The chickens are coming home to roost. We had previously written in our Law Journal column about what we believed to be an unfortunate result coming from the interpretation of a condominium’s by-laws in the partial taking of a gated community on Long Island, (“Just and Not So Just Compensation”, NYLJ 2/3/05) preceded by another column by us on the problems inherent in valuing condominiums and cooperative housing units in condemnation proceedings (“Valuation of Condominiums and Cooperatives”, NYLJ 4/28/04). The problem was not with the Court’s decision, but with the condemnation clause in the by-laws which led to the decision. We predicted more problems yet to come. The chickens that are coming home to roost are in the condemnation clauses in by-laws in condominiums affected by partial takings of both common elements and individual units for the new Second Avenue Subway.
In the February, 2005 article, we wrote about the case of Murphy v. State of NY, 14 AD3d 127, 787 NYS2d 120 (2d Dep’t., 2004) where the condemnation clause in the by-laws reads 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 if 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 owners 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 element and to each irrevocably restricted common element…”.
In that case, the taking was of part of the unrestricted common elements which caused consequential damages to four individual units in significant amounts. The balance of the units were not similarly affected. The Appellate Division, based upon the above language, held the four unit owners had no right to make an individual claim and the claim for damages had to be made by and paid to the Board of Managers, even though those same by-laws did not provide for paying those special damages to those few owners who actually suffered the damage.
The language in those by-laws was not an aberration. In fact, most by-laws we have seen were similar. In another set of by-laws for a condominium apartment house we have seen, the language reads as follows: “In the event of a taking in condemnation or by eminent domain of part or all of the common elements, the award made for such taking shall be payable to the Board of Managers if such award amounts to $1,000,000 or less, and to the insurance trustee if such award amounts to more than $1,000,000.” It is included as a separate paragraph in a clause dealing with casualties.
In the same by-laws, it also provides that the exterior walls and slabs in the ceilings and floors as well as other parts are common elements, some general and some restricted (restricted common elements were not defined). Thus, in the event of a taking, in whole or in part, we are left to define the intent (if there was even any thought given to have an intent) of the parties to such clauses. At least as to the unit itself we know who the owner is and its right to be paid for the unit, at least if and until someone takes the position that all claims are those of the Association. Nichols on Eminent Domain (3d ed) makes reference to such a position by some, as difficult as it is to justify same.
We have seen an even worse clause. It states, in essence, that in the event of any condemnation, whether of a unit or a common element, the award is to be paid to the Board of Managers with no direction to the Board of Managers to pay it to the party who owned the unit. In that particular case, while the taking is planned to be mostly of common elements, there is a planned taking of a part of a commercial unit. We wondered when we read that clause if anyone ever took the time to read the clause when they bought their unit. We know the owner of that commercial unit was not aware of the language, until we pointed it out. Was it possible that the drafter of that instrument, much less the Attorney General’s Office which reviewed it, intended that if a part of the building was condemned, the owners of the units taken were to forfeit the value of those units to be shared with the owners of all of the other units? That is what it literally provides.
Let us tell you now the problems that we see unresolved by these condemnation clauses, particularly as most of the proposed takings are of the common elements and all or parts of commercial units. Where individual units are involved, there is also involved takings of “common elements” within those units such as outside walls and interior structural elements of the building such as columns, beams in floors and ceilings. One can anticipate conflicting claims by reason thereof. Then there will be takings by the MTA of common elements and the building of ancillary facilities, such as exhaust towers, or any other use within them and adjacent to particular units which may have an impact in their values. That is not to mention the taking of all or part of particular units where it is provided the award for same is payable to the Board of Managers.
So why do we bother? Because the problems show up in the condemnation proceedings when the language of the condemnation clauses must be applied. How does one explain to a court that the language used does not mean what it appears to so clearly say? How does one explain to an owner that the damages to his unit are being paid to the Board of Managers or Condominium Association to be shared with all of the other unit owners?
We are not skilled draftsmen of legal documents but we decided to give a try to writing a condemnation clause for condominium by-laws in the hope it would come to the attention of those who draft such documents. We believe that with the change of a few words, it probably could be made applicable to a cooperative building. While the cooperative owner holds a leasehold, plus a stock interest in the cooperative corporation rather than a fee estate in his unit, it is, for practical purposes, a distinction without a real difference. The cooperative owner is just as much a fee owner as is the condominium owner; the units are marketed, bought and sold as if they were. He pays no rent for his leasehold other than common charges and the term of his lease is so long as it amounts to a fee. It is inextricably tied to his ownership of the stock in the cooperative corporation. As we had occasion to previously write, a cooperative defies traditional descriptions of real property. It is treated differently for different purposes. One of our partners just bought a cooperative apartment. Examination of the proprietary lease indicated it had no condemnation clause and it has a very long expiration. That lease is being rewritten, to correct that deficiency, as are the other leases. He, in effect, bought a fee, as far as he and the other stock owners in the cooperative corporation believe.
The following is our perception of what the condemnation clause in condominium by-laws should read (with apologies to more adept draftsmen).
“Should all or part of one or more condominium units be taken or damaged by right of eminent domain and/or a regulatory taking, any award or damages paid for same shall be paid directly to each unit owner, each of whom shall have the right to make a separate claim for same. The award shall include the taking of the unit’s restricted common elements, whether within the limits of the unit or outside of same, as well as all of the common elements included within the limits of the unit (walls, floors, ceiling, utilities) and the Condominium Association waives any claim against the award to the unit owner for any such taking. The Condominium Association shall, however, retain the right to claim and receive compensation for the taking or damage to all other common elements outside of the limits of the unit as well as the cost to cure damages caused by the taking of common elements within any taken unit.
In the event the taking is of common elements other than those described above and/or where the damages are equally applicable to all units, the award made shall be payable to the Board of Managers. However, the unit owners retain the right to make a separate claim and be paid the award for consequential and/or severance damages to their individual units arising from the taking of any common element, restricted or general, outside of the limits of the units, where such damages are not general to all units and are special to those particular units.
Should all of a unit be taken, the unit owner shall be relieved of the obligation to pay common charges and the Condominium Association shall have the right to make claim for any damages by reason thereof. Should a part of a unit be taken, the common charges shall be reduced in the same proportion the square footage of the part taken bears to the square footage of the whole unit and both the Association and the unit owner shall each have the right to individually make claim and be paid for their damages by reason thereof.
Should, for any reason, a court direct payment to the Condominium Association of the award which should be paid to a unit owner by reason of the provisions herein, the Association shall promptly pay same to the unit owner.”
The reference to the common elements is occasioned by the fact that although each unit is spatially defined, it is impossible to separate it from the structural elements making up part of it where they are defined as common elements, some described as restricted and others not. The Condominium Association owns nothing gainful in such common elements—they merely being necessary to support each of the individual units. It is to the benefit of the individual units that the Association owns same, since it then has the obligation to maintain and repair same as a common charge. There is no corresponding benefit to the Association. It is similar in concept to the value of a street. Whatever value there is to the land in a street is reflected in the abutting properties for which it provides light air and access which is why, when a street is taken, the land in the street is deemed to have but nominal value; so too with the common elements. While some by-laws use the term restricted common elements without defining it, others make plain that to which it refers are those common elements that have no value to other than particular units. An example that comes to mind is a driveway leading to the garage of a particular unit which lies outside of the limits of the structure which makes up the unit and its use is restricted to that unit.
The reason for retaining in the Association the right to damages from the taking of common elements inside of a taken unit other than the value of that particular unit is for such cases where the taking of a unit may sever a utility line going to other units or common areas which must be replaced or some similar circumstance. The retention of the right to damages for the other common elements is where a taking affects all units equally, such as an outside garden or any other amenity available for the owners of all units to use.
We also attempt to make clear that in the event of the taking of all or part of a unit, there is no residual obligation to continue to pay common charges for the area taken. However, this may have the result of increasing the common charges for all other units and, thus, there is reserved the right of the Association to seek to recover as damages from the condemnor those damages on behalf of all of the other unit owners.
While we have no doubt our draftsmen efforts are far from perfect, we believe it is better than the by-laws we have seen.
Reprinted with permission from the September 25, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.