Based on California Law

Our office is commonly asked whether a contractor who files an action to foreclose on a mechanic’s lien can recover his attorneys fees against the owner of the property if he prevails at trial. There is a distinction in the type of cases where a contractor seeks to foreclose on a mechanic’s lien. Where the contractor has a direct contract with the owner, that contract may contain a provision for the recovery of attorneys fees. In that case, the contractor may obtain an award of attorneys fees for prevailing on the breach of contract action, but not on the mechanic’s lien action. It may appear that the contractor is getting his attorneys fees because it is all part of the same action, but the attorneys fees award is on the contract. A mechanic’s lien is an action against property for the value of the improvement. The claim on the contract is not secured whereas the mechanic’s lien is secured by the property.

The more common scenario where the issue arises is where a subcontractor or a material supplier files suit on a mechanic’s lien because that person or entity was not paid by the subcontractor or contractor with whom they have a contract or purchase order agreement. The supplier or subcontractor may be suing the owner because the person that they have a contract with is insolvent, has filed bankruptcy, or has nothing. That lawsuit is against the property; there is no right to attorneys fees.

The mechanic’s lien is limited to the reasonable value of the labor, services, equipment or materials furnished, or the price agreed upon by the lien claimant and the person with whom he or she contracted, whichever is less. That statutory language does not include attorneys fees.

If he or she prevails, the mechanic’s lien claimant is entitled to interest from the date of the lien being recorded, as well as certain “costs” which are nominal, and typically only include court fees, court reporter’s fees, etc., and not attorneys fees. The claimant is entitled to the interest and costs not because of the lien action but because he or she is a successful litigant. Anyone successful in a lawsuit is entitled to these nominal costs and interest if the sum was capable of being determined. For example, the interest you would be entitled to is the legal rate of interest (currently 10 percent), and not the rate of interest in your contract.

The reasoning for not allowing attorneys fees to be recovered is that the mechanic’s lien claim is against the property, and is limited to the amount that the property was improved by the lien claimant. It is not based on the contract. Therefore the only amount that can be charged against the property is the “improvement” of the property. Attorneys fees do not improve the property, but bricks and mortar do.

The presentation and/or documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents.

Article written based on New Jersey Law

1. When the Clerk or Judge calls the list of all matters scheduled, if the landlord is present in the courtroom and the tenant is not, the tenant will be “in default.” In that case, a judgment granting the landlord possession of the leased property may be entered against the tenant after the landlord has filed an affidavit proving a right to possession. Forms are available in the courthouse. If the tenant is present in the courtroom and the landlord is not, the landlord’s complaint will be dismissed without prejudice, meaning it may be filed again without penalty.

2. In non-payment of rent cases, the tenant has the right to pay the full amount of rent into court (or with the clerk) by the close of the business day that the trial is set for and have the case dismissed.

3. A landlord may not evict a tenant based upon failure to pay any attorneys’ fees, costs or late charges, unless there is a lease provision which states that such fees are collectible as rent. Even if the lease allows such charges to be collected, the amount due as rent may be limited by a rent control ordinance, or in the case of public or federally-assisted housing, by federal law.

4. A landlord and tenant may decide to settle a case before court, but the decision is entirely voluntary. Any settlement should be reduced to writing and filed with the court. This will protect both parties in the event of a breach by the other. Most Courts require that the terms of the agreement be “placed on the record,” in open court. This is for the protection of both parties as well. A settlement agreement should be placed “on the record” as a matter of course if there are complex terms, or if the tenant is agreeing to vacate.

5. If the tenant wishes to challenge the allegations or accuracy of anything stated in the complaint, including the amount of rent due and owing, the tenant has a right to a trial before a judge.

6. The entry of a judgment for possession means that a landlord may request the court clerk issue a Warrant for Removal to a Court Constable and the tenant can be evicted.

7. If a judgment for possession is entered, a Warrant for Removal may not be issued until three days later. The Warrant for Removal authorizes a Special Civil Part Officer (Constable) to lock out the tenant three days after the Warrant has been served on the tenant. Service of the Warrant is generally accomplished by the Officer leaving a copy at the tenant’s apartment. The lock out may not occur on a weekend or on a judicial holiday. Also, weekends and holidays are not counted in calculating the number of days before the Warrant can be signed or issued. This means that the tenant will be locked out at a minimum of eight days from the day judgment of possession is entered..

8. If a judgment for possession is entered after a trial, or because a tenant did not appear in court, or because the tenant agreed with the landlord to the entry of a judgment, a tenant has the right to apply to the court for a hardship stay at any time up to ten (10) days after the Warrant for removal has been executed (door locked!) The court may grant or deny the stay and the landlord has a right to be heard at the hearing on the application. A stay of the judgment means that the tenant will not be removed for as long as the stay is in effect. The court may grant a stay for up to a maximum of 6 months. During the period of the stay, the tenant must pay all back rent, pay the future rent on time, not disturb the neighborhood, and not damage the property. After the stay is over, the tenant may be evicted by the landlord through the Constable without any further judicial action unless the Court grants an extension not to exceed 6 months from the date of judgment.

9. The Court provides a list of social service agencies that may be able to help tenants find other housing or provide grant monies.

10. If a landlord and tenant agree to an eviction, a consent judgment for possession must be prepared. When this happens, the landlord must also submit, in writing, a sworn statement that one of the causes for eviction authorized in the eviction statute has occurred. This sworn statement must be filed before the court will accept the consent judgment. The sworn statement must also state that all fees and charges sought by the landlord are allowed by federal, state and local law, as well as the lease.

Article written based on New Jersey Law

Many clients and readers of News & Views call or e-mail me with recurring questions regarding a real estate acquisition. The purchase of a home, or first venture into multi-family realty, for most individuals requires a substantial investment of time and money. A general understanding of the nature of the transaction can help avoid many costly errors. In this two part article I will attempt to answer, in plain language, the following questions:

PART I

-What do real estate agents or brokers do?
-What is a listing broker?
-What efforts will the real estate agent make to sell the property?
-When is the broker’s commission earned?
-What is a binder?
-What is a contract for purchase and sale?
-Can a contract for purchase and sale be contingent (conditional)? -What is a mortgage?
-What types of mortgages are available?
-What portion of a monthly mortgage payment actually goes towards reduction of the loan?
-Where can a purchaser obtain a mortgage?
-How does a buyer obtain a mortgage loan?
-How does a borrower know what a mortgage loan will cost and what the monthly payments will be?
-What happens if the buyer defaults on his mortgage loan and fails to make payments?

Q. What do real estate agents or brokers do?

A. A suitable property for purchase can be found in many different ways. Driving through a desirable neighborhood will often disclose “for sale” signs posted on lawns. Advertisements for property by geographical location are listed in the classified section of almost every newspaper. Primarily, however, people find real estate through the use of a real estate agent or broker. Real estate agents charge a commission based on a percentage of the sales price of property sold. The percentage can vary widely and range from as little as 1% to as much as 6% or more. Often, the commissions are negotiable. As real estate brokers are almost invariably the agent for the seller; they owe a duty to the seller to act with the utmost of good faith. The agent will, therefore, attempt to obtain the highest possible purchase price for his client. A buyer may be able to locate an agent who will work just for him/her; such agents are sometimes called “buyer’s brokers.” A buyer’s broker generally will charge by the hour or on a flat fee basis.

Q. What is a listing broker?

A listing is a contract that gives a broker a right to sell property. The listing agreement details the broker’s commission upon successfully locating a buyer. Listings are ordinarily given for specific periods of time, e.g., 6 months or 1 year. There are three basic types of listing:

Ø 1. Exclusive right to sell - this type of listing assures the agent that regardless of who sells the property, the listing agent will receive at least a portion of the sales commission, even if the owner is the one who finds a buyer.
Ø 2. Exclusive listing - in this type of listing the seller may not list the property for sale with any other broker. Generally, the owner may sell the property independently without incurring liability for commissions.
Ø 3. Open listing - this type of listing allows the owner to list the property with several agents; the first one to sell the property receives the commission.

Q. What efforts will the real estate agent make to sell the property?

A. Real estate agents will often advertise listed properties in newspapers or specialty journals. In New Jersey as well as many other states, they will post the property with a multiple listing service alerting other agents that the property is available for sale. If a real estate agent other than the broker subsequently sells the property, the commission is shared with the listing broker.

Q. When is the broker’s commission earned?

A. This question is often the subject of protracted litigation. A simple answer is that a broker’s commission is earned and payable once a buyer who is ready, willing and able to buy the property is located through the efforts of the broker. If the owner refuses to “close” (conclude) the transaction after a buyer has been found, the owner is obligated to pay the agent’s commission. Likewise, if a buyer defaults (refuses to close) after a purchase contract has been signed, the broker will generally be entitled to all or a portion of the deposit money paid by the buyer, depending on the terms set out in the contract of sale. A broker who introduces parties that consummate a sale even after the listing has expired is generally entitled to a commission.

Q. What is a binder?

A. Occasionally, the purchase of real estate begins with a buyer signing a memorandum indicating a willingness to buy the property under certain conditions. Often, a deposit accompanies the binder. Depending on the language of the binder, it may or may not constitute a binding contract. A purchaser should never sign a binder without the advice of a legal representative.

Q. What is a contract for purchase and sale?

A. Once there has been a meeting of minds between buyer and seller on the terms of purchase of property, a written contract will be prepared and signed by all of the parties. The contract will specify the purchase price, any applicable conditions such as rights of inspection, financing terms and a proposed date and time of closing. A contract for purchase and sale is the final word on the agreement between the parties. Any oral agreements or promises made before the contract is signed are void and unenforceable. The purchase and sale agreement should provide that any earnest money (deposit) will be placed in either the broker’s or an attorney’s escrow (trust) account to ensure that the buyer will get his money back if the purchase is not completed due to no fault of the buyer. There can be no valid or enforceable oral agreement for the purchase or sale of real estate.

Q. Can a contract for purchase and sale be contingent (conditional)?

A. Various contingencies and conditions are often contained in real estate contracts. Contracts usually provide that the buyer will make a good faith effort to obtain a mortgage and that if the buyer fails to qualify for a mortgage, the contract is cancelled and all deposit money will be returned. The contract will also generally be conditioned on the seller being able to convey good and marketable title to the purchaser, i.e., that there are no liens or claims against the property and that it is owned by the seller.

Q. What is a mortgage?

A. Unless a purchaser will be paying all cash to purchase property, they will have to find a lender willing to finance the purchase. Various banks or mortgage lenders can assist in locating lenders and or will actually make the loan. A mortgage is a contract that gives the lender a “secured interest” in real estate. This means that if the borrower fails to make his mortgage payments, the lender can foreclose the mortgage and take the property. Mortgages are accompanied by promissory notes that set out the amount of money owed and how it is to be repaid.

Q. What types of mortgages are available?

A. There are several categories of mortgages and payment plans. The 3 most common include:

Ø 1. Conventional mortgages - a conventional mortgage provides for payoff of the loan (amortization) over a fixed number of years. At the end of the mortgage term, the mortgage will have been paid off and the borrower will receive a “satisfaction” document, indicating that no additional money is due. The interest rate in a conventional mortgage may be fixed (stay the same through the entire loan period) or be variable (subject to annual adjustment up or down). Variable interest rates are generally tied to a national standard interest rate that is published annually.

Ø 2. Balloon Mortgage - a balloon mortgage offers short term financing to a borrower. While payments may be calculated based on a long-term (e.g., 20 year) payout, the mortgage “balloons” or becomes payable in full after a shorter term (e.g., 5 years.) For example, a $100,000 mortgage may be amortized (payments calculated) for a payout over a 20 year period at an interest rate of 8%; the parties agree that at the end of 5 years the entire balance of the mortgage “balloons,” or becomes due. When the mortgage balloons, the buyer will generally have to obtain a new mortgage.

Ø 3. Purchase Money Mortgage - A purchase money mortgage is a conventional or balloon mortgage that the seller gives to the buyer to finance the purchase of the property. These mortgages are often given to buyers who have a poor credit history and would otherwise be unable to obtain financing to complete the purchase.

Q. What portion of a monthly mortgage payment actually goes towards reduction of the loan?

A. The amortization (payoff) of mortgages is scheduled so that in the early years, the largest portion of the monthly payment is allocated to interest and only a small portion to principal. This means that after 5 years of payments on a 20 year mortgage, there will be only a small reduction in the principal amount of the loan. In later years, a larger portion of the payment actually is applied to loan reduction.

Q. Where can a purchaser obtain a mortgage?

A. In addition to banks, mortgages may be available through mortgage companies. A buyer may utilize the services of a mortgage company or broker. Some lenders offer federally guaranteed mortgages that are backed and insured through federal agencies, such as the Federal Housing Administration (FHA) or the Department of Veteran’s Affairs (VA). The FHA or VA may finance up to 100% of the mortgage loan. Conventional lenders will generally only fund 90% or less of the purchase price of a primary residence, and 80% or less for commercial or investment realty, and will require that the non-financed portion be paid directly by the purchaser at or before the closing.

Q. How does a buyer obtain a mortgage loan?

A. The mortgage lender will require the buyer to provide a credit history, tax returns, and other financial information to determine whether the buyer is a good credit risk and has sufficient income to make payments (qualify the borrower). Additionally, the lender will require the property to be inspected for defects and appraised to verify that the purchase price is fair and that there is sufficient equity (value over and above the mortgage) to protect the loan. Different lenders have different financial requirements. Ordinarily, an applicant for a mortgage loan must deposit sufficient funds with the mortgage lender to perform the appraisal and credit check. A buyer may be pre-qualified by a mortgage lender (approved for a loan before a contract to purchase is signed). This will allow a closing to take place more quickly and will assure a seller that he has a buyer who can afford to purchase his property. Pre-approval can be used as a powerful negotiating tool by a buyer who finds a “motivated” seller.

Q. How does a borrower know what a mortgage loan will cost and what the monthly payments will be?

A. Under federal law, the mortgage lender is required to make full disclosure of the true interest rates, the cost of the loan, any commissions paid and the amount of the monthly payment.

Q. What happens if the buyer defaults on the mortgage loan and fails to make payments?

A. The lender will file a legal proceeding called a foreclosure. In a foreclosure action, the lender will be required to show that payments were not made as agreed. After a foreclosure judgment is obtained, the property is auctioned for sale and the proceeds are used to pay off the mortgage loan. The mortgage holder may bid at the auction up to the amount of the mortgage balance. If the proceeds are not sufficient to pay off the loan, there may be a judgment entered against the defaulting borrower for any arrearages (any past money owed). Mortgages almost always provide that the borrower is responsible for all attorney’s fees and court costs incurred in the foreclosure proceeding.

Q. What should a borrower do if served with a complaint for foreclosure?

A. If the borrower is truly in default, the remedies are somewhat limited. The borrower can seek new mortgage financing for a longer term that will allow for reduced payments. The proceeds of the new loan will be utilized to pay off the loan that is in default. Unfortunately, it is very difficult to get a new loan when the borrower is already in foreclosure. The borrower can offer the lender title to his property in lieu of foreclosure. This allows the lender to avoid a lengthy and expensive foreclosure proceeding; the lender becomes the owner of the property without having to proceed with further legal action. In return, the lender agrees not to pursue any arrearage judgment against the homeowner. The homeowner will lose his property, but will not be responsible for any loan balance.

Q. What happens if a buyer cannot qualify for a mortgage loan?

A. If a mortgage contingency clause (i.e., a provision that makes the contract conditional upon the buyer being able to obtain a mortgage) is contained in the contract for purchase and sale, the buyer will receive a refund of any deposit money advanced toward the purchase. The buyer can also attempt to obtain a purchase money mortgage from the seller.

Q. If the seller has an existing mortgage on the property, can the buyer assume (take over) the mortgage so that new financing does not have to be obtained?

A. Mortgages may be assumable or due on sale. The existing mortgage will indicate if it can be assumed by a buyer, or whether it must be paid in full at the time of sale. Mortgages that are assumable may, nevertheless, provide for an increase in interest rates or qualification of the buyer before assumption. Most mortgages are due on sale.

Q. What rights does a buyer have when applying for a mortgage?

A. The federal Equal Credit Opportunity Act as well as other federal regulations prevents lenders from rejecting loan applicants due to race, color, national origin, religion, sex, marital status, age, or handicap. Additionally, a mortgage lender must consider any public assistance funds, alimony, child support or maintenance payments received by the applicant on a regular basis as if such payments were ordinary income.

Q. Do the buyer and seller need to be represented by an attorney in a real estate transaction?

A. It is strongly recommended that a buyer be represented when purchasing real estate property. An attorney will examine the contract, determine whether there are adequate protections for the buyer, make sure that expenses of the sale are properly allocated, and review the documents of conveyance (deed, bill of sale, etc.), the mortgage, and the closing statement (accounting of money paid and received). Attorneys and title companies will also examine title. This means that the buyer’s legal representative will review the history of sales, deeds and mortgages to verify that there are no liens (claims against the property) and that title is good. Generally, an attorney or title company will issue a policy of insurance called a title policy that will reimburse the buyer if it turns out that title was defective due to a forgery or lien that was not picked up during the title search. A seller’s rights must also be protected. Real estate agents are not permitted to practice law or prepare legal documents such as deeds, mortgages or other documents of conveyance.

Q. What happens at the closing?

A. The real estate closing is the final stage in the purchase and sale process. If mortgage financing has been obtained, the closing will generally take place at the offices of the lender. The closing will be attended by the seller and purchaser, their respective attorneys, the real estate broker and the closing agent for the mortgage lender. At the closing, the mortgage and accompanying note are signed by the buyers, the real estate broker remits any escrow money (deposit) to the seller less broker’s commissions, the buyer pays any necessary cash to close above the mortgage and the seller delivers a deed and other documents of conveyance to the buyer, receiving in return the net mortgage proceeds and other cash to close. Any outstanding mortgages or liens are paid off from funds exchanged at the closing. The parties will receive and review detailed accountings of money paid and received (a closing statement) to assure that financial obligations have been met. Deeds and other documents showing a change of ownership, together with any mortgages will be recorded in the county where the property is located to alert future buyers or lenders of the status of title. When existing mortgages are paid off at closing, the buyer will obtain a satisfaction of mortgage that is recorded to reflect that the mortgage lien has been extinguished.

Q. What is a warranty deed?

A. Most real estate contracts require the seller to deliver to the buyer a warranty deed that affirmatively states that the seller has good and marketable title to the property being sold. Occasionally, a buyer will receive and accept a quit claim deed, which merely transfers the seller’s interest in the property to the buyer without promising that title is good and marketable. A quitclaim deed is rarely used in conventional real estate transactions; it is generally used for transfers between family members, gifts of property or in the context of a divorce proceeding when one party is ordered or agrees to convey the marital home to a former spouse.

Q. What are condominiums and cooperatives?

A. Condominium is the term for a form of ownership of real estate where a buyer acquires title to an apartment or unit in a multiple dwelling building and receives a right to use common areas such as recreational areas. Condominiums are purchased in the same way as private homes, that is, they are conveyed by deed and may be financed with a mortgage. A purchaser of a condominium must be pre-approved by a condominium board. Under federal law, a buyer cannot be rejected by reason of race, color, religion or place of national origin. Condominiums have complex rules and regulations that all owners must observe. Monthly maintenance fees are collected by the condominium board to maintain the common areas. Periodic assessments may be levied against unit owners to pay for major expenses. The condominium documents may restrict a unit owner’s right to rent or lease an apartment. In a cooperative, a purchaser acquires shares of stock which allow use of common areas and leases a specific apartment. A governing board that sets policy and rules for the operation of the building controls the cooperative. Cooperatives function like closely held corporations. It is often difficult to obtain financing to purchase shares in a cooperative as the interest that a buyer obtains is not a real estate interest.

Q. How can title to property be held?

A. Purchasers of real property can hold title in different ways. The way that title is held will be reflected on the deed to the property. 1. Joint tenancy - when title is held jointly, the parties named in the deed agree that if one of them dies, the other will acquire exclusive title to the property. A provision in a will giving an interest in jointly held property to a third party will be ineffective - the property can only go to the surviving joint owner. When property is held jointly between a husband and wife, it is referred to as “tenancy by the entireties.” A joint tenant cannot sell his interest in jointly held property without a court proceeding dividing interests and authorizing the sale. 2. Tenancy in common - in this form of ownership, each party named in the deed has absolute title to their share of the property. If there are two tenants in common named in the deed, each owns a interest in the property. The interest may be devised by will or sold.

Article written based on New Jersey Law

The New Jersey Administrative Code provides the Department of Community affairs (DCA) with enforcement powers over Title 5, Chapter 10 entitled Maintenance of Hotels and Multiple Dwellings. Subchapter 8 provides the “code” standards for the maintenance of unit interiors. This is great information to review if you are subject to DCA inspections or need to apply for a “Green Card” for your building. The Code provides as follows:

Section 5:10-8.2 ~ Interior surfaces

· (a) All floors, walls, ceilings and other surfaces shall be kept in good repair, that is, free from cracks, breaks, split or splintering boards or woodwork, loose plaster, flaking or peeling paint or other materials. Loose Or defective sections shall be removed and replaced so that the point between the repair and the sound material is made flush and smooth.

· (b) Floors, walls, ceilings and other exposed surfaces shall be kept clean, free from visible foreign matter, sanitary and well-maintained at all times. If necessary to accomplish the foregoing, these surfaces shall be kept painted, whitewashed, papered, covered or treated with sealing materials or other protective coatings as needed.

· (c) Interior walls, ceilings and other exposed surfaces in units of dwelling space shall be kept smooth, clean, free of flaking, loose or peeling paint, plaster or paper and capable of being maintained free of visible foreign matter and of vermin, and in a sanitary condition. If and when necessary to accomplish the foregoing or any part thereof, such interior surfaces shall be spackled, painted, papered or otherwise provided with a protective coating appropriate for the surface material and this shall be done at least once every three years unless it is clearly unnecessary. Painting or other provision of a protective coating shall be the responsibility of the occupant and not of the owner when required more frequently than once every three years as a result of the acts or omissions of the occupant, a member of his family or household or his guest.

· (d) Owners shall maintain records indicating the date on which any dwelling unit or part thereof was painted or otherwise provided with a protective coating for six years. Said records shall also indicate the name and address of the person who did the work, the nature of the work done and the cost. Said records shall be made available upon request to the Bureau or to any inspector performing an inspection of the premises on behalf of the Bureau.

· (e) Except where housekeeping services are provided, normal housekeeping as required for the maintenance of cleanliness and Sanitation within individual Units of dwelling space of multiple dwellings shall be the responsibility of the occupants and shall not, unless a hazard to the health, safety or welfare of persons other than the occupants of the dwelling unit is thereby created, be the responsibility of the owner.

Forewarned is forearmed. Knowing these requirements before your building is inspected will reduce the surprises one can usually expect when the DCA inspector hands you the report.

Article written based on New Jersey Law

Over the years, our firm has been engaged by a wide range of real estate buyers ranging from the first-time home buyer to the highly sophisticated organization looking to purchase a major commercial site. Regardless of the nature of the proposed acquisition, we advise each one to perform their real estate due diligence.

A thorough due diligence assessment process removes uncertainty from key decisions that must be made when analyzing the cost/benefit of any real estate transaction. A comprehensive inquiry should be designed to provide a buyer with clear pictures of where their strategies and decisions are taking them, or to put it simply - what it is they are buying.

Even though the term “due diligence” may seem daunting, it can be defined simply as “the responsibilities of a person or business to exercise proper care and planning prior to making any business decision, or entering into any business venture.”

There are a multitude of details which must be considered when dealing with purchasing a parcel of real estate. Many of these details are easily overlooked. The function of due diligence is to independently verify all representations made by a prospective seller as well as to uncover pertinent facts which have not been disclosed but which are important to the buyer.

A multi-tenant property, either residential, office/retail or mixed use is the most complex for evaluation purposes. I have attempted to put together a detailed outline of what should be considered both by the novice, as well as the seasoned real estate professional in connection with performing real estate due diligence. Even in a high-performance real estate marketplace, astute investors and lenders know to look both ways before they leap.

After identifying a target property, due diligence starts during the contract negotiation stage. Unless the seller understands at the beginning of the process what document production and other information, will be required before the deal is closed, there is going to be automatic trouble in getting to the closing table. When a seller is presented with a thorough list of required due diligence items by a prospective purchaser, the seller can be overwhelmed. Many of the items that must be examined are personal and private, i.e., tax returns, and sellers are not usually comfortable with just “turning loose a box of documents.”

Including a list of required due diligence items, therefore, is essential in the purchase agreement and it is expected that there will be some negotiation as to what will and will not make it to the final draft.

Ample time (at least 30 days AFTER the delivery of all documents) should be provided to complete due diligence. Agreements should state that the purchaser must give written notice that all due diligence is complete and satisfactory, or that there would be no further obligation to proceed with the transaction. Generally, due diligence should not be undertaken until after the contract is executed by all parties. Any time triggers should be tied to the delivery date of the LAST document supplied by the seller, with provisions for the extension of time based on the appearance of any non-disclosed material documentation. By requiring written acceptance of the due diligence items, control of the deal can be maintained.

[BOLD]PROCEEDING WITH DUE DILIGENCE - LEAVE NO STONE UNTURNED [ENDBOLD]

Beyond the physical condition of the property (discussed below), there are a multitude of intangibles that have to be taken into account when evaluating a site for acquisition. Literally EVERY document concerning the land, building and its operation MUST be examined. This includes leases (with any and all extensions and modifications), notes and mortgages, (whether the buyers are assuming them or not), title policy, certificate of occupancy, New Jersey Department of Community Affairs (DCA) “green cards” insurance policy(s), ADA compliance, elevator maintenance contracts, tax history, licenses (in some jurisdictions), parking lot contracts, etc.

There are sophisticated companies that provide due diligence services. Several provide their clients with a detailed market analysis of income, operating expenses, vacancy rates, rental competition, sold comparables, on-market competition, and available sources of financing. They will also gain knowledge of the property and all internal and external factors likely to affect its economic health, now and in the future.

The benefit of having an independent evaluation ensures that an enlightened and clear assessment of a project’s potential and pitfalls will be exposed. This is especially so if a buyer does not have sufficient experience in real estate investment to do a complete and thorough job. The detriment is usually the cost.

An evaluation of factors which an astute purchaser must consider includes:

(1) Cash flow projections;
(2) Appraisal, environmental and engineering reports;
(3) Sales and rental comparables;
(4) Market trends and property values; and
(5) Financing strategies and alternatives.

To accomplish these 5 broad evaluations, a buyer should request that the seller produce the following documentation. These are not exhaustive lists.

[BULLET]Financial statements
[BULLET]At least one year of monthly P & Ls (preferably two years)
[BULLET]Balance sheet (three years)
[BULLET]Rent roll including term, deposit and payment history
[BULLET]Tax returns - three years (five years preferred)
[BULLET]Insurance - policy, including all riders, risk assessments and disclosure affidavit for carrier
[BULLET]Existing loan documents including notes, deeds of trust, closing statements and title policy rate riders
[BULLET]All leases, entire copies plus any addendums or riders
[BULLET]All security deposit records
[BULLET]Any service contracts - trash, extermination, maintenance, management, commission agreements, union agreements, vending, billboard, pay telephone, etc. and any contract to be assumed by purchaser
[BULLET]Copies of all prior appraisals, engineering reports, environmental reports
[BULLET]Survey (as built), legal description, architectural and engineering plans and specifications
[BULLET]Payroll register, list of employees including name, position, wage rate and entitled benefits
[BULLET]Business licenses
[BULLET]Utility bills - water, sewer, gas, electric (at least two years of monthly statements) (or recap report from provider showing usage and cost)
[BULLET]Fire system inspection reports
[BULLET]Property tax bills for the past three years
[BULLET]Litigation history - details of any past or pending litigation (if none, then affidavit from owner)
[BULLET]Tax appeal status, if any
[BULLET]Department of Community Affairs (DCA) “green card” with prior inspection reports

When considering the external physical conditions of a target property, an informed purchaser is well advised to secure the services of a licensed inspection service. Depending on the nature of the physical attributes of the property, the following items should be considered:

[BULLET]Engineering inspection and survey
[BULLET]Environmental inspection and survey; key issues: asbestos, lead paint, testing of underground tanks, wetlands
[BULLET]Environmental Phase One
[BULLET]Environmental Phase Two Assessment/Subsurface Investigation if recommended by the Phase One inspection, which may include but are not limited to subsurface drilling and sampling, monitoring well installation and sampling, ground penetrating radar, and asbestos and lead sampling
[BULLET]Survey for abandoned underground storage tanks
[BULLET]Type of roof - consider number of layers of roofing material installed and identify evidence of damage
[BULLET]Assess leaks or moisture damage inside the structure (both roof and basement)
[BULLET]Drainage system should direct water ways from the structure
[BULLET]Availability of municipal water and sewer
[BULLET]External electrical connections and boxes
[BULLET]Condition of chimneys. If the chimneys are masonry, are there signs of loose mortar. If the chimneys are metal, are there signs of rust or corrosion
[BULLET]Cracks in sidewalks or driveways that are large enough to present a tripping hazard
Condition of any retaining walls. Signs of movement
[BULLET]Major cracks, bulges, or other visible signs of settlement in the foundation. Condition of the exterior surface of the foundation, especially at ground level
[BULLET]Has the septic tank been cleaned and inspected
[BULLET]Have handrails been installed where needed

When considering the internal conditions of a particular piece of improved real estate, one should consider the following items:

[BULLET]Are ground-fault breakers installed at bathrooms, kitchens, outside and other wet locations
[BULLET]Have modern garage door openers been installed that will reverse if someone becomes trapped underneath
[BULLET]Age of heating system - equipped with modern safety controls; also when it was last serviced
[BULLET]Signs of rust corrosion or scorching around heating unit
[BULLET]Sufficient source of outside air provided to the heating system
[BULLET]Condition of piping or ductwork
[BULLET]Test heating equipment for carbon monoxide production
[BULLET]Carbon monoxide alarms installed/tested
[BULLET]Smoke detectors installed/tested
[BULLET]Cracks or bulges at the interior finish surfaces
[BULLET]Do doors or windows bind in their openings, or are the openings out of square
[BULLET]Are interior floors level
[BULLET]Is there any earth/wood contact in the crawl space or basement
[BULLET]If there sufficient fireproof barrier to utility rooms and garage
[BULLET]Is there sufficient electrical service
[BULLET]Is structure insulated to typical standards
[BULLET]Was urea-formaldehyde or asbestos-containing insulation used
[BULLET]Property serviced by private water or sewer systems.
[BULLET]Water-potability test and a drawn-down test
[BULLET]Main water shut-off valve operational and accessible
[BULLET]Is there a main sewer clean-out
[BULLET]Is there sufficient water pressure
[BULLET]Age of water heater and properly installed temperature and pressure relief valve

One result of a thorough due diligence process is that when the time comes to present a deal to either partners, investors, lenders or another buyer, one will have the level of information and knowledge surrounding the property that gives a clear picture of a property’s financial and physical condition. This information enables others to make lending and investing decisions relative to the property in an informed manner. In addition, proper due diligence also reflects favorably upon a purchaser in the eyes of lenders and cuts down on time bringing the transaction to loan closing.

The most important result, however, is that the buyer will receive the benefit of the bargain made and paid for, without receiving very unpleasant and possibly fatal news after the closing. Once the purchase price is paid, absent certain limited circumstances, the property with all of its faults belongs to the buyer, and if it isn’t worth what was paid, the buyer will have to live with the consequences.

The information you obtain in this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Article written based on New Jersey Law

The following are recurring questions landlords should have a working knowledge of. I generally don’t put a disclaimer in my articles but in this case, be advised:

The information you obtain in this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Q. When can a tenant escrow rents until repairs are affected by a landlord, or in the alternative, deduct the costs of repairs from the rent?

A. A landlord warrants to the tenant that the leased property is habitable. This is known as the implied warrant of habitability. This warranty is not against all inconveniences or discomforts. A claimed defect must be on the premises and must directly affect the tenant’s ability to occupy the demised (rented) premises. Transitory failures generally do not constitute a breach of this warranty. Courts have found that the breach must be so substantial as to amount to a constructive eviction. This means that the problem must be so bad that the tenant cannot continue to occupy the space and would have to leave unless the repairs were made. Recently, judges hearing habitability cases, as they are known, have been leaning away from a strict interpretation of the case law and have been giving tenants credit in the form of rent abatements for claimed defects that may be perceived as trivial.

There are four options available to a tenant claiming that their Warrant of Habitability has been breached: They could:

(i) declare that they have been constructively evicted and leave the premises;
(ii) repair the defect on the premises and deduct the costs for repair from their rent;
(iii) withhold the rent until the landlord effects the repairs; or
(iv) make the repairs and proceed with suit against the landlord to collect the costs of same.

If the tenant determines that there is a problem that amounts to a breach of the implied warranty of habitability, the tenant should notify the landlord in writing of the problem and allow a reasonable period of time for the landlord to make the repairs.

If the repairs are not made, and the tenants escrow the rent (or pay less than the full rent amount by deducting costs to repair from same), said landlord can file with the Courts for a judgment for possession evicting the tenants for non-payment of rent. Upon the filing of the eviction action, the court will set a trial date. If the tenant wishes to be heard on the issue of habitability, the Court will most likely set it down for a new hearing date and require that said tenant place the escrowed funds into a court escrow account pending said hearing. The tenant will then have his or her opportunity to prove to a judge that said defects breach the warranty. Examples of defects that could affect habitability are: no heat during cold weather months, defects that prevent the tenants from using certain rooms in the rental premises such as the bathrooms or the kitchen, or off premises conditions which are created by, or are under the control of, the landlord which affect the use of the rental property by the tenants (e.g. disturbing activities of other tenants and common area security).

If the judge agrees with the tenant that there is a breach of the warranty of habitability, the judge will grant an abatement of the rent. This constitutes the difference between the reasonable rental value of the unit in its defective condition and the agreed upon rent. This may be determined on a percentage basis without expert testimony. The abatement is granted only for the period of time that rent was withheld, however.

This is not to say that a landlord does not have an obligation to make repairs that do not affect the habitability of the residential rental property. If the defects do not go to habitability, the tenant can, after giving the landlord a reasonable opportunity to fix it, fix it himself, and sue the landlord for the costs of repair. Habitability is what allows a tenant to escrow rent for that purpose.

The doctrine of the implied warranty of habitability has been applied to non-residential tenancies as well. For example, abatements have been granted to professional office tenants and to other commercial tenancies having to do with problems with a parking lot.

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Q: What happens when a tenant breaches the lease by leaving the rental property before the scheduled end of the rental term in the lease?

A. When a tenant signs a lease for a rental property, here she is agreeing to be responsible for monthly rental payments during the complete term of that lease. Although this applies to both commercial and residential tenancies, the example of a typical one year lease of a residential property will be discussed here.

Many times tenants will rent their home, and then have to leave before the end of the term for any one of a number of reasons (including an opportunity to purchase a home, a business transfer of a tenant to a different state, or the need to find more affordable housing). A tenant should provide the landlord with written notice of premature termination as far in advance of the departure date as possible, in order to give the landlord the greatest opportunity to re-rent the premises. However, this written notice, no matter when it is given, does not alleviate the tenant of his or her responsibility to pay rent under the lease.

Upon leaving, the tenant becomes responsible for payment of rent until the end of the lease term or the re-rental of the premises, whichever comes first. In return, the landlord has a duty to mitigate damages and to make every reasonable effort to re-rent the premises as soon as possible. What usually happens is that the landlord will put the tenant on notice of his duty to pay rent, but not proceed against the tenant to collect same until the tenant’s duty and obligation to pay rents ends (thus fixing the total amount owed for purposes of suit).

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Q. What steps must the landlord take in order to evict a tenant from a rental property?

A. No matter what the circumstance, and whether the rental property is residential or commercial, the landlord cannot effect a “self-help” eviction. He or she must proceed through the state landlord-tenant court in order to evict a tenant. The procedures to be followed prior to filing of the eviction complaint, however, vary depending upon grounds for eviction and the nature of the rental property.

No matter what the type of landlord-tenant relationship, the simplest eviction procedure for a landlord is one based on non-payment of rent. Once the tenant has breached the lease by failing to pay rent, the landlord may bring an eviction action in landlord-tenant court seeking a judgment for possession. Upon the filing of the complaint, a court date is assigned, and the papers are served upon the tenant. If the tenant pays the rent in full (including attorney’s fees and late fees, if the lease calls for it) by the close of business on the day of trial, then the eviction action is dismissed by the Court, and the lease breach no longer exists. If the tenant does not have a justification for not paying the rent ( e.g. a rent escrow flowing from a claimed breach by the landlord of the implied warranty of habitability) and cannot pay the rent by the end of business that day, a judgment for possession will issue by the Court.

As a matter of practice, a judge will order that no warrant for removal (the document which authorizes a court officer to evict a tenant) will issue for three days following the entry of judgment. At the end of that waiting period, but not later than 30 days from that date, the landlord can request that a warrant for removal be issued to a court officer for an eviction. If the landlord fails to request the warrant within 30 days, he must petition the court by motion for permission to do so out of time. The court officer then posts the warrant for removal on the door of the rental property, and waits three business days. During those three days the tenants can seek a stay of eviction. This stay can be granted for several reasons. The most common would be on the grounds that the eviction would cause a hardship upon the tenants due to an unavailability of other dwelling accommodations. The granting of the stay is discretionary with the court, but subject to certain conditions. The tenant may get a hardship stay so long as all rent arrearages plus court costs and current rent are paid, the tenant is not disorderly during the stay, the tenant does not wilfully damage the premises during the stay, and payment is made when due for use and occupancy during the stay. The stay can be for no longer than six months.

There are other grounds for eviction other than non-payment of rent, but the procedures prior to suit differ depending upon the nature of the tenancy. Some of the more common grounds are as follows. For a more detailed discussion, contact our office.

Disorderly tenant. A landlord may bring an action to evict a tenant who is considered disorderly because his conduct is disturbing to the peace and quiet of other tenants. When the conduct consists of noise, it must be repetitious and excessive. In other words, it must be disorderly to a person of “normal” sensitivities. In order to evict on these grounds, the landlord must first issue a notice to cease, which is a written statement to the tenants ordering them to cease the disorderly conduct. If the disorderly conduct continues after the notice to cease, the landlord then issues a notice to quit, which is a written document served upon the tenants indicating that the landlord is terminating the tenancy as of a particular date. In the case of a disorderly tenant, the landlord must wait at least three days after the service of the notice to quit before an eviction action can be brought.

Willful or just grossly negligent damage to the premises. A landlord can bring an action to evict a tenant for wilfully or through gross negligence causing or allowing damage to the rental premises. This does not require a notice to cease but does require a written notice to quit with a three day waiting period before an eviction action can be brought.

Violation of the rules and regulations of the landlord and/or violation of lease covenants. The landlord can bring an action to evict a tenant for a substantial violation of reasonable rules and regulations of the landlord or for substantial violations of covenants in the lease. A notice to cease is required, along with a notice to quit carrying with it a one month waiting period from the service of the notice to quit before an eviction can be brought. The violation of the rules and regulations or lease covenants must be substantial, the rules must be reasonable, and the tenant must have accepted them in writing at the commencement of the lease, or as a part of the lease, and for breach of a lease covenant the lease may have reserved the right of re-entry for that breach. What this means is that the lease itself must contain language allowing the landlord to retake possession of the rental premises for the violation of these rules, rather than simply suing the tenant for damages that flow from that breach. A common example of this is a tenant that keeps a pet on the premises in violation of a “No Pets” provision in the lease.

Failure to pay rent after an increase. The landlord can bring an action to evict a tenant for failure to pay rent after a notice of increase. No notice to cease or notice to quit is required. However, when the rent is increased in a month-to-month tenancy, the landlord must serve a one-month notice to quit terminating the old tenancy and another notice offering a new tenancy and stating an increased rent. This, however, does not give the landlord license to make unconscionable increases in the rent. Increases must be reasonable, which means it would be acceptable to a fair and honest person and not be “monstrously harsh and shocking to the conscience.”

Habitual late payment of rent. The landlord can bring an action to evict a tenant for habitual late payment of rents. A notice to cease and a one month notice to quit are both required. Cases in New Jersey have held that a finding of habitual late payments of rent requires at least two late payments following the notice to cease (there is no case law indicating how many payments must be late before the notice to cease is served).

Personal occupancy by owner or purchaser of unit. An owner may bring an action to evict a tenant if the unit is to be personally occupied by the owner or buyer of the unit. This applies to the owners of three cooperative or condominium units or less or the owner of a building of three residential units or less. The owner himself must seek to occupy the residential unit personally or have contracted to sell it to a buyer who wishes to occupy the premises personally (and the agreement of sale calls for the unit to be vacant at the time of closing). In this instance, the landlord must serve a two month notice to quit, essentially giving the tenant two months to move out.

Occupancy as consideration of employment. Many times people will be able to live in a leased unit rent free as a benefit of employment by the owner. This only applies when the tenant became an employee of the owner simultaneous to or before becoming a tenant. Under these circumstances, a landlord need only serve a three day notice to quit. Where the tenant became an employee of the owner after having become a tenant, the tenant must be given an opportunity to continue living there under a lease for payment of rent.

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Q. What are the landlord’s obligations with regard to the security deposit?

A. After a tenant leaves the rental property, for whatever reason, the landlord must, within thirty days of that departure, provide a written report as to the status of the security deposit and serve same upon the tenant either by personal service or by certified mail. Said report must itemize the total amount of the security deposit, plus interests accrued on that deposit during the lease term, and then itemize each deduction from the security deposit (if there are any). If money is owed to the tenant, then that money must be paid within that thirty day period. If the landlord does not pay money owed to the tenant within those thirty days, or wrongfully withholds all or a portion of the security deposit, the tenant can sue the landlord for double the wrongfully withheld security deposit. For those tenants that employ the services of an attorney, attorneys’ fees can be granted at the discretion of the court if the tenant is successful.

To prevail, the tenant must only prove the existence and subsequent termination of a qualifying residential landlord tenant relationship, the receipt of (or liability for) the security deposit by the landlord, and the failure of the landlord to return the deposit and interest within 30 days. The landlord then has the obligation (and corresponding burden of proof) to justify the failure to return the deposit and interest, which includes proving the validity of any deductions.

If the rental property is residential and not an owner occupied building with no more than two other rental units, the landlord must also give written notice, within 30 days of the receipt of the security deposit, of the name and address of the depository bank or savings and loan association where the deposit was placed, and that bank or savings and loan association must be within the state of New Jersey. If the notice is late or non-existent, the tenant, upon their written notification to the landlord, may apply security deposit current or future rents, without being required to supply another security deposit. In other words, the landlord loses his security and a tenant gets up to a month and a half free rent (since New Jersey law bars landlords from taking more than one and a half month’s rent in security).