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Just and Not So Just Compensation

In our April 28, 2004 column titled “Valuation of Condominiums and Cooperatives,” we decried the inadequacy of condemnation clauses in condominiums and cooperatives agreements. We ended the article predicting that because of it “we may see some strange results in condemnation proceedings.” Based upon the recent decision of Murphy v. State of New York in the Second Department (2004 N.Y. Slep Op. 09607), we should have added that when such clauses are drawn those who draft them should understand the potential consequences of their language because they may lead to unintended results. That is what happened in that case.

The case involved the taking of a strip of land of about 60,000 square feet by the State of New York for the widening of Shelter Rock Road in Roslyn, Long Island. The strip was part of the common land of a residential condominium and resulted in a few of the units being placed right on top of what is a major thoroughfare. Not only was a claim filed in the Court of Claims by the condominium for both direct and consequential damages on behalf of all of the unit owners, but a separate claim was filed by at least one of the unit owners. She claimed she was specially damaged in that it seriously diminished the value of her unit, distinguished from the general damage suffered by all of the unit owners. Apparently, the road widening placed the common swimming pool and recreation area immediately adjacent to the road and allegedly made the condominium as a whole less valuable.

The condominium consists of 48 residential units in 24 buildings on 24 acres, together with roads, a swimming pool, tennis courts, utilities and other common elements. The unit owners own the interior of their units and a 1/48th “undivided interest” in the common lands and the exclusive right to occupy “irrevocably restricted common elements” such as decks and driveways. That the individual unit claimant was recognizably more severely damaged than other unit owners is evidenced by the fact that the Department of Transportation (without consulting the Attorney General’s office, so we are advised) paid as an advance payment to that owner $400,000 as its “highest approved appraisal.” We assume this amount was not before the court as it is not noted in the opinion and it would have been reversible error for it to be put before the Court of Claims by the claimant.

Despite the prior “advance payment” of $400,000 to the unit owner (and three others similarly situated), the State moved to dismiss the unit owner’s claim by reason of the condominium’s by-law provisions alleging she had no standing to make the claim. The relevant by-law provisions read as follows:

“In the event all or part of the common elements are taken in condemnation or eminent domain proceedings, the award from such proceedings shall be paid to the Insurance Trustee if the award is more than $40,000 and to the Board of Managers if the award is $40,000 or less, to be distributed in accordance with Section 3 of Article VII [governing reconstruction after a casualty] but in the following amounts:

“(a) so much of the award as is applicable to unrestricted common elements, to the Home Owners pro rata according to the respective common interest appurtenant to the Homes owned by such Home Owners.

“(b) so much of the award as is applicable to irrevocably restricted common elements to the Home Owner having general use of such common element.

“In such eminent domain or condemnation proceeding the Board shall request that the award shall set forth the amount allocated to unrestricted common elements and to each irrevocably restricted common element. In the event the award does not set forth such allocation then the question of such allocation shall be submitted to the arbitration in accordance with the Arbitration Statutes of the State of New York.”

The State argued that all of the residents were bound by these by-laws in that no unit owner could receive a separate award for the taking of any part of the common elements. The owner argued that this provision only applied to awards made for the common elements and only had internal application to how that award was handled, that her claim was for consequential damages to the value of her unit which she unquestionably owned and was not an award for the value of the common element. The Court of Claims agreed with the unit owner. The Appellate Division, Second Department, did not and reversed. As we read the decision, it did so almost apologetically. It seemed to be troubled by the result in that it did too much explaining.

As the Court noted, this is a case of first impression in New York and in virtually every other State, except Maryland, where its highest court recognized the right of unit holders to be separately compensated for their unique consequential damages. As the Court stated, “the resolution of this controversy, however, lies not within foreign case law, but within the declaration and by-laws pursuant to which Fairways was created, and its business is conducted.” We would note, however, the resolution of the case rested in how the by-laws were interpreted. Different from the Appellate Division’s interpretation of what was intended, we believe it can be gleaned from the provision giving to the unit owner the award of damages arising from the taking of the “irrevocably restricted” common elements. Thus, not all damages from the taking of a common element go to the Association. This provision recognizes that there may be damages unique to a particular unit holder arising from a taking of a common element. What appears to be reserved in that clause are those damages unique to the unit owner as differentiated from those suffered generally. It makes no sense to us to reserve that right without putting it into context with the first paragraph’s meaning.

However, we admit our interpretation is colored by what we perceive to be the “just” part of the compensation in this case. The language can reasonably be interpreted as did the Appellate Division particularly when the by-laws speak of “the award from such proceedings” going to the Association. But, at the end of the day, it was the individual unit owner who suffered a loss to the value of her unit. It is she who must be made whole. The common elements, like a street, are burdened with the easements of the abutting owners, and as such have but nominal value. (Matter of City of N.Y. [Van Hill Realty Co., Inc.], 19 A.D.2d 739, 242 N.Y.S.2d 782 (2nd Dept., 1963); In re Northern Boulevard, 258 N.Y. 136 (1931)). Its value is reflected, as in a street, in each of the 48 individual units. To the degree each loses value equally, the Association can fairly speak for them. But, not for the special unique damage to a unit holder. That is how we interpret the by-laws. For the Court to state, “If the claimant has indeed been significantly injured disproportionately to other condominium owners, her remedy, if she has any, must lie in the discretion of the Fairways Board” What discretion? Should it interpret the by-laws in a way the Court did not itself feel justified in doing where they provide for a “pro rata” division of the proceeds from the taking of a common element.

While we disagree with the result, the fault lies elsewhere. It lies in the language of the by-laws. While the Court took the literal language of the by-laws and applied it to all damages, “from the condemnation proceedings” we do not believe that was what its drafters intended to accomplish. Our problem is that we have had too many conversations with too many attorneys who do not have a clue of how condemnation clauses are applied or why. We suspect the drafter did not envision a special damage to any unit holder disproportionate to those of the others growing out of a taking of part of the common elements. It certainly puts those uniquely damaged at a severe disadvantage. They have to depend on the good will of the other unit holders to give up their right to be proportionately enriched by the disproportionate damage to the few who were specially damaged. Since the decision rested on the unfortunate opaqueness of the by-laws, all it took was the drafter to be more explicit in the language of the by-laws to avoid such a result. What bothers us most is that from what we had previously been told such language used here is not unique. What would it take to provide that unit owners have a right to claim for damages not suffered generally by the other unit holders, or something similar.

The Court was troubled by the fact that to permit separate claims by each unit holder would not only unduly tax the court system, but increase the cost to the State in responding to such multiple claims. But that would not be the case from our interpretation. Nor, even if it were so, should it be the determinant if it results in unjust compensation. To put the final touch on this, we understand that the State will now sue each of those who received the $400,000 advance payments for return of same plus interest. To really complicate the situation, we understand that one of the unit owners to be sued has since sold his unit.

At about the same time this decision came down, the same court, different panel, decided Village of Port Chester v. Sorto, (2005 N.Y. Slip op-60272). (We represent Sorto.) This case stands for the proposition of who has the right to receive an award for trade fixtures. In a prior decision (Matter of Village of Port Chester, 303 A.D.2d 416), the Appellate Division affirmed the lower court based on the state of the record at that time, in granting a Writ of Assistance to evict the claimant without first having made an advance payment, as provided in EDPL. The Village in that case had challenged the claimant’s right to any award as never having had a written lease for the premises he occupied and thus alleged he had no standing.

In the current litigation, the lower court, in a motion to strike his claim, denied the claimant the right to any compensation based onres judicata and/or collateral estoppel from the first decision. The Village alleged that not having a lease, Sorto was not entitled to an award. The proof showed the claimant took over his brother-in-law’s restaurant, alleging he bought it, and ran it paying the rent to the landlord in his own name for around four years. He also testified he made substantial improvements to the premises, that because the landlord had his offices in the same building and regularly ate at the restaurant, he was aware of all of this.

The Appellate Division found that if that proof be credited the claimant was entitled to an award as a “condemnee” as defined in EDPL. The Court of Appeals said a long time before EDPL that if a claimant was legally in possession, (Matter of City of N.Y. [Allen Street], 256 N.Y. 236) and owned the trade fixtures, the courts would not speculate that he would not have been able to extend his soon to be expiring lease absent the condemnation proceedings and thus he had a right to a trade fixture award. Since then, courts universally have been treating legal occupants as condemnees entitled to a trade fixture award.

The Appellate Division has by this decision once again clarified this rule of law, albeit in the context of the definition of a “condemnee” in EDPL If an occupant is legally in possession of premises which were condemned, he is a “condemnee” entitled to be paid for his trade fixtures, no matter the status of his lease or an absence of same.

Reprinted with permission from the February 3, 2005 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.