Real Property Law

AppDiv, Second Dept

(memorandum opinion)

In an action for specific performance of a right of first refusal, holder of the right appealed from a Supreme Court order granting summary judgment to the seller of the subject building. The Appellate Division affirmed, holding that when the seller had an offer to purchase the subject building and a neighboring building, holder of the right of first refusal was obligated to meet the offer for the combined buildings, or else relinquish the first refusal right.

In 1992, seller's predecessor-in-title purchased the subject parcel, known as Springtree Apartments, pursuant to an agreement requiring seller, before selling to a bona-fide third-party purchaser, to give notice of the sale to current plaintiff. Plaintiff was then required either to consent to the sale or to “purchase the premises, on the same terms and conditions as contained in the offer.” On the same day, seller purchased a neighboring parcel from a different corporation, owned by the same shareholders, on precisely the same terms. Five years later, in 1997, seller entered into an agreement with a third party to purchase both the subject parcel and the neighboring parcel. The agreement to purchase the subject parcel was expressly made contingent on the simultaneous purchase of the neighboring parcel. Current plaintiff was provided with notice of the sale, and responded that it wished to purchase only the subject parcel. When seller refused to convey only the subject parcel, plaintiff brought this action.

In upholding Supreme Court's award of summary judgment to seller, the Appellate Division held that in light of the language in the agreement creating the right of first refusal, plaintiff could not compel sale of the subject parcel without the neighboring parcel. The court also noted that plaintiff had provided no evidence of collusion between seller and third-party purchaser.

COMMENT

When a tenant holds a right of first refusal, a landlord may not defeat tenant's right by offering the property for sale as part of a larger package. Thus, in C & B Wholesale Stationery v. S. De Bella Dresses, Inc., 43 A.D.2d 579, tenant held a right of first refusal over the leased premises. Before selling the leased premises and other property to a third-party buyer, landlord offered to let the tenant match the third party's offer. Tenant declined, asserting a right to purchase only the leased premises. When the landlord then sold to the third-party buyer, tenant brought an action against both landlord and third-party buyer. The court ordered conveyance of title to the leased premises back to the landlord and enjoined further sale of the lease premises by the landlord unless landlord permitted tenant to meet a bona-fide offer for those premises. As the court put it, “[t]he right which plaintiff enjoyed by virtue of the first refusal clause cannot be rendered nugatory by the devise of attaching additional land to the leased premises and finding a buyer for the entire parcel.” Id. at 580. See also Sautkulis v. Conkli 1 A.D2d 962, affd 2NY2d 919 (tenant's right of first refusal over parcel prevents landlord from selling parcel to third party as part of a larger package)

Although a tenant who holds a right of first refusal over property may enjoin a landlord from conveying that parcel as part of a larger package, tenant may not compel the landlord to sell only the property over which tenant holds a right of first refusal. Thus, in New Atlantic Garden v. Atlantic Garden Realty Corp., 201 App. Div. 404, affd. 237 N.Y. 540, the court denied specific performance to a tenant seeking to compel landlord to convey the property over which tenant held a first refusal right. The court indicated that tenant was entitled to injunctive relief preventing the sale of the demised premises as part of a larger package, but could not compel landlord to sell only a piece of what landlord had planned to sell.

Laramie appears to be inconsistent with prior cases because the court permitted the seller to sell to a third party while bypassing the lessee's first refusal right. Perhaps, the fact that the same shareholders held rights of first refusal over the two neighboring parcels influenced the court to reach a different result.

Issues of Fact Preclude Release of Escrowed Funds

Earle v. Gangadeen

NYLJ 3/19/03, p. 21, col. 2

Supreme Ct., Queens Cty

(Taylor, J.)

In an action by home purchaser against her former lawyer, as escrow agent, purchaser sought release to her of the escrowed funds. The court held that issues of fact about performance of contract conditions precluded the court from ordering release of the funds to either party.

At closing of a home purchase, seller agreed to make repairs to the property, and the parties agreed that purchaser's lawyer would hold $17,000 in his attorney escrow account to ensure that the repairs were made. Seller made some of the repairs, and the lawyer released $8500 to seller. Purchaser contended that the remaining repairs had not been made, and lawyer sent a letter to seller indicating that the buyer would not extend seller any more time, but would use the remainder of the escrow funds to retain independent contractors to correct the remaining items. Lawyer then advised purchaser that if the parties did not settle their dispute, he would have to bring an action to resolve the matter, which would cost $1000, which would be deducted from the amount in escrow. Purchaser then retained another lawyer to bring this action against her former lawyer. Seller also brought an action seeking release of the escrow funds. Lawyer sought compensation for the time spent trying to resolve the dispute between the parties.

The court started by noting the escrowee's responsibility to hold funds to insure strict compliance with the condition. The escrowee is a fiduciary with duties to both parties. In particular, the court held that an escrowee must make an independent determination of compliance with the condition, except where it is beyond his ability to do so. In that event, the escrowee may be required to bring an interpleader action for a judicial determination of compliance. Here, the court concluded that issues of fact required plenary determination: first, whether seller had complied with the condition precedent, and second, whether lawyer/escrowee had properly discharged his duties, in that the lawyer made no independent determination of compliance with the condition. The court held that the lawyer was not entitled to legal fees for defending the actions, first because he did not submit itemized time sheets and second because his failure either to make an independent determination of compliance or to bring an interpleader action led to the actions in the first place.

COMMENT

An escrow agent has an obligation to make an independent determination of compliance with a contractual condition to releasing escrowed funds. A disbursal of funds without an independent determination leaves the agent liable for what an independent inspection would have shown. Thus, in Akivis v. Brecher, 128 Misc. 2d 965, purchaser had contracted with the seller for the latter to remove contents from the purchased premises and to leave it in “broom-clean” condition. The seller apparently did not fulfill this condition, but sent a notice of compliance to the escrow agent, who disbursed the escrowed funds to the seller. The agent did not make an independent determination as to whether the purchaser had indeed complied. The purchaser brought an action against the sellers, and also brought a separate action against the escrow agent for an accounting and for damages resulting from seller's alleged failure to remove contents from the premises. Noting that the escrow agent had an obligation to make an independent determination of compliance, the court held that the escrow agent was “personally responsible” for the damages that would have been avoided had the agent made an independent determination: the smaller of the cost of removing seller's items or the accumulated charges specified in the contract for each day of the seller's escrow.

New York case law has not addressed the escrow agent's liability in case he makes an independent but erroneous determination. As a result, an agent would appear to have two “safe” courses of action. First, the agent can bring an interpleader action so that a court can determine whether there has been compliance with the condition. Second, the escrow agent can retain the proceeds in escrow until the parties reach agreement or until one of them institutes an action for release of the escrow funds. Thus, in Takayama v. Shaefer, 240 A.D.2d 21, purchaser brought an action against seller and the escrow agent (seller's attorney) for return of a deposit plus interest. The sale contract included a mortgage contingency clause, and when purchaser requested return of the deposit, seller's attorney requested proof of denial of the mortgage, which the purchaser refused to give. The court rejected purchaser's argument that escrow agent was liable for interest, holding that the agent had “no legal or ethical obligation to commence an interpleader action under pain of liability.” Instead, the escrow agent had the right to “hold the funds indefinitely.” As a result, the agent was liable only for the funds on deposit, not for interest on those funds.

Do Changed Conditions Warrant Termination of Residential Use Covenant?

Chambers v. Old Stone Hill Road Associates

NYLJ 3/24/03, p. 26, col. 1

AppDiv, Second Dept

(memorandum opinion)

In an action by homeowners to enforce restrictive covenants against landowner who leased property for construction of a wireless telephone tower, landowner appealed from Supreme Court's grant of summary judgment to homeowners. The Appellate Division affirmed, concluding that enforcement of the covenants would not violate any public policy.

Landowner owns two lots in an area in which deeds impose covenants that prohibit “any building except detached residential dwelling houses each for the occupancy and use of one family.” In 1998, landowner leased 2000 square feet on one of the lots, with a right of access over the other lot, to Verizon Wireless for purpose of constructing a wireless service facility, including a 120-foot monopole and a two-story storage shed. The town approved a special permit for the facility, but homeowners brought this action to enforce the covenants and enjoin the facility. Supreme Court granted summary judgment to homeowners.

In affirming, the Appellate Division rejected landowner's argument that the restrictive covenants should be extinguished pursuant to RPAPL 1951. The court emphasized that landowner's hardship was self-created, and did not tip the balance of the equities in favor of extinguishing the covenant. The court also rejected the argument that enforcement of the covenant would violate a general public policy in favor of rapid development of wireless telecommunications facilities, noting that the federal Telecommunications Act of 1996 (47 USC sec. 151 et seq.) preserves the authority of state and local governments regarding placement construction and modification of facilities. The court also held that the statute does not preempt the power of private citizens to enforce restrictive covenants that would preclude such facilities.

COMMENT

RPAPL ' 1951 provides that a restrictive covenant is subject to judicial termination if the “restriction is of no actual and substantial benefit to the persons seeking its enforcement. Although the statute, by its terms, only applies when a covenant produces no benefit to the person seeking its enforcement, courts will terminate covenants that render the burdened property valueless, even if the covenants continue to provide marginal benefit to the covenant's beneficiaries. Thus, in Orange and Rockland Utilities v. Philwold Estates, 52 NY2d 253, the Court of Appeals terminated a restrictive covenant that limited the use of riverfront land to a hydroelectric plant. After the parties created the covenant, the City of New York condemned the burdened landowner's riparian rights, making the land worthless for a hydroelectric plant. Despite the covenant's continuing benefit to the party seeking its enforcement – by keeping adjacent land unspoiled and enhancing hunting and fishing rights – the court held section 1951 applicable, invoking notions of “relative hardship.” Similarly, in Board of Education, East Irondequoit Central School District v. John Doe, 88 AD2d 108, the court applied section 1951 to extinguish a covenant limiting land owned by a school district to residential use. The school district, which no longer needed the parcel, had established that there was no market for residential homes on the parcel.

When, however, parties agree to a restrictive covenant with the knowledge that the covenant may render the land valueless or devalue the property to zero, the courts will not apply section 1951. Thus, in Nature Conservancy v. Scott Congel, the court upheld a covenant that precluded defendant from building on certain land. 296 A.D. 2d 840. The court, in upholding the requirement that the land remain in its natural state noted that the defendant “purchased the property at a substantially reduced price with full knowledge of the restrictive covenant. Thus, any hardship on his part was self-created” as the parties had explicitly placed value on maintaining the land in its natural state. In Chambers itself, the court emphasized that any hardship was self-created; moreover, in Chambers there was no evidence that the covenant had rendered the parcel valueless.

Holder of First Refusal Right Must Match Offer for Combined Buildings

Laramie Springtree Corp. v. Equity Residential Properties Trust

NYLJ 3/17/03, p. 29, col. 3

AppDiv, Second Dept

(memorandum opinion)

In an action for specific performance of a right of first refusal, holder of the right appealed from a Supreme Court order granting summary judgment to the seller of the subject building. The Appellate Division affirmed, holding that when the seller had an offer to purchase the subject building and a neighboring building, holder of the right of first refusal was obligated to meet the offer for the combined buildings, or else relinquish the first refusal right.

In 1992, seller's predecessor-in-title purchased the subject parcel, known as Springtree Apartments, pursuant to an agreement requiring seller, before selling to a bona-fide third-party purchaser, to give notice of the sale to current plaintiff. Plaintiff was then required either to consent to the sale or to “purchase the premises, on the same terms and conditions as contained in the offer.” On the same day, seller purchased a neighboring parcel from a different corporation, owned by the same shareholders, on precisely the same terms. Five years later, in 1997, seller entered into an agreement with a third party to purchase both the subject parcel and the neighboring parcel. The agreement to purchase the subject parcel was expressly made contingent on the simultaneous purchase of the neighboring parcel. Current plaintiff was provided with notice of the sale, and responded that it wished to purchase only the subject parcel. When seller refused to convey only the subject parcel, plaintiff brought this action.

In upholding Supreme Court's award of summary judgment to seller, the Appellate Division held that in light of the language in the agreement creating the right of first refusal, plaintiff could not compel sale of the subject parcel without the neighboring parcel. The court also noted that plaintiff had provided no evidence of collusion between seller and third-party purchaser.

COMMENT

When a tenant holds a right of first refusal, a landlord may not defeat tenant's right by offering the property for sale as part of a larger package. Thus, in C & B Wholesale Stationery v. S. De Bella Dresses, Inc., 43 A.D.2d 579, tenant held a right of first refusal over the leased premises. Before selling the leased premises and other property to a third-party buyer, landlord offered to let the tenant match the third party's offer. Tenant declined, asserting a right to purchase only the leased premises. When the landlord then sold to the third-party buyer, tenant brought an action against both landlord and third-party buyer. The court ordered conveyance of title to the leased premises back to the landlord and enjoined further sale of the lease premises by the landlord unless landlord permitted tenant to meet a bona-fide offer for those premises. As the court put it, “[t]he right which plaintiff enjoyed by virtue of the first refusal clause cannot be rendered nugatory by the devise of attaching additional land to the leased premises and finding a buyer for the entire parcel.” Id. at 580. See also Sautkulis v. Conkli 1 A.D2d 962, affd 2NY2d 919 (tenant's right of first refusal over parcel prevents landlord from selling parcel to third party as part of a larger package)

Although a tenant who holds a right of first refusal over property may enjoin a landlord from conveying that parcel as part of a larger package, tenant may not compel the landlord to sell only the property over which tenant holds a right of first refusal. Thus, in New Atlantic Garden v. Atlantic Garden Realty Corp., 201 App. Div. 404, affd. 237 N.Y. 540, the court denied specific performance to a tenant seeking to compel landlord to convey the property over which tenant held a first refusal right. The court indicated that tenant was entitled to injunctive relief preventing the sale of the demised premises as part of a larger package, but could not compel landlord to sell only a piece of what landlord had planned to sell.

Laramie appears to be inconsistent with prior cases because the court permitted the seller to sell to a third party while bypassing the lessee's first refusal right. Perhaps, the fact that the same shareholders held rights of first refusal over the two neighboring parcels influenced the court to reach a different result.

Issues of Fact Preclude Release of Escrowed Funds

Earle v. Gangadeen

NYLJ 3/19/03, p. 21, col. 2

Supreme Ct., Queens Cty

(Taylor, J.)

In an action by home purchaser against her former lawyer, as escrow agent, purchaser sought release to her of the escrowed funds. The court held that issues of fact about performance of contract conditions precluded the court from ordering release of the funds to either party.

At closing of a home purchase, seller agreed to make repairs to the property, and the parties agreed that purchaser's lawyer would hold $17,000 in his attorney escrow account to ensure that the repairs were made. Seller made some of the repairs, and the lawyer released $8500 to seller. Purchaser contended that the remaining repairs had not been made, and lawyer sent a letter to seller indicating that the buyer would not extend seller any more time, but would use the remainder of the escrow funds to retain independent contractors to correct the remaining items. Lawyer then advised purchaser that if the parties did not settle their dispute, he would have to bring an action to resolve the matter, which would cost $1000, which would be deducted from the amount in escrow. Purchaser then retained another lawyer to bring this action against her former lawyer. Seller also brought an action seeking release of the escrow funds. Lawyer sought compensation for the time spent trying to resolve the dispute between the parties.

The court started by noting the escrowee's responsibility to hold funds to insure strict compliance with the condition. The escrowee is a fiduciary with duties to both parties. In particular, the court held that an escrowee must make an independent determination of compliance with the condition, except where it is beyond his ability to do so. In that event, the escrowee may be required to bring an interpleader action for a judicial determination of compliance. Here, the court concluded that issues of fact required plenary determination: first, whether seller had complied with the condition precedent, and second, whether lawyer/escrowee had properly discharged his duties, in that the lawyer made no independent determination of compliance with the condition. The court held that the lawyer was not entitled to legal fees for defending the actions, first because he did not submit itemized time sheets and second because his failure either to make an independent determination of compliance or to bring an interpleader action led to the actions in the first place.

COMMENT

An escrow agent has an obligation to make an independent determination of compliance with a contractual condition to releasing escrowed funds. A disbursal of funds without an independent determination leaves the agent liable for what an independent inspection would have shown. Thus, in Akivis v. Brecher, 128 Misc. 2d 965, purchaser had contracted with the seller for the latter to remove contents from the purchased premises and to leave it in “broom-clean” condition. The seller apparently did not fulfill this condition, but sent a notice of compliance to the escrow agent, who disbursed the escrowed funds to the seller. The agent did not make an independent determination as to whether the purchaser had indeed complied. The purchaser brought an action against the sellers, and also brought a separate action against the escrow agent for an accounting and for damages resulting from seller's alleged failure to remove contents from the premises. Noting that the escrow agent had an obligation to make an independent determination of compliance, the court held that the escrow agent was “personally responsible” for the damages that would have been avoided had the agent made an independent determination: the smaller of the cost of removing seller's items or the accumulated charges specified in the contract for each day of the seller's escrow.

New York case law has not addressed the escrow agent's liability in case he makes an independent but erroneous determination. As a result, an agent would appear to have two “safe” courses of action. First, the agent can bring an interpleader action so that a court can determine whether there has been compliance with the condition. Second, the escrow agent can retain the proceeds in escrow until the parties reach agreement or until one of them institutes an action for release of the escrow funds. Thus, in Takayama v. Shaefer, 240 A.D.2d 21, purchaser brought an action against seller and the escrow agent (seller's attorney) for return of a deposit plus interest. The sale contract included a mortgage contingency clause, and when purchaser requested return of the deposit, seller's attorney requested proof of denial of the mortgage, which the purchaser refused to give. The court rejected purchaser's argument that escrow agent was liable for interest, holding that the agent had “no legal or ethical obligation to commence an interpleader action under pain of liability.” Instead, the escrow agent had the right to “hold the funds indefinitely.” As a result, the agent was liable only for the funds on deposit, not for interest on those funds.

Do Changed Conditions Warrant Termination of Residential Use Covenant?

Chambers v. Old Stone Hill Road Associates

NYLJ 3/24/03, p. 26, col. 1

AppDiv, Second Dept

(memorandum opinion)

In an action by homeowners to enforce restrictive covenants against landowner who leased property for construction of a wireless telephone tower, landowner appealed from Supreme Court's grant of summary judgment to homeowners. The Appellate Division affirmed, concluding that enforcement of the covenants would not violate any public policy.

Landowner owns two lots in an area in which deeds impose covenants that prohibit “any building except detached residential dwelling houses each for the occupancy and use of one family.” In 1998, landowner leased 2000 square feet on one of the lots, with a right of access over the other lot, to Verizon Wireless for purpose of constructing a wireless service facility, including a 120-foot monopole and a two-story storage shed. The town approved a special permit for the facility, but homeowners brought this action to enforce the covenants and enjoin the facility. Supreme Court granted summary judgment to homeowners.

In affirming, the Appellate Division rejected landowner's argument that the restrictive covenants should be extinguished pursuant to RPAPL 1951. The court emphasized that landowner's hardship was self-created, and did not tip the balance of the equities in favor of extinguishing the covenant. The court also rejected the argument that enforcement of the covenant would violate a general public policy in favor of rapid development of wireless telecommunications facilities, noting that the federal Telecommunications Act of 1996 (47 USC sec. 151 et seq.) preserves the authority of state and local governments regarding placement construction and modification of facilities. The court also held that the statute does not preempt the power of private citizens to enforce restrictive covenants that would preclude such facilities.

COMMENT

RPAPL ' 1951 provides that a restrictive covenant is subject to judicial termination if the “restriction is of no actual and substantial benefit to the persons seeking its enforcement. Although the statute, by its terms, only applies when a covenant produces no benefit to the person seeking its enforcement, courts will terminate covenants that render the burdened property valueless, even if the covenants continue to provide marginal benefit to the covenant's beneficiaries. Thus, in Orange and Rockland Utilities v. Philwold Estates, 52 NY2d 253, the Court of Appeals terminated a restrictive covenant that limited the use of riverfront land to a hydroelectric plant. After the parties created the covenant, the City of New York condemned the burdened landowner's riparian rights, making the land worthless for a hydroelectric plant. Despite the covenant's continuing benefit to the party seeking its enforcement – by keeping adjacent land unspoiled and enhancing hunting and fishing rights – the court held section 1951 applicable, invoking notions of “relative hardship.” Similarly, in Board of Education, East Irondequoit Central School District v. John Doe, 88 AD2d 108, the court applied section 1951 to extinguish a covenant limiting land owned by a school district to residential use. The school district, which no longer needed the parcel, had established that there was no market for residential homes on the parcel.

When, however, parties agree to a restrictive covenant with the knowledge that the covenant may render the land valueless or devalue the property to zero, the courts will not apply section 1951. Thus, in Nature Conservancy v. Scott Congel, the court upheld a covenant that precluded defendant from building on certain land. 296 A.D. 2d 840. The court, in upholding the requirement that the land remain in its natural state noted that the defendant “purchased the property at a substantially reduced price with full knowledge of the restrictive covenant. Thus, any hardship on his part was self-created” as the parties had explicitly placed value on maintaining the land in its natural state. In Chambers itself, the court emphasized that any hardship was self-created; moreover, in Chambers there was no evidence that the covenant had rendered the parcel valueless.