Scott E. Mollen

Condominiums—Board Entitled to Exercise Right of First Refusal—Price Allegedly Too Low—Breach of Contract, Breach of Fiduciary Duties and Aiding and Abetting a Breach of Fiduciary Duty and Tortious Interference with Contract Claims Dismissed—Co-ops v. Condos

A plaintiff purchaser of a condominium apartment (unit) commenced an action, seeking damages against the seller, a real estate broker, the condominium and its board of Managers (board) (collectively, “defendants”). The defendants, except for the broker, moved to dismiss the complaint and to cancel a notice of pendency and for sanctions against the plaintiff. The plaintiff moved for partial summary judgment on his breach of contract and tortious interference claims.

The unit had been publicly listed for $949,000. The plaintiff entered into a contract to purchase the unit for $850,000. The contract provided that the board had a right of first refusal (ROFR) to purchase the unit. The (ROFR) was incorporated in condominium's by-laws. It specified that the board had 30 days to elect whether to exercise the (ROFR) after receiving notice of the sale from the seller.

After the board had advised the seller that it was exercising its (ROFR), the seller transferred title of the unit to the board. The plaintiff thereafter commenced the subject action, alleging claims for breach of contract, tortious interference with contractual relations, conspiracy to tortiously interfere with contractual relations, breach of fiduciary duty as against the broker, conspiracy to breach fiduciary duty and tortious interference with fiduciary duties and/or aiding and abetting a breach of fiduciary duty.

The plaintiff alleged that the defendants engaged in misconduct “when the board exercised its (ROFR) and purchased the apartment.” The plaintiff contended that the board did not exercise its (ROFR) “in the manner required by the by-laws.” The plaintiff further asserted that the seller's attorney had admitted that the board exercised the (ROFR) because the plaintiff's “contract price was 'too low.'” A defendant who had signed the contract on behalf of the seller, (representative), was a board member and had voted to override the contract that he had signed.

The plaintiff also alleged that certain defendants were motivated “to show an inflated price for the apartment so that the price trend would show publicly as an increase at the asking price instead of a decrease of approximately 10 percent below the asking price.” The plaintiff further claimed that the broker had tried to “coerce him into buying the furniture in the apartment, telling him that if he did not, he 'could expect that the deal to be derailed.'”

The defendants argued that no breach of contract had occurred, i.e. the board had “properly and legitimately exercised its (ROFR).” The plaintiff countered that the (ROFR) had not been properly exercised because “(1) there was no proper notice of the contract to the board; (2) there was no meeting or vote for the (ROFR) to be exercised; and (3) the sale of the apartment to the board was on different terms and conditions than those provided in the contract, such as not selling it within 15 business days, not selling it for cash, and not selling it within 60 days of the purported exercise of the (ROFR).” The plaintiff further argued that the representative was a member of the board and had wrongfully participated in the board's vote on the (ROFR), given his “conflict of interest as the party who executed the contract.”

The court held that the sale of the unit to the board was not a breach of contract and the plaintiff, as “a mere contract vendee,” lacked “standing to challenge alleged violations of the by-laws.” The court further held that the representative's failure to recuse himself had not “frustrated the purpose of the contract” and had not violated the “covenant of good faith and fair dealing.” Even if the representative was obligated to abstain from the vote, the remainder of the board, “four out of five members, nevertheless legitimately voted in favor of exercising the (ROFR),” i.e., the representative's vote “did not change the ultimate outcome of the vote” and the plaintiff could not establish any damages from the failure to recuse. Thus, the court dismissed the breach of contract claim.

The court also dismissed the tortious interference with contractual relations claim. There was no privity between the plaintiff and the board. The plaintiff lacked standing to challenge the board's compliance with its by-laws. The court further found that the board's actions “were taken in good faith to further a legitimate interest of the condominium corporation, especially when consideration is given to the corporation's start-up financial status.”

aThe plaintiff had failed to adequately plead that the board, by allegedly violating its by-laws, had acted “to intentionally procure the breach of (plaintiff's) contract” or that the board's exercise of its (ROFR) “was not taken in good faith in the 'lawful and legitimate furtherance of corporate purposes.'”

Additionally, the court explained that New York “does not recognize an independent cause of action for civil conspiracy” and dismissed the claim for conspiracy to tortiously interfere with contractual relations. The court also dismissed the claim that defendants violated the by-laws by failing to hold the board meeting on proper notice, and failing to exclude an interested board member and failing to hold a meeting of unit owners.

The plaintiff had also alleged that the defendants had aided the broker in “manipulating public information regarding the contract” and “attempting to coerce the plaintiff to buy furniture in the apartment that was expressly excluded from the contract.” The court held that the plaintiff failed to “adequately identify a fiduciary duty owed to him by members of the alleged conspiracy, or a breach of any such duty” and dismissed the conspiracy to breach a fiduciary duty claim.

The broker had not moved to dismiss the claims asserted against her. The plaintiff had alleged that “as a licensed real-estate salesperson,” the broker had “breached her fiduciary duty to him once she failed to properly advise plaintiff 'of her role as a dual agent as the form she supplied to plaintiff was not properly completed by her or the plaintiff.” The plaintiff asserted that the broker acted as a dual agent who had listed the apartment price as “higher than his contract price in an attempt to 'obtain higher prices for not just the apartment, but also for the other four apartments for which (the broker) had the listing with the defendants.” The plaintiff argued, inter alia, that the broker had been “working unlawfully to keep the other listings,” had induced the other board members “to vote in favor of the (ROFR).”

The court found that even if such allegations sufficiently stated a breach of fiduciary duty claim against the broker, the plaintiff had still failed to “adequately allege facts showing that any of the other defendants aided and abetted in (the broker's) alleged breach of fiduciary duties, or tortiously interfered with such duties.” Thus, the court dismissed the complaint against the defendants other than the broker and denied the plaintiff's motion for partial summary judgment.

Comment: Most New York condominium boards lack “purchaser screening rights” that most cooperative corporations possess. That is why some purchasers, who think that they are unlikely to be approved by a co-op board because they have a weak employment history, a weak financial statement, bad credit, a litigious history, etc., will seek to purchase condominiums. However, as the subject case illustrates, a condominium may exercise a right of first refusal, if such right is embodied in the governing documents. Such right is rarely exercised, since a board would then have to come up with the money to purchase the unit.

Condominium boards will occasionally exercise such right when they think that their purchase of a unit is in the best interest of the condominium, e.g., a purchase price is too low and may diminish the value of other units in the building. A below market price may involve an estate sale, a seller having financial difficulties or a seller's need for a fast sale because of a need to relocate for a new job.

One of the most high profile disputes involving a condominium board's right to “veto” a prospective sale, involved a condominium board's attempt to prevent real estate investor Abraham Hirschfeld from selling his apartment to former President Richard Nixon. The board claimed, inter alia, that the former president's security detail and other security measures would violate the condominium's by-laws and house rules. Representing Mr. Hirschfeld, I argued that the presence of the Secret Service would not violate the governing documents, that the condominium board's sole ability to block the sale was to exercise its right of first refusal, and that the Secret Service would make the building one of the “safest buildings in New York City.” (At that time, (1979), the crime rate was escalating rapidly. The New York Times soon thereafter called 1980, the “worst year of crime in city history.”) That dispute was settled prior to a court decision. It appeared that President Nixon had changed his mind and preferred to purchase a townhouse.

Interestingly, there are no laws that prevent a cooperative from operating in a manner similar to a condominium and vice-versa. Thus, it is technically possible for a cooperative to have a right of first refusal in lieu of a right to screen specific purchasers. However, while it is possible to legally “transplant” the characteristics of a condominium into a cooperative, such changes must be accomplished in conformance with the cooperative's organizational documents. These changes may involve many practical “challenges.” There may be substantial disagreements as to such changes among unit owners, agreements with existing mortgages may be impacted and there may be tax ramifications.

In an effort to enhance the market values of cooperative apartments, some co-op boards have tried to make the purchase process more “user friendly” by, inter alia, by increasing the amount of financing that is permitted, establishing more liberal policies with respect to subletting, making the purchaser approval process faster by simplifying their application and by providing some of the amenities that are found in new construction condominiums, e.g., fitness facilities, children's play rooms, attractive roof decks, etc.

Some people prefer to live in co-ops because co-op prices are often lower than condominiums. Co-op buildings often have underlying mortgages and maintenance charges are higher. Furthermore, foreign buyers and buyers from outside of New York, often prefer receiving a deed and having broad subletting and occupancy rights and the ability to sell without the necessity of obtaining board approval of their purchaser. The rest of the world and the rest of the country are more familiar with condos than with co-ops, which mostly exist in New York.

Additionally, young people often prefer condominiums because, inter alia, they lack a strong financial statement and want to use the most amount of financing they can get. They often prefer newer buildings and developers today generally build condos, not co-ops.

However, some people still prefer co-ops because they place a high value on screening prospective purchasers and limiting prospective occupants. Recent stories about apartments being used by strangers who do not respect building rules, e.g., by smoking in non-smoking buildings, creating excessive noise from late night parties, engaging in illegal activities such as the sale of illegal drugs or prostitution, reinforce such co-op owners' perceptions that there are certain benefits to a screening process.

In the subject case, the court found that there was no evidence that the exercise of the right of first refusal was not based on a good faith effort to further the condominium's legitimate interests. This was not a case where a board exercised its right of first refusal to block a sale, so that a board member could purchase the unit for his or her own family.

Since this case involved a suit by a prospective purchaser, the court also found that the plaintiff lacked standing to assert violations of the condo's by-laws. With respect to co-ops, most sellers do not sue their boards when a prospective purchaser is rejected. They don't sue because most sellers need or want to sell relatively quickly and they do not want to “carry” their apartment unit for years while the parties pursue pre-trial discovery, engage in motion practice, await a trial and then wait for the end of the appellate process.

Moreover, generally co-op boards are not required to provide reasons for the rejection of a purchaser. Thus, if someone thought that a rejection was predicated on an illegal or otherwise improper reason, it would likely be difficult to uncover admissible evidence of such wrongful conduct. Moreover, while a seller would have to fund his or her litigation, a board's ongoing legal costs will be funded by the entire building. Thus, most sellers would rather move on to a new buyer who may be more acceptable to this board.

Segev v. 262 N 9 LLC, Supreme Court, New York County, Case No. 651697/2018, decided March 20, 2019, Scarpulla, J.

Landlord Tenant—Immigration Status Not Dispositive as to Family Member Succession Rights

A landlord appealed from a trial court order which denied it's the landlord's motion for summary judgment of possession in a holdover summary proceeding.

A rent-stabilized tenant died in May 2015. The landlord thereafter commenced a holdover proceeding against the respondent, alleging that the respondent's occupancy status “was that of a licensee with no right to continue possession.” Respondent is a Taiwan citizen who had been admitted to the United States in 2005 and remained on a valid F-1 student visa.

Respondent sought succession rights as a nontraditional family member of the tenant. The landlord argued that as a matter of law, the respondent's “immigration status precludes him from establishing that he primarily resided in the subject apartment for the two-year period prior to tenant's death….'” The landlord relied on “federal immigration law which requires the holder of an F-1 visa to have 'a residence in a foreign country which he has no intention of abandoning'…and which defines 'residence' as a 'principal, actual dwelling place in fact, without regard to intent….'” The landlord cited a Court of Appeals decision which interpreted “identical language” and held that a “primary residence in New York and a B-2 visa are logically incompatible'”

The Appellate Term (court) affirmed the trial court's denial of summary judgment, on the grounds that that the respondent's “status as a holder of an F-1 visa is not dispositive as a matter of law in determining whether he is entitled to succession.” The court emphasized the differences between a B-2 visa, which was at issue in the prior Court of Appeals case, and an F-1 visa that the respondent holds. A B-2 “tourist visa is designed to permit short-term entry into this country…specifically, entry that is 'temporarily for business or temporarily for pleasure….'” In contrast, an F-1 student visa “is valid for the duration of status, which is defined as the time during which an F-1 student is pursuing a full course of study at an approved educational institution….” The court reasoned that in contrast with a “tourist”, an “international student in New York on an F-1 visa may likely make a long-term commitment to live, study and, when approved, work here.”

The respondent had lived in the United States for more than a decade, while studying for a doctorate in music. The court noted that it was “possible that an F-1 visa holder may, while living in New York for an extended period, get married, start a family, or reside with someone in a relationship characterized by emotional and financial commitment and interdependence.” Moreover, “the principal residence abroad requirement for a B-2 tourist visa holder must be viewed in a different context with respect to a student on an F-1 visa, who, as the United States State Department has observed, 'does not possess ties of property, employment, family obligation, and continuity of life typical of B visa applicants,' since students are often 'single, unemployed, without property, and are at the stage in life of deciding and developing their future plans'….”

The court explained that even if the previously cited Court of Appeals decision applied to the holder of an F-1 student visa, the Court of Appeals had “recognized that there may be 'some unusual circumstance' where a foreign national on a tourist visa may meet the primary residence requirement of New York City's rent regulations….”

In this case, the respondent asserted that while “pursuing his studies, he met and fell in love with tenant, moved in with him in late 2012, that the two were dedicated and committed partners, and that they planned to marry before tenant's untimely death.” The court opined that under such circumstances, the respondent's “immigration status should not be dispositive as a matter of law on his succession claim, particularly given that considerations of citizenship and immigration status are not among the criteria for family member succession enumerated in the governing regulations…whose remedial purpose is 'to prevent the grievous harm that would ensue from the wholesale eviction of family members' from their home-apartment following the record tenant's death or departure….”

Tres Realty LLC v. Yu, Appellate Term, First Dept., Case No. 570300/18, decided April 2, 2019, Shulman, P.J., Gonzalez, Cooper, JJ. All concur.

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