Scott E. Mollen

Contracts—Lender's Conditional Letter Was Not a “Mortgage Commitment”—Buyers Failed to obtain Final Mortgage Commitment, Failed to Ask for Extension and Failed to Timely Cancel Contract—Sellers Entitled to Keep Deposit

This case involved a failed purchase/sale real estate transaction and a dispute over the down payment. Plaintiff buyers moved for summary judgment and the defendant sellers cross-moved for summary judgment dismissing the complaint. The court granted the sellers' cross-motion to dismiss the complaint.

The buyers sought to purchase a condominium owned by the defendants. The parties had entered into a contract of sale (contract) on Jan. 26, 2017. The buyers had provided a $10,000 downpayment. The contract contained a mortgage contingency clause which provided that:

The obligations of Purchaser…are conditioned upon issuance on or before thirty (30) days from the date hereof (the “Commitment Date”) of a written commitment from an Institutional Lender pursuant to which such Institutional Lender agrees to make a loan other than a VA, FHA or other governmentally insured loan to Purchaser, at Purchaser's sole cost and expense, of $800,000 or such lesser sum as Purchaser shall be willing to accept….

The contract further provided that:

If such commitment is not issued on or before the Commitment Date, then, unless Purchaser has accepted a commitment that does not comply with the requirements set forth above, Purchaser may cancel this Contract by giving Notice to the Seller within 5 business days after the Commitment Date, in which case this Contract shall be deemed cancelled and…the Downpayment shall be promptly refunded to Purchaser.… If Purchaser fails to give Notice of cancellation or if Purchaser shall accept a commitment that does not comply with the terms set forth above, then Purchaser shall be deemed to have waived the Purchaser's right to cancel this Contract and to receive a refund of the Downpayment.…

On Feb. 15, 2017, the buyers “were conditionally approved for a mortgage” by a lender (lender). The approval letter contained several “conditions that had to be satisfied before the mortgage would be approved and [buyers]” were requested to provide additional information, including “the condo's bylaws and master deed.” On March 10, 2017, “(after the time to cancel the contract had passed), [lender] declined to provide [buyers] with financing on the ground that the premises were an unacceptable property type.” The lender was concerned because the “condo's HOA did not contribute at least 10 percent of their monthly dues to a reserve account.” The buyers asserted that they advised the sellers that their mortgage approval had been revoked on March 14, 2017.

On March 29, 2017, the buyers told the sellers that they had “'never received a commitment. They received a conditional commitment which was revoked'” and they demanded “a return of the downpayment.” The sellers refused to return the downpayment, on the grounds that the buyers “failed to give notice of cancellation within 5 days of February 25, 2017,” i.e., the “commitment date.” The sellers declared their intent “to proceed with a TIME OF THE ESSENCE closing” to be held on April 10, 2017. The buyers then commenced the subject action seeking return of the downpayment.

The court explained that mortgage contingency clauses are “construed to create a condition precedent to the contract of sale. The purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser's inability to obtain a mortgage commitment within the contingency period. However, when the lender revokes the mortgage commitment after the contingency period has elapsed, the contractual provision relating to failure to obtain an initial commitment is inoperable, and the question becomes whether the lender's revocation was attributable to bad faith on the part of the purchaser.”

The sellers opposed the buyers' motion for summary judgment, arguing, inter alia, that they needed “discovery to assess whether plaintiffs acted in bad faith in trying to cancel the contract.” The sellers also sought summary judgment on the grounds that the buyers had a contractual obligation to obtain “a firm commitment as opposed to a contingent approval” and the plaintiffs had “waived the mortgage contingency clause by failing to cancel the contract or, at the very least, request an extension until [lender's] contingent approval was finalized.”

The salient issue was “whether the conditional approval letter from [lender] satisfied the requirement that [buyers] receive a written commitment from an institutional lender.” If the lender's letter was a commitment, then the court had to determine “whether the revocation of that commitment was caused by [buyers'] bad faith.” The court noted that it would not have to reach the issue of bad faith if a commitment had never been obtained.

The court stated that the “ordinary dictionary meaning” or a mortgage commitment is “a formal written communication setting forth the terms and conditions of the mortgage loan” that “was required to satisfy the mortgage contingency clause.” The court further noted that an Appellate Division, Third Department decision held that a conditional mortgage commitment letter is not a mortgage commitment. (Eves v. Bureau, 13 AD3d 1004, 788 NYS2d 311 [3d Dept. 2004]).

The initial letter from the lender granted a conditional approval, but identified 18 items buyers were required to send in. That letter further stated that once those items were received, the lender would then conduct “a final review of the loan documents” and when such review was completed, it would issue “a final approval.” The lender's letter which denied the financing, stated that “[w]e are unable to offer you financing at this time.”

The court found that the buyers had “never obtained a mortgage commitment pursuant to the contract.” Rather, they had “only received a letter from a lender offering preliminary approval and detailing the steps that were required in order to receive a commitment.” The court opined that there was “no logical way to construe the initial letter from [lender] as a written commitment pursuant to the contract.” Moreover, the buyers' attorney had written to the sellers' attorney, stating that the buyers had “never received a commitment.”

The court explained that to treat the conditional approval as a commitment “would require the court to ignore the significance of the mortgage contingency provision, which created a deadline to move the sale along.” The court reasoned that the buyers should not be able to “obtain a de facto extension of that deadline because they chose to wait for [lender's] decision rather than seek a mortgage from a different lender or seek an extension from [sellers].” Since the buyers had never obtained a mortgage commitment, the court did not “consider the issue of the revocation and [buyers'] purported bad faith.” The court stated that “if there was no mortgage commitment, then it could not be revoked because of [buyers'] bad faith.”

Since the buyers had neither cancelled the contract nor asked for an extension while they awaited final approval from the lender, the court granted the sellers' cross-motion for summary judgment dismissing the complaint.

The court further observed that although losing an entire downpayment may be “a harsh outcome,” courts may not “rewrite a term of a contract signed by the parties.” The court acknowledged that “as a general matter, it makes sense to allow a buyer to get back the downpayment where a lender revokes financing after making a commitment.” However, here, the lender had only offered a conditional commitment and then decided not to approve the mortgage upon review of the relevant documentation. Moreover, the sellers had taken the apartment off the market. The court emphasized that it lacked the power to “effectively grant [buyers] an extension of the mortgage contingency clause or rewrite that provision because it has a harsh outcome.”

Sanjana v. King, Sup. Ct., N.Y. Co., Index No. 153650/2017, decided June 8, 2018, Bluth, J.

Landlord-Tenant—By Renting a Stabilized Apartment Through Airbnb, Tenant “Commercialized Her Apartment” and Treated It As a “De Facto Hotel”—Violation Incurable

A tenant appealed from a final judgment which awarded the landlord possession in a holdover summary proceeding. The Appellate Term, First Department (court) affirmed.

The tenant “listed her rent stabilized apartment on the Airbnb website at nightly rental rates starting at $200 per night, and entered into more than one dozen separate rentals totaling 79 nights in 10 months, with up to 5 guests per rental, collecting as much as $366 per night, more than four times tenant's daily rent of $90.00.” The court found that the “evidence amply supported the trial court's conclusion that tenant commercialized her apartment, an incurable violation of the Rent Stabilization Law….”

The court explained that the “tenant's illegal, de facto hotel operation showed complete disregard for the legitimate security concerns of landlord and other tenants of the residential building, who were subjected to dozens of transient strangers staying for short periods in tenant's apartment, which illegality itself warranted termination….”

The court held that the tenant “was not entitled to a notice to cure or any further opportunity to cure.” “Once substantial profiteering has been established, the tenant is subject to eviction without any right to cure, as a matter of law….” The court further noted that it was “doubtful that a cure would be possible.” “In this context, 'cure' does not mean simply the termination of the illegal subletting, but also the refund to the subtenants of the overcharges.” Based upon the “number of individuals tenant hosted via Airbnb, with whom she had no direct financial dealings, it appears that the overcharges tenant collected 'could not practicably be refunded.'”

The tenant had argued that the landlord had “treated the apartment as a market rate, unregulated unit.” However, “[i]n determining whether a dwelling unit is subject to rent regulation, what the parties think might be its status or even what they agree to be its status is not dispositive; what is controlling is whether the premises meet the statutory criteria for protection under the applicable regulatory statute.” The court also rejected the tenant's claim that “she did not know the premises were stabilized” when she committed the subject violations. The court noted that “ignorance of relevant law is not a defense to complying with legal obligations….”

Additionally, since ignorance of the law is not a valid defense, the court rejected the tenant's claim that she was unaware that the apartment was stabilized at the time of her Airbnb subletting.

Finally, the court noted that the tenant sought “to reap the benefits of stabilization through a rent overcharge action in Supreme Court, wherein she seeks, inter alia, treble damages for alleged rent overcharges collected by landlord during the same period of time.”

230 E. 48th St. LLC v. Campisi, App. Tm., First Dept., Index No. 570664/17, decided June 4, 2018, Shulman, J.P., Gonzalez, Edmead, JJ. All concur.

Landlord-Tenant—Illegal Use of Apartment—Prostitution—One-Year Statute of Limitations In CPLR 215(4) is Inapplicable and Certain Lower Court Cases Should Not Be Followed

A trial court had granted a landlord summary judgment, denied a subtenant's cross-motion for leave to amend her answer and awarded the landlord possession in a holdover proceeding. The tenant appealed. The Appellate Term (court) affirmed.

The landlord had “established prima facie entitlement to summary judgment of possession in this holdover proceeding based upon illegal use of the apartment premises (see RPAPL 711[5] and Real Property Law §231[1]).” The tenant had been “convicted of promoting prostitution…, among other crimes.” The record, including excerpts of the tenant's criminal trial, “conclusively established that the apartment…[was] used for prostitution on an ongoing basis, that the tenant knew of and acquiesced in this illegal activity, and, indeed, received a portion of the proceeds from such activity….” The tenant had proffered “bare, conclusory allegations denying that such illegal activities took place at the apartment.” The court viewed such assertions as “insufficient to raise any triable issue of fact.”

The court also held that the trial court had “providently exercised its discretion in denying” the subtenant's “motion for leave to amend her answer, since her proposed defenses lack merit.” The court noted that even if the subtenant had standing to assert a statute of limitations [SOL] defense to the holdover petition, the subtenant was relying upon the one-year SOL embodied in CPLR 215(4) and such provision was inapplicable.

CPLR 215(4) provides for a one-year SOL for:

an action to enforce a penalty or forfeiture created by statute and given wholly or partly to any person who will prosecute; if the action is not commenced within the year by a private person, it may be commenced on behalf of the state, within three years after the commission of the offense, by the attorney-general or the district attorney of the county where the offense was committed….

The court explained that “[t]he words 'penalty or forfeiture' when used in a Statute of Limitations refer to something imposed in a punitive way for an infraction of a public law and do not include a liability created for the purpose of redressing a private injury, even though the wrongful act be a public wrong and punishable as such.” The court found that the subject eviction “is not a penalty or forfeiture, since it is not 'impressed for punishment.'” The “tenant's eviction from the premises under the statute (RPAPL 711[5]) clearly was intended to protect the health, welfare and safety of the public residing in the same community as well as the tenants who reside in the same building…and thus served a legitimate civil and remedial purpose.”

Additionally, the court explained that CPLR 215(4) was inapplicable, since “it is a special limitation provision governing statutorily created penalties and forfeitures given to a common informer ('any person who will prosecute'). The informer has one year to commence an action for the penalty. If he does not do so, the state may bring the action, subject to an additional two-year limitation….” Moreover, the one-year SOL “is applied in citizen-taxpayer actions to enforce public rights…and is not properly applied to a summary proceeding commenced by landlord in its proprietary capacity.”

The court further stated that “[l]ower court cases such as New York City Hous. Auth. v. Pretto, 8 Misc 3d 708 (Civ. Ct, Bronx County 2005),” which holds that the one-year statute of limitations embodied in CPLR 215(4) applies to illegal use eviction proceedings and “should not be followed.”

Midtown Plaza Hous. Co. v. Gamble, App. Term, First Department, Index No. 570690/17, decided June 1, 2018, Shulman, P.J., Gonzalez, Edmead, JJ. All concur.

Scott E. Mollen is a partner at Herrick, Feinstein.