GANFER & SHORE, LLP
CLIENT ADVISORY
JANUARY 2011
HAPPY NEW YEAR
Ganfer & Shore, LLP wishes all of our clients and friends a very happy and healthy 2011.
CONTRACTUAL PROVISION PRECLUDES CONDOMINIUM
UNIT PURCHASER’S CLAIM FOR FRAUD, COURT HOLDS
Most purchase agreements for condominium units provide that the purchaser agrees it is not relying on any representations or warranties outside the purchase agreement itself. Such a provision will generally preclude a fraud claim based on alleged misrepresentations that were made before the purchase agreement was signed and are not reflected in it. Plaza PH2001 LLC v. Plaza Residential Owners LP, 2010 WL 5154399, 2010 N.Y. Slip Op. 9385 (App. Div. 1st Dep’t Dec. 21, 2010).
In this case, the purchaser of a penthouse condominium unit in the Plaza Hotel sued the seller, which was the Sponsor under the offering plan, claiming that “the actual measurements of the finished apartment” did not live up to representations made by the seller. These representations, however, were not reflected in the purchase agreement. Observing that the plaintiff had “stipulated in the Purchase Agreement that it was not relying upon any extra-contractual representations,” the court held that this fact “destroys the allegations in [the] complaint that the agreement was executed in reliance upon [defendants’] contrary oral representations.”
The court observed that a narrow exception to this rule exists “where the defendant was in exclusive possession of facts demonstrating that a disclaimed representation was false at the time the disclaimer was made.” The exception did not apply here, because when the purchase agreement was signed, the building was still being renovated and the penthouse was under construction. Thus, any representation concerning the penthouse’s measurements could not have been false as of that time.
The court allowed the purchaser to proceed with its claim for breach of contract, alleging that “certain aspects of the finished penthouse apartment did not conform to the specifications of the condominium offering plan incorporated by reference into the Purchase Agreement.”
PURCHASER OF COOPERATIVE SHARES FROM RECEIVER
IS HELD NOT TO BE A HOLDER OF UNSOLD SHARES
An investor who acquires a cooperative unit as a “holder of unsold shares” frequently enjoys rights not possessed by tenant-shareholders, such as the ability to sublet or sell the unit without board approval and without paying certain fees. In 2005, the Court of Appeals held that status as a “holder of unsold shares” must be determined based on the contractual documents between the Cooperative and the shareholder. This will consist primarily of the proprietary lease, and in some instances will also require examination of other documents such as the offering plan. A series of subsequent court decisions has applied this ruling to various situations. (For discussion of these decisions, please see the July 2005 and October 2008 issues of this Client Advisory, available on our website.)
Rotblut v. 150 East 77th Street Corp., 2010 WL 5071337, 2010 N.Y. Slip Op. 9178 (App. Div. 1st Dep’t Dec. 14, 2010), is another such case. In this case, the “[plaintiffs] purchased the subject apartment, 11 years after the conversion, from a trust company acting as receiver for a depository institution that acquired the apartment after a default.” The plaintiffs “offered no evidence that the original, defaulting, purchaser was ‘produced’ by the Sponsor.” The court noted that “pursuant to the contract of sale, plaintiffs acknowledged that the trust company was not the Sponsor or acting on behalf of the Sponsor.” Under these circumstances, the court held that plaintiffs “failed to establish that the shares and proprietary lease at issue were transferred from an original purchaser of unsold shares,” as the court felt was required under this building’s governing documents.
Plaintiffs contended that the Cooperative had waived its right to challenge their status as holders of unsold shares by agreeing that board consent to certain acts was not required and that certain fees need not be paid. The court held that this argument was barred by a “no waiver” provision of the proprietary lease. The court also rejected plaintiffs’ contention that the Cooperative was estopped from challenging their status, because “the cooperative made no representations at the time of sale and expressly required plaintiffs to make all necessary investigations.”
COOPERATIVE BOARD ALLOWED TO REJECT PROPOSED
SALE OF BUILDING-OWNED APARTMENT BASED ON PRICE
A Cooperative held the shares pertaining to a unit. The Cooperative’s managing agent, which also acted as its real estate broker, located a purchaser, who entered into a contract of sale. The contract provided that “[t]his sale is subject to the unconditional consent of” the Board and that if consent was refused, either party could cancel the contract. The Board rejected plaintiff’s application. Plaintiff initially contended that the rejection was based on his race and disability, but this claim was dismissed by the New York City Human Rights Commission. The Board asserted that it rejected the application because it believed it could obtain a higher price for the unit.
Plaintiff then contended that the Board had no right to reject the contract that had been negotiated and signed on the Cooperative’s behalf, simply on the basis of an allegedly inadequate price. The court disagreed in Harris v. Seward Park Housing Corp., 2010 WL 4880283, 2010 N.Y. Slip Op. 8861 (App. Div. 1st Dep’t Dec. 2, 2010). The court held that “[t]here never was any enforceable agreement between these parties,” but merely a purchase application subject to board approval. Moreover, the “cooperative had a legitimate business interest in procuring the highest possible price for the sale of its units.” The “plaintiff, as a mere contract vendee of shares rather than a shareholder, did not have a cause of action for breach of contract against the cooperative.”
In Singh v. Turtle Bay Towers Corp., 74 A.D.3d 568 (1st Dep’t 2010), the court similarly recognized a cooperative’s interest in the price of a unit whose sale is presented for approval. In this case, the Cooperative enjoyed a right of first refusal with respect to proposed sales. The Board voted to exercise this right “based upon the determination that the purchase price for the subject unit was significantly below market value.” In upholding the Board’s action, the court cited Court of Appeals precedents emphasizing the breadth of board discretion under the Business Judgment Rule.
An important issue on which case law guidance is divided is whether a cooperative board may validly disapprove a purchase application on the ground that the price that the purchaser will pay to an existing tenant-shareholder is too low. (Please see the discussion of this issue in the September 2004 issue of this Client Advisory.) The Harris and Singh cases deal with specific factual scenarios and may not necessarily be dispositive on this broader issue.
