Courts are supposed to use authorized rules developed over time in earlier court docket choices or via laws. This creates predictability. It permits individuals in actual property transactions—and their counsel—to know with cheap confidence what the implications of actual property agreements and deal constructions will probably be.
In a weird choice earlier this 12 months, a trial court docket in Brooklyn made up rules of actual property regulation that really don’t exist in any respect however could have been handy or useful for deciding the case.
The underlying info have been difficult. In 2016, a property proprietor signed a contract of sale. Issues arose with the vendor’s title. Perhaps there was a federal tax lien. The closing dragged out for years. The vendor by no means appeared very keen about really closing the deal, or about continuing in accordance with the pre-closing course of contemplated by the contract. The vendor tried, ineffectively, to terminate the contract due to the title issues.
Impartial of all that, quickly after the client and vendor signed their contract, in addition they appear to have signed a 99-year lease underneath which the client as tenant agreed to pay $10 as lease for the whole lease interval.
Ultimately, in 2022, the vendor determined to promote the property to a distinct purchaser. The primary purchaser went to court docket to attempt to block the sale, on two grounds. First, the vendor was nonetheless underneath contract to promote the property to the primary purchaser, which raised difficult factual and authorized questions that lie outdoors the current dialogue. Second, the primary purchaser claimed that it held a 99-year lease that will successfully frustrate or forestall the sale to the second purchaser.
The court docket wanted to contemplate, amongst different issues, the impact of that potential 99-year lease.
The court docket famous that the New York Tax Legislation treats 99-year leases as conveyances, and imposes a state switch tax on them. However no state switch tax was paid. The court docket additionally famous that nobody ever bothered to report the 99-year lease.
Based mostly on these two circumstances, the court docket declared that the lease was “unenforceable.” In different phrases, failure to pay state switch tax on a lease or failure to report that lease makes the lease unenforceable, in keeping with the court docket.
Neither proposition accurately states New York regulation.
The New York Tax Legislation establishes an enforcement mechanism for switch taxes on conveyances of actual property. Nowhere does that mechanism say that failure to pay state switch tax leads to an unenforceable conveyance. It leads to penalties, legal responsibility for the recipient of the conveyance, curiosity funds, judgments, foreclosures, and extra. The Legislature is admittedly good at developing with punishments for the actual property trade. If the Legislature meant to invalidate a conveyance for nonpayment of state switch tax, it could have stated so.
On a extra technical or maybe amusing word, the state switch tax applies solely when the quantity paid for the conveyance exceeds $500. Underneath the info of this case, the consideration fell wanting that threshold by $490, so no state switch tax was due in any occasion.
Likewise, nothing in New York actual property regulation mandates that anybody should report a lease, even a 99-year lease. Most individuals do report such leases, for superb causes. Failure to report doesn’t impair the enforceability of the lease as between landlord and tenant. It stays in place as a superbly enforceable obligation between two events. If the owner doesn’t stay as much as its lease obligations, the tenant may have a superbly good authorized declare towards the owner.
Maybe the court docket was typically skeptical of the existence of the lease and made up regulation to invalidate it. Maybe the court docket regarded the whole saga as reflecting badly on each purchaser and vendor. In any case, the remedy of the 99-year lease was an instance of artistic writing by a court docket, versus the sound software of established authorized rules. If anybody took it severely, it could undercut the soundness that’s important in actual property transactions.
The case demonstrates that one can not at all times depend on courts to get it proper. In response, individuals in actual property transactions must attempt to hold issues easy and easy, which actually didn’t occur on this explicit case. There’s additionally the chance that the choice will probably be appealed. It needs to be, however an attraction most likely doesn’t justify the expense.