Development—Adjacent Property Owner Entitled to Damages Caused by Adjacent Construction—Strict Liability for Damage Caused by Excavation—Damages Included Construction Costs, Lost Rent, Tenant Relocation and Buyout Costs and Professional Fees

The plaintiff owned a 10-unit apartment building located in Manhattan. An adjacent property contained a parking garage owned by defendant “A.” “A” had commenced construction work on its garage, including excavation work to create a sub-basement. Defendant “B” was “A’s” general contractor. “C” was “a subcontractor for foundation, underpinning and concrete work.”

The NYC Department of Buildings (DOB) had issued a notice of violation (notice) stating that “A” had violated NYC Admin. Code §27-1031(b)(1) by failing “to properly carry out excavation work at more than 10 feet below grade and to protect the adjoining property.” The notice stated that “A” had excavated to 16 feet, and in doing so, had “failed to protect adjacent structures resulting in ‘substantial cracks & separation on various floors of adjacent properties.’” The DOB ordered “A” to cease “all excavation work” and to “[i]mmediately stabilize & protect adjacent structures.” The DOB issued a second notice which indicated that “there was ‘major structural damage to adjoining structure.’” “A” challenged the second notice at an administrative hearing. The Administrative Law Judge (ALJ) found that “the lack of structural support created dangerous conditions and that the work that was done constituted ‘unsafe excavation.’”

The plaintiff had been forced, by reason of “structural damage caused by the excavation of the garage,” to vacate its apartment building, which had been fully rented at the time. The plaintiff retained counsel to assist in the process of “buying out and relocating tenants.” The rent roll had been approximately $16,000 per month. The building had been completely vacated by December 2005 and remained vacant for four years until December 2009.

Additionally, the plaintiff had hired engineers and experts to analyze the damage and to make emergency repairs, including “underpinning, shoring and support work….” The plaintiff was required “to rebuild structural elements.”

The plaintiff incurred more than $2,000,000 in construction costs and had been compelled to finance such work. It had incurred approximately $484,000 in finance closing costs and interest. Moreover, the plaintiff’s insurance company would not renew its coverage and replacement insurance was at a substantially higher cost. The plaintiff had received approximately $800,000 from its insurer for property damage and lost rental income.

The plaintiff had sued “A,” “B” and “C.” “C” had failed to answer the complaint. The plaintiff had moved for a default judgment against “C.” However, such motion had previous been denied as untimely and the plaintiff’s case against “C” was dismissed. “A” thereafter commenced a third-party action against “C” for indemnification and contribution. “C” again failed to answer. The court had previously found that “C” had defaulted and ordered “an inquest for an assessment of damages.” “A” did not pursue the inquest immediately since the main action against it was still being litigated. Thereafter, the remaining defendants, except “C,” “entered into a partial settlement…with Plaintiff.” The settlement amount was $1.4 million. All defendants other than “A” and “C” were released from further liability.

Thereafter, the court had to determine “A’s” liability to the plaintiff, the amount of damages owed by “A” to the plaintiff and “A’s” assessment of damages in its default case against “C.” “A’s” submissions focused on its claim against “C.” “A” did not take a position with respect to the plaintiff’s request for a judgment against it or the amounts requested by the plaintiff. Rather, it argued that “any amount adjudged against it for Plaintiff’s damages should…be added to ['A''s] assessment of damages against ['C'].”

The court explained that:

Under Administrative Code of the City of New York §27-1031(b)(1), if an excavation was undertaken at a depth of more than ten feet below the legal curb level “the person who causes such excavation to be made shall, at all times and at his or her own expense, preserve and protect from injury any adjoining structures.” In Yenem Corp. v. 281 Broadway Holdings… the Court of Appeals recently found that this law imposes strict liability on an owner of property whose violation proximately caused damage to an adjoining building.

The court cited the DOB violations and the ALJ decisions with respect to the damage and causation. Citing Yenem, the court held that “A” was strictly liable to the plaintiff.

The court explained:

Where a building is damaged by the negligent removal of lateral support by its neighbor…the proper measure of damages is “reasonable cost of restoration,” including the cost of repairs and “reasonable value of the services of engineers employed to ascertain the extent and cause of the injury”…. Owners are also entitled to loss in rental value during the time repairs are being made….

The plaintiff sought more than “$5 million dollars, including the costs of repairing structural damage, lost rent, and professional fees.” The plaintiff provided “cancelled checks and hundreds of invoices.” The court found that the plaintiff had demonstrated that “many of its damage claims are recoverable reasonable restorations costs.” However, some damages had not been proven and required a hearing.

In addition to approximately $2 million in construction costs, the plaintiff had paid approximately $15,000 to “A” pursuant to a court ordered licensing agreement. A court had, pursuant to RPAPL §881, permitted the plaintiff to work from the roof of the garage to complete remedial work.

The plaintiff had received approximately $663,000 from its insurance carrier for part of the expenses. The construction damages requested, less insurance payments, was approximately $1.5 million. The court found such damages to be reasonable and also awarded, counsel fees of approximately $8,500 relating to obtaining “the court ordered license to complete the remedial work.” The court further awarded approximately $750,000 for approximately five years lost rent, after deducting the approximately $136,000 of insurance proceeds.

The plaintiff also sought to recover approximately $31,000 incurred in buying out tenant leases and relocating tenants. Additionally, the plaintiff had paid a brokerage fee of approximately $16,000 “to re-let the apartment building” after completion of the repair work. The plaintiff also paid approximately $23,000 to its landlord/tenant counsel with regard to tenant relocation costs. The court found that such expenses “reasonably flow from the necessity to vacate the apartment building in order to undergo repairs” and granted approximately $70,000 for tenant relocation and brokerage fee costs.

The court further found that plaintiff’s expenditure of approximately $366,000 over an approximately five-year period for experts who rendered advice as to how to remedy the problems, was reasonable. The court also awarded approximately $8,500 for the legal cost of obtaining a license to enter “A’s” property. Thus, the court awarded approximately $375,000 for professional services. However, the court found that there was “no authority” to award the expenses attributable to the approximately $550,000 increase in the insurance premium and “without further proof,” the court would not rule on that claim at that time.

Additionally, the plaintiff sought approximately $200,000 in closing costs and approximately $284,000 in interest payments in connection with its $2 million construction loan. The court opined that such costs and interest seemed “somewhat high” and the plaintiff had not provided “authority for the proposition that” such costs should be “included in assessing the reasonable costs of restoring a building.” The plaintiff had not shown that any part of such 2010 loan was used to pay for restoration work which had been completed by December 2009, when the plaintiff re-let the building. The court stated that the plaintiff must present legal authority and evidence as to why such expenses should be charged to “A.”

The plaintiff had also sought approximately $121,000 for “Financial Counsel” costs, but did not give a breakdown of services rendered, nor cite “to any authority allowing the Court to consider such fees as a reasonable part of the damages.” The court rejected such request. Additionally, the plaintiff sought approximately $800,000 in damages representing the amount that the insurer had paid to the plaintiff for its losses, plus statutory interest as part of a subrogation claim. The plaintiff relied upon a confidential agreement it had made with its insurer, pursuant to which the plaintiff was allegedly given the insurer’s subrogation rights to its claims against “A.” However, the court would not enforce such “side agreement between the Plaintiff and its insurance company, the existence of which has not been shown.” The court opined that awarding such sum “would provide Plaintiff with a double recovery, to which no party is entitled.” If the plaintiff intended to pursue this claim, it needed “proof in hand that such a recovery is legally proper and appropriate.”

Thus, the court awarded the plaintiff damages against “A” in the amounts of approximately $1.5 million for construction costs, approximately $750,000 for lost rent, approximately $70,000 for relocation and buyout expenses and approximately $375,000 for professional fees for a total damage amount of approximately $2.7 million. Since the plaintiff had already received $1.4 million in partial settlement of the case, the plaintiff was entitled to approximately $1.3 million, plus prejudgment interest.

“A” asked for an assessment of damages against “C” on its indemnification claim. The court saw “no reason why it is entitled to the entire amount” of the $1.4 million settlement money. The settlement was paid by four separate parties to the litigation. “A’s” portion was approximately $292,000. The court found that “A” was entitled to be indemnified for that part of the settlement that was paid to the plaintiff, and therefore, awarded “A” approximately $292,000 against “C” “on default for indemnification of its partial settlement payment.” The court also awarded a default judgment to “A” against “C” for approximately $1.3 plus interest.

Comment: NYC Admin. Code §27-1031(b)(1) had been repealed effective July 1, 2008 and had been replaced with an “equivalent provision in the New York City Construction Code.” The court noted that the issue of “[t]he question of whether a violator of this new provision is strictly liable for damage proximately caused by a violation was not addressed by the Court of Appeals in Yenem and is not before this Court.” However, the court noted that “at least one court citing the reasoning in Yenem has found that strict liability does attach to this new provision.” See American Security Insurance v. Church of God of St. Albans, 38 Misc.3d 274 (Sup. Ct., Queens Co. 2012).

East 77 Owners Co. v. King Sha Group, 603340/07, NYLJ 1202611071033, at *1 (Sup., NY, Decided July 2, 2013), Schoenfeld, J.

Adverse Possession Claim Against the MTA Survives Motion to Dismiss­—Governmental/Proprietary Capacity Test Remains Valid

The plaintiff owned property that was adjacent to property owned by the defendant Metropolitan Transit Authority (MTA). The plaintiff sought, inter alia, a determination that it is the owner of the adjacent property by reason of adverse possession. The MTA moved, pre-answer for, inter alia, an order dismissing the verified complaint. The MTA primarily argued that “[t]he law of adverse possession does not apply….”

The court explained that:

Adverse possession requires that the possession be hostile and under claim of right, actual, open and notorious, exclusive, and continuous for a period of 10 years’…. Plaintiff’s…Complaint alleges these elements…. Since, if proved, Plaintiff’s purported adverse possession would have “ripened into title” prior to the effective date of certain amendments to the Real Property Actions and Proceedings Law, the amendments are not applicable here….

The “only purported ‘documentary evidence’ submitted” by the MTA were copies of the NYC Department of Finance Quarterly Statements of Account for the property from July 2008 through November 2012, showing that property taxes had not been paid. The court stated that “[a]ssuming that the property tax records are in admissible form and that they constitute ‘documentary evidence’ for purposes of CPLR 3211(a)(1), they do not warrant dismissal of the Verified Complaint.” With the exception of the most recent quarterly statement, which showed the owner’s name “as ‘NYC MTA’ and its ‘mailing address’ on Madison Avenue, all of the statements show the ‘Owner name’ as ‘Not On File’ and either a blank ‘Mailing address’ or the notation ‘Bad Location Address.’” Moreover, “‘the failure to pay taxes is not conclusive evidence’ on a claim for adverse possession” and in some cases, it “would be ‘irrelevant.’” The court opined that such evidence does not “utterly or conclusively” dispute the plaintiff’s claim.

The MTA relied on cases which held that “‘a municipality cannot lose title through adverse possession to property which it owns in its governmental capacity, or which has been made inalienable by statute’; but that ‘[c]onversely, when a municipality holds real property in its proprietary capacity, there is no immunity against adverse possession’….” The foregoing immunity from adverse possession “has been conferred on other governmental entities.”

The MTA had not cited any “appellate authority applying these principles to a claim of adverse possession to property held by a public authority like defendant MTA, but at least one trial court has so held…and Plaintiff here does not challenge it.” Moreover, the court noted that the MTA “performs ‘an essential governmental function.’”

The MTA had asked the court “to hold that all property to which [MTA] has title is immune from adverse possession.” The MTA cited a 1988 Court of Appeals decision in support of its contention that the “governmental/proprietary distinction should be abandoned.” Such decision addressed a city’s “imposition of its land use requirements” on a county and held that the “governmental/proprietary ‘labeling device’ should be replaced with a ‘balancing of public interests’ analytic approach.” The subject court found such ruling to be “inapposite,” and noted that the Court of Appeals “continues to use the governmental/proprietary analytic approach in other areas,” including the adverse possession area of the law.

The court also rejected the MTA’s argument that “all of the MTA’s property should be deemed to be held ‘in a governmental, rather than proprietary capacity’…, not as a matter of fact (which would be, at best, unusual on a CPLR 3211 [a] [7] motion to dismiss), but as a matter of law by reason of the statutory provisions that determine Defendant’s existence and operation.” “The immunity from adverse possession conferred on certain governmental property is based upon the inalienability of property dedicated to the public trust and not held for the purpose of sale or other disposition….” In the subject case, the court held that it “need go no further” than to determine that the MTA had not established that the property is “immune from adverse possession as a matter of law.”

The MTA had further contended that the “[p]laintiff’s overt acknowledgment of MTA’s ownership” in the complaint is “fatal to its adverse possession claim.” The court stated that “[u]nder the law as it existed at the time title allegedly vested in [Plaintiff], ‘in the absence of an overt acknowledgment during the statutory period that ownership rested with another party, actual knowledge of the true owner did not destroy the element of claim of right.’” The court further stated that “[a]ssuming that the…allegations from the…Complaint are found to be judicial admissions that are conclusive on the facts asserted…, and that they would qualify as ‘overt acknowledgment’ of [MTA's] ownership of the disputed property, which [MTA] does not address by reference to any case authority,” “the acknowledgment was clearly not made ‘during the statutory period.’” Moreover, the plaintiff’s “failure to pay taxes on the disputed property adds nothing.” Accordingly, the court denied the MTA’s motion to dismiss.

Brocho V’Hatzlocho Corp. v. MTA, 23735/12, NYLJ 1202610060036, at *1 (Sup., KI, Decided July 2, 2013), Battaglia, J.

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