Will attorney general eat crow on escrow guidance?

AG agrees to re-asses its recent interpretation of law

New York Attorney General Eric Schneiderman
New York Attorney General Eric Schneiderman

The New York state Attorney General’s office is taking a second look at rules designed to protect new-condominium buyers after the real estate industry balked at a set of directives the AG sent out earlier this year.

In August, Attorney General Eric Schneiderman’s office circulated a memo to developers providing guidance as to how the office interpreted state laws requiring sponsors to hold buyers’ deposits in escrow until a building is completed. About seven weeks later, however, the AG’s office pulled an about-face and suspended the memo’s prescriptions.

“The Department of Law has received numerous comments on its memorandum . . . [and] is in the process of evaluating these issues,” read a dispatch dated Sept. 22. “The guidance and directives set forth . . . are suspended until further notice.”

The August memo was one of a handful that the attorney general sends out each year – often offering clarification on an issue or details as to how the office reads certain state laws. What was unusual, real estate attorneys said, is to have one so contentious it causes the AG to backpedal so abruptly.

“It’s clearly out of the ordinary,” said Jay Neveloff, chair of the real estate practice at the firm Kramer, Levin, Naftalis and Frankel. “There were enough points raised in this memo that they needed to think things through. It’s just an example of where you really had to take a closer look.”

At issue was the AG’s interpretation of the word “completed” in the state law regulating when buyers’ deposits and down payments can be released from escrow.

According to the city’s administrative code, a unit is considered completed when the city Department of Buildings issues a permanent certificate of occupancy for the entire building. In practice, however, buildings that appear completed can go years without receiving a final certificate – often for reasons outside a developer’s control such as apartment owners with open building permits.

“There’s very little regulation or attention paid to this requirement,” said attorney Meg Goble of Rheem Bell & Mermelstein, adding that sponsors will sometimes walk away after closing on units with only temporary certificates in place, leaving condo boards “holding the bag.”

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Indeed, investigators in the AG’s office found that developers abandon plans to obtain a permanent certificate with disturbing frequency” after the last apartment is sold.

As a remedy, Schneiderman’s office directed developers either to create a second escrow account, one not sourced from buyers’ monies, with enough funds to complete construction and obtain a permanent certificate, or otherwise hold deposits in escrow until the building is certified completed.

“This would spook construction lenders. This would be too aggressive,” said attorney Stuart Saft, chair of the New York real estate group at the firm Holland and Knight. “Because of the way the proposal was written you couldn’t distribute any money from the sale of units until you got a PCO. Some buildings go 10 to 15 years without a PCO.”

The new directives also required developers to file pre-closing amendments to their condo offering plans that would provide more transparency as to who controlled escrow accounts, along with tightened regulation on how much funds they hold.

While the means the AG’s office originally employed to address the current state of affairs have been controversial, the ends sought are less-so. Many real estate attorneys said consumers do indeed need more protection.

“Developers and sponsors were taking liberties,” Cole Schotz attorney Jordan Metzger said.

Schneiderman’s office is accepting comments on the memo until later this month.

“What’s even more interesting to see is where they come out on the issue,” Metzger added.

Hiten Samtani contributed reporting to this article.