue to treat the contract as valid and await the designated time for performance before bringing suit.’” (Citing Lucente v. Int’l Bus. Machs. Corp., 310 F. 243 (2d Cir. 2002).

Since the “A” plaintiffs had declared their intention to revoke their contracts before the closing date and the defendant had continued to treat the contracts as valid, and notified each plaintiff of the closing date, and the plaintiffs had “failed to close on the designated closing date,” the court held that the “A” plaintiffs had breached their contracts. Thus, the defendant was entitled to retain the “A” plaintiffs’ “deposits, less any interest earned while they have been held in escrow” and pursuant to the contract, they were also entitled to reasonable attorney fees.

Rai v. WB Imico Lexington Fee, 09 Civ. 9586, NYLJ 1202622169830, at *1 (SDNY, Decided Sept. 27, 2013), Gardephe, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.