Introduction
In response to the increasing flood risks in the State of New Jersey, on July 3, 2023, New Jersey Governor Phil Murphy signed legislation creating stringent flood risk disclosure requirements applicable to landlords and sellers of commercial and residential real property in New Jersey (the “NJ Flood Disclosure Requirements”). By the enactment of the legislation, New Jersey now joins the majority of states which have mandatory flood risk disclosure requirements. The NJ Flood Disclosure Requirements include disclosures relating to (i) the property’s flood risks and (ii) the property’s flood history. As mandated by the legislation, the New Jersey Department of Community Affairs and the New Jersey Department of Environmental Protection (a) developed and made available model disclosure notices for use by landlords and sellers of real property, and (b) created a website which gives property owners, prospective tenants, and prospective buyers the tools to access flood risk information.
Disclosure Requirements – Landlords
Each landlord must provide a written notice to each tenant under any new commercial or residential lease entered into on or after March 20, 2024, and to each tenant under any commercial or residential lease which is renewed on or after March 20, 2024. Such notices must be executed prior to the execution of any lease or lease renewal. The disclosure must set forth (i) whether the property is located in either (a) the FEMA Special Flood Hazard Area (the “100-year floodplain”) or (b) the FEMA Moderate Risk Flood Hazard Area (the “500-year floodplain”), and (ii) whether the landlord has actual knowledge that the rental premises or any portion of the parking areas of the real property containing the rental premises has experienced flooding.
For residential leases and residential lease renewals, landlords must ensure that the written flood disclosures meet the following requirements:
- the flood disclosure must be attached as a rider to all residential leases and to all residential lease renewals, and the flood disclosure must be separately acknowledged in writing by both landlord and tenant;
- the landlord must advise the tenant, in writing, that standard renter’s insurance policies do not typically cover flood damage, and that separate flood insurance may be available; and
- the flood disclosure must be made in not less than 12-point typeface.
The NJ Flood Disclosure Requirements apply to landlords who rent or lease, for a term of at least one month, commercial space or residential dwellings, except that the NJ Flood Disclosure Requirements do not apply to: (A) dwelling units in a property containing not more than two such units; (B) dwelling units in an owner-occupied property of not more than three dwelling units; or (C) dwelling units in hotels, motels, or other guest houses serving transient or seasonal guests for a period of less than 120 days.
If a landlord fails to make a required disclosure to a tenant, and the tenant subsequently becomes aware that the property is located within a flood hazard area, the tenant may terminate the lease upon written notice to the landlord and the tenant may recover all prepaid rent and other amounts for any period following the date of termination. In addition, if a landlord fails to make a required disclosure to a tenant, and flooding occurs which results in damage to the tenant’s property, affects the habitability of the property, or affects access to the property, then the tenant may pursue all legal remedies under the law to recover damages from the landlord.
Disclosure Requirements – Sellers
The NJ Flood Disclosure Requirements must be satisfied with respect to all sales of real property which close on or after March 20, 2024.
The NJ Flood Disclosure Requirements mandate that sellers of commercial and residential real property provide notification to buyers of real property. The New Jersey Department of Community Affairs has developed a “form” disclosure notice (the “Property Condition Disclosure Statement”). The Property Condition Disclosure Statement includes a set of eight specific disclosures relating to the property’s location within certain flood hazard areas and the property’s flooding history. Since the Property Condition Disclosure Statement will be required in all sales of real property, the Property Condition Disclosure Statement should be presented to a prospective buyer simultaneously with the first draft of the purchase and sale contact, and must be acknowledged by the buyer before the buyer is obligated to proceed with the purchase.
Unlike leases, the NJ Flood Disclosure Requirements do not provide for specific rights or remedies of a purchaser of real property to whom required disclosures have not been made. However, buyers may still have a basis to recover damages and initiate claims against the seller.
Lender Considerations
Although lenders are required, pursuant to banking regulations, to ascertain the special flood hazard status of mortgaged properties, lenders should also conduct appropriate diligence and underwriting inquiries to ensure that all commercial and residential leases and lease renewals entered into on or after March 20, 2024, are fully compliant with the NJ Flood Disclosure Requirements so as to mitigate the risk of any tenant at any mortgaged property having the right to terminate its lease. Lenders should also review the forms of their borrowers’ commercial and residential leases to confirm that such forms comply with the NJ Flood Disclosure Requirements. For mortgage loans secured by real property which is being developed or has been developed as a condominium, planned unit development, or other “for-sale” purposes. Lenders should also confirm that their borrowers’ forms of any sale contracts comply with the NJ Flood Disclosure Requirements.
Client Alert 2024-031
