Pre-vesting Offers and the Duty to Negotiate

A recent case decided by the New Jersey Appellate Division has highlighted the rule that condemning municipalities do not have a duty to negotiate with mortgagees when condemning a property on which they hold an interest. Borough of Merchantville v. Malik & Son, LLC, handed down on February 5th, specifically held that the condemning municipality was only required to conduct pre-complaint bona fide negotiations with the record owner of the property.* Thus, the municipality did not have to conduct negotiations with the assignee of a mortgagee which had obtained a final judgment of foreclosure.

A little bit of background on the case may help illuminate its importance. The municipality commenced an action to condemn a residential apartment complex and made an offer to the record owner for the property based on its appraisal report. The owner rejected the offer and noted that it would “be in a position to discuss more reasonable compensation in an amount which would satisfy all liens and encumbrances on the property.” The same day the offer was rejected, the lienor contacted the municipality  claiming it was the real property in interest because it had obtained an order of foreclosure on the property and that a sheriff’s sale for the property would be held shortly. The lienor also advised that the record owner would not be able to sell the property without the lienor’s approval. The municipality did not respond to this communication and the lienor filed a claim on December 5th, and thereafter moved to dismiss the condemnation action. The trial court denied the motion, holding that the municipality was only obligated to enter into bona-fide negotiations with the record owner. The Appellate Division confirmed.

In New York, EDPL section 303 governs the offer in condemnation proceedings. It reads:

The condemnor shall establish an amount which it believes to represent just compensation for the real property to be acquired. The condemnor shall make a written offer to acquire the property for one hundred per centum of the valuation so established. In no event shall such amount be less than the condemnor’s highest approved appraisal. Wherever practicable, the condemnor shall make the offer prior to acquiring the property and shall also wherever practicable, include within the offer an itemization of the total direct, the total severance or consequential damages and benefits as each may apply to the property.

N.Y. Em. Dom. Proc. Law § 303 (McKinney)

Two important principles regarding the pre-vesting offer are worth discussing. In New York, the perceived inadequacy of an offer is not sufficient grounds to argue that a condemnor’s offer prior to title vesting was not made in good faith. Furthermore, under EDPL § 302, the condemnor is excused from making an offer if “the owner, his agents or employees, tenants or other occupants shall upon reasonable notice by a written request by the condemnor, provide pertinent data or information including books and records necessary to prepare such appraisal. ” N.Y. Em. Dom. Proc. Law § 302 (McKinney).

Matter of Consolidated Edison Company of New York, Inc. v Neptune Associates, Inc., 143 AD2d 1012 (Oct. 31, 1988) highlights this first principle. In this case, Con Edison sought to acquire the 3 1/2 acres of Neptune’s property located in Coney Island, Brooklyn. Neptune refused to consider sale of the property and instead sought to negotiate a long term lease. Additionally, Neptune refused to provide various requested documents and other information requested by Con Edison in order to prepare an appraisal. Con Edison thereafter provided the statutorily required notice and hearing and commenced its condemnation proceeding. Neptune interposed an Answer with the affirmative defense to the vesting of title, arguing that Con Edison had failed to negotiate in good faith as required by EDPL article 3. The  Appellate Division, Second Department  disagreed, stating:

Inasmuch as the EDPL contains no requirement that the condemnor negotiate with and make an offer of compensation to the property owner prior to the commencement of public hearings pursuant to EDPL article 2 (see, EDPL 301-303), the court properly concluded that Neptune’s proposed affirmative defense to that effect was ineffectual. Moreover, Con Ed’s willingness to negotiate with Neptune in good faith prior to its resort to condemnation is amply demonstrated by the record.

The court went on to say that Con Ed’s

[R]epeated request for information demonstrate that it made ‘every reasonable and expeditious effort to justly compensate Neptune for the property by ‘negotiation and agreement… Neptune, however, thwarted Con Ed’s reasonable effort to reach a fair appraisal by failing to provide the necessary data, which rendered the making of an offer of payment impracticable. Under these circumstances  EDPL 302 specifically excuses the condemnor from making an offer of payment prior to acquisition.

143 AD2d at 1014.

The second principle regarding the offer is demonstrated by Matter of National Fuel Gas Supply Corporation v Town of Concord, 299 AD2d 898 (Nov. 15, 2002). In this case, the Appellate Division for the Fourth Department specifically held that EDPL 303 only requires the condemning authority to make an offer it believes to represent just compensation for the real property acquired. There is no requirement that the condemnor “plead or prove, as a prerequisite to the acquisition of property by eminent domain, that it negotiated in good faith with the property owners.” 299 AD2d at 899. See also: Oswego Hydro Partners L.P. v Phoenix Hydro Corp., 163 AD2d 829 (July 13, 1990).

* We are grateful to Mike Hedden of FTI Consulting for bringing this case to our attention.

Posted in Condemnation Procedures, New York, Offer & Compensation, Recent cases, Uncategorized
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