You are a seasoned developer about to break ground on your next great project – an 80-story, 2-million-square-foot tower in Midtown Manhattan. This is the culmination of a process that started five years ago. First, you identified the land and commissioned a zoning study to understand its potential. You raised capital to purchase the land by wrangling investors and lenders. You engaged in lengthy negotiations over a complicated purchase agreement. You hired an architect and entered into contracts with other owners on the block to assemble the air rights necessary to construct a building of the size you desired. As the design developed, you began bidding the project so that you could hit the ground running after the closings. By the time sufficient financing was in place and all of the deals closed for land and air, years had passed since you started the project.

You now own the land and the air. You have the necessary capital to sustain the project to completion. You have the final design and the construction team in place. You have pulled the permits. Everything is in place to get started. But the project has stalled – you cannot proceed because your neighbors will not give you access to their properties so you can install protections required by the New York City Building Code.

Adjacent Protections and the Need for Licenses

Under the NYC Building Code, developers and builders are required to protect adjacent property. The types of protection required vary depending on the work being performed but most often include a preconstruction survey, structural monitoring, support of party walls, roof and chimney protections, and the installation of sidewalk sheds and overhead protection.[1] In addition, when soil, foundation or underpinning work is performed, the person performing such work is required to preserve and protect adjoining structures from damage.[2]

Installing necessary protections often means obtaining a license from neighboring property owners to access their property to protect it. License agreements are a vital and frequently bothersome component to developing real estate in New York City. Because construction professionals cannot enter adjacent property without permission of the owner, adjacent property owners have significant leverage in negotiating these license agreements. Savvy adjacent property owners – i.e., owners with the foresight to hire a construction attorney to negotiate the license – are aware of this leverage dynamic and know that developers will likely pay a substantial license fee in exchange for access.

A project will usually be stopped until the requisite protection is installed. If a developer does not come to terms with its neighbors by the time construction begins, the project risks indefinite and potentially ruinous delays.

During the recent construction boom in New York City, particularly in Brooklyn and the Bronx, neighbors have increasingly demanded absurdly high license fees in exchange for minimal access. On top of that, it is customary for the developers to pay the legal and engineering fees incurred by the neighbors in negotiating such license agreements. This dynamic has sparked a cottage industry of lawyers and consultants who track construction projects in New York City and reach out to neighbors to offer their services “free of charge.”

Court Intervention for Obstinate Neighbors

In the worst situations, neighbors and developers simply cannot reach an agreement on a license without the developer paying an excessive fee. In these instances, the developer has two options: it can pay the excessive fee demanded, or it can commence a special proceeding in court to obtain a court-ordered license. The NYC Building Code provides developers with a statutory mechanism to obtain access necessary to install protections by court order. The Building Code entitles developers to a compulsory license “upon such terms as justice requires” and obligates developers to pay “for actual damages occurring as a result of the entry.”[3]

The compulsory license action, however, does not come without tradeoffs. The proceeding can take months, and even then courts have behaved unpredictably, often awarding generous access and legal fees to the neighbors and putting onerous conditions on developers. Given the high cost and uncertainty of the compulsory license action, developers usually pay up, especially in light of the delays courts are experiencing due to the ongoing COVID-19 shutdown.

This entire process can be extremely frustrating for developers, especially since the Building Code does not expressly contemplate a license fee and states that where a neighbor refuses to grant a license, “such duty to preserve and protect the adjacent property shall devolve to the owner of such adjoining property[.]”[4]

New York courts have traditionally been reluctant to enforce this clause, but recently decisions indicate that this hesitancy may be changing. In New York Public Library v. Condominium Board of the Fifth Avenue Tower,[5] the project owner commenced a compulsory license action seeking a license to enter the adjacent premises to install temporary scaffolding and roof protections. The adjacent property owner demanded, among other things, $1,500 per month for the entire duration of the construction project as a license fee. After failing to reach an agreement on the license, the developer brough a compulsory license action. In its decision, noting that the Building Code does not require a license fee, the court granted the developer’s petition for a license and denied the adjacent owner’s request for a fee.[6]

Another glimmer of hope for developers is the Supreme Court’s decision in Procida Construction.[7] In Proceda, the adjacent property owner sued a construction manager for damage it claimed was caused during foundation work. The court denied the plaintiff’s motion for summary judgment, holding that the plaintiff failed to demonstrate that it granted the defendant construction manager a license to enter the adjoining property and inspect it before the foundation work at issue was performed. In effect, the court enforced that portion of the Building Code that states that where a license is refused, the duty to protect devolves to the adjacent property owner.

Whether these cases signal a shift in the way courts intend to address an adjacent owner’s refusal to provide access for construction or are mere outliers is yet to be determined. However, these cases are a step in the right direction for developers.

A Cautionary Tale

Most attorneys practicing construction law are intimately familiar with the nightmarish scenario where a multi-million-dollar project is delayed for months, if not years, due to a recalcitrant neighbor. And even where a project proceeds after a license is obtained, the financial damage from such delays can be devastating to any project.

Several years ago, a prolific developer was constructing a 200-unit residential apartment building in Brooklyn with an $80 million budget. A dilapidated brick townhome with a one-story garage sat immediately adjacent to the project on its eastern corner. The developer bought the project after a prior developer had already demolished the existing buildings, so construction could start immediately.

To get started, the developer needed to install roof protection on the roof of the garage, but there was no access agreement with the neighbor. The neighbor demanded a $60,000 access fee, and the developer refused to pay such a large amount, feeling it amounted to extortion. After attempting to negotiate an access agreement for the next six months, the developer finally took the neighbor to court for access.

After multiple hearings, the developer was awarded access 18 months later, but by then most of the building had been constructed except for a small carve out around the garage. The court also awarded the neighbor most of his legal and engineering expert fees and a $45,000 access fee. This was a huge financial hit, even for a project of this size.

This cautionary tale demonstrates why clients should commence negotiations on the neighbor access agreements as early as possible, even before the property is acquired if practical. The earlier the neighbor’s motives are identified, the faster they can be addressed, especially if court intervention is or will be necessary.

New York City has seen a construction boom over the past decade that is probably unrivaled in the history of the world. Yet it is the only place where a construction project’s fate can rest so heavily on the whims of a disinterested – or worse, nefarious – neighbor. As such, every developer must consider access issues at the earliest opportunity or else risk the viability of its projects by not doing so.

 

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[1] New York City Building Code §§ 3309.4, 3309.10, 3309.12 and 3307.6.

[2] See New York City Building Code §§ 3309.4, 3309.5.

[3] N.Y. Real Prop. Acts. Law § 881 (McKinney).

[4] E.g., New York City Building Code §§ 3309.4, 3309.5, 3309.10.

[5] Sup. Ct., N.Y. County, Nov. 30, 2017, Index No. 157703/2017 (Bluth, J.).

[6] On appeal, the First Department unanimously modified the Supreme Court’s decision in New York Public Library, holding that although the determination to award a license fee is discretionary, it was an improvident exercise of discretion by the lower court to deny a license fee entirely.

[7] Famous Formaggio Pizzeria, LLC v. Procida Constr. Corp., 2018 NY Slip Op. 28064 (Sup. Ct. Bronx County, February 28, 2018).