Real Property Law

,AppDiv, Second Dept

(memorandum opinion)

In purchasers' action for specific performance of a contract to sell real property, purchasers appealed from Supreme Court's dismissal of the complaint. The Appellate Division reversed and reinstated the complaint, concluding that the contract's liquidated damages provision did not preclude purchasers from bringing an action for specific performance.

Purchasers contracted to purchase the subject premises for $1,200,000, with closing scheduled for on or about Jan. 15, 2003. At the same time, purchasers leased a portion of the premises for use as a retail store. The sale contract acknowledged the lease, and that purchasers were about to spend substantial sums 'in connection with the leasehold in contemplation of the conveyance.' Because of that, the contract provided that if title did not close for any reason other than purchasers' willful default, purchasers would be paid $100,000 as liquidated damages. The contract also provided that seller's 'sole remedy' for purchasers' breach would be $5000. Closing was delayed. On Nov. 1, 2004, purchasers' lawyer sent seller a letter calling for closing on Nov. 29, 2004. Seller responded by indicating that it was exercising its right under the contract not to close and to pay the stipulated liquidated damages to purchasers. Purchasers responded with this action for specific performance. The Supreme Court dismissed, concluding that under the terms of the contract, purchasers were limited to liquidated damages as a remedy for seller's breach. Purchasers appealed.

In reversing, the Appellate Division held that the liquidated damages language in the contract was not sufficiently explicit to bar purchasers' claim for specific performance. In particular, the court contrasted the language making liquidated damages seller's 'sole remedy' against purchaser with the language dealing with seller's breach, which included no comparable language. Hence, the court reinstated the complaint.

COMMENT

Where a New York contract for the sale of real property explicitly provides that liquidated damages are the exclusive remedy for non-performance, a court will bar a purchaser's claim for specific performance. Thus, in 195 Lombardy Street, L.L.C. v. McCarthy, 2006 N.Y. Slip Op. 52078(U), the Supreme Court dismissed the purchaser's complaint seeking specific performance where the liquidated damages clause stated that 'the purchaser's sole remedy shall be the return of the down payment ? and then neither party to this agreement shall have any further rights or obligations hereunder.' The court noted that the parties had freely bargained for the inclusion of a liquidated damages clause that limited their rights and liabilities.

By contrast, when the contract provides for liquidated damages, but does not explicitly state that liquidated damages are to be the sole remedy for non-performance, the court will not infer from the liquidated damage provision alone that the parties intended to bar a purchaser's claim for specific performance. In Barclay Arms Associates v. Clemente, 98 A.D.2d 892, the Appellate Division awarded specific performance to purchaser where the contract was unclear as to whether the liquidated damages clause was to be the sole remedy for non-performance. There, the liquidated damages clause stated that 'responsibility of the parties ? shall be expressly limited to a return of purchaser's deposit ?; or a claim against such deposit by purchaser to exceed no more than $2,500.00.'

When the language of the liquidated damage clause is insufficient, by itself, to preclude an award of specific performance, courts look to the contract as a whole to determine whether the parties intended to bar specific performance. Thus, in Barclay Arms, the court stated that it was unable to conclude that the parties intended to make liquidated damages the sole remedy for the breach, and that the contract, as a whole, demonstrated that the underlying intent of the parties was to perform the contract. In contrast, the Appellate Division in Filiotis v. Noonan, 150 A.D.2d 425, denied the moving party's request for specific performance where the contract was silent as to whether the liquidated damages clause was to be the sole remedy for non-performance. There, the contract stated that' in the event of any default ? liquidated damages shall be $1,000.' In denying specific performance, the court, in a brief memorandum, concluded that, despite the absence of explicit language in the contract precluding specific performance, circumstances surrounding the contract's execution, as elicited at the hearing, disclosed that the parties intended that the liquidated damages clause would preclude specific performance.

In determining the intent of the parties to a contract with ambiguous language, courts will not conclude that a liquidated damage clause bars specific performance when it would have been economically irrational for the parties to preclude specific performance. Thus, in Rubinstein v. Rubinstein, 23 N.Y.2d 293, the Court of Appeals granted specific performance of a contract for the a sale of real property in connection with the dissolution of a partnership. There, the liquidated damages clause did not explicitly state that it was to be plaintiff's exclusive remedy. The court emphasized that, in light of the purpose the agreement, it would have been 'preposterous' for the parties to have written a liquidated damages provision that excluded specific performance. The court emphasized that '[w]e may not presume persons act so irrationally.'

Title Defect Arises

U.S. Bank National Association v. Stewart Title Insurance Co.

NYLJ 3/5/07, p. 33, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action to recover on a title insurance policy, title insurer appealed from a Supreme Court order granting insured summary judgment dismissing seven affirmative defenses. The Appellate Division affirmed, holding that the title defect did not arise upon foreclosure of a prior mortgage, but was instead present at the time the policy was issued and therefore covered by the policy.

Insured's predecessor took a mortgage on the subject property to secure a $98,000 loan. On the same day, title insurer issued a title insurance policy to insured's predecessor and its successors or assigns, insuring the mortgage as a first priority mortgage lien. Mortgagor defaulted on the loan, and predecessor brought a foreclosure action. During the pendency of that action, predecessor ordered a foreclosure search, which revealed four mortgages recorded prior in time to its mortgage. Predecessor then made a formal claim to title insurer, and informed insurer that a notice of pendency had been filed in the foreclosure of one of the senior mortgages (the BT mortgage). Meanwhile, predecessor assigned the mortgage to an assignee, who in turn assigned it to current insured. Title insurer advised predecessor to proceed with the foreclosure action because the BT mortgage had been satisfied, even though the satisfaction had not been recorded. Current insured obtained a judgment of foreclosure and sale, but learned on the eve of the sale that the property had previously been sold in the BT foreclosure action. Insured then made a demand for payment under the title policy for 'complete failure of title.' Insurer denied coverage on the ground that insured had failed to promptly notify insurer of the BT foreclosure action, and that delay had prejudiced insurer. Supreme Court awarded summary judgment dismissing seven of insurer's eight affirmative defenses.

In affirming, the Appellate Division rejected insurer's contention that the title defect arose when the notice of pendency was filed in the BT foreclosure action. The court noted that the lien of that mortgage encumbered the property before issuance of the title policy, so that the title defect arose before the date of the policy and was therefore covered by the policy. The court also rejected insurer's contention that current insured had assumed the defect because insured knew of the defect at the time it took an assignment of the mortgage. The court noted that current insured acquired all of the equities held by the original insured. The court held that a question of fact remained with respect to insured's affirmative defense based on untimely notice: did insurer's letter, which authorized insured to proceed with its foreclosure action, constitute a waiver of any notice defense. But the court also noted that insurer's allegations of prejudice resulting from untimely notice was 'purely speculative and questionable in light of the apparent lack of equity in the property.'

Liquidated Damages Claim

Coizza v. 164-50 Crossbay Realty Corp.

NYLJ 2/26/07, p. 38, col. 1

,AppDiv, Second Dept

(memorandum opinion)

In purchasers' action for specific performance of a contract to sell real property, purchasers appealed from Supreme Court's dismissal of the complaint. The Appellate Division reversed and reinstated the complaint, concluding that the contract's liquidated damages provision did not preclude purchasers from bringing an action for specific performance.

Purchasers contracted to purchase the subject premises for $1,200,000, with closing scheduled for on or about Jan. 15, 2003. At the same time, purchasers leased a portion of the premises for use as a retail store. The sale contract acknowledged the lease, and that purchasers were about to spend substantial sums 'in connection with the leasehold in contemplation of the conveyance.' Because of that, the contract provided that if title did not close for any reason other than purchasers' willful default, purchasers would be paid $100,000 as liquidated damages. The contract also provided that seller's 'sole remedy' for purchasers' breach would be $5000. Closing was delayed. On Nov. 1, 2004, purchasers' lawyer sent seller a letter calling for closing on Nov. 29, 2004. Seller responded by indicating that it was exercising its right under the contract not to close and to pay the stipulated liquidated damages to purchasers. Purchasers responded with this action for specific performance. The Supreme Court dismissed, concluding that under the terms of the contract, purchasers were limited to liquidated damages as a remedy for seller's breach. Purchasers appealed.

In reversing, the Appellate Division held that the liquidated damages language in the contract was not sufficiently explicit to bar purchasers' claim for specific performance. In particular, the court contrasted the language making liquidated damages seller's 'sole remedy' against purchaser with the language dealing with seller's breach, which included no comparable language. Hence, the court reinstated the complaint.

COMMENT

Where a New York contract for the sale of real property explicitly provides that liquidated damages are the exclusive remedy for non-performance, a court will bar a purchaser's claim for specific performance. Thus, in 195 Lombardy Street, L.L.C. v. McCarthy, 2006 N.Y. Slip Op. 52078(U), the Supreme Court dismissed the purchaser's complaint seeking specific performance where the liquidated damages clause stated that 'the purchaser's sole remedy shall be the return of the down payment ? and then neither party to this agreement shall have any further rights or obligations hereunder.' The court noted that the parties had freely bargained for the inclusion of a liquidated damages clause that limited their rights and liabilities.

By contrast, when the contract provides for liquidated damages, but does not explicitly state that liquidated damages are to be the sole remedy for non-performance, the court will not infer from the liquidated damage provision alone that the parties intended to bar a purchaser's claim for specific performance. In Barclay Arms Associates v. Clemente, 98 A.D.2d 892, the Appellate Division awarded specific performance to purchaser where the contract was unclear as to whether the liquidated damages clause was to be the sole remedy for non-performance. There, the liquidated damages clause stated that 'responsibility of the parties ? shall be expressly limited to a return of purchaser's deposit ?; or a claim against such deposit by purchaser to exceed no more than $2,500.00.'

When the language of the liquidated damage clause is insufficient, by itself, to preclude an award of specific performance, courts look to the contract as a whole to determine whether the parties intended to bar specific performance. Thus, in Barclay Arms, the court stated that it was unable to conclude that the parties intended to make liquidated damages the sole remedy for the breach, and that the contract, as a whole, demonstrated that the underlying intent of the parties was to perform the contract. In contrast, the Appellate Division in Filiotis v. Noonan, 150 A.D.2d 425, denied the moving party's request for specific performance where the contract was silent as to whether the liquidated damages clause was to be the sole remedy for non-performance. There, the contract stated that' in the event of any default ? liquidated damages shall be $1,000.' In denying specific performance, the court, in a brief memorandum, concluded that, despite the absence of explicit language in the contract precluding specific performance, circumstances surrounding the contract's execution, as elicited at the hearing, disclosed that the parties intended that the liquidated damages clause would preclude specific performance.

In determining the intent of the parties to a contract with ambiguous language, courts will not conclude that a liquidated damage clause bars specific performance when it would have been economically irrational for the parties to preclude specific performance. Thus, in Rubinstein v. Rubinstein, 23 N.Y.2d 293, the Court of Appeals granted specific performance of a contract for the a sale of real property in connection with the dissolution of a partnership. There, the liquidated damages clause did not explicitly state that it was to be plaintiff's exclusive remedy. The court emphasized that, in light of the purpose the agreement, it would have been 'preposterous' for the parties to have written a liquidated damages provision that excluded specific performance. The court emphasized that '[w]e may not presume persons act so irrationally.'

Title Defect Arises

U.S. Bank National Association v. Stewart Title Insurance Co.

NYLJ 3/5/07, p. 33, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action to recover on a title insurance policy, title insurer appealed from a Supreme Court order granting insured summary judgment dismissing seven affirmative defenses. The Appellate Division affirmed, holding that the title defect did not arise upon foreclosure of a prior mortgage, but was instead present at the time the policy was issued and therefore covered by the policy.

Insured's predecessor took a mortgage on the subject property to secure a $98,000 loan. On the same day, title insurer issued a title insurance policy to insured's predecessor and its successors or assigns, insuring the mortgage as a first priority mortgage lien. Mortgagor defaulted on the loan, and predecessor brought a foreclosure action. During the pendency of that action, predecessor ordered a foreclosure search, which revealed four mortgages recorded prior in time to its mortgage. Predecessor then made a formal claim to title insurer, and informed insurer that a notice of pendency had been filed in the foreclosure of one of the senior mortgages (the BT mortgage). Meanwhile, predecessor assigned the mortgage to an assignee, who in turn assigned it to current insured. Title insurer advised predecessor to proceed with the foreclosure action because the BT mortgage had been satisfied, even though the satisfaction had not been recorded. Current insured obtained a judgment of foreclosure and sale, but learned on the eve of the sale that the property had previously been sold in the BT foreclosure action. Insured then made a demand for payment under the title policy for 'complete failure of title.' Insurer denied coverage on the ground that insured had failed to promptly notify insurer of the BT foreclosure action, and that delay had prejudiced insurer. Supreme Court awarded summary judgment dismissing seven of insurer's eight affirmative defenses.

In affirming, the Appellate Division rejected insurer's contention that the title defect arose when the notice of pendency was filed in the BT foreclosure action. The court noted that the lien of that mortgage encumbered the property before issuance of the title policy, so that the title defect arose before the date of the policy and was therefore covered by the policy. The court also rejected insurer's contention that current insured had assumed the defect because insured knew of the defect at the time it took an assignment of the mortgage. The court noted that current insured acquired all of the equities held by the original insured. The court held that a question of fact remained with respect to insured's affirmative defense based on untimely notice: did insurer's letter, which authorized insured to proceed with its foreclosure action, constitute a waiver of any notice defense. But the court also noted that insurer's allegations of prejudice resulting from untimely notice was 'purely speculative and questionable in light of the apparent lack of equity in the property.'