LAW-50-11-00002-A Determining When Funds Escrowed in Connection with the Offer or Sale of Cooperative Interests in Realty May be Released

11/14/12 N.Y. St. Reg. LAW-50-11-00002-A

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 46

November 14, 2012

RULE MAKING ACTIVITIES

DEPARTMENT OF LAW

NOTICE OF ADOPTION

 

I.D No. LAW-50-11-00002-A

Filing No. 1064

Filing Date. Oct. 26, 2012

Effective Date. Nov. 14, 2012

Determining When Funds Escrowed in Connection with the Offer or Sale of Cooperative Interests in Realty May be Released

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:

Action taken:

Amendment of sections 18.3(b)(p), 20.3(o), 21.3(l), 22.3(c)(k), 23.3(q), 24.3(m) and 25.3(l) of Title 13 NYCRR.

Statutory authority:

General Business Law, section 352-e(2)(b) and (6)

Subject:

Determining when funds escrowed in connection with the offer or sale of cooperative interests in realty may be released.

Purpose:

Elimination of the Attorney General's role in adjudicating such disputes.

Substance of final rule:

The proposed amendments eliminate the Attorney General’s role in adjudicating contractual disputes between sponsors of cooperatives, condominiums, homeowners’ associations, timeshares, and senior residential communities and contract vendees, thereby leaving such matters to be adjudicated in court, as is done in the case of analogous disputes concerning contracts to purchase private homes and transactions between non-sponsor sellers and purchasers. The non-substantive changes made to the rules as published in the September 5, 2012 New York State Register are as follows: (1) by separate Notice of Adoption, also published in the September 5, 2012 New York State Register, the Department of Law (DOL) clarified that escrowed funds may be deposited in multiple accounts; the rules as adopted herein have been conformed to reflect that change; (2) certain language in the existing regulation concerning retention of funds in escrow was inadvertently omitted from the previously posted revised version of 13 N.YC.R.R. § 18.3; it has been restored; and (3) certain language requiring the submission of an executed escrow agreement and bank forms was omitted from 13 N.Y.C.R.R. § § 18.3, 20.3, 22.3, 23.3, and 25.3, but not from § § 21.3 and 24.3. It has been eliminated in all sections.

Final rule as compared with last published rule:

Nonsubstantive changes were made in sections 18.3, 20.3, 21.3, 22.3, 23.3, 24.3 and 25.3.

Revised rule making(s) were previously published in the State Register on

May 16, 2012 and September 5, 2012.

Text of rule and any required statements and analyses may be obtained from:

Lewis A. Polishook, New York State Department of Law, 120 Broadway, 23rd Floor, New York, N.Y. 10271, [phone], email: [e-mail]

Revised Regulatory Impact Statement

The revisions to the adopted version of the proposed revised regulations published on September 5, 2012, do not alter the amended regulations’ impact on compliance obligations, economic or technical feasibility, jobs, small business, local government participation, impact on professional services, or costs in any way. The revisions merely change certain references from singular to plural, restore language inadvertently omitted from one section of the proposed revised regulations, and eliminate unnecessary requirements for submission of documents from two other sections of the proposed revised regulations.

Revised Regulatory Flexibility Analysis

The revisions to the adopted version of the proposed revised regulations published on September 5, 2012, do not alter the amended regulations’ impact on compliance obligations, economic or technical feasibility, jobs, or small business or local government participation. The revisions merely change certain references from singular to plural, restore language inadvertently omitted from one section of the proposed revised regulations, and eliminate unnecessary requirements for submission of documents from two other sections of the proposed revised regulations.

Revised Rural Area Flexibility Analysis

The revisions to the adopted version of the proposed revised regulations published on September 5, 2012, do not alter the amended regulations’ impact on reporting, record keeping, and other compliance requirements in rural areas or rural area participation. The revisions merely change certain references from singular to plural, restore language inadvertently omitted from one section of the proposed revised regulations, and eliminate unnecessary requirements for submission of documents from two other sections of the proposed revised regulations.

Assessment of Public Comment

Changes Made Based on Comments on the December 14, 2012, Notice of Proposed Rule Making

The Department of Law (DOL) received comments from two individuals in connection with the initial Notice of Proposed Rule Making. As described in the Notice of Revised Rule Making published in the May 16, 2012 New York State Register, the DOL made the following changes to its original proposals:

First, the proposed revised regulations clarified that all existing offering plans were to be amended to eliminate the Attorney General’s dispute resolution function, but that (a) amendments updating the escrow language of offering plans should not be submitted before September 4, 2012; and (b) the Attorney General would continue to have jurisdiction to entertain applications concerning disputes where the purchase agreement was signed before September 4, 2012.

Second, the DOL modified the language of the subsections governing the release of funds. The revised proposed amendments track the standard form contracts (the “Form Contracts”) for cooperative, condominium, and home sales prepared by the New York City and New York State Bar Associations by providing that the escrow agent may release funds to the sponsor upon prior written notice to the purchaser unless the purchaser provides timely notice of objection to the release of funds, in which case the escrow agent must retain the funds in escrow until receipt of a further written directive signed by the parties to the purchase agreement or final non-judicial adjudication of the merits of the dispute.

Third, as noted in the May 16, 2012 Notice of Revised Rule Making, the DOL has seen several situations in which purchasers were unaware of the impending release of funds or may even have been misled by ongoing settlement negotiations. For this reason, both the original proposed amendments and the revised proposed amendments required written notice 30 days before the release of escrowed funds.

Changes Made In the Second Notice of Revised Rule Making, Dated September 5, 2012

The DOL received comments from one individual and one law firm in response to the Notice of Revised Rule Making. In response to those comments, the DOL revised its proposal to reflect that notice of at least 30 days must be given by the escrow agent to the parties before releasing the funds only if the escrow agent proposes to release funds without a judgment, determination of the Attorney General, closing, or written directive of all parties.

In addition, the DOL made the following changes, that were not based on any specific public comments:

First, the revised proposed regulations will not apply to existing purchase agreements. Sponsors were given additional time to update their offering plans, escrow agreements, and form purchase agreements to conform to the new regulations, and should do so when they submit their next substantive update amendment after the adoption of the proposed regulations. As revised, the proposed regulations provide that the Attorney General will continue to adjudicate escrow disputes concerning the disposition of down payments for purchase agreements that provide for dispute resolution by the Attorney General that were signed on or before March 1, 2013. After the proposed regulation is adopted, sponsors may, after they have filed an amendment conforming their offering plans to the revised regulations, enter into purchase agreements that do not call for dispute resolution by the Attorney General. For disputes arising in connection with purchase agreements that provide for dispute resolution by the Attorney General and were signed before March 1, 2013, the previous version of these regulations will remain in effect.

Second, the proposed revised regulations give additional guidance as to those matters by specifying key terms that must be included in the escrow agreements, and provides that those mandatory terms are legally binding on the parties even if omitted from the escrow agreement.

Third, the revised proposal also replaces the previous bilateral escrow agreement between sponsors and escrowees with a requirement that all parties to the escrow agreement--sponsor, purchaser, and escrowee--must sign the escrow agreement, and clarifies that this agreement may be included in the purchase agreement itself, as is commonly done in real estate transactions not regulated by the Attorney General.

Fourth, the further revised proposal also clarifies the existing requirement that the escrow agent and escrow account signatories be independent of the sponsor.

Comments to the September 5, 2012 Notice of Revised Rule Making

The DOL received two sets of comments to the September 5, 2012 Notice of Revised Rule Making, but has made no changes in response to these comments. The DOL has made minor non-substantive changes to the rules as adopted; those changes are described in the “Terms and Identification of Rule” section of this Notice of Adoption.

The first commenter points out that the regulations do not explicitly authorize funds pursuant to an arbitral award, and suggests that “funds should also be permitted to be released in accordance with a decision issued by JAMS or the American Arbitration Association in the County of New York State in which the condominium is located by the rules then in effect,” because, in the commenter’s view, “[a]rbitration has proven to be a legitimate, less costly alternative to litigation.”

The second commenter raised several issues:

First, he points out that the maximum coverage of federal deposit insurance is $250,000, not $100,000.

Second, the commenter suggests that the obligation of the escrowee to give the purchaser notice of deposit of the funds should run from the date of delivery of the escrow agreement or purchase agreement.

Third, the commenter suggests that rescission should not be available merely for failure to give notice of deposit of the funds.

Fourth, the commenter suggests that the regulations should allow sponsors and purchasers to opt out of dispute resolution by the Attorney General even in those purchase agreements for which the revised regulation continues to authorize such dispute resolution.

Fifth, the commenter suggests that 30 days between notice and release of funds is too long, and proposes 15 days as a more reasonable time limit.

Department of Law Response to Comments

Arbitration: As the DOL stated in its assessment of public comment published on May 16, 2012, the issue of the interplay between the Department’s dispute resolution regulations and arbitration clauses in purchase agreements is outside the scope of this rule making. That issue may be addressed in a separate rule making. However, to the extent otherwise permitted by law, an escrow agent may, consistent with the revised escrow regulations adopted in this rule making, release funds pursuant to an arbitral award that has been confirmed by a court pursuant to CPLR 7510 or is no longer reviewable pursuant to CPLR 7511(a).

Federal Deposit Insurance: The DOL adopted amendments to its regulations on September 5, 2012, eliminating references to outdated amounts for federal deposit insurance. The proposed revised revisions were made when the previous version of the DOL’s regulations was still in effect, giving the incorrect appearance that the outdated language would continue.

Delivery of Purchase Agreement vs. Execution of Escrow Agreement: The proposed revised regulations define “escrow agreement” as either a separate escrow agreement or a part of the purchase agreement. Hence, the commenter’s suggestion that the proposed revised regulations refer to “10 business days after the escrow agreement or purchase agreement is signed” is superfluous. The DOL disagrees with the suggestion that the 10-day period commence with delivery of the executed agreement to the purchaser, as this would allow a sponsor or escrow agent to delay notice of deposit of the escrowed funds by delaying the delivery of a fully-executed agreement.

Rescission for Failure to Give Notice: The current regulations allow the Attorney General to require an offer of rescission for failure to inform purchasers of the deposit of funds, but further provide that “[r]escission may not be afforded where proof satisfactory to the Attorney General is submitted establishing that the escrowed funds were timely deposited in accordance with these regulations and requisite notice was timely mailed to the purchaser.” The proposed revised regulations do not change this provision, but merely change the means by which purchasers should contact the DOL to reflect the fact that the DOL will no longer adjudicate escrow disputes. The DOL does not believe that the current regulation imposes unfair or undue burdens, given the importance placed on the proper maintenance of escrowed funds, but further notes that it has seen relatively few issues arise under this provision, and that the issues that have arisen have been resolved expeditiously.

Opting out of Dispute Resolution: The proposed revised regulations allow sponsors to modify their offering plans to eliminate dispute resolution before the DOL for purchase agreements signed after the regulation is adopted. The DOL has not previously authorized sponsors to opt out of dispute resolution before the DOL, and does not believe that this option should be given to sponsors for purchase agreements calling for DOL dispute resolution. The DOL notes that purchasers and escrowees still have the option to choose not to seek to resolve their disputes before the DOL even under purchase agreements calling for dispute resolution by the DOL.

Notice Before Release of Funds: The DOL previously considered and rejected a comment that the 30-day notice period before release of funds was too long. The DOL has seen several situations in which purchasers were unaware of the impending release of funds or may even have been misled by ongoing settlement negotiations. Further, the time that elapses between execution of a purchase agreement and closing is typically much longer in sponsor-purchaser sales than it is in resale transactions. Consequently, it makes sense to require a longer notice period for sponsor sales. The DOL further notes that it has previously clarified that the 30-day notice requirement does not apply when the funds are released at closing or pursuant to stipulation, court order, or determination by the Attorney General.