Scott E. Mollen

Condominium Sponsor Entitled to Keep $2 Million Deposit—Repudiation and Fraudulent Inducement Claims Rejected—If a Purchaser Defaults, Down payments of 10 Percent, 25 Percent or Even 50 Percent May Be Forfeited Absent Disparity of Bargaining Position, Duress, Fraud, Illegality or Mutual Mistake—Time of the Essence Letter Not Necessary Since Contract Specified Time Was Of The Essence—Facts Peculiarly Within The Sponsor's Knowledge

A plaintiff condominium sponsor (sponsor) moved for a judgment on the pleadings pursuant to Fed. Rule Civ. P. 12(c) and for fees and costs pursuant to a purchase agreement (contract) between the sponsor and the purchaser (purchaser). The sponsor sought release of the deposit, on the grounds that the defendant purchaser failed to close. The purchaser had agreed to buy a new construction condominium apartment and had provided a 20 percent deposit, in the amount of $2,113,000, to be held in escrow.

After the construction was completed in July 2017, the sponsor notified the purchaser of a scheduled closing date. The purchaser did not close within the time specified by the contract. The sponsor thereafter issued a Notice of Default (Notice) on Nov. 9, 2017, giving the purchaser 30 days to cure and close. The purchaser failed to close within the cure period.

Following unsuccessful discussions between the parties, on Jan. 19, 2018, the sponsor advised the purchaser that it planned to terminate the contract. The purchaser then notified the escrow agent of the purchaser's claim that he had been fraudulently induced to enter into contract and instructed the escrow agent to hold the deposit. On Jan. 24, 2018, the sponsor terminated the contract and demanded release of the deposit. The escrow agent continued to hold the deposit. The sponsor thereafter commenced the subject action. The purchaser counter-claimed, alleging fraudulent inducement and repudiation. The court granted the sponsor's motion and denied the purchaser's cross-motion.

The contract provided that after the sponsor set a closing date, the purchaser had an additional 30 days to cure, and time would then be “of the essence.” If the purchaser failed to timely cure, the sponsor had “sole discretion” to cancel the contract and retain the deposit as liquidated damages, plus any interest earned thereon.

The liquidated damage provision stated that it had been entered into “voluntarily, after negotiation, without duress or coercion …” and each party had full opportunity to be, “advised by 'counsel, … and other … advisors of its own choosing.'” The purchaser also agreed that it had not relied upon any “representations, warranties, … statements … written or oral, in deciding to enter into the (contract)…”, and that it could not be orally modified.

After the sponsor had notified the purchaser that the closing was to occur on July 24, 2017, the purchaser exercised his right to adjourn the closing by 30 days and requested that the closing “occur at a 'mutually-agreeable date and time no later than August 23, 2017 at 2 p.m.” The purchaser did not close on or before Aug. 23, 2017 or at any time thereafter.

The sponsor sent an email to the purchaser which stated that “before our lawyer sends a default notice, I wanted to reach out to you to find out what your intentions are.” The purchaser replied, “My intention is to close.” The sponsor sent a proposed contract amendment on Oct. 12, 2017 which proposed an extension of the closing date to Jan. 5, 2018. On Oct. 26, 2017, the sponsor wrote to the purchaser that since the purchaser had not responded with respect to extending the closing date, the purchaser let sponsor know how they'd like to proceed. The purchaser stated that he would close in the new year, “but will have some proposed changes to the amendment.” The sponsor asked about such comments and said that it needed the amendment now. The purchaser responded that he would “loop back within 24 hours.”

On Nov. 9, 2017, the sponsor sent the purchaser the Notice. The Notice stated that the failure to close title constituted an Event of Default, as defined by the contract, that all rights to adjournments have been “exhausted” and if the purchaser failed to cure within 30 days, the sponsor would exercise its rights under the contract.

The purchaser wrote that he “still wanted to close.” The purchaser stated that he was working with a bank and they advised they can close by the end of February. The sponsor asked whether the purchaser could close by the end of January. The purchaser stated that he would seek an alternate lender so that he could close by the end of January. On Dec. 4, 2017, the sponsor sent a new proposed amendment, setting a closing date of Feb. 28, 2018. The purchaser wrote that he would be discussing the new amendment and get back to the sponsor.

The sponsor further advised the purchaser that it would terminate the contract if it did not receive funds by 5 p.m. on Dec. 22, 2017. The purchaser never signed the last proposed amendment, nor had transmitted funds and the parties never agreed to a new closing date. On Jan. 8, 2018, the sponsor advised that the purchaser that it would terminate the contract unless it heard from the purchaser.

Thereafter, the purchaser's counsel instructed the escrow agent to not release the deposit. On Jan. 24, 2018, the sponsor sent a Notice of Termination of the contract. The sponsor then commenced the subject action, alleging breach of contract and seeking a declaratory judgment directing the release of escrow deposit. The purchaser asserted affirmative defenses and counter-claims, alleging “repudiation and fraud in the inducement.”

Citing the terms of the contract, including the purchaser's representation that he would not rely on any written or oral communications conveyed prior to or simultaneous with the execution of the contract, the court granted the sponsor's motion for a declaratory judgment.

The court explained that courts will “deny a down payment refund when the purchaser has defaulted, regardless of whether the down payment was 10 percent, 25 percent, or even 50 percent, of the purchase price…,” absent “disparity of bargaining power between the parties, duress, fraud, illegality or mutual mistake.” The subject contract was the “product of months-long negotiation, between sophisticated parties, both represented by counsel of their choosing.”

The court found that the purchaser had failed to present a “genuine issue as to any material fact” that would justify the sponsor not receiving the down payment from escrow. The sponsor's pleadings demonstrated “an ability to close on the Closing Date designated by the closing notice; and (purchaser) failed to raise a plausible claim to the contrary.” The fraudulent inducement claim was barred by disclaimers embodied in the contract. The purchaser was a “sophisticated businessman represented by counsel” and the contract had a “merger clause.” The court found that the sponsor was “ready, willing, and able to close on the 'closing date'” and that the purchaser's pleadings offered “little more than speculation in response to (sponsor's) well-pled facts.”

The purchaser's repudiation claim was based on the sponsor wrongfully issuing the Notice of Termination. However, such act was within the sponsor's “discretion under the (contract),” when the purchaser failed to close within 30 days of receiving the Notice. Thus, the purchaser, not the sponsor was in breach of the contract at the time when the Notice of Termination had been issued. Therefore, the purchaser could not “state a claim for anticipatory breach.” There could not be an “anticipatory repudiation of a duty not owed.” Furthermore, the purchaser could not assert repudiation when he had not pled that he had the requisite “willingness and ability to perform before the repudiation and that he would have rendered the agreed performance”, were it not for the sponsor's “supposed repudiation.” Thus, the court dismissed the repudiation claim.

The court also dismissed the fraudulent inducement claim because it was “entirely dependent on alleged oral misrepresentations….” The purchaser had “disclaimed reliance on any” oral representations and had affirmed that the contract embodied the parties' “entire agreement.” The court explained that “[p]ermitting such a claim in these circumstances would allow the (purchaser) to 'deliberately misrepresent' its purported non-reliance in the contract and would make it impossible for 'two businessmen dealing at arm's length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.'”

The purchaser had alleged that the seller had misrepresented that the building was “60-70 percent sold-out”, the sponsor had a “present plan to increase prices by 8-12 percent”, “though the alleged increase had not gone into effect” and the building's well-known architect had “committed to purchasing the apartment directly above the one (purchaser) was interested in.”

The court held that each such misrepresentation was barred by the contract's disclaimer as to reliance on oral representations. Moreover, the alleged misrepresentations “involve predicted events set to occur in the future” and the purchaser was “sophisticated business person” who had been represented by counsel in the negotiations. The court reasoned that if such misrepresentations were “truly material”, the purchaser had the “sophistication, guidance, and means to ensure that the (contract) required (sponsor) to affirm them.” The court also noted that where a party is on notice of “material facts which have not been documented and he nevertheless proceeds with a transaction without securing available documentation or inserting appropriate language in the agreement for his protection, he may truly be said to have willingly assumed the business risk that the facts may not be as represented. (Purchaser) cannot now complain that he has been defrauded when his own lack of due care is responsible for his predicament.”

Additionally, the purchaser had argued that he's entitled to an “indefinite” adjournment of the closing date, since the sponsor had not sent a “time of the essence” letter specifying a law day for closing. However, the contract clearly specified that “time was of the essence” and that the “'on or before' date must be complied with.” Thus, the sponsor did not need to send a time of the essence letter.

Since the sponsor was within its rights, the court dismissed the purchaser's repudiation claim. If the sponsor did not breach the contract, the anticipatory repudiation claim had to fail. Only a party who is not in breach of the agreement may bring an anticipatory repudiation claim.

The purchaser's fraud in the inducement claim was based on the aforementioned alleged misrepresentations and facts that, allegedly, were “peculiarly within” the sponsor's knowledge. The court held that the “peculiar knowledge” exception was inapplicable. The parties are “sophisticated companies or businessmen” and the purchaser “had a low-cost alternative such as insisting that the written contract terms reflect any oral undertaking on a deal-breaking issue.” Decisional precedent held that a party should not be heard to complain that he had been defrauded “when it is his own evident lack of due care which is responsible for his predicament.” The sophisticated purchaser was represented by real estate counsel throughout the negotiation of the contract and afterwards. The purchaser could not disclaim reliance and then claim to have been defrauded by statements that he has already disclaimed. Accordingly, the court held that the sponsor was entitled to keep the purchaser's down payment.

Comment: Some purchasers who perceive that the real estate market is “softening,” will try to “back out” of their contracts by alleging that the sponsor did something wrong. Such purchasers must overcome the language of their contracts, including provisions that provide there were no representations or warranties, except those expressly set forth in the contract and related documents, and merger and integration provisions that bar claims of alleged oral agreements.

28th Highline Assocs. LLC v. Roache, U.S. District Court, S.D.N.Y., Case No. 18 Civ. 1468, decided Feb. 22, 2019, Sweet, J.

Landlord-Tenant—Occupant Did Not Qualify as a “Non-traditional Family Member” as Contemplated by 'Braschi'—Financial and Emotional Relationship Was More Indicative of “Roommates” Than Family Members

A landlord commenced a licensee hold over proceeding, alleging that the respondent is a licensee of the subject apartment (occupant). The landlord had terminated the occupant's license by serving a “Ten Day Notice to Quit to A Licensee.” The tenant of record (tenant) had died in October 2016. When the occupant failed to vacate, the landlord commenced the subject proceeding. The occupant alleged that she was entitled to succession rights. Following discovery, the court conducted a trial.

The court explained section 2204.6(d)(3) of the NYC Rent and Eviction Regulations (regulations) protects surviving family members, of a deceased tenant from eviction. The regulations protect “traditional family members” such as a “husband, wife, son, daughter, stepson, stepdaughter, father, mother….” The regulations also protect “non-traditional family members.” These are “any persons who reside, with the tenant of record, … as their primary residence and proves an emotional and financial commitment between such person and tenant of record.” The criteria for establishing non-traditional family membership were set forth in Braschi v. Stahl Assoc. Co., 74 N.Y.S.2d 201 (1989). The criteria include:

a) longevity of the relationship;

b) sharing of or relying upon each other for payment of household or family expenses and other common necessities of life;

c) intermingling of finances as evidenced, among other things by, joint ownership of bank accounts, personal and real property, credit cards, loan obligations, sharing a household budget for purposes of receiving government benefits, etc.;

d) engaging in family type activities by jointly attending family functions, holidays and celebrations, social and recreational activities etc.;

e) formalizing of legal obligations, … responsibilities to each other by such means as executing wills naming each other as executor and/or beneficiary, conferring upon each other … authority to make health care decisions each for the other, … making a domestic partnership declaration, or serving as representative payee for purposes of public benefits, etc.;

f) holding themselves out as family members to other family members, friends, members of the community … or society in general, through their words or actions;

g) regularly performing family functions, such as caring for each other or each others extended family members, and/or relying upon each other for daily family services;

h) engaging in any other patterns of behavior, agreement, or other action which evidences the intention of creating a long term, emotionally-committed relationship.

No one of the foregoing factors is dispositive. It is the totality of the relationship … which controls the final analysis. The occupant met the two year statutory requirement.

However, the court found that the evidence did not establish that the occupant and the tenant had financial commitments to each other, other than as “roommates or friends.” They shared the rent, utilities and certain other household expenses. They did not intermingle finances and did not share any bank accounts, credit cards or loan obligations. The occupant did not receive the tenant's social security and was not listed as a dependent on the tenant's tax returns. The occupant did not manage the tenant's finances and “did not know who did.” The occupant was not named in the tenant's will and was not a beneficiary of the tenant's life insurance policy or his retirement account. Thus, the occupant failed to “establish a financial commitment other than as roommates or friends.”

With respect to “emotional commitment”, the occupant testified that she and the tenant “dined together, shopped together, and spent time at movies, concerts and operas together.” However, the occupant testified that they did those things “alone.” They did not hold themselves out as a family. The occupant's “parents did not meet (tenant), … (tenant's) sister solely looked upon her as someone (tenant) lived (with) and … when (occupant) went to holiday celebrations at her parents, (tenant did not accompany her.)” The tenant had appointed his estranged sister as the executrix of his estate and gave his estranged sister power of attorney.

The occupant could not demonstrate that she and the tenant “celebrated birthdays together” or “holidays together, exchanged holiday cards, texts or emails with each other to memorialize their relationship,” as “would be expected of people involved in a relationship.” They did not take “pictures together, travel together or attend religious services together which again, would be considered normal everyday activities” of family members. The occupant did not “participate in major decisions as would be expected between two people allegedly committed and involved as (occupant and tenant).”

The occupant had testified that she was with the tenant “24/7” and produced witness testimony that she was the tenant's “sole emotional support.”  However, the occupant was “employed outside of premises” and the tenant's “friends helped take care of him.”

The court held that although the occupant “appeared sincere”, the “emotional relationship did not rise to the level of 'non traditional' family and … the relationship was solely as roommates.” Accordingly, the court held that the occupant failed to establish the “requisite emotional and financial commitment needed to succeed to the premises” and granted a final judgment of possession in favor of the landlord.

Comment: Counsel for the landlord acknowledged that several building residents testified that the occupant had taken good care of the tenant and that they had considered “the pair as a family.” However, the landlord demonstrated that the parties led separate lives with respect to their finances, family activities and medical matters. The tenant did not provide a comment.

206 West 80th Street LLC v. Julianna Morgan, Civil Court, New York Co., Housing Part R, Index No. L&T 78155.17, decided Feb. 6, 2019, Katz, J.

Scott E. Mollen is a partner at Herrick, Feinstein