Wednesday, March 23, 2011

Could developers be required deposit money into an escrow account to protect against damage to neighboring properties?

Assembly Bill A00706, if passed, would require developers to deposit a portion of the total estimated project cost into an escrow account for damage caused to neighboring properties during construction.  This bill is clearly aimed at protecting property owners within the City of New York against the explosion of  instances in which property damage is caused by improper construction and excavation on an adjoining site.  Improper construction, demolition or excavation on an adjoining site can often cause damage to the adjoining property ranging from minor cosmetic issues to total destruction of the structure on the adjoining property (such as where the foundation is irreparably compromised).  The proposed law would set up an account and a claims procedure whereby the party with the damaged property could make a claim and achieve complete resolution of the claim within sixty days from the date the claim is commenced.  If no claim is made within six months of project completion the funds would be returned to the developer. 

The proposed law raises a few interesting issues: 1) will developers be able to come up with the additional funding at the beginning of the project in order to get the project off the ground (will lenders allow draws against the construction loan for purposes of setting up the escrow account); 2) will failure to submit a claim to the escrow fund waive the right to bring legal action to recover damages?; 3) is sixty days really enough time to fully investigate and pay a claim when litigation in this arena can often take several years to resolve due to damage and causation issues?; and 4) if you are deemed to have no right of recover against the escrow fund will that prohibit your filing of a lawsuit to recover damages (i.e. would the rejection of the claim trigger a res judicata like effect)?

Stay tuned as this bill makes its way through the legislative process. We will continue to monitor the progress of the bill to see whether it is referred for a vote.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or

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