Background

The Visual Artists Rights Act (“VARA”) is an amendment to the federal copyright law that grants certain moral rights to visual artists, including the rights of attribution and integrity.  Under the right of attribution, an artist has the right to claim authorship of her work and to prevent the use of her name as the author of: (i) any artwork she did not create or (ii) any artwork that has been distorted, mutilated or modified in a way that is prejudicial to her honor or reputation.  Under the right of integrity, the artist may generally prevent: (i) any intentional distortion, mutilation or modification of an artwork that is prejudicial to her honor or reputation and (ii) the destruction of any work of recognized stature.

Importantly, artists maintain these rights regardless of whether they have sold or otherwise transferred the artwork or their copyright interests in the work.  For works created on or after June 1, 1991, the effective date of VARA, the rights provided for endure for the life of the artist, or in the case of a joint work, the life of the last surviving artist.  These rights may not be transferred, but they can be waived by a writing signed by the artist.

Certain exceptions to these rights exist.  For example, modifications caused by the passage of time (such as fading or dulling) or the inherent nature of the materials used to create the artwork do not violate an artist’s rights under VARA.  Additionally, modifications resulting from conservation (e.g., re-touching) or the public presentation (including lighting and placement) of an artwork are not VARA violations unless the modifications are caused by gross negligence.   Moreover, the law only applies to a “work of visual art,” which is defined to include paintings, drawings, prints, sculptures and artistic photographs, existing in a single copy or in a limited edition of 200 copies or fewer.  Posters, maps, globes, charts, technical drawings, diagrams, models, applied art, motion pictures and other audio-visual works are specifically excluded from the definition of that term.  Additionally, works “made for hire,” which are works that are prepared by an employee within the scope of her employment, are not protected under VARA.

Of interest to building owners is the so-called “building exception,” which applies to works “incorporated in or made a part of a building in such a way that removing the work from the building will cause modification of the work.”  These works do not get protection from modification if the artist consented to the installation of his work in the building (if pre-VARA) or if the building owner and the artist executed a written acknowledgment that removal of the work may subject it to modification (if post-VARA).  In addition, the right of integrity does not apply where an artwork can be removed without damage from a building, provided the building owner either makes a diligent, good-faith attempt without success to notify the artist of the intended removal or provides notice to the artist, who fails to remove the work or pay for its removal.  When the building owner has complied with this notice requirement, the artist has no claim under VARA when the work is removed.

Since its enactment over twenty years ago, courts have decided several hard cases interpreting the language of VARA.  In the real estate context, several courts have grappled with cases questioning whether the statute applies at all to the artwork in question.  For example, in Carter v. Helmsley-Spear, Inc. , 71 F.3d 77 (2d Cir. 1995), a trio of artists filed a lawsuit to prevent a building owner and manager from altering artwork that they were commissioned to create for a commercial building located in Long Island City, including several sculptural forms that they affixed to the walls and ceiling of the building’s lobby.   In that case, the court rejected the landlord’s claim that the work was “applied art” since it was affixed to the building, but nonetheless dismissed the artists’ case because the court found the artwork was “work made for hire,” and therefore not a work of visual at under VARA.   In Phillips v. Pembroke Real Estate, Inc., 459 F.3d 128 (1st Cir. 2006), an artist tried to prevent a manager of a public park from removing several sculptures that he created specifically for the park, including stone forms that were integrated into the landscape of the park.  The artist eventually lost the case after an appellate court ruled that his sculpture was site-specific artwork, which is not covered by VARA.   This ruling was called into doubt by a court which recently dismissed on other grounds an artist’s VARA claim challenging the modification of a wildflower garden he created for a city park.  See Kelley v. Chicago Park Dist., 635 F.3d 290 (7th Cir. 2011). Although the property holders prevailed in these cases, they had to endure protracted legal battles in order to resolve the artists’ claims under VARA.

The Take Away

Before artwork is installed on your building, you might want to consider whether to add language in your agreements protecting you from potential VARA claims.  If you are commissioning artwork to be displayed on your building, you should consider whether to include a provision in your commission agreement whereby the artist waives any and all moral rights, including the artist’s rights under VARA.  If you want to hire an artist to create artwork to be incorporated into your building in such a way that removal would damage the work, you should also consider obtaining a written acknowledgment signed both by you and the artist stating that the installation of the work may subject the work to damage.  You should also keep records that include the artists’ contact information and update these records regularly so that you can comply with your notification obligations in the event that you wish to remove an artwork from your premises.

If you think your tenant may commission artwork to be installed in a leased premises, you might want to consider including in the lease the tenant’s agreement to obtain a VARA waiver from any artist hired to create artwork for display on the premises.  You also may want to include in your lease a provision whereby the tenant would indemnify you for any damages incurred as a result of a VARA claim.

By Amelia K. Brankov, counsel at the law firm of  Frankfurt Kurnit Klein & Selz.

Our unassuming board is going to want to be made aware of certain regulations governing the security deposit before finalizing their commercial lease.  While the internet is a never-ending source of articles and guides relating to the legal requirements on landlords in the residential paradigm, the internet is noticeably less fulfilling in the commercial setting.  This is likely to leave our amateur landlord who is trying to navigate the commercial leasing waters perplexed.  Of particular concern to is (a) whether to deposit the security into an interest bearing account and (b) whether the security should be deposited into a separate account designated strictly for such deposits.

If our benevolent board decides to do their due diligence, they are going to run into some serious confusion the minute they begin reading the relevant statute, New York’s General Obligations Law (the “NYGOL”)  § 7-103(2-a), which reads, “Whenever the money so deposited or advanced is for the rental of property containing six or more family dwelling units, the person receiving such money shall . . . deposit it in an interest bearing account . . .”  Clearly enough, the statute requires the security to be deposited into an interest-bearing account if the rental unit is situated in a building with six or more apartments, and does not require the same for a non-residential building being leased strictly for commercial purposes.  But what if the building, like the one being operated by our unwary board, is being utilized primarily as a residential cooperative or condominium, but contains a commercial storefront?  Does the board have to put the security deposit for rental of the storefront into an interest bearing account because the property also contains six-plus dwelling units?  This type of scenario is hardly an anomaly, yet the ambiguous language of the NYGOL leaves those who have a reason to care with unanswered questions and a slew of potential legal ramifications.

So what is the Board to do?

There is a simple solution with little to lose as the NYGOL also allows the cooperative owner to retain a sum equivalent to “one percent annum” of the earned interest as an administrative expense.   It is pretty clear that the coherent plan of action for the board to take is to deposit their commercial tenant’s security into an interest bearing account and pay the tenant all interest earned, less one percent, regardless of the argument that the plain language of the NYGOL may not apply to commercial leases.

Now that the board is aware of the type of account to use and who is entitled to the interest, what should we make of the member’s suggestion to deposit the security into his personal business account?  The answer is much simpler than the previous conundrum.  A landlord may not comingle a tenant’s security deposit with other funds in a landlord’s general account.   Case law has held that the consequence of doing so is conversion which entitles the tenant to recover the deposit in its entirety even if the tenant may be in breach of the lease, a very bad result for our cooperative and the board of directors.   Paterno v Carroll, 75 A.D.3d 625, (N.Y. App. Div. 2d Dep’t 2010).  Moreover, the board has a compelling justification to act within the bounds of these laws as § 7-109 grants the Attorney General authority to bring suit in the name of the People of the State of New York for violations of the sections relating to security deposits.

Our recently learned board is also going to want to take into consideration a few other requirements before adjourning their monthly meeting.  § 7-103(1) also requires the landlord who places his tenant’s security into an interest bearing account to give notice to the tenant specifying the name and the address of the bank where the deposit is held, by which the depository bank must have a place of business in New York State.

Now that we have managed to keep our board of directors out of trouble with regard to security deposits, they can concentrate on more interesting matters, such as arbitrarily denying the most recent purchase application…

- Ryan V. Stearns and Jerome J. Strelov

More and more, real estate attorneys are going to closings which are delayed one, two, three or even four hours.  In a typical scenario, the closing is scheduled for 11AM, everyone arrives on time and the closing almost finishes smoothly but…  The buyer’s bank attorney does not have checks and everyone starts getting anxious.  The seller has moved out, the buyer’s movers are on their way and the seller needs to bring those checks to another closing to buy another apartment.

What just happened?

Some may argue that the root of this epidemic is the intolerably-designed and overly complex HUD-1 Settlement Statement (“HUD-1”) which is to be signed by the sellers and buyers in a deal involving financing and is supposed to simply provide a detailed summary of the financial aspects of the closing but is often the cause of extensive delays and agada.  The instructions alone, for this 3 page form are a mind boggling 11 pages long.

After going through the inevitable emotions of frustration, anger, and eventually apoplectic rage, it becomes logical to ask: Why is the bank attorney always late?  Why does he never show up with checks? Why hasn’t the bank’s wire hit yet?

In order to fully understand why this occurs, it is necessary to discuss the bank’s relationship to the HUD-1 and the effect it has on the lender’s attorney.

The bank’s procedure should work something like this: (1) The lender’s attorney receives a clear to close from the bank; (2) The lender’s attorney prepares the HUD-1 and sends it to the bank for approval;  (3) The bank approves the HUD-1 and sends the wire to the lender’s attorney in the early morning;  and (4) The lender’s attorney cuts the required checks and goes to a local branch of the bank to have these “certified” in time for the 11 AM closing.

Sounds simple enough right?  It is simple until the bank’s underwriting department does not approve the HUD-1 and sends it back for revisions sometimes two or three times.  Coalesce this with the large number of HUD-1s that one bank representative is responsible for, and suddenly what should have taken an hour or less, take north of 24 hours.  To go back to the original illustration, although your closing took place as scheduled, the HUD-1 was not approved until that day, and thus the wire was not sent out in the early morning, guaranteeing delays in the closing.  Once the wire finally does hit, the bank attorney has to somehow obtain certified checks, which usually means another trip back to the office to get the checks and then a journey to the bank (and a wait on line) to get the checks certified.  Meanwhile, closing small talk has been exhausted, managing agents are talking about increasing fees and tempers are flaring.

But wait, it can get even worse.  Sometimes in the mad rush to create the HUD-1, the lender’s attorney forgets or is unable to get the seller’s attorneys comments until the closing.  Then the fun really begins because the seller’s attorney will often find a missing charge or error and insist the HUD-1 be revised, causing the lender’s attorney, the buyer’s attorney and the bank to revise the HUD-1 in a panic mode which often results in further mistakes.

Add all of this together and you are in for a long delay, an angry adversary and additional expenses to what should have been a routine and celebratory event.  If this weren’t involving the time, money and emotions of several people around a closing table it would be humerous.

While most of these delays seem inevitable, one possible way to ensure that the closing occurs in a reasonable amount of time is to schedule it late in the afternoon.  Assuming there are no other issues, this will effectively give the bank and the bank’s attorney an ample amount of time to get the HUD-1 approved and the wire sent on time.

Another and less viable solution (in this overregulated environment) is to simply eliminate the dreaded HUD-1 and make our closings go faster and smoother.

- Jerome J. Strelov and Ryan V. Stearns

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Many people are aware of the dangers of carbon monoxide (CO) and most take the very necessary precaution of installing a CO detector in their homes.  Until this year, landlords were required to install CO detectors for their tenants under legislation passed in 2004.  However, CO detectors only have a useful life of about 6 years and, as a result, detectors installed in 2004 are now due for a replacement.

On December 27, 2011, Mayor Bloomberg signed Local Law 75 (the “Law”) which went into effect on April 27, 2012.  The Law requires, among other things, that all owners of class A multiple dwellings and private dwellings install CO detectors in each dwelling unit and replace such devices upon the expiration of their useful life.   The occupants are obligated to maintain the devices in good repair and to replace any device which is stolen, removed, missing or which stop working (NYC Administrative Code, §27-2046.1(b) and (c)).  Owners of class B multiple dwellings have the option of either installing a CO detector in each dwelling unit or a line-operated zoned carbon monoxide detecting system with central office tie-in and annunciation in all public corridors and spaces.  (NYC Administrative Code §27-2046.2).  Class A multiple dwelling are permanent residences and Class B are temporary residences.

The Law specifically sets forth that a CO detector installed prior to the April 2012 must be replaced by the owner when its useful life expires or by October 27, 2012 (6 months after the effective date of the law), whichever is later.

One question that comes to mind is whether owners of co-op or condo apartments are responsible for installing their own CO detectors.

In a condominium form of ownership, unit owners themselves are typically responsible for complying with regulations covering smoke detectors, window guards, asbestos and lead paint, while the condo board is responsible for complying with regulations concerning the common elements.

In a cooperative form of ownership, the board is the owner of the building and not the individual unit owners and it is the responsibility of the co-op to install smoke detectors, window guards, and deal with asbestos and lead paint.

However, Information on the City’s website indicates that, for owner-occupied coops and condos, the board and the shareholders must decide who is responsible for compliance with the law.

Although it is unclear, it seems that condo owners will be responsible for installing their own CO detectors while coop owners can rely on the coop corporation to do so.

In any case, all property owners should take steps to understand the Law, not only to avoid unnecessary fines or violations, but also to ensure that alarms are working in good order to avoid potential tragedies.  We suggest that regardless of who is responsible, occupants regularly test the detectors to make sure they are working.

For more information about carbon monoxide and NYC’s detector requirements, click here for the City’s FAQ’s pamphlet.

By Nahum M. Palefski and Jerome J. Strelov

Among the executor’s more vexing challenges can be the sale of a co-operative or condominium apartment.  In that situation, the buyer’s lawyer and title company will want to be very sure that the executor has the ability to make the sale free of any liens or claims.  For a co-op, the managing agent will also get into the act and demand his pound of flesh.  In order to complete the sale, the executor must usually provide the following:

1) Letters Testamentary:  or, if there was no will, then Letters of Administration:  These are the most crucial documents as they establish that the executor has been appointed by the Court and has the power to transfer the property.  No sane buyer would go forward without this;

2) Death Certificate:  This should be self explanatory although one has to wonder how an executor could get the necessary letters without a death certificate.  I guess this is just like wearing a belt and suspenders.

3) The Will:   A copy certified by the Court or the executor’s attorney should suffice.  Even the moderately careful lawyer will want to be sure that the will doesn’t say something like “I give my apartment to the my bird “Tweety”;

4) Affidavit of Debts and Domicile: In its most basic terms this simply sets forth where the decedent lived when he died so that any out of state liens or taxes can be dealt with and confirms that the decedent’s bills have been paid;

5) Title Company Affidavit:  This will be required in sales of condos and, if the buyer is getting leasehold title insurance, for co-ops.  This is effectively a more complex affidavit of debts and domicile but can be problematic for the executor who only  met the decedent once about 10 years ago;

6) Releases of Tax Liens: These may be required on both the state and federal levels.  Although the releases should be simple to obtain they can take a bit of time so they should be dealt with as soon as possible; and

7) An Affidavit of Heirship:  This is sometimes required in situations where there is no will and sets forth the relatives, (both living and deceased) of the decedent.

Even more challenged is the executor who is directed by the will to transfer the apartment to a particular heir.  In that case, the co-op or condominium documents must be carefully reviewed to determine if there are any restrictions on these types of transfers and what hoops have to be jumped through (i.e. think board packages) to complete the deal.

It was known as much for its 1950’s high school swing out seats as for its delicious burgers.  When they announced the closing saddened crowds of long time faithful customers gathered to eat their last meal.  I was one of them.

 Jerry gets primed for his last Prime Burger

I’ve been eating at The Primeburger for over 20 years and will miss the tomato soup and prime burger combo that was so popular.  But, as sad as I am to see this virtual landmark close, the real estate lawyer in me was curious as to what really happened, since I knew that the owners of the restaurant also owned the building.  The word on the street is that they sold the building with an ORAL promise to let them stay and run The Primeburger.  However, right before the closing, set for later this month, the almost new owners advised that they had other plans for the building and that The Primebuger, cool seats and all, had to get out of Dodge.   The lesson to be learned is basic yet as in this instance, often overlooked.  GET IT IN WRITING.

A writing is a writing is a writing. 

Here’s a great little short film about The Primeburger that is no more.  Sad.

FIRPTA stands for the “Foreign Investment in Real Property Tax Act” of 1980 (the “Act”).  Pursuant to US tax law, all persons, whether foreign or domestic, must pay income tax on sales of U.S. real property interests.  Domestic persons are subject to this tax as part of their regular income tax, but foreigners are not.  As such, the Act was passed to address how foreign sellers pay this income tax.  In order to ensure that foreign sellers pay the tax, the Act requires purchasers of real property to withhold 10% of the full sales price.   If the seller is a foreign corporation, the percentage increases to 35%.

Under the Act, a foreign person is a nonresident alien individual, foreign corporation that has not made an election under the tax law to be treated a domestic corporation, foreign partnership, foreign trust or a foreign estate.  It does not include a resident alien individual.

There are a few exemptions under which a seller may be exempt from FIRPTA, including:

1. If the purchase will  be used as a residence for a price $300,000 or less;

2. If the purchaser receives a statement from the seller that the seller is a not a foreign person;

3. If the purchase is of an interest in a non-publicly traded domestic corporation where the corporation provides the required affidavit; or

4. If the purchase is of shares of a publicly traded corporation.

The most common method of ensuring the purchaser that the seller is not a foreign person, and relieving the purchaser of the FIRPTA withholding, is by the seller’s delivery to the purchaser of an affidavit commonly called the “FIRPTA affidavit”.

If it is determined before closing that the seller is a foreign person, the buyer must report and pay over any tax withheld using IRS form 8288 and 8288-A.  In most cases, this must be done by the 20th day of the transfer.  When a title agency is involved in the transaction, the agency can verify the seller’s status and oversee the necessary paperwork.   If the transferor is a foreign person and the buyer fails to withhold the tax, that buyer may be held liable for the tax.  This potential exposure mandates particular attention to this often overlooked aspect of the real estate closing.

It goes without saying that a “foreign person” buying United States real estate should be aware that they will be subject to FIRPTA withholding when they eventually sell the property.

By: Nahum M. Palefski, Esq. and Jerome J. Strelov, Esq.

Here are some points to keep in mind when negotiating a loan commitment letter:

Prepayment Rights:  When lenders make loans, they expect a certain profit from the interest paid by the borrower over the course of the full term of the loan.  When a loan is paid off before the intended maturity date, the lender loses the benefit of its bargain.  In New York State, borrowers do not have a right to prepay loans except as may be set forth in the loan documents.  Therefore, borrowers should insist on an express right to prepay.  Negotiation will arise in the context of when the borrower may be allowed to prepay (at any time or only after a certain number of years into the term) and/or the amount of any prepayment (in whole or just in part).  Borrowers should also make sure that any prepayment penalty would not apply to the application of insurance proceeds as a result of a casualty or condemnation event.

Due on Sale:  With a loan that is secured by one property, it would difficult to challenge a provision allowing a lender to call a default if the borrower sells the property without the lender’s permission.  However, if the loan is secured by more than one property, the borrower will want more flexibility in this regard.  One way to make this provision more palatable is to ask that the lender’s consent to a sale not be unreasonably withheld, conditioned or delayed.  Another possibility is for the lender to allow one or more of the properties to be sold provided the proceeds are used to pay down the loan proportionately.  It is important to make sure these scenarios fall outside the general prepayment provision and will not be subject to prepayment penalties, if any.

Transfer Rights:  The provisions concerning the transfer of interests in the borrower are often difficult and highly negotiated.  A lender’s primary concern regarding transfers of interest in the borrower is really one of change of control.  The lender makes a loan to a company based on many factors, one of which is its comfort level with the principals of that company.  However, a borrower should always campaign for a bit of wiggle room.  Specifically, a borrower should be allowed to make transfers that do not violate the lender’s primary concern.  For example, transfers that do not result in a change of control or transfers to affiliates or to family members in connection with bona fide estate planning should be permitted.

Guarantors:  A principal of a borrower that is asked to give a personal guaranty of the loan should tread cautiously.  Lenders will always prefer broad liability, but these individuals should strenuously resist.  Ways to reduce liability include setting a maximum amount of exposure or limiting the guaranty to interest only.  Another way is to provide for a release if the borrower meets certain conditions (e.g., operating income or debt-to-equity ratios).

Escrows:  Many loans will call for certain funds to be held in escrow.  Typically, these are for real estate taxes and insurance payments.  Obviously, a borrower should try and eliminate these accounts entirely, but if the lender insists, a borrower could try and have the accounts set up only if there is an event of default.  A borrower should also oppose the Lender’s preference to hold the funds in non-interest bearing accounts.

Closing Costs:  Although the borrower generally does not have much leverage to negotiate many of the bank fees and expenses, it is important that the commitment letter detail all the costs and fees that the borrower is going to be expected to pay and their due dates.  Typically, these include any origination fees, the cost for the environmental site assessment, the appraisal, flood zone certificate, lender’s counsel’s fees and other miscellaneous bank service fees.  If the borrower is expected to pay for the bank’s legal fees, perhaps a cap can be negotiated so that the borrower’s exposure is limited.

As mentioned above, a loan commitment letter merely provides a general outline of the understandings between the parties that will be developed in greater detail in the loan documents themselves.  However, much time and effort (and legal fees) can be saved if those understandings are sufficiently laid out in the commitment letter, ensuring that there are no surprises as the parties move further into the process.

By Nahum M. Palefski

First things first.

These are some of the things to look for in a brokerage agreement:

1)      The term:  Just how long do the Sellers have to work with the broker?  How easy is it for the Sellers to end the relationship and sign up with broker No. 2?  While the Sellers first preference might be for a shorter term then the Broker wants,  Sellers should consider that if the term is too short or the Sellers can cut out the Broker on too short a notice, the Broker may not be as willing to put as much effort (think advertising money and time) into the deal.  So it may not work in the Sellers favor to have too short a term.  Brokering is hard work and takes a great deal of time, effort and expense and it may not be in the Sellers best interest to disincentivize their Broker by keeping him or her on too tight a leash.

2)      The commission:   This one is obvious but Sellers should realize that in an “exclusive arrangement”, they will owe the commission even if they sell the property to their Aunt Tilly UNLESS the agreement says otherwise.  The agreement should also spell out if there are any reduced commissions (i.e. “4% if I sell to my next door neighbor Bob in the next 30 days”).  The Sellers will naturally want to pay a lesser commission but should note that a lower commission may result in lost opportunities since buyers’ brokers (who share the commission) might prefer to steer their buyers to properties offering a higher commission.

3)      Post Contract Sales:  It ain’t over till it’s over.  Many brokerage agreements fairly provide for the Sellers to still pay the commission AFTER the term so long as there was a sale to a buyer whom the Broker found. Fair is fair but the Broker should provide a list of the people he or she introduced to the property and there should be some time limit.

4)      “If, as and when”:  The four most frightening words in the English language to brokers.  The agreement should be clear that the Broker only gets their commission “IF AS AND, WHEN” a contract is signed, the deal closes and the Sellers get paid!

5)      Indemnity: Sellers should be protected from claims by other brokers that the Broker they are dealing with brought to the property.  Brokers hate this but it is fair.  Many brokers will reluctantly agree to it at least up to the amount of commissions they are paid.

6)      Should the Broker get a commission if the buyer defaults and the Sellers wind up keeping all or some of the downpayment?  Some brokers want their commission on the downpayment if the deal falls apart after the contract is signed.  While this seems sort of reasonable it is also fair that the commission be based on the amount of downpayment the Sellers keep AFTER all the Sellers’ costs (think legal fees in a protracted fight over the downpayment) and expenses.

While there are other issues to think about (such as  the listing price and advertising) the above list is a reasonable start of the basic points to consider when entering into a brokerage agreement.  Good Luck with your sale!