LEGAL CORNER: The Loss of Life Caused by Hurricane Ida and Its Impact on the New York Real Estate Market

On Sept. 1, 2021, our area was hit particularly hard from the remnants of Hurricane Ida. Record-setting levels of rain fell in just a few hours causing unprecedented flash flooding leaving horrific death and destruction in its wake. Our thoughts and prayers go out to all of those who lost their lives and to their loved ones. The flooding caused by Ida took the lives of 29 people in New Jersey, 16 people in New York City and one person in Connecticut. Of those who died in New York City, 11 perished  in illegal basement apartments (see https://nyti.ms/3kcfq4y).

New York City has long had problems with illegal basement apartments which number in the tens of thousands. Unfortunately, it is at times like this when the real danger of these illegal apartments is brought to the forefront. Homeowners, real estate agents, real estate attorneys and other real estate professionals need to be aware of the dangers and the potential liability that exist in connection with illegal apartments.

New York City Prohibitions and Requirements Relating to Basement Apartments

New York City’s Department of Housing Preservation and Development provides that “basements and cellars in residential properties of all sizes can NEVER be lawfully rented or occupied unless the conditions meet the minimum requirements for light, air, sanitation and egress, and have received approval by the Department of Buildings (DOB).” HPD recommends that before entering into any lease, tenants should visit New York City’s DOB website to review the certificate of occupancy for the home in which the apartment is located to determine whether the apartment is illegal (see https://on.nyc.gov/3tIp9D1). Purchasers should also review the DOB records (and the records of any town or city building department) before entering into a contract of sale for the purchase of a home so as to confirm whether or not a basement apartment is legal. The DOB also provides additional tips to help tenants determine whether the apartment was illegally converted to an apartment (see https://on.nyc.gov/3nxZZ8N).

HPD also provides detailed information regarding whether a basement or cellar apartment (which are defined differently) may or may not be occupied or rented (see https://on.nyc.gov/3AdXdcy). The HPD explains that “cellars in one- and two-family homes can never be lawfully rented. Cellars in one- and two-family homes cannot be lawfully used for sleeping, eating, or primary [occupancy].” However, basements may be occupied or rented in limited instances. It is important to note that there are different requirements as to whether a basement apartment may be legally occupied (i.e., by a family member or members) and whether it can be lawfully rented.

The Dangers of Illegal Apartments and the Potential Liability

HPD warns that “occupants of illegal basement and cellar apartments face potential dangers such as carbon monoxide poisoning, inadequate light and ventilation, and inadequate egress in the event of a fire.” After the flooding caused by Ida, it is clear that the dangers of limited egress proved to be deadly where water levels rose so quickly trapping several individuals in these illegal apartments. According to the Gothamist (see https://bit.ly/39ae3gm), the New York Police Department is “…investigating the six incidents in which basement apartment dwellers lost their lives during last Wednesday’s storm, opening up the potential for criminal charges against homeowners who may have created dangerous conditions for their tenants.”

The HPD and DOB will conduct inspections for illegal occupancy and rentals of basements and cellars and will issue violations. If an apartment is found to be illegal, a vacate notice will be issued, forcing the tenant to move and look for another apartment. If a vacate order is issued, the occupant can receive relocation services through HPD and HPD will place liens on the property owners for the costs incurred in connection with the relocation services (which could also include the cost of temporary housing) provided to these tenants. HPD further explains that “if the Vacate Order is issued by HPD, the agency will notify the owner and occupants and provide an enforcement date. HPD will re-inspect the premises on the enforcement date to verify the illegal basement or cellar apartment is vacant and properly sealed.”

Will Insurance Policies Cover Potential Wrongful Death Claims and Other Losses?

Another major issue that exists is whether a homeowner’s insurance policy or flood policy, if one exists, will cover the extensive property damage and claims made by those who lost family members in the illegal apartments. Many insurance policies will customarily attempt to exclude coverage, especially when it involves illegal acts, leaving the homeowner with extensive liability and legal exposure. Landlords and property owners could face lawsuits and, ultimately, large judgments, if it is found that the illegal apartments were unsafe and dangerous.

Depending on the types of coverages and exclusions contained in each policy, individuals (and businesses) may not be reimbursed entirely for all of the losses sustained. The Wall Street Journal reports that “rain that enters buildings through holes created by winds in doors, windows, walls and roofs is considered damage from windstorms, not flooding, and won’t be covered by flood insurance.” (See https://on.wsj.com/3tIV7ib). Damage caused by the wind may be covered but only after the homeowner covers the deductible. The Wall Street Journal further points out that insurance will normally not “…cover structural improvements to the home—only the costs necessary to restore the home to the condition it was in before the flooding” and explains that “renters who live in basement units and have a flood insurance policy from the government are out of luck. The program doesn’t cover personal possessions below ground level, according to FEMA.” Additionally, for those homeowners with basements, insurance coverage normally “…only includes structural elements, cleanup costs and equipment that is typically stored in a basement such as oil tanks, furnaces, hot water heaters, washing and drying machines, and circuit breaker boxes.”

The Potential Risk and Liability Faced by Real Estate Licensees

Real estate agents must also be careful when listing apartments for rental or sale. Liability could extend to real estate licensees who knowingly rent illegal apartments to tenants. When advertising rentals, and even sales, real estate agents must be very careful. Under Section 175.25(b)(9) all “advertisements shall include an honest and accurate description of the property to be sold or leased.” According to guidance (“DOS Guidance”) issued (see https://bit.ly/3tOBC83) by the New York State Department of State, Division of Licensing, licensees must make a reasonable effort to verify the legal status of the properties marketed and are required to disclose a property’s illegal status to potential purchasers or tenants. According to the DOS Guidance, “…where a broker has actual knowledge that a property lacks a permit or is otherwise illegal (i.e., illegal conversion), such information must be affirmatively disclosed. This requirement is found squarely within the department’s powers to discipline a licensee for: ‘dishonest or misleading advertising, or [where such licensee] has demonstrated untrustworthiness or incompetency.’ NY RPL § 441-c.” The DOS further stated that “it is a well-established rule that the department is ‘vested with broad discretion in imposing punishment on real estate licensees who have demonstrated untrustworthiness, and the exercise of that discretion will not be lightly disturbed.’” Ultimately, the DOS has broad powers to issue substantial fines and revoke real estate licenses.

Further, despite the fact that New York is a caveat emptor (i.e., “Buyer Beware”) state, under Real Property Law Section 443 (Disclosure Regarding Real Estate Agency Relationships), the broker has a duty, whether representing the seller or when acting as a buyer’s agent to “…disclose all facts known to the agent materially affecting the value or desirability of property except as otherwise provided by law.” While the seller may be afforded the protections of the caveat emptor doctrine, a real estate licensee could be held liable for not disclosing the fact that an illegal apartment is being marketed for rent, or that a home with an illegal apartment is being listed for sale, as these are facts which clearly affect the value or desirability of the property. If a broker knows that there is no certificate of occupancy, that fact must be disclosed. Many times, real estate agents claim that a seller or landlord instructs them not to disclose this information. However, according to the DOS and New York’s Real Property Law, following the seller’s direction to not disclose such information would constitute an act of untrustworthiness which could lead to loss of a commission, imposition of fines, revocation of one’s license and other liability. When such a circumstance arises, the licensee may need to withdraw from representing the client.

Real Estate Closings: Ida’s Devastating Effects

Similar to what transpired when Hurricane Sandy hit the New York area, many pending real estate transactions will be forced to be adjourned for significant periods or to be potentially terminated altogether. Lenders on many transactions have already sent out notices to purchasers that they will need to re-inspect the properties before they are able to proceed with the transaction. Some lenders have begun to circulate “Affidavits of No Damage” to the parties, requesting the parties affirm whether or not the property sustained any damage as a result of the storm. According to The Real Deal, the “…flash floods in New York and New Jersey in the aftermath of Hurricane Ida could delay or derail as many as 47,000 pending real estate transactions valued at more than $19.4 billion in those states alone….” The Real Deal reported that “New Jersey was hit harder than New York, with 30,462 transactions worth $10.7 billion in jeopardy. There were 17,019 transactions worth $8.7 billion at risk in New York. …” Homeowners should contact their insurance carriers immediately and file a claim. Real estate agents and attorneys should reach out to their clients and determine if any damage was sustained and provide them with any assistance and guidance.

Assistance is Available

Homeowners and tenants alike must take affirmative steps to inform their insurance carriers about the losses sustained and file claims immediately. Governor Hochul secured an Emergency Disaster Declaration from President Biden and has instructed insurance companies to file all claims expeditiously. The counties covered by the emergency declarations include Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster and Westchester. All of those who were affected by the remnants of Hurricane Ida should visit the Disaster Flood Resource Center set up by New York State Department of Financial Services (see https://on.ny.gov/39cJTZO). It provides important information regarding obtaining financial assistance from New York State as well as the Federal Emergency Management Agency (“FEMA”) (see https://on.ny.gov/3tPeGWo). Between the coverages afforded by insurance companies and assistance provided by the state and federal governments, hopefully those affected by the storm will be made whole. Unfortunately, no assistance will be able to bring back the loved ones lost due to the storm, but one must learn from these events so as to try to avoid it as much as possible in the future.

Homeowners in disaster areas should reach out to their mortgage servicer if they are located in a federally declared disaster area. Inman News reported that “Mortgage servicers can provide forbearance for up to 90 days to homeowners they believe were affected, without contacting them. Homeowners in disaster areas may be able to reduce or suspend their mortgage payments for up to 12 months without incurring late fees or risking foreclosure.” Inman also pointed out that Fannie Mae was also providing a Disaster Payment Deferral Plan [see https://bit.ly/3tGL79e] which may help homeowners catch up on missed payments.

The National Association of Realtors is working with HGAR and other local associations to provide grants and financial assistance as well. In addition, NAR provides invaluable resources and guidance for Realtors (see https://bit.ly/3k8tk7L) when natural disasters such as Hurricane Ida occur.

We Must All Come Together

It is important that all real estate professionals and the real estate community come together in times of need to help those affected by these natural disasters and horrific events. Assisting those in need and providing them with the guidance necessary may not bring back loved ones or physical possessions, but it will go a long way to helping those affected by these tragic events to heal and move forward a little quicker. It is also critically important for real estate agents to inform the clients of the dangers of renting illegal apartments. The exposure to liability is immense and must be stressed to all of those who rent and market real property for sale or lease.