Goldstein Rikon Rikon & Houghton P.C.

212-422-4000

Menu

Valuing Contaminated Property

The valuation of real property that might require remediation for contamination presents numerous valuation problems. The problem becomes acute when the property is taken for a public purpose. Most owners do not want to have their property taken from them in an eminent domain proceeding. Imagine an owner’s chagrin to find out that it will receive less than the fair market value for the property. A condemnation of property is a forced sale involving the inherent power of the sovereign to acquire property it needs for a public purpose. Traditionally, the property taken is to be valued as of the date that title vested in the condemnor. While there is often little that can be done to stop a condemnation, both the United States and New York State Constitutions require that the condemnor pay the former owner, now a claimant. “just compensation.” The exact determination of “just compensation” constitutes the key issue in a condemnation trial.

A new tactic now used by condemnors is the attempt to deduct the full cosl for the remediation of a site from the value it offers the former owner. indeed, we are aware of some situations where the alleged costs to remediate exceed the fair market value of the property. As will be discussed below, the failure to offer full compensation is unconstitutional and violates statutory and case law. Often, too, it cannot be supported factually.

The law requires that a parcel of land that is condemned be valued at its “highest and best use.” This is an absolute requirement and the appraised must set forth the appraiser’s opinion as to the “highest and best use,” regardless of actual use when it was condemned.

If the highest and best use of a parcel that was used as a truck depot is for a shopping center and such use is otherwise legal and appropriate, that is the use to be considered for valuation purposes. If, for example, the shopping center would be constructed on a concrete slab, why should that owner be responsible for the total cost for remediating oil-contaminated soil, especially when it was caused by migrating water?

The condemnor’s construction requirements, say for building a new subway tunnel, or a new school with full basement, will far exceed what would be required by the former owner to develop the property in its “highest and best use.” Furthermore, the offsets for remediation by condemnors often represent improper attempts to subsidize the project’s costs.

Excessive Charges and Waste

Experts evaluating the remediation costs paid by condemnors are often aghast at the excessive charges and waste incurred by governmental agencies for remediation. These costs are incurred without any control or input by the former owner.

As if this were not enough, a claim for damages in a condemnation proceeding is a Special Proceeding with limited jurisdiction. There is no right to a jury. A claim ant-condemnee no longer may bring suit to recover the cost of remediation from former owners or adjoining property owners. Thus, it would be fundamentally unconstitutional as a violaton of Due Process to deprive the former owner of its full compensation.

The litigation over the proprietary measure and cost of remediation will be more proflix than the determination of fair market value. This would, in of itself, violate New York’s Eminent Domain Procedure Law, which re quires prompt payment and resolution of claims with reduced litigation.

The premise for the imposition of remedia tion costs is found in the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), also known as Superfund. The New York State Department of Environmental Conservation (NYSDEC) has adopted its own Regulations and Guidance Policy, which sets forth minimum mandatory actions to achieve regulatory compliance for property affected by petroleum hydrocarbons in the State of New York.

While it is clear that assessed values of property shouid be reduced to account for environmental contamination, this is because the cardinal principle of property valuation for tax purposes, as is set forth in the State Constitution, is that property “[a]ssessments shall in no case exceed full value” for the actual use of the property. Compare that standard to the Eminent Domain standard of “Highest and Best Use.”

There are other significant reasons for considering re mediation costs in a tax certiorari proceeding. The peti tioner still owns the property and has the ability to implead third parties and control remediation costs.

‘Unique Fingerprint’

In a technical report on appraising contaminated property, the Appraisal Institute noted that

…each environmental problem is as unique as a fingerprint. Based on our collective experience, the use of comparabies in the analysis of a specific situation is highly limited; each situation must be examined on its own terms. The sales-comparison approach is useful in establishing the unimpaired value provided that certain cautions are observed, but it has very limited applicability in establishing adjustments to arrive at an environmentally impaired value.

At the same time, the Appraisal Institute in its leading treatise [t]he Appraisal of Real Estate (11th ed.) says that the value of an interest in impacted or contaminated real estate may not be measurable by simply deducting the remediation or compliance cost estimate from the estimated value as if unaffected.

How can a claimant in a condemnation proceeding, with a constitutional right to recover just compensation, be required to litigate such diverse issues — especially when the former owner is denied a remedy against others who may be responsible?

Recently, the Second Circuit decided ABB Industrial Systems Inc. v. Prime Technology Inc. In a non-condemnation setting, the court held that unless it could be shown that a party “spilled hazardous chemicals or otherwise contaminated the site,” those parties, former owners or operators, could not be held liable for the existence of hazardous substances premised merely on the “passive migration” of hazardous substances.

While the ABB Industrial Systems Inc. case provides welcome news, and a safe haven, to property owners and operators when faced with the existence of “passive migratian” of a hazardous substance, it also shows the total injustice and impropriety of at tempting to charge a condemnee for cleaning up a site or a public project.

Even if the contamination is not “passive,” the attempted deduction of remediation costs should not be al lowed. In private enterprise, the trend is to transform underutilized and con taminated sites into usable revenue properties, i.e, Brownfield Redevelopment. Indeed, the Taxpayer Relief Act of 1997 added new

To Tell or Not to Tell

We noted a decision in the New York Law Journal on Oct. 16 by Justice Miller 1A Part 18, New York County Supreme Court, in Van Wagner Advertising Corp. v. S & M Enterprises which struck a responsive chord. There, as we read the decision, the parties, a landlord and his tenant, had stipulated a settlement of a dispute between them, which the tenant was seeking to set aside on the grounds that the landlord was obligated to advise the tenant that at the time the stipulation was being entered into he knew that the postal service was preparing to condemn the property and he did not do so. As a result, the tenant entered into the stipulation, allegedly giving up valuable rights in exchange for an alleged illusory benefit of continued possession under a lease.

The Court set aside the stipulation based upon the fact that “even if defendants’ actions do not rise to the level of intentional fraud or misrepresentation, setting aside the stipulation of settlement is warranted in this instance. Relief from stipulations will be granted based on general equitable considerations, particularly where, due to circumstances beyond the control of the parties, the purposes of stipulation are being frustrated or contingencies of settlement fail to occur . . .”

Common Problem

It is not our intention to comment upon this decision as it will possibly be resolved in an appellate court, but merely use it to highlight a not too uncommon problem. We often get calls from property owners whose properties are within an area considered for condemnation who are having problems renting because of it and who seek to lease to potential tenants and want to know whether they are obligated to advise them of the pending condemnation. Or we get a telephone call from a property owner who hears his property is in a potential condemnation area and is ready to enter into a contract of sale and should he advise the buyer or even where he is about to close a mortgage.

The question, of course, is loaded with ethical and economic considerations, if not legal ones. There are few reported decisions that we can find on the subject. These are part of the larger question of an owner’s rights with respect to a property which is being considered for condemnation.

To start with, from the very earliest cases it is clear that until there is actually a passage of title to a condemnor in a condemnation proceeding an owner has the absolute right to do with his property as he sees fit despite his supposed knowledge of a pending condemnation proceeding (Mayor v. Mapes, etc. 6 Johns Ch. 46 (1822); In re Wall Street, 17 Barb 617 (1854); Vitale v. State of N.Y., 33 AD 2d 977, mot. for lve. to app. dism. 26 NY 2d 801; Matter of City of N.Y. (Briggs Ave.), 196 N.Y. 255, same case 118 App. Div. 224; Frontier Town Properties, Inc. v. State of N.Y., 58 Misc. 2d 388; Matter of City of N.Y. (Two Bridges U.R.,) Sup. Ct. N.Y. Co., Index No. 41385/69 Opin of June 16, 1972, per Chimera, J., unreported; Matter of City of N.Y. (West 172d St.), 167 App. Div. 807).

An Exception

The exception to this is where an owner, in bad faith, solely for the purpose of enhancing an award makes additions or improvements to his property, the so called “house planting” cases. (Matter of City of N.Y. (Briggs Ave.), supra; Matter of the Mayor, 24 App. Div. 7; In re Waterfront and Harbor of City of N.Y., 37 NYS 2d 217, 218 (1942); In re: Northern Blvd. 258 N.Y. 136, 151; People v. Dickey,148 App. Div. 662, 113 NYS 221, 223).

While this is clearly the law in this state, yet a perusal of the cases makes clear that a condemnee who goes out and makes major improvements to his property in the face of a pending proceeding may not be treated as sympathetically by the Courts (see Matter of City of N.Y.( G & C Amusements), 55 NY 2d 353, 449 NYS 2d 671 (1982) as one who stops his plans for such an improvement (see Matter of City of N.Y. (Staten Island Industrial Park-Jomar Real Estate Corp.), 89 AD 2d 724, 462 NYS 2d 260, aff’d 61 NY 2d 843 (1984)).

Despite this, the thrust of the law in the whole series of cases decided under the rubric of “condemnation blight” in dealing with the owner who, because he is unable to keep his property up and in repair, who loses tenants and financing because of long drawn-out planning for a public improvement suffers economic losses and property devaluation rests on the proposition that there is a life to real property despite the planning for a condemnation (City of Buffalo v. J.W. Clement Co., 28 NY 2d 241 (1971); City of Buffalo v. Geo. Irish Paper Co., 31 AD 2d 470, 299 NYS 2d 85, aff’d 26 NY 2d 869). Also particularly where unsuccessful petitioners in such circumstances were assured that when the trial came they would receive compensation for their losses caused by that condemnation planning (In re 76 Crown Street Corp. v. City of N.Y., 35 AD 2d 1005, 317 NYS 2d 978 (1971); Cinco v. City of N.Y., 58 Misc. 2d 828, 296 NYS 2d 26 (1968).

Resting on the same assumption are cases where, because of pending condemnation proceedings, various approvals under the police power having been denied or withheld, are set aside by the courts (Jensen v. City of N.Y., 42 NY 2d 1079 (1977); In re St. Morris Assocs. V. McMorran, 35 AD 2d 997, 318 NYS 2d 121 (1970); Corrado v. Wolf, 37 Misc. 2d 89, 235 NYS 2d 336; Matter of City of N.Y. (John F. Kennedy H.S.) NYLJ, 7-24-76, p. 10, co 3 (Sup. Ct., Bronx Co., Brust, J.); Matter of Kemp, 80 AD 2d 897 (1981); Rockaway Peninsula Corp. v. State of N.Y., 262 NYS 2d 670, 677, rev’d on other grounds 29 AD 2d 997, 289 NYS 2d 506 (1965)).

End to Lease Sought

Getting closer to the case which triggered this column is the case where a tenant, hearing about a proposed condemnation, unsuccessfully sought to end his lease obligation to avoid having to fixture his premises as a supermarket, the court holding that a planned condemnation and short of actual condemnation is not sufficient to be deemed a frustration of the lease (2811 Food Corp v. Hub Bar Building Corp., 35 AD 2d 277, 315 NYS 2d 277 (1970).

Then there is Creative Living Inc. v. Steinhauser, 78 Misc. 2d 29, 355 NYS 2d 897, aff’d 47 AD 2d 598 (1st Dept. 1975) where despite the fact that the Board of Estimate had authorized condemnation of the property the failure to close on a contract of sale because of the proposed condemnation of the property was deemed a default with a forfeiture of the deposit.

Of course, all of this begs what is a basic underlying problem in many of these cases. When is one supposed to know that a condemnation proceeding is pending so as to be obligated to advise a tenant or lender or purchaser if, indeed, there is such an obligation? Is it when it is talked about, when something official is done, after a public hearing, when a project has been authorized or when? The problem is that, in fact, until a project is actually in the taking format, when proceedings have actually started, you cannot know that it is really a fact.

We know of many horror stories of property owners who were advised their property was to be taken and took irrevocable steps to their severe economic detriment. We’ve seen an owner’s building plans changed so that the building was not to be built within the lines of a proposed highway, building on only part of his lot, and then the highway line was changed. We have seen the Lower Manhattan Expressway abandoned after twenty years of talk and actual condemnation approval.

A major New York newspaper built an entire new warehouse facility to replace one on Buttermilk Channel which was planned to be taken for the Red Hood Container Port and ended up with both because of a change in the plan. We have seen tenants move out of buildings to be condemned leaving the landlord with vacancies and severe economic losses only to see plans for the project abandoned. The West Side Highway should be fresh in everyone’s mind and there the State actually appropriated all of the city’s piers, and the project has been abandoned. The fact is that when asked all we ever can do is talk about plans but we never can assure anyone thee is going to be a condemnation until it actually happens.

The question then is what is the duty of a property owner to advise anyone about these “plans.” And at what stage of planning does such a duty, if there be one, arise. The cited case does not really tell us, it does not rest upon a duty, but only equitable considerations. Perhaps some day we will find out.

Reprinted with permission from the November 18, 1987 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Filing of Claims

One of the basic distinctions between the procedure used by the State of New York and that used by all other public bodies in instituting proceedings in eminent domain for the acquisition of private property is the manner in which those proceedings are instituted and the claim which must be filed by the condemnee.

The Eminent Domain Procedure Law (EDPL), while enacted supposedly to create a uniform procedure for determining just compensation in all eminent-domain proceedings did no such thing. It substantially reenacted two of the basic three procedures then in use throughout the State, with some changes, while only eliminating one of those three, the procedure contained in the Condemnation Law which provided for trials before three lay commissioners.

2 Procedures

Article 5 of the EDPL contains two different procedures, denominated as (A) and (B) procedures, as set forth in §501. (A) procedures are those relating to appropriations by the State of New York and heard in the Court of Claims while (B) procedures result from condemnation proceedings heard in the Supreme Court. The fact that the former is an appropriation and the latter a condemnation makes a substantial difference in these procedures. In the former, the State, by administrative action, files a map in the appropriate office and by so doing vests title in itself with no court proceedings being instituted. In the latter, the condemnor, after service of process, institutes a court proceeding to take title and by so doing vests title in itself with no court proceedings being instituted. In the latter, the condemnor, after service of process, institutes a court proceeding to take title and by so doing brings the condemnee into Court for the purpose of fixing just compensation for the taking.

The impact of the difference in these procedures is felt in the process of filing a claim. In the (A) procedure, claims against the State in the Court of Claims, notice of the acquisition is to be personally served on the condemnee and he thereafter has three years in which to file a claim which institutes the litigation to fix his just compensation. That three-year period is a statute of limitations and failure to file within that time bars any later claim with the condemnee deemed to have accepted the amount of the condemnor’s offer of its “highest approved appraisal.”

In the (B) procedure, after the Court ordered filing of the appropriation map, which vests title and institutes the proceeding, the condemnor has thirty days to notify the condemnees of the taking and direct that “on or before a date therein specified, file a written claim, demand or notice of appearance — with the condemnor and the clerk of the court of the county in which the order has been filed.” The time given is usually from thirty to sixty days.

This procedure is a virtual reenactment of the procedure used in the Consolidated Condemnation Procedure of the Administrative Code of the City of New York and the various other statutes which followed its provisions, such as the Nassau County Administrative Code, the Suffolk County Improvement Act, the Westchester County Administrative Code, and the Village Law. As such, although the EDPL is relatively new, we have a substantial body of law interpreting its provisions, and particularly as to the nature of a claim under such procedure and the consequences of a filing after the date set forth in the notice of acquisition.

General View

The general and usual view of the matter was set forth in some detail in Matter of City of New York (East River Drive), 159 Misc. 741, 757, 289 N.Y.S. 433, 450, affirmed 259 App. Div. 1007, 21 NYS 2d 509, motion for leave to appeal, denied 284 N.Y. 818. It was accompanied by In re Triborough Bridge Approach, 159 Misc. 617, 288 N.Y.S. 697, 719, affirmed 257 App. Div. 940, 12 NYS 2d 887, leave to appeal denied 282 N.Y. 808.

The Court there called attention to the fact that while the purpose of the provision was to present surprise and eliminate hardship on the part of the City in defending itself against unjust claims at the same time the just compensation rights of the claimant must be viewed as guaranteed to him by the Constitution.

The Court noted that the trouble with the statute is that it may work a greater hardship in some cases in its full operation than it relieves, that “. . . It surely cannot be made the instrument to violate the spirit of these constitutional provisions of just compensation in condemnation cases. It would seem that the notice of claim is in the nature of a pleading setting forth the extent of the claim thus made by the claimant. Pleadings are always subject to amendment. The discretion of the Supreme Court to correct mistakes, not jurisdictional, may not be taken away, at least until the Legislature specifically so states in the law itself. It should be observed that there appears to be no affirmative statement in this statute prohibiting the considering of claims which are not filed within the specified time for the filing thereof. Nor is there any penalty prescribed for a failure to do so. A party has the right to be heard in defense of his property rights. In the absence of these provisions it is clear that the court may, in the exercise of its discretion, allow an amendment to the notice of claim and hear the claim on its merits.”

As the years went by, the almost uniform position taken by condemnors was not only, in the absence of prejudice, could a claim be amended but a claim filed right up to the trial itself. It would be very hard to allege and prove prejudice as to real estate where the condemnees not only know what it has taken but, if it has followed the statute, has already appraised the property in order to make an offer and advance payment. It is also true as to trade-fixture claimants, and particularly where they are still in possession of the premises taken.

Late Filing Allowed

From time to time an odd challenge would be made by a condemnor, but with predictable results. Thus in In re Parking Place in the Village of Hempstead, Nassau County, 280 App. Div. 801, 113 NYS 2d 230, motion denied 280 App. Div. 894, 115 NYS 2d 658, appeal dismissed 304 N.Y. 870 a refusal by the trial court to accept a claim filed after the date provided for was set aside by the Appellate Division, obviously as an abuse of discretion. In re City of New York (Brooklyn Bridge S.W. Urban Renewal Project, NYLJ, Nov. 20, 1967, page 20, col. 8, the Court not only permitted the late filing of fixture claims years after the taking and the date to file claims but noted that such filings had been permitted many times. In the same proceeding, but in a different decision found at 54 Misc. 2d 424, 282 NYS 2d 597, 602, the Court allowed an amendment of fixture claims on the trial itself, noting the claimant was still in possession. A late filing of claim was permitted in Matter of Town of Oyster Bay of Plainview (Dayton Plainview Inc.) Index No. 9434/1972 decided Sept. 16, 1974.

The underlying premise of each of these cases is the rationale stated in In re East River Drive, supra. The statue involved is not a statute of limitations, the parties are already in Court, at worst it is a late pleading with the inherent power of the Court to permit it, and weighing the fact that we are dealing with a constitutionally guaranteed right of “just compensation” it would take a very clear showing of hardship on the part of the condemnor to bar such a claimant.

Reprinted with permission from the July 11, 1986 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Highest & Best Use: Economic Feasibility

It is an axiom in condemnation proceedings that property must be valued for its “highest and best use.” Highest and best use has been defined as “the most profitable likely use to which a property can be put.” It has also been defined as “the use of land which may reasonable be expected to produce the greatest net return to land over a given period of time, and “that legal use which will yield to land the highest present value.” (American Institute of Real Estate Appraisers, Appraisal Terminology and Handbook (Fourth Edition), page 92.)

What is clear is that whether by lack of knowledge, lack of capital, change of circumstance or plain indifference or any other reason, not all real estate is put to its most productive or highest and best use and that actual use is not the determinant of the value of the property. Since fair market value presupposes a price between not only a willing buyer and seller, but knowledgeable ones, and at the highest price obtainable in the market, that price must reflect the most profitable use of the property, its highest and best use.

It is not unexpected then that condemnees, looking to maximize their recovery, have been given to project more valuable uses for their property than its actual use and that condemnees, looking to minimize their exposure, should look at the property much more conservatively and with a jaundiced eye. It also should not be surprising that there should be a wide variance in appraised values between condemnors’ and condemnees’ appraisers, despite the competing appraisers being reasonable and honest, when the underlying assumptions of each as to most profitable use are different.

In dealing with the issues raised in this context, the appellate courts have reacted to various fact patterns. While their decisions, of necessity, have sounded like black letter rules, and in some instances have been treated as such by lower courts, they have, for the most part, been a recognition that the rule merely reflects the action of the market place and must have a common sense application.

‘Proof of Facts’

Thus, a use projected far enough into the future that any benefit from it would be so discounted by the market so as to yield no appreciable present value could not be considered. The rule stated by the Court, was “that a speculative use of this character must be substantiated by proof of facts that indicate a likelihood that the property would be put to such a use within the reasonably close future.” (Matter of City of New York (Wilson), 21 AD 2d 652, 653, 249 NYS 2d 811, aff’d. 16 NY 2d 814, 263 NYS 9.)

Further, a use base on nothing in reality, substantiated by no facts and being merely the product of the claimant’s imagination and hypothetical, cannot be the basis of an award (Matter of City of New York Shorefront High School-Rudnick, 25 NY 2d 146, 303 NYS 2d 47). Thus, in Triple Cities Shopping Center, Inc. v. State of New York, 26 AD 2d 744, 272 NYS 2d 207, aff’d. 22 NY 2d 683, 291 NYS 2d 801, an owner, who claimed that the purpose for which he bought the taken property was to build a gas station and motel on the property, but who could not show any activity on his part at that direction and who, as the court stated, could not show any commercial activity at all in the immediate vicinity of the taking was denied a valuation on that basis. The same was said as of the early 1960’s as to the potential for a high rise apartment development at Ninety-third Street and First Avenue in the Matter of City of New York (Wilson), supra. (Our father tells us of the condemnation judge who pooh-poohed the possibility of apartment house development in Kew Gardens and adjacent Forest Hills during the trial for the building of Grand Central Parkway in the 1930’s).

It is the lack of activity in the adjacent area that is really the key to the problem in most instances. When does the challenge to a proposed best use arise? Usually when there is a vacant piece of land with a use claimed for it consistent with nothing in the vicinity or where a use is claimed different than the use it is actually being put to and again there is nothing in the vicinity used similarly, or even worse, the uses in the vicinity are inconsistent with such a use.

Some Issues Clear

It is clear, from those same facts, that not every vacant piece of land or differently used property gives rise to a contest on the issue of highest and best use. Who would argue that a parking lot on Park or Fifth Avenues in the vicinity of Fifty-seventh Street has a highest and best use for a high rise residential or commercial building? Why? Because the extrinsic facts of the surrounding uses makes quite clear what the best use is.

And it is also quite clear that no other proof of highest and best use is required much less that such use is economically as well as physically feasible. (Matter of City of New York (Broadway Cary Corp.), 34 NY 2d 535, 354 NYS 2d 100; Rochester Urban Renewal Agency v. Lee, 83 AD 2d 770, 443 NYS 2d 479 (4th Dept.).) It is equally clear that proof would be needed of a potential for such a use if the same claim were made for land in rural New York State or in some other undeveloped area or even while the surrounding area does not make clear that such a development is reasonable probable. Matter of City of New York (Broadway Cary Corp.), supra; Matter of City of New York (Jomar Real Estate Corp.) 94 AD 2d 724, 462 NYS 2d 260, aff’d. 61 NY 2d 843, 473 NYS 2d 963; Larig v. State of New York, 58 AD 2d 734, 396 NYS 2d 122 (4th Dept.).

In the Matter of City of New York (Broadway Cary Corp.), supra, the Court reversed the findings of the trial court that a vacant piece of land “situated in an area zoned for light manufacturing” had a highest and best use as a shopping center since the claimants failed to substantiate their contention by proof of “the economic feasibility of the proposed venture.” The Court noted that in Shorefront High School-Rudnick, 25 NY 2d 146, at p 149, 303 NYS 2d 47 that it “is likely that the expert would consider the availability of financing, costs of construction, taxes, possible profits and the like in arriving at his conclusion concerning the highest and best use of the land.” At first blush, without reading the record for the facts of the case and without consideration of the facts in Matter of City of New York (Jomar Real Estate Corp.), supra, one might believe that another level of proof was now to be required in all of these cases, that of an economic feasibility report requiring another level of expensive expert witness testimony.

Common Sense Approach

But common sense dictates otherwise. Vacant land, parking lots or old brownstone or townhouse buildings at or near the corner of Fifth Avenue and Fifty-seventh Street do not require and economic feasibility report to demonstrate that more of the same of what has been built around it is its highest and best use. If that can be accepted as a fact, and it seems unquestionable that it should be, then we know that such a report is not required in all cases. What is it then that Broadway-Cary was talking about and what is it that Jomar decided in its name. The plot of land in Broadway-Cary Corp. was located in Staten Island in a manufacturing area across the street from a low rent housing project. There did not appear to be a residential base of sufficient purchasing power to support a shopping center. While the zoning was M-1, that by itself had no meaning as it permitted shopping centers of right. Its real significance was that the area was developed as light manufacturing, and plain common sense raised warning lights against making assumptions that such a development could be economically successful. It was against that background that the Court called for proof of economic feasibility.

The facts in Jomar had some points similarity but were on the whole different.

Again the property was zoned M-1, it was in Staten Island and it was vacant land. But unlike the facts in Broadway-Cary it was situated directly across the street from a newly developed residential area with no existing shopping facilities for about a mile, except for an isolated store here and there. At the time the property was condemned and in connection with a variance to permit the construction of a shopping area within the targeted residential area the City Planning Commission, based upon a study, made findings of the need for much more square feet of store space in the area than would be provided for in the condemned property. The icing on the cake was that the owners had not only prepared plans for a shopping center prior to any projected condemnation and had been prevented from filing same by reason of the proposed condemnation, but had done work on preparing the land itself including its grading, putting in of street improvements and sewers and acquired sewer hookup rights for the shopping center. This was deemed sufficient proof of highest and best use without a “formal feasibility study.” (An informal study had been testified to by the claimant’s appraiser).

Thus, it seems to us, we are back to square one. Common sense rules the day. There are no absolute criteria in establishing what a market is and what it does. There are no black letter rules of what constitutes proof of highest and best use. There is no absolute criterion of an economic feasibility study to justify a proposed use. It is not an appraisers’ full employment rule. While proof is required to justify a use different than the way the property is actually being used or different than is consistent with the surrounding area or even different than plain common sense seems to indicate it appears that there is no absolute requirement of what that proof is. And we believe that is how it should be.

Reprinted with permission from the April 17, 1985 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Project Blight – Project Enhancement

It is not an unusual occurrence for controversy to surround the proposal to build a public improvement. It is usual that when there is controversy, it causes a delay in the project’s implementation or even its shelving. The current controversy over Westway and the Forty-Second Street redevelopment is somewhat reminiscent of the proposal to build the Lower Manhattan Expressway which, after perhaps twenty years of discussion and litigation, was killed at the last minute by Mayor Lindsay, just when it appeared the land necessary to build it was to be acquired. Westway has been delayed twelve or more years since it was proposed and Forty-Second Street is probably three or more years old since U.D.C. became involved in attempting to develop a plan.

Effect of Publicity

During the proposal and discussion process, especially in controversial projects, substantial publicity is given and the public becomes aware of that project. It is the effects of that publicity which has caused problems in the condemnation proceeding with respect to its effect on value.

That its effect is misunderstood is reflected in several telephone calls we received from clients when a lecturer in a real estate course reportedly advised his class that in the Forty-Second Street project the properties there would be valued t the level of value they reached when the project had first been announced a number of years ago. Needless to say, if that were indeed the fact, which it is not, they would be seriously affected, in view of the steep climb in real estate values in general in Manhattan since that announcement, and particularly in midtown Manhattan.

The announcement of a project, depending on its nature, usually has two effects. The first is to the properties within the project area which are proposed to be condemned. The other is to the abutting area.

Historically and predictably, properties proposed to be condemned are negatively affected. It starts with tenants concerned that they may not have sufficient time to relocate and seek to move right away. Or, if they choose to stay, they cease making repairs and improvements to their premises, believing they will not be thee long enough to enjoy them. Property owners do the same ting. If a boiler or an elevator needs replacement, instead of making the substantial investment it would require, more expedient measures are taken in the face of a pending condemnation. When a vacancy occurs, it is extremely difficult to get new tenants, certainly those who would put substantial fixtures or improvements into their new premises.

Assuming, there was an equal bargaining position between landlord and tenant before, the pendulum rapidly swings against the landlord who must make all kinds of concessions to keep his property from becoming or staying vacant. Instead of seeking rent increases he is happy to keep his rent roll intact. Mortgaging of the property becomes extremely difficult. The ability to sell becomes impaired, except to speculators. No one wishes to buy into litigation. If the project is in the proposal state long enough, the landlords’ problems multiply. It is not unusual to see decreasing rent rolls, vacancies and signs of deterioration, despite an otherwise thriving real estate market. The problem had become so common, with the proliferation of urban renewal in the 1960’s and 1970’s, that it acquired a name “condemnation blight.”

Case in Buffalo

As property, as a general rule, is to be valued in the condition it is in at the date it is condemned, a rule of law evolved in which the property owner was not to suffer the effect of the value depressing effects of a proposed condemnation proceeding. It was summed up in City of Buffalo v. J.W. Clement Co., 28 N.Y. 2d 241, 321 N.Y.S. 2d 345, where in refusing to declare a “de facto” taking as of an earlier date, because of the value depressing effects of the long planning process, the court stated: “Indeed, the aggrieved property owner has a remedy where it would suffer severely diminished compensation because of acts by the condemning authority decreasing the value of the property (Niagara Frontier Bldg. Corp. v. State of New York, 33 AD 2d 368, decided herewith). In such cases where true condemnation blight is present, the claimant may introduce evidence of value prior to the onslaught of the ‘affirmative value-depressing acts’ City of Buffalo v. George Irish Paper Co., 31 AD 2d 470, 476, 299 N.Y.S. 2d 8, 14) of the authority and compensation shall be based on the value of the property as it would have been at the time of de jure taking, but for the debilitating threat of condemnation (see, also, City of Detroit v. Cassese, 376 Mich. 311, 317 — 318, 136 NW 2d 896; City of Cleveland v. Carcione, 118 Ohio App. 525, 190 NE 252; 4 Nichols, Eminent Domain (3 ed.), Sec. 12,3151; Owen, Recover for Enhancement and Blight in California, 20 Hastings L.S. (Univ. of Cal.) 622, 643 — 649 (January 1969). This in turn, requires only that there be present some proof of affirmative acts causing a decrease in the value and difficulty in arriving at a value using traditional methods (City of Buffalo v. George Irish Paper Co., 31 AD 2d 470, 299 N.Y.S. 2d 8, aff’d. 20 N.Y. 2d 6869, 309, N.Y.S. 2d 606).”

Other Court Rulings

Similarly, other courts in the State applied the same principle, that if value depreciated because of planned condemnation, the value as it would have been but for it was to be awarded (City of Rochester v. Lanni, 33 AD 2d 888, 307 N.Y.S. 2d 596 (4th Dept., 1969);Mobil Oil Corp. v. State of New York, 55 A.D 2d 821, 390 NYS 2d 297 94th Dept., 1976); City of Buffalo v. Manguso, 42 AD 2d 673, 344 NYS 2d 248 (4th Dept., 1973); Kessler v. State of New York, 21 AD 2d 568, 251 NYS 2d 487 (3d Dept., 1964); 76 Crown Street Corporation v. City of New York, 35 AD 2d 1005, 317 NYS 2d 978 (2d Dept., 1970); In re 572 Warren Street, 58 Misc. 2d 1073, 298 NYS 2d 429 (sup. Ct., Kings Co.). This includes disregarding lowered or stagnant rents in an otherwise upward market, deteriorated property, lower sales prices, etc.

While the value of property within the footprint of the project undoubtedly suffers, the same is not necessarily true of the property surrounding the project. While some projects may depress surrounding property values (an egregious example would be a garbage dump) many projects increase them. This is more than an academic observation in a condemnation setting.

To begin with, the same principle applies. Value, in a condemnation sense, may not be affected by being either increased or decreased solely by reason of the planned project (United States v. Miller, 317 US 369). Thus, land may not be considered more valuable as available for the use for which the project is designed, if not otherwise available for that use. Nor may the enhanced value of surrounding land, caused by the anticipation of the coming project, as reflected by sales and leases, be used to prove the value of the land condemned. That, however, is a subject easier stated than dealt with on a practical level, particularly in a sharply rising real estate market, such as we have been enjoying in New York the last number of years. The most appropriate sales and leases are those closest to the site, but those are the most likely to be affected by any value enhancement of the project, particularly if the planning process has been at all lengthy. (Sometimes it has been so lengthy and so controversial that the market discounts it as a possibility and it ceases to affect the value of adjacent property). To eliminate them may be to eliminate the only practical proof of value. Certainly, if lands adjacent have been affected, those within the project’s footprint, for the reasons stated, will almost certainly be. Then in a sharply rising market, the value increases may really be by reason of that fact, rather than by reason of project enhancement. Most often, it will be a mixture of both.

View Not Unanimous

This, incidentally, is not a unanimous view in all jurisdictions. New York is one of those which do not permit value enhancement by reason of the proposed project (In re Addition to Lincoln Square Urban Renewal Project, 22 Misc. 2d 619, 198 NYS 2d 248; Fitzgerald v. State of New York, 9 AD 2d 486, 194 NYS 2d 569). Some states permit it in whole or part (City of Valdez v. 18.99 Acres (Alaska),686 P. 2d 682; DOT of State of Florida v. Nolven, 455 SO. 2d 301; Baylin v. States Roads Comm’n (Md.), 475 A. 2d 1155.

The New York rule is set forth in United States v. Miller (317 U.S. at pages 376377): “If a distinct tract is condemned, in whole or in part, other lands in the neighborhood may increase in market value due to the proximity of the public improvement erected on the land taken. Should the government, at a later date, determine to take those lands, it must pay their market value as enhanced by the factor of proximity. If, however, the public project, from the beginning, included the taking of certain tracts but only one of them is taken in the first instance, the owner of the other tracts should not be allowed an increased value for his lands which are ultimately to be taken any more than the owners of the tract first condemned is entitled to be allowed an increased market value because adjacent lands not immediately taken, increased in value due to the projected improvement.

“The question then is whether the respondents’ lands were probably within the scope of the project from that time the government was committed to it. If they were not, but were merely adjacent lands, the subsequent enlargement of the project to include them ought not deprive the respondents of the value added in the meantime by the proximity of the improvement. If, on the other hand, they were, the government ought not to pay any increase in value arising from the known fact that the lands probably would be condemned. The owners ought not to gain by speculating on probably increase in value due to the government’s activities.”

Question Raised

The language itself raises questions. The more obvious ones are when is a condemnor “committed” to a project, and does the rule continue to apply even though many years have passed since there was a “commitment” to the project? Does just the passage of substantial time bespeak a noncommitment? Does commitment connote approval of a finished plan rather than the preliminary steps which precede it? There is a difference of opinion in varying jurisdictions. We suspect as an aftermath of Westway and Forty-Second Street redevelopment, we are going to get more answers to these questions in New York.

Reprinted with permission from the February 20, 1985 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Some Considerations of Condemnation Clauses

Most leases used today are form leases containing “boiler plate” clauses. Although they are reviewed when attorneys are involved, our observation, based upon the almost universal nonchanges in standard condemnation clauses, is that they generally are accepted as written. The inference must be that they are either so expertly drawn that they anticipate all situations or are so little understood that most do not know what to do with them. Where, however, leases are drawn to order, one can find a variety of condemnation clauses, some done quite well, others less so. Some are drawn so inexpertly, that we wonder if either party had enough basic knowledge to know how to structure such clauses.

Drafting a Specialty

The condemnation clause is one that requires special knowledge and understanding. In drafting such a clause, one must understand why it is necessary, what it is supposed to accomplish and how it impacts on a tenant’s rights as against the landlord in a condemnation proceeding.

A tenant with a leasehold estate has a grant of an interest in the real estate, the extent of that estate being measured by the leasehold instrument. In the usual lease, there is a grant for a term of years (or a specific lifetime which can be equated to a term of years based upon life expectancy tables) in exchange for the payment of rent. There is a benefit to a tenant when the value of his leasehold exceeds the amount of rent that he is paying. Absent any contrary contractual arrangement (the condemnation clause) the tenant is entitled to have any benefit from that leasehold estate compensated for if it is condemned. A tenant who has a five-year remaining term to his lease under which he has a rent obligation of $1,000 a year but which space is worth $2,000 a year has the benefit of $1,000 per year for five years.

Under this example, the value of the space is measured by the rental of $2,000 per year, of which the landlord receives but $1,000 and the tenant the other $1,000. Each would be entitled to compensation for his respective interest. As the property may not be worth more than 100 percent of its value and as the tenant has been granted an interest in that property, any compensation the tenant receives is carved out of the value of the property as a whole.

Ruling in A&P Cases

As was said in Great Atlantic & Pacific Tea Co. v. State of N.Y., 22 N.Y. 2d 75, 84, 291 N.Y.S. 2d 299, 305 (1968):

“Generally speaking, where there are two or more interests or estates in a condemned parcel, the proper mode of assessing damages is to ascertain first the damage to the fee as if it were unencumbered, and then to apportion that amount among all of the estates and interest which are held in the property. . . . . In computing the value of the leasehold, the court must first ascertain the fair rental value of the premises and then deduct therefrom the actual rent reserved for the remaining period or term of the lease.”

How this rent disparity comes about very often determines the position of the parties as to whether the tenant should be entitled to compensation for loss of the lease. Most landlords, with cause, take the position of why should I give the tenant any part of the compensation for my property if he did nothing but be there when values increased, either from inflation, an increase in neighborhood values or just a miscalculation of values in making the lease?

However, the increase in rental value may come about by an expenditure by the tenant for the improvement to the property. This runs a gamut from the improvement of an “as is” building to a substantial structural alterations or additions to the erection of an entire structure under a ground lease. Obviously, when this occurs, the tenant assumes he will receive the benefits of those improvements, not only over the full term of the lease but through his option periods as well. Such expenditures not only increase the value of the property but are deemed prepaid rent by the tenant. (In re Water Street, 19 A.D. 2d 44, 24, 241 N.Y.S. 2d 44 (1963)).

One must be careful, however, in differentiation between those tenant improvements which became part of the real estate either under common law doctrines or the “alterations and improvements” clause in standard leases which reflect it and those installations which are tenants’ trade fixtures for which the tenant is entitled to additional and separate compensation (Matter of City of N.Y. [Allen Street], 256 N.Y. 236 (1931)) and which do not add to the rental value of the property, not becoming part of the landlord’s estate.

It is when the tenant has added to the value of his landlord’s estate by improvements, the enjoyment of which over the term of the lease is cut off by condemnation, that he seriously bargains for a share of that condemnation award. That share may be determined in any way the parties may agree, and the Courts, in apportioning a condemnation award, will be bound by the terms of that agreement (Traendly v. State of N.Y., 51 A.D. 2d 489, 382 N.Y.S. 2d 365 (1976)).

Many Approaches Used

Many approaches to such an agreement have been used. The basic approach is to let the measure of compensation be the difference between rent reserved and higher rental value over the term of the lease, including tenant option periods, discounted to present value based upon market rates of risk and return for leaseholds. When this happens, there are in essence three estates to be valued, making up 100 percent of the value: the landlord’s estate based upon the rent reserved in the lease, the tenant’s estate which is based upon the additional rental value over the rent reserved for the term of the lease and the landlord’s reversionary interest after the expiration of the lease. If properly valued, these three together should equal 100 percent. Because the property is most times valued by a capitalization of income and the leasehold is valued in accordance with tables on the present value of a future flow of income which mathematically do not work out the same, there is often a disparity, which is particularly egregious in longer term leases.

The drafter of a condemnation clause should be aware of the problem and attempt to treat it in his lease clause. One suggestion is to provide that in no circumstance may the owner of the fee estate receive less than the value of the lease rent capitalized plus the reversion with the tenant receiving the present worth of his rent bonus as long as it does not reduce the landlord’s award below that figure.

Very often, where improvements are made to the real estate which add to its value, the means chosen to compensate the tenant is to separate real property from trade fixtures, specifically enumerating them, and provide for an amortization of the cost of the improvements over the term of the lease. The problem is in differentiating between trade fixtures and improvements and assuming that the real estate value is increased dollar for dollar with the cost of the improvements. Probably, this is the best compromise approach, considering the alternatives, but it appears to us that the trade fixture award, if and when made, should be factored into the computations.

Where there is a land lease, with the tenant constructing the building, two approaches have been used, one the typical common laws case approach and the other a provision that the land value goes to the fee owner and the building to the tenant. There are, however, practical problems.

An Example

As an example, take a building which, when built, conformed to the maximum that could be built under the zoning regulations. Subsequently, the zoning is changed to permit more intensive use of the land resulting in an increase in value. If the land were valued only consistent with what was built on it, it has one value. If valued in accordance with its highest and best use, i.e., what could now be build on it, it has a higher value. But the property still produces income only in accordance with how it is built and produces a value based upon it. Yet the rule of law in condemnation proceedings provides for a value in accordance with highest and best use. If one first values the land based on highest and best use the building value is decreased. If one takes either current building value (assuming it could independently be fixed) or land value based upon the building as built, the land value, in terms of its value if freed from the lease, suffers. The problem has led to protracted negotiations where the problem has been recognized.

It has been suggested that there are at least two answers to the problem. First, increase in land value increases the rental value which, in any event, will increase total value. But, it does not handle the problem of an increase in value by reason of a zoning change. The second answer is probably the correct one. Buildings only have such value as they add to the land. As the land becomes increasingly more valuable and the building is less and less an adequate improvement, for whatever the reason, it becomes more and more obsolete until the land value, freed of the building, is in excess of the land as improved with that building, at which time, it would be demolished. Thus, it is the land which must first be valued at its highest and best use with the residual value between it and total value attributable to the building.

Whatever the answer, however the parties arrive at it, it must be considered in terms of knowledge of the economics of real property valuation and how the clause will work in that context. Note that we have not begun to discuss partial takings and the special problems inherent in them, in terms of apportionment of rent, reconstruction, allocation of values, etc. We reserve that for another column.

Reprinted with permission from the April 7, 1982 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Payment of Interest on Condemnation Awards

The New York Court of Appeals in a recent decision In the Matter of County of Nassau v Eveandra Enterprises, Inc. 42 NYS 349 (1977), appeal dismissed for want of a substantial Federal question – U.S. -, has put a new light upon the payment of interest on condemnation awards. To some observers it would appear that this decision is a departure from historic concepts of the manner of the determination of a proper rate of interest. It certainly leaves open a question of how, if ever, the statutory rate may be questioned in New York.

Rate in New York

The rate of interest on condemnation awards in the state of New York is provided for in Gen. Mun. Law, Section 3-a(2) and State Finance Law, Section 16. They provide for a rate of 6 percent per annum simple interest payable when the award is paid. The rate of interest has been the subject of litigation particularly when, as has been the case recently, the market rate to borrowers has climbed above the statutory rate. The Supreme Court of the United States has held that interest on a condemnation award is part of the just compensation to be paid and as such its amount is a judicial question and the courts are not bound by statutory provisions. Seaboard Air Line R, Co. V U.S. 261 U.S. 299; Jacobs v. U.S. 290 U.S. 13. This distinguishes it from other rates of interest such as on judgments which are strictly statutory.

There is a history of litigation concerning the rate of interest in condemnation proceedings in this state which has followed this principle. Thus, in Bronx River Parkway 259 AD 552, 556, in the context of the lowering of the statutory rate from 6 percent to 4 percent, it was stated.

Controlling Factor

“The right of just compensation is, of course, the controlling factor. No statute may interfere with or prejudice that right. On April 25, 1938, when title vested herein, the property owner’s right to just compensation, including proper interest, became a vested property right. The statutes of this state recognized that right and provided that interest should be added to an award for the property taken (Administrative Code, Section B-15-18.9; Tax Law, Section 296; General business Law, Section 370). The statutory rate of interest is not controlling if some other rate is required to meet the constitutional requirements… Accordingly at least until evidence is introduced showing that the altered rates do not afford just compensation, the maximum legal rate would be a proper amount to award after change in the law.”
The Court of Appeals, in affirming (284 NY 48, 54 aff’d. 313 U.S. 540 (1941) stated:

“In the absence of evidence as to what such additional sum should be, interest, as provided by law, meets the constitutional requirement… In the absence therefore, of any contractual or statutory right to interest at a specific rate, or any evidence that a four per centum per annum is unreasonably low, the statute of 1939 is applicable…”

Attacks by Condemnees

From time to time thereafter, as interest rates continued to increase above the 4 percent rate provided by statute, periodic attacks were launched by Condemnees against the statutory rate. Inedibly, each failed essentially on the basis of failure of proof. Claimants attacking the rate would call to the trial court’s attention the “common knowledge” of higher rates of interest and introduce no proof of what a proper rate should be (Matter of City of New York (Maxwell) 16 NY2d 497, 499 (2965); Matter of Port Authority Trans-Hudson Corp. 20 NY2d 457, 473 (1967);Matter of City of New York (Fifth Avenue Coach Lines) 18 NY2d 212 (1966), Cert. Den. 386 U.S. 778; Matter of Incorporated Village of Hempstead 59 Misc2d 547,290 NYS2d 859, aff’d 33 AD2d 1036; Matter of Town of Huntington (Crab Meadows) 31 AD2d 759,298 NYS2d 665.

In August 1966, the Legislature amended the State Finance Law to provide for a 6 percent interest rate on State condemnation awards leaving intact the 4 percent rate then in effect on all other awards including those payable by the City of New York. The City rate thereafter was attacked in court proceedings on two grounds, denial of just compensation and denial of equal protection of the laws. Proof was adduced showing various forms of money rates for commercial and real estate loans and municipal borrowings with expert proof also submitted. The statutory rate was declared unconstitutional and a 6 percent rate fixed on both grounds. Matter of City of New York (Manhattan Civic Center Area) 57 Misc2d 156, 291 NYS2d 656, aff’d 32 AD2d 530, 299 NYS2d 675, aff’d 27 NY2d 518, 312 NYS2d 995 (1970).

Buffalo Case

In City of Buffalo v. J.W. Clement Co., Inc., 28 NY2d 241, 256- 266 (1971) the Court commented:

“The determination of the proper rate of interest, however, being a part of just compensation, is necessarily a judicial function which the Legislature may not usurp (cases cited). This is not to say that the statutory provision for the payment of interest is without efficacy, for we have consistently viewed the statutory rate as presumptively reasonable, and, in the absence of evidence sufficient to rebut that presumption capable of being applied the legal rate of interest merely fixes a fair measure or a prima facie measure of the proper rate to afford just compensation. In the absence of proof that some other legal rate must be paid to afford such compensation, the legal rate as it existed during the period elapsed satisfies the constitutional requirement. The question thus becomes whether the evidence introduced by Clement in the instant case is sufficient to rebut the statutory presumption; and as we are presented with affirmed findings of fact, tending to show that the rate of interest was not unreasonable, and as these findings are supported by substantial evidence, we are jurisdictionally precluded from reviewing the same.”

With this as a background the latest push of interest rates which carried them to historic highs triggered yet another round of litigation against the now statutory rate of 6 percent. Some were back to allegations of unreasonable low rates without proof (Perament v. State of New York, 39 AD2d 781; Matter of City of New York (Avenue II) NYLJ June 3, 1975, page 19, Column 8 (Sup. Co., Queens Co., Castaldi, J.); Matter of Hillside Avenue and Park Avenue. (Nassau Co. Sup. Ct.) Not reported, Index No. 7638/70, with predictable results. Others submitted proof but still lost despite the failure of the condemnor to offer any proof other than relying on the statute Matter of City of New York (Washington Heights Highbridge Park Development Area), NYLJ, April 10, 1975, page 14, Co. 3 (Sup. Ct. NYCo., Cotton, J.) On grounds such as that the then prevailing high interest rate was but temporary and that 6 percent was a fair rate.

Nassau County Case

In Eveandra Enterprises, Inc., v. County of Nassau, supra, uncontradicted proof was submitted as to commercial and municipal interest rates and expert testimony elicited that from the period of 1969 through 1975, 9.75 percent was a mid point between the average cost to a borrower of 12 percent and the 7.5 percent return the County was receiving on its short-term investment six year period involved. No proof was submitted by the County to substantiate the statutory rates. Despite this the trial court found that “the general policy of the courts has been to follow the rate of interest as set by the Legislature” and the Appellate Division stated “In our opinion, claimant’s evidence did not overcome the presumptive validity of the statutory rate.”

In the appeal to the Court of Appeals it was argued that while substantial proof was submitted by claimant no proof was adduced by the County, that the presumptive validity of the statute was not evidence in that it merely cast on the condemnee the burden of going forward with the evidence, and that when the burden was met the presumptive rate disappeared as evidence.

Court’s Affirmance

The Court of Appeals in affirming in a memorandum decision noted that:
“Claimant has not demonstrated that the validity of the prejudgement interest rate of 6 percent is constitutionally unfirm. Compensation accruing at the time of vesting and for the period prior to any award in a condemnation proceeding ‘is payable as a substitute for the beneficial use of the real property’ (Matter of Rochester Carting v. Levitt, 36 NY2d 264, 268). Such compensation is awarded in these cases upon the theory that it is necessary to make it full compensation for the loss sustained by the landowner and we are unable to agree with the claimant that the statutory rate of interest as provided in the General Municipal Law, Section 3-a(2) and State Finance Law, Section 16, is in conflict with the constitutional right of just compensation. The result we here reach is not unreasonable and lends stability to the mandate for the payment of full and equitable compensation as fixed by the Legislature. The appropriate interest rate is not measured by particular fluctuations in categories of interest rates for public or private securities or lending. So long as the statutory rate constitutes a judicially acceptable fair return for the deprivation of the use of that property or the money equivalent of that use either or in combination the statutory rate.

This decision appears to raise more questions then it answers. If indeed the statutory rate is merely presumptive, as has previously been held, what kind of proof do the courts require to overcome the effect of the statute? The proof actually offered which was deemed insufficient was the same as proved successful. In Matter of City of New York (Manhattan Civic Center), supra.

Interest as Substitute

The Court refers to interest as a substitute for the beneficial use of the property. Does the Court require proof of fair rental value wither exclusively or in combination with money use rates? In Matter of City of New York (Maxwell) supra, that type of proof was rejected. If so, what happens to the line of cases that speak of interest as compensation for delay in payment, for being deprived of the money equivalent of the loss of use of the money from the time the property was taken? Most condemnees would prefer the beneficial use test as it inevitably is more than a rate relating only to the use of money.

How does the Court make a determination that the statutory rate is “judicially acceptable?” Is it related to evidence or may the Court merely establish a criterion on some unknown standard that a particular rate is judicially acceptable? If the former, how did the Court make that finding in the absence of confirmatory evidence in the record and if the latter, what role does evidence of interest or other rates play in that determination?

How important is stability so that the rate is not “measured by particular fluctuations in categories of interest rates for public or private securities or lending,” as against the statement in People ei rel. Emigrant Industrial savings Bank v. Sexton 284 NY 57, 62:
“Interest is given as damages for delay in payment of the principal obligation Matter of O’Berry, 179 NY 285. Thus the rate of interest should be that current in the periods during which the delay in payment has occurred O’Brien v. Young, 95 NY 428; Reese v Rutherford 80 NY 644.” How is fairness in interest rates to be judged? On Long-term cyclical savings so as to achieve stability or representing the rates actually current during the particular periods involved?

Finally, how does one now go about getting a judicial determination on the quantum of an interest award? After Matter of City of New York (Manhattan Civic Center), supra. We thought we knew. We do not anymore.

Reprinted with permission from the December 6, 1977 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Alterations and Improvements Clause

In most form leases there is a provision similar to Clause 3 of the Real Estate Board form lease known as the “alterations and improvements’ clause.” Although they vary in detail, the essential part of the clause provides that “all alterations — installations and additions or improvements upon demised premises made by either party — shall become the property of landlord, and shall remain upon, and be surrendered with said premises, as a part thereof, at the end of the term or renewal term as the case may be.”

The question then, with respect to tenants installations, is where there is such a clause, in the event of a condemnation proceeding, are they fixtures for which a tenant may receive compensation or have they become the property of the landlord for which he receives the compensation?

Court Interpretation

Courts generally, in interpreting this clause, have treated it as simply declaratory of the common law. At the common law the same property may be treated differently as between different parties as to whether on installation it becomes realty or personalty. While a particular installation might be treated as part of the real estate, as between a vendor and vendee of the real estate, that very same property might at the same time be considered personalty as between the landlord and the tenant. Since the vendor-vendee test is applied between condemnor and condemnee, and the test is different between landlord and tenant it is usual to find that property installed by a tenant is deemed a compensable trade fixture as part of the real estate while at the very same time as between the landlord and tenant it is deemed the property of the tenant. McCrea v. Central National Bank of Troy, 66 N.Y. 489 (1876).

In conflicts between the landlord and tenant the question as to whether it is realty or personalty is resolved by the effect to be given to the agreement between the parties as to the intention to make the installation a permanent accession to the property Murdock v. Gifford, 18 N.Y. 25 (1859). Courts have not treated the usual alterations and improvements clause as declaratory of an intent to make the installation the property of the landlord if the nature of its installation did not otherwise make it so.

Ruling Cited

In U.S.A. v. Certain Lands Located in the Borough of Manhattan 306 F. 2d 439, 449 it was stated:

“Some fixtures, even though annexed by the tenant are ‘distinctively realty’ and therefore become the property of the landlord; others which are removable without material injury to the freehold remain the property of the tenant even though they are classified as realty because they are severely damaged or lose substantially all their value on severance. Examples give meaning to the distinction. Asphalt cemented to the floor by the tenant belongs to the owner. But ‘sectional moveable and interchangeable partitions’ specially adapted to the building but removable without injury to it are realty belonging to the tenant.”

“Machinery which is sufficiently annexed to be fixture within the Whitlock Avenue case is ordinarily ‘realty’ which belongs to the tenant. Similarly, wiring and pipe are the kind of ‘realty’ which remains the property of the tenant ‘where those items have no connection with the operation of the building and serve to purpose but the proper functioning of the tenant’s fixtures, and are a part of the fixtures instead of the building.'”

In 344 F. 2d 142 the court, clarified further to above in stating: “We may well have misled Judge Dimock by our statement that ‘asphalt cemented to the floor by the tenant belongs to the owner.’ This would be true if the asphalt became the only floor or integral with it, but we see no good reason for distinguishing a covering of asphalt tiles, removable without damage to the basic structure or a false ceiling similarly removable, from the partitions held to belong to the tenant in the Century Holding Case.”

Clause Discussed

The court in 306 F. 2d 439, then went on to discuss the alterations and improvements clause. “This distinction between improvements made by the tenant which became the landlord’s property and those which remain the tenant’s, even though considered ‘realty,’ is not changed by the standard alteration provision. This clause, with or without the exception for moveable trade fixtures, adapts and perhaps, very slightly extends the New York concept of fixtures which though annexed by the tenant are ‘distinctively realty’ — The New York courts bearing in mind the purpose of the law of fixtures ‘to protect those who, having an estate less than a fee in land had made improvements upon which, if they could not retain, would be lost to them’ have taken a generous view of what may be removed without injury to the freehold and is excluded from the standard alterations clause.”

The interpretation of this clause was also treated with in In re Howard Laundry Co., 203 Fed 445 (2d Cir. 1913) where it was stated that “This clause was simply declaratory of the law and gave the landlord no additional right to articles found to be trade fixtures. It was undoubtedly intended to cover permanent additions to the buildings and not personal property which for business purposes is a temporarily and detachably fastened to the floor or ceiling of a building.

“The presumption is that trade fixtures belong to the tenant and if it be the intention of the parties that they shall become the property of the landlord at the expiration of the lease, that purpose should be stated in language so clear and explicit that there can be no doubt as to its meaning. That intent cannot be deduced from broad and general language, which is usually found in the printed forms, regarding improvements. When this word is used without any language defining or extending its ordinary meaning, the courts, with substantial uniformity have held that it relates to improvements to the realty and not to trade fixtures.” (See also In re Seward Park Slum Clearance Project, 10 A.D. 2d 498 (1960), In re Mount Holly Paper Co., 110 F. 2d 220, 225 (3rd Cir. 1940).

No End to Term

Although condemnation acts to terminate the lease, this is not deemed, for the purposes of this clause, such an end to the term as forfeits the tenant’s installations to the landlord. Gristede Bros., Inc., v. State of N.Y., 11 A.D. 2d 580 (3rd Dept. 1960); U.S. v. Seagren, 50 F. 2d 335.

The law is full of cases where there was an endeavor to protect a tenant as to his installations and to prevent a forfeiture to the landlord whether there be an alterations and improvements clause or not. Ombony v. Jones, 19 N.Y. 237; Webber v. Franklin Brewing Co., 123 App. Div. 465 (1st Dept., 1908), aff’d on opin. below 198 N.Y. 509; Excelsior Brewing Co. v. Smith, App. Div. 668 (2d Dept., 1908); Century Holding Co. v. Pathe Exchange, 200 App. Div. 62 (1st Dept. 1922); Lewis v. Ocean Navigation and Pier Co., 51 Hun 644, 3 N.Y.S. 911, aff’d 125 N.Y. 341; Bernheimer v. Adams, 70 App. Div. 114 (1st Dept., 1902), aff’d 175 N.Y. 472.

The result then is that in condemnation proceedings, the alterations and improvements clause is in effect ignored and the ordinary common law rules applied.

Reprinted with permission from the November 6, 1975 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

The Mortgagee as Affected by Condemnation

A recurring problem in condemnation proceedings is the status of mortgages on condemned property. Inevitably there arises the question of priorities, of proper rates of interest to be paid to the mortgagee and the dates when interest is paid. The answers to these problems are grounded in the fundamentals of the relationships of the parties in a condemnation proceeding.

A mortgage, of course, is nothing else but the security for a debt. While the mortgage is a real property interest, the debt is personal whether in the form of a bond or note. While often the owner of the property is personally liable for the debt, besides having the property stand as security for its payment, it is at least as usual that, for a variety of reasons, the present property owner is not personally liable for the debt but merely owns the property subject to the mortgage.

Debt Not Affected

When property is condemned the basic debt is not affected, the debtor remains ____ on the bond or note and has the right to proceed to collect the debt by enforcement of the bond in accordance with its terms (Muldoon v. Mid-Bronx Holding Corporation (287 N.Y. 229, 231, 1942, Copp v. Sands Point Marina 17 N.Y. 2d 291, 1966). At the same time the condemnation proceeding takes title down to the ground wiping out the mortgage and converting the mortgage into an equitable lien against the award having the same relative priority that it had as to the property itself (Fliegel v. Manhattan Savings Bank 296 N.Y. 214, 1947).

It is then that the obligation of the sovereign to pay the award is substituted for the security of the real property. While particular statutes may codify and amplify these principles, these rights do not depend upon statute but are grounded in the common law. Statutes such as section B 15-15.0(8) of the Administrative Code of the City of New York recognize a mortgagee as an “owner” of the property and thus entitled to a share of the award.

Case is Cited

Cases such as In re Matter of Dry Dock Savings Institute (104 N.Y.L.J., 115, decided Oct. 1, 1940, Sup. Ct. N.Y. Co., McLaughlin, J.) have stated that “after title is taken by the City the Appellate Division of this department has ruled that the money represented by the award is a fund and that a first mortgagee as well as any other lienor shares in that fund in accordance to its priority.”

However, since the debt remains unaffected by the condemnation it would appear that mortgagee in collecting its debt has the right to collect on the bond or in the alternative to enforce its debt against the condemnation award (or any deficiency after suing on the bond) (Copp v. Sands Point Marina, 17 N.Y. 2d 291). Pragmatic considerations in almost all instances foreclose the prior course of action since it takes a brave mortgagee indeed to substitute the certainty of a collection out of an award guaranteed by the sovereign for the uncertainty of both the ability to collect on a judgment against a debtor and to take one’s place in line as a recent judgment creditor against possible intervening lienors and/or judgment creditors.

Rights of Mortgagee

Assuming now that the mortgagee does not pursue its rights in accordance with the terms of its bond or note but looks to the condemnation proceeding there then comes into question the rights of the mortgagee in the condemnation proceeding. To begin with, as an owner of a right in the award the mortgagee has the right to appear in the proceeding to protect its interest, whether by way of fixing the award or by fixing the amount owing to it or by directing payment to it out of the award.

The courts have held that when an award has been tendered for payment stopping interest, the mortgagee may not wait for the former fee owner to move to collect the award and insist on payment to it of the interest owing to the date the mortgagee is paid, but it is the duty of the mortgagee as an owner of a part (or all) of the award to affirmatively move to collect the award and failing to do so in time, the loss of interest fails on it to the extent that the payment would have been paid to it (Matter of Dry Dock Savings Institution, 104 N.Y.L.J., 115, Oct. 1, 1940, Sup. Ct. N.Y. Co., McLaughlin, J.; In the Matter of the City of N.Y. Franklin D. Roosevelt Houses, N.Y.L.J., May 25, 1962, page 12; In re Washington Heights Federal Savings and Loan Assoc., N.Y.L.J., May 18, 1964, p. 17, N.Y. Sup. Ct., Fine, J.).

Treatment of Mortgagee

Further if the mortgage debt is to be collected out of the award the mortgagee is treated as an owner not only as to the dates of when interest is paid, but also as to the rate of interest. The statutory rate on condemnation awards presently is 6 per cent per annum. A mortgage may provide for a different rate. If the property is condemned the mortgagee will collect interest at no different rate than any other owner despite a different rate provided for in the mortgage (362 Washington Ct. Corp. v. Peninsula National Bank 53 Misc. 2d 499, 279 N.Y.S. 2d 204, 1967; In re City of N.Y. 267 N.Y.S. 2d 950; In the Matter of the City of New York, Franklin D. Roosevelt Houses, supra; In re Washington Heights Federal Savings and Loan Association supra; Fliegel v. Manhattan Savings Bank; supra; Muldoon v. Mid-Bronx Holding Corporation, supra).

An interesting wrinkle to the problem is where the mortgage instrument itself provides that in the event of condemnation interest shall be as provided for in the mortgage rather than at the statutory rate (In re Brooklyn Bridge Southwest Urban Renewal Project, 46 Misc. 2d 558, 260 N.Y.S. 2d 229, aff’d ___ A.D. 2d ___, 262 N.Y.S. 2d 1020, 1965) the court held the mortgagor to the agreement to pay the higher rate.

One is given to wonder why such an agreement should be given effect different than an ordinary bond or note which may provide for a higher interest rate. The courts have specifically held that the mortgagee is an owner, receive interest as does any other owner, that it is the sovereign which is paying the award and the interest and that where the mortgagee seeks enforcement of its debt against the award it is limited to the statutory rate.

Decision Cited

It is to be noted that the Appellate Division (Second Department in Copp v. Sands Point Marina, Inc., 21 App. Div. 2d 823, 824, 1964), treated the problem of swinging on the note and collecting the judgment from the award in the following language:

“Without prejudice to defendant’s future right to a refund of the amount equal to the difference between the statutory rate of 4 per cent interest payable in condemnation and the contract rate of 5 per cent in the event that plaintiff hereafter should obtain payment of the mortgage debt or interest thereon from the condemnation award . . . .”

It is, to us, at least difficult to reconcile these later two decisions. Apparently in the latter case the court has followed through on the basic premise that despite any agreement between the parties as to the rate of interest if the debt is to be paid in any way out of the award in condemnation then it is the statute which is to apply and not the agreement between the parties.

Reprinted with permission from the July 1, 1975 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Valuation of Streets

A problem of more than passing interest in many condemnation proceedings in most areas of the City with undeveloped or partially developed land is what is the value of land designated on the City map or on private approved subdivision maps as a street although never acquired by the City. Compounding that problem is where those mapped streets were recognized in conveyancing by property owners facing on those mapped streets who conveyed describing the lands as fronting on those streets. Since all of the City of New York has now been mapped by the general City map this is a universal problem.

Who Owns Land?

The first question is who owns the land in the bed of a street mapped by a municipality. The fact of a mapping of a street by a municipality does not create any interest in the municipality nor does it divest the owner of any rights in that land. To do so would be a taking without just compensation and thus unconstitutional (Foster v. Scott, 136 N.Y. 577, 1897; Vangellow v. City of Rochester, 190 Misc. 128, 71 N.Y.S. 2d 672, 678, 1947; Headley v. City of Rochester, 272 N.Y. 197, 1936; Rand v. City of N.Y., 155 N.Y.S. 2d 753, 1956). That map is generally part of a comprehensive plan for an orderly development of the City and that is all.

For a municipality, as such (distinguished from the public), to acquire street rights (whether a fee title for street purposes or only street easements leaving the naked title in private hands), it requires either a dedication and acceptance, a user, or a condemnation. (In speaking of streets by user distinction must be made between private user and public user). Absent any of these, title to a mapped street would remain in non-municipal hands. However, if a grantor in conveyance treats that City map as he would a privately filed map there may be other consequences, discussed later (In re Braddock Avenue, infra).

As to the title to the land in the mapped street it is hornbook law that unless a deed contains an express reservation to the grantor, a conveyance of land abutting upon a street (merely mapped or actual) grants a fee to the center line of the abutting street and this is so whether the conveyance be a tax deed or any other kind of deed, whether reference is made to the street or not, or whether the description is only by tax lot number (3 Kent’s Commentaries [14th Ed.] p. 432-433, Lowe v. DeFelippo, 12 A.D. 2d 788, 209 N.Y.S. 2d 652; Gottfried v. State of N.Y., 23 Misc. 2d 733, 201 N.Y.S. 2d 649; Bo-Con, Inc., v. Sweeney [Sup. Ct., Rich. Co.] N.Y.L.J. May 19, 1967, p. 21, col. 6; Bissell v. N.Y. Central Railroad Co., 23 N.Y. 61, 65; Kent v. Winer, 30 A.D. 2d 703, 292 N.Y.S. 265).

Who Holds Title?

Thus, since it is most unusual for a grantor to reserve title to the bed of a mapped street (unless he intends to dedicate it to the municipality) title almost always, to the center line of the mapped street, will be in the abutting owner. Assuming the land can be used independently or in conjunction with other property and all that has occurred is the municipal mapping of a street, it is clear that it has a full value no different than other adjacent land. (Its value may be less for not having street frontage or access but that is another matter.)

But what happens if the owner of the lands abutting on that mapped street (whether mapped by the City or on a private map) decide to treat that street as if it is an actual street?

In the normal course of events, land, which started out as farms or as other large tracts, in order to be used, became subdivided. To afford access to the individual pieces of subdivided lands, so they could be used and sold in smaller pieces, subdivision maps were made by the one common owner showing that the individual plots had street frontages and could be reached from the system of public streets. Today most municipalities provide that before lands are subdivided that a subdivision map be approved by the municipality and filed. In fact, between 1902 and 1916 Section 1540 of the New York City Charter provided that the filing of a private subdivision map was an offer to dedicate a fee for street purposes which offer was accepted upon approval of the map by the City. (We have not researched for any decisions as to either the constitutionality of this statute or its interpretation.) Usually a map to be accepted for filing must conform to the municipality’s general plan for its streets and will not be accepted for dedication unless either the map is approved with its changes or the streets conform to the general plan.

Common Law Cited

Now, the question is what happens, when a subdivision map is filed, to the land which is shown on that filed map to be in the bed of a street. The common law is as stated in Lord v. Atkins (138 N.Y 184, 191). “It is well settled that when the owner of land lays it out into distinct lots with intersecting streets or avenues, and sells the lots with reference to such street, his grantees or successors cannot afterwards be deprived of the benefit of having such streets kept open. When, in such a case, a lot is sold, bounded by a street, the purchaser and his grantees have an easement in the street for the purposes of access, which is a property right.”

It will under such circumstance be presumed that there was an intention by the grantor to create these rights over his own lands but only in favor of those in privity of contract with him and not to other owners or the public generally. These property rights are private easements and extend only to lands on the same block to the next cross street on each side of the lots sold leading to a system of public streets (In re East 177 Street, 239 N.Y. 119, 131; Matter of Opening of Twenty-Ninth Street, 1 Hill 189; Reis v. City of New York, 188 N.Y. 58; In re East 5th Street, Borough of Manhattan, 146 N.Y.S. 2d 794, 803) unless it is provided otherwise. Note that while an intention to create private easements will be presumed, such a presumption of intention is not conclusive, and there must be such an intention (In re Northern Boulevard, 258 N.Y. 136; In re Braddock Avenue, 278 N.Y. 163, 171). Even then, only those easements will be presumed which are necessary to afford access to the property conveyed and usually will not extend beyond the next intersecting street (In re East 177 Street, 239 N.Y., at 131; Reis v. City of N.Y., supra). They are akin to easements of necessity.

Not a Public Street

But this does not make such a street a public street and neither the public nor the municipality acquires any rights in it. “The dedication and acceptance are to be proved or disproved by the acts of the circumstances under which the land has been used. Both are questions of intention. The owner’s acts and declarations should be deliberate, unequivocal and decisive, manifesting a positive and unmistakable intention to permanently abandon his property to the specific public use. If they be equivocal or do not clearly and plainly indicate the intention to permanently abandon the property to the use of the public, they are insufficient to establish a case of dedication. “In the case of a highway the public must accept the dedication” Holdane v. Trustees of Village of Cold Spring, 21 N.Y. 474, 477. As was stated in In re East 177 Street, (supra): “The acts and declarations of the party must be unmistakable in their purpose and decisive in their character showing an intent to dedicate the land, absolutely and irrevocably to the public use and there must also be an acceptance and formal opening by the public authorities, or a user (Niagara F. Susp. Bridge Co. v. Bachman, 66 N.Y. 261).” Thus, merely the showing of streets on a tax map by the municipality does not evidence an acceptance by the public authority (Sanchelli v. Fata, 306 N.Y. 123; Johnson v. City of Niagara Falls, 230 N.Y. 77).

What, then, is the value of land so encumbered by private easements. The Courts generally treat such land as having a nominal value (Matter of City of N.Y. [149th Ave.], N.Y.L.J., Feb 4, 1972, page 19, cols. 5 and 6; In re Braddock Avenue, 249 A.D. 652, 251 A.D. 669, aff’d 278 N.Y. 163; In re Decatur Street, 196 N.Y. 286; In re Schneider, 136 App. Div. 444, rev’d on other grounds 199 N.Y. 581). But this is not infallibly true (In re Northern Boulevard, 258 N.Y. 136; In re East 177 Street, 239 N.Y., at p. 131). It depends upon the extent to which the easements burden the fee or whether the land under the easements can otherwise be profitably used. If one owner has a title to all the lands fronting on the mapped street he has the complete power to extinguish those easements and the law will credit him with doing that which he has the right to do (if not in fact treating those easements as if merged in the fee) (Gerbig v. Zumpano, 7 N.Y. 327; Snyder v. Monroe County, 2 Misc. 2d 946, aff’d 6 A.D. 2d 854). If there were only a single (or a few) other property on that street and it would benefit both owners to eliminate the private easements and gain an unencumbered fee title the law again will presume a probability of such occurring and fix a value based on such a probability with the value dependent upon the strength of such probability (In re Northern Boulevard, supra).

Now suppose there are private easements encumbering a naked fee title, rendering the value of that naked fee nominal. Is it a dead loss to the (abutting) owner? Obviously not. The creation of streets by themselves create value in many ways to the abutting owner and these are every day recognized by appraisers and assessors, outside of the fact that without (street) access there is no value.

Most appraisers recognize zones of value with relation to street frontages. The front half of a City lot is usually assigned two-thirds of its value, with the rear portion assigned one-third. This is because of its proximity to the street. Dependent upon use and zoning the value of land beyond standard lot depths is often treated as rearage having half the value of the frontage. Assessors will most often reflect what is in effect a transfer of values from the bed of the street to the abutting property by assessing no value to privately owned land in the bed of a street and noting on their records “value of land in bed of street reflected in abutting property.” Thus, corner lots for certain uses are valued at 50 per cent more than an inside lot, key lots at 10 per cent more and a 10 per cent increment in value is given to an entire plot for a second street frontage, with further percentages for even more street frontages.

While there may not be an exact equation between the “lost” value to the naked fee title in a street (whether public or private) and the increased value of an abutting property it is evident that the value is not a dead loss and that there is a substantial increase in value in the abutting property.

Reprinted with permission from the May 7, 1974 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.