To: New Jersey Law Revision Commission

From: Staff

Re: Follow-up for Tentative Report on Landlord Tenant Law Revision

Date: May 9, 2011

MEMORANDUM

This memorandum addresses issues raised at the March 17, 2011 Commission meeting concerning suggested proposed revisions to sections of the tentative report. Staff seeks Commission feedback regarding the proposed revised language for each section.

1. Notification to tenants if property in flood zone (46A:4-7).

The Commission asked Staff to obtain additional information regarding the different kinds of flood zones, the consequences of those zones and the involvement of FEMA and any state agency in the flood zone determinations, and then redraft this section. The Commission also directed Staff to consider the following issues when redrafting: 1) how to address landlord notifications to tenants of flood zone changes in the case of lease renewals; 2) the distinctions that exist between residential and nonresidential tenancies with regard to the availability and application of flood zone information; 3) the further distinctions that exist between different levels of commercial tenants with regard to the extent of tenant responsibility for obtaining and using flood zone information; and 4) the actual areas covered by the flood zone, i.e., whether the flood zone covers the parking lot, rather than the building or dwelling itself.

Staff spoke with Bob Banks, Manager of Flood & Geographic Search Services for Signature Information Solutions LLC, for which the name “Charles Jones” is the registered trademark.[1] Mr. Banks advised that FEMA now makes all flood mapping determinations in accordance with their own rules and procedures. Although the state may conduct flood studies, state information is not used by Charles Jones nor relied upon by lenders to require flood insurance.[2] There are approximately 8 to 10 flood zones set up by FEMA[3], only two broad categories of which – category A or V – require flood insurance[4]. In effect, according to Mr. Banks, every property in New Jersey is in some sort of flood zone but the only flood zone designation that has any significance is the “special flood hazard area”, as noted on the attachment. About 30% of floods occur in areas that are not marked as “special flood hazard areas” and zones that require flood insurance (A or V) are not necessarily areas that are subject to flooding. Nonetheless, it appears that the designation that should trigger a landlord’s notification under the law is a “special flood hazard area”, as defined by FEMA, which will require flood insurance.

Mr. Banks also pointed out some interesting facts. FEMA is in the process of updating its flood zone mapping digitally on a countywide basis. Of the 21 counties in New Jersey, 12 or 13 counties already have been updated. When mapping and updating, FEMA takes into account base flood elevation changes per area basis, and FEMA will change flood zone area maps if proof is provided to FEMA that a change is needed. A lender may purchase what is called “life of loan protection”, which is a service by which the lender is notified automatically if there are any changes in the flood zone areas. If a lender had such a service and a property formerly in a zone of no consequence changes to a special flood hazard area, Charles Jones then would alert the lender who would then require the owner to obtain flood insurance. If that owner is also a landlord, then under current law, that landlord would have to notify the tenant. But if no lender is involved, the owner/landlord and the tenant would not be automatically notified of a change in flood status, although any landlord or tenant may gain access to information about flood zone determinations from the FEMA website.

Mr. Banks explained that base elevation levels are described as the height of a property above the base elevation set by FEMA. For example, if a surveyor prepares an elevation certification that shows the elevation of a building above the elevation of the land, and one can demonstrate to FEMA that the building is above the special flood hazard area and that FEMA should make the change in its mapping, FEMA will usually go along.

Staff also spoke with John Scordato, Supervising Engineer, for the New Jersey Department of Environmental Protection (“NJDEP”), Bureau of Dam Safety & Flood Control. Mr. Scordato advised that in 1974 the state mandated the delineation of flood plains (pursuant to N.J.S. 58:16A-1 et seq.) and in the early 80’s adopted work maps and other flood plain data. The state has worked in coordination with FEMA even before it was FEMA (back in 1968, this function, now in FEMA was part of HUD.) The state tells FEMA what to re-study and coordinates its flood plain mapping with FEMA flood plain mapping. In some cases, the state and FEMA disagree because the state is more stringent than FEMA. (For example, the state uses a 2/10 of a foot rise in the floodway standard as compared to FEMA’s 1 foot rise in the floodway standard[5]). FEMA’s standards, however, guide the federal flood insurance program. There is no state flood insurance program. The state’s flood plain mapping primarily affects property development in New Jersey, although the NJDEP also works with FEMA to make sure that FEMA’s flood data is accurate.

Ms. Scordato further advised that FEMA’s flood insurance program is based on the 100-year flood plain standard, which means that there is a 1% chance of a flood occurring in any year. When asked why FEMA mapping and flood designations might change over time (for example, during the course of a lease term), Mr. Scordato replied that because of continuing changes in technology and improved photography, the accuracy of flood plain drawing has improved. There also are changes in flood plains as a result of the creation or elimination of bridges. Every year new bridges are being built. Because newer bridges are not built in the same fashion as their older counterparts, a change in flood plain can occur. He also mentioned that policy decisions may also have an effect. For example, there are major changes in Monmouth County -- specifically the municipalities of Hazlet, Union Beach and Middletown -- because of the decertifying of a levee. As a result, 5,000 properties have been added in the flood plain that were not in the flood plain before. Although many flood plain studies had been rubber-stamped over the years, i.e., old analyses were used to determine the flood plain and no new analyses were conducted, now with the advent of more accurate technology and photography, some properties have been taken out of flood hazard areas and others brought into flood hazard areas.

Mr. Scordato pointed out that because renters’ flood insurance is available for purchase and the tenant may wish to obtain the insurance, landlords should advise tenants when the landlords are made aware of the remapping of a property that results in the property being brought into a flood hazard area.

Mindful of the new information concerning FEMA classifications, as well as the views of the Commission as reflected in the Minutes of the March 17, 2011 and June 17, 2010 meetings, Staff revised the language of this section. In June of 2010, the Commission determined that both the terms “flood zone” and “flood area” should be in the statute because a tenant was entitled to information -- prior to leasing a property – regarding whether a property is subject to flooding and whether flood insurance would be required and available. However, from the information obtained by Staff, it appears that the key issue for flood insurance purposes is whether a property is in a special flood hazard area. The concept of a “flood zone” does not seem to have any real meaning for purposes of obtaining flood insurance or identifying properties subject to flooding. It also seems very unlikely that a property subject to actual flooding would not be in a special flood hazard area, although it is quite likely that a property in a special flood hazard area might not be prone to actual flooding. As a result, Staff chose to eliminate entirely any reference to the term “flood zone” in the statute.

Set forth below are two versions of a revised section 46A:4-7 which take into account the information mentioned above as well as the other concerns raised by the Commission at the March meeting. Version A differs from Version B solely because of the issue raised that more sophisticated commercial tenants perhaps should bear the burden of due diligence to determine whether a property is in a flood zone. The Commission suggested that in order to determine the level of sophistication of the commercial tenant, a limit could be imposed based on the size of the property or the dollar amount of the lease. Staff chose to use a standard that keys square footage. The draft also tries to address the Commission concern about renewal tenancies.

VERSION A:

46A:4-7. Notification to tenants if property in flood zone; residential and nonresidential rental premises

a. A landlord of any residential rental premises or of nonresidential rental premises containing less than 3,500 square feet shall notify each tenant in writing if the rental premises or any portion of the parking areas of the real property containing the rental premises subject to the lease are determined, in accordance with law by the Department of Homeland Security, Federal Emergency Management Agency (FEMA), to be located in a flood zone or special flood hazard area. Each existing tenant shall be notified at the time that the determination is made. If the lease is in writing, the notice required under this subsection may be included in the written lease if printed in bold face capital letters of not less than 10 point type.

b. Each new tenant shall be notified prior to the tenant’s agreement to lease the rental premises or the real property containing the rental premises. Each tenant up for renewal of the lease shall be notified no earlier than ten days prior to the agreement renewing the lease.

c. If the premises are in a special flood hazard area at the commencement of the lease or renewal and notification is not provided given to the tenant until the lease or renewal has already been signed agreed to by both parties, or the tenant has already occupied the rental premises or the real property, the tenant may, by written notice given to the landlord no later than three business days of the tenant’s receipt of notification, void terminate the lease or renewal on the basis that the rental premises or any portion of the parking areas of the real property containing the rental premises are located in a special flood zone or hazard area. Termination shall be effective on the last day of the calendar month in which the notice is provided.

d. If the premises are not in a special flood hazard area at the commencement of the lease or renewal, a tenant may not terminate the lease under this section if subsequently notified that the premises have been determined to be located in a special flood hazard area.

e. A tenant who terminates a lease under this section shall pay rent in accordance with the terms of the then existing lease until the lease is terminated and possession is delivered to the landlord.

Source: 46:8-50.

VERSION B:

46A:4-7. Notification to tenants if property in flood zone; residential and nonresidential rental premises

a. A landlord of any residential or nonresidential rental premises shall notify, in writing, each tenant if the rental premises or any portion of the parking areas of the real property containing the rental premises subject to the lease are determined, in accordance with law by the Department of Homeland Security, Federal Emergency Management Agency (FEMA), to be located in a flood zone or special flood hazard area. Each existing tenant shall be notified at the time that the determination is made. If the lease is in writing, the notice required under this subsection may be included in the written lease if printed in bold face capital letters of not less than 10 point type.

[Only change is made to subsection a.; reference to square footage is eliminated. Remainder of the revised statute is as in Version A.]

2. Security deposit replacement fee alternative to security deposit (46A:13-16).

The Commission asked Staff to prepare language that clarifies the nature of the security deposit replacement fee so that it will not be confused with a pet fee or amenity fee. Staff proposes the following language which would be added to current section 46A:13-16, subsection c.

46A:13-16. Alternatives to securing the tenant’s performance

a. Alternative to security deposits.

A landlord may offer the tenant the alternative to a security deposit of either purchasing a surety bond or paying a nonrefundable security deposit replacement fee in accordance with the provisions of this section. A security deposit replacement fee is a fee designed as a substitute for a security deposit and is not designed or intended to compensate the landlord for any extra expenses incidental to the lease. The security deposit replacement fee may be required instead of a security deposit only if it is offered by the landlord and accepted by the tenant in accordance with subsection c. below. A landlord may also offer the tenant the option of combining payment of a partial security deposit with purchasing a surety bond so long as the total amount of security deposit and surety bond principal does not exceed one and one half month’s rent. A landlord may not, however, require a security deposit replacement fee and another form of security from a tenant. Nor may a landlord require, as a condition of the lease or otherwise, a surety bond or the payment of a security deposit replacement fee in place of a security deposit, or the combination of security deposit and surety bond, and a tenant may not use a surety bond or a security deposit replacement fee unless that alternative is offered by the landlord.