Cooperatives & Condominiums

Condominium Sales Exempt from Interstate Land Sales Full Disclosure Act

Romero v. Borden East River Realty LLC

NYLJ 3/16/10, p. 25, col. 3

U.S.Dist Ct., E.D.N.Y.

(Ross, J.)

In an action by pre-construction purchasers of condominium units to rescind their purchases, purchasers and sponsor each moved for summary judgment. The court granted sponsor's summary judgment motion, concluding that the sales qualified for an exemption from the Interstate Land Sales Full Disclosure Act (ILSA)(15 USC ' 1701-1720).

Related sponsors used a common promotional plan to market two separate condominium projects in Hunters Point, Queens. One condominium was ultimately to include 132 residential units, and the other was to include 72 residential units. Both condominiums were also to include roof terrace units and parking units that could only be sold, ultimately, to purchasers of the residential units. Sponsors filed offering plans with the New York State Attorney General on Sept. 11, 2007, and began selling the units. At the time sponsors began selling the units, they were unaware of the existence of ILSA, and made no effort to comply with its provisions. Sponsors began construction. Subsequently, between Jan. 26, 2009 and April 16, 2009, lawyers for a number of purchasers sent letters to sponsor exercising their purported right to terminate their purchaser pursuant to ILSA. Sponsors obtained temporary certificates of occupancy on Feb. 17, 2009 for one project and on March 12, 2009 for the other project. At that time, sponsors concluded that their plan was exempt from the registration requirements of ILSA, and the Department of Housing and Urban Development ultimately agreed. Purchasers then brought this action.

ILSA requires covered developers to provide a property report to each purchaser before executing the purchaser agreement, and also includes anti-fraud provisions. The issue in this case focused on exemptions from ILSA. Section 1702(a)(2) exempts from ILSA the sale or lease of any improved land on which there is a residential building, and ' 1702(a)(7) exempts sales to persons who acquire lots for the purpose of resale or lease to persons engaged in the business of constructing residential buildings. At the time sponsors obtained the certificate of occupancy, 57 residential units were unsold in the first condominium, 47 were unsold in the second condominium, and one that had previously been sold had been sold to a person who purported to have acquired it for resale. One unit was sold on the same day the sponsor obtained the certificate of occupancy. Sponsors therefore concluded that only 98 units (132 + 72 ' 57 ' 47 ' 1 ' 1) had been sold before the certificate of occupancy had been issued. Sponsors therefore claimed that they qualified for the ILSA exemption in 15 USC ' 1702(b), which exempts developers from ILSA's disclosure obligations, but not anti-fraud obligations, for “a subdivision containing fewer than one hundred lots which are not exempt under” ' 1701(a).

In awarding summary judgment to sponsors, the court rejected purchasers' argument that the sponsors could not piggyback the statute's exemptions, and also rejected their argument that the terrace and parking units should be counted as lots. The court noted that there the statute included no timing requirements, so that sponsor's plan to sell 100 units or more was not relevant; the issue was how many undeveloped lots the sponsor actually sold. The court then concluded that both the statute itself and HUD regulations supported sponsor's contention that a developer can combine the use of the various statutory exemptions. Finally, the court concluded that the roof terrace and parking units were not separate lots because they had no functional or practical existence separate from a residential lot. As a result, sponsors qualified for exemption from ILSA's disclosure provisions, and purchasers were not entitled to rescind.

Assessment Does Not Violate RICO or FDCPA

Pu v. Charles H. Greenthal Management Corp.

NYLJ 3/23/10, p. 31, col. 1

U.S. Dist. Ct., S.D.N.Y.

(Holwell, J.)

In an action by condominium owner against the condominium association and other defendants alleging fraud and violations of RICO and the Federal Debt Collection Practices Act, (FDCPA), the various defendants moved to dismiss. The court granted the motion, finding no basis for the state or federal claims.

The condominium association imposed a $380,000 assessment on unit owners (amounting to about $4,200 per owner) for hallway repairs. The association acted after 76% of the unit owner voted in favor of the assessment. Unit owner in this case, however, relied upon a bylaw provision requiring that all assessments in excess of $100,000 be approved by “in excess of two-thirds (2/3) in Common interest of all the Unit Owners and their mortgagees.” Unit owner contends that the association never obtained the consent of mortgagees. Unit owner argued that this failure made the assessment invalid, and that the association's efforts to collect the invalid assessment constituted a violation of RICO and FDCPA. The case was referred to a federal magistrate, who concluded that the condominium association had not violated the by-laws because the association had provided notice to the mortgagees, who did not object. Unit owner sought review of that determination.

In upholding the magistrate's report, the court first contrasted the provision in the disputed bylaw with other by-law provisions that explicitly required affirmative, written approval by mortgagees. The court therefore concluded that the mortgagee consent clause in this bylaw did not require affirmative written approval of the mortgagees; notice and failure to object was sufficient to comply with the bylaw terms. The court then turned to the federal claims and suggested that the availability of treble damages might have provided the motivation for including those claims. In any event, the court dismissed the RICO claim for failure to identify circumstances indicating conscious fraudulent behavior by the association. In particular, the court emphasized that the association had provided notice to all of the mortgagees, and had informed unit owners of the notice-and-objection process, thus belying any scheme to subvert the approval process outlined in the bylaws. The court also dismissed the FDCPA claim, noting a number of deficiencies, starting with unit owner's failure to establish that the association was a “debt collector” within the meaning of the statute. Once the court dismissed the federal claims, the court concluded that rather than remanding the state claims to state court, justice would better be served by dismissing those claims outright. The court indicated that the defendants should not have to defend against these meritless claims for a second time.

Co-Op Corporation Properly Ignores Abatements and Exemptions in Computing Tenant's Liability for Real Estate Taxes

Barnan Associates v. 196 Owners Corp.

NYLJ 3/26/10, p. 47, col. 1

Court of Appeals

(memorandum opinion)

In a commercial tenant's action against landlord, a co-operative corporation, for rent overcharges attributable to tax increases, the co-op corporation appealed from the Appellate Division's reversal of Supreme Court's dismissal of the complaint. The Court of Appeals reversed, holding that the co-op corporation had properly ignored tax abatements and exemptions in calculating the tenant's liability for increased real estate taxes.

In 1979, the commercial tenant leased the subject premises pursuant to a lease requiring tenant to pay 14.5% of the dollar amount of any increase in real estate taxes over and above the base amount. The lease further provided that the “base amount” shall be the “dollar amount computed by and resulting from the application of the 'base tax rate' to the 'base assessed valuation.'” The lease also provided that the “base assessed valuation” shall be determined “without regard or giving effect to any exemption or abatement.” Subsequently, the owner converted the building to cooperative ownership, and the association became the building's owner. Since the 1998-1999 tax year, tenant shareholders have availed themselves of tax abatements and tax exemptions targeted at condominium and co-op unit owners. The city calculated the abatements and exemptions, and directs that the co-op corporation subtract the amount of the abatement and exemption from the building's real estate tax assessment, and pay that amount directly to the tenant-shareholders. When the commercial tenant became aware of the situation, it objected that the co-op corporation was continuing to charge the commercial tenant 14.5% of the difference between the current real estate tax assessment and the base assessment, without subtracting from that difference the amount of the abatements and exemptions. When the the co-op corporation disagreed, the commercial tenant brought this action. Supreme Court granted the corporation's motion for summary judgment dismissing the complaint, but the Appellate Division modified, holding that the commercial tenant was entitled to summary judgment.

In reversing, the Court of Appeals concluded that the language of the lease agreement was unambiguous in requiring increases to be based on any increase in real estate taxes. The abatements and exemptions did not result in a decrease in the co-op corporation's real estate taxes, nor did it reduce the corporation's tax liability. The court also focused on the lease language explicitly excluding exemptions or abatements from any determination of base assessed valuation, and concluded that it would be illogical to take exemptions and abatements into account in a determination of tenant's liability for tax increases.

Merger Clause Does Not Bar Purchaser Claim Against Sponsor's Concealment of
A Wall That Blocked View

Hiralion Real Estate, Inc. v. 225 5th, LLC

NYLJ 4/1/10, p. 26, col. 1

Supreme Ct., N.Y. Cty.

(Friedman, J.)

In an action by a condominium unit purchaser for a declaration that it is entitled to rescission of its contract to purchase the unit, the condominium sponsor sought summary judgment. The court denied the summary judgment motion, concluding that the merger clause in the purchase contract did not bar the purchaser from raising questions of fact about the sponsor's concealment of a wall that blocked views from the apartment.

The purchaser entered into an agreement with the sponsor to purchase a duplex penthouse apartment for $6.6 million. The apartment was to be constructed by combining an existing 12th-floor unit with a new unit to be built on the 13th floor. The purchaser contends the sponsor represented that the apartment would have sprawling views, while in fact an 8-foot parapet blocks all views except the sky. The sponsor contended that the merger clause in the sale contract bars the purchaser's claims, and sought summary judgment.

In denying the sponsor's summary judgment motion, the court noted first that the contract's merger clause included a provision in which the purchaser acknowledged that it had not relied on the sponsor's representations on issues “including, but not limited to the description or physical condition of the Building or the Unit, the size or the dimensions of the Unit ' ” and a variety of other issues. Not included on the list was any mention of views. The court invoked the doctrine of “ inclusio unius est exclusio alterius” to conclude that the merger clause did not preclude representations about views as opposed to representations about the description or physical condition of the unit. The court then held that purchaser had raised questions of fact about representations made by the sponsor, about whether the architectural plans were ambiguous about the height of the parapet, and about whether the sponsor had concealed the existence of the parapet. As a result, the court held that the sponsor was not entitled to summary judgment.

Condominium Sales Exempt from Interstate Land Sales Full Disclosure Act

Romero v. Borden East River Realty LLC

NYLJ 3/16/10, p. 25, col. 3

U.S.Dist Ct., E.D.N.Y.

(Ross, J.)

In an action by pre-construction purchasers of condominium units to rescind their purchases, purchasers and sponsor each moved for summary judgment. The court granted sponsor's summary judgment motion, concluding that the sales qualified for an exemption from the Interstate Land Sales Full Disclosure Act (ILSA)(15 USC ' 1701-1720).

Related sponsors used a common promotional plan to market two separate condominium projects in Hunters Point, Queens. One condominium was ultimately to include 132 residential units, and the other was to include 72 residential units. Both condominiums were also to include roof terrace units and parking units that could only be sold, ultimately, to purchasers of the residential units. Sponsors filed offering plans with the New York State Attorney General on Sept. 11, 2007, and began selling the units. At the time sponsors began selling the units, they were unaware of the existence of ILSA, and made no effort to comply with its provisions. Sponsors began construction. Subsequently, between Jan. 26, 2009 and April 16, 2009, lawyers for a number of purchasers sent letters to sponsor exercising their purported right to terminate their purchaser pursuant to ILSA. Sponsors obtained temporary certificates of occupancy on Feb. 17, 2009 for one project and on March 12, 2009 for the other project. At that time, sponsors concluded that their plan was exempt from the registration requirements of ILSA, and the Department of Housing and Urban Development ultimately agreed. Purchasers then brought this action.

ILSA requires covered developers to provide a property report to each purchaser before executing the purchaser agreement, and also includes anti-fraud provisions. The issue in this case focused on exemptions from ILSA. Section 1702(a)(2) exempts from ILSA the sale or lease of any improved land on which there is a residential building, and ' 1702(a)(7) exempts sales to persons who acquire lots for the purpose of resale or lease to persons engaged in the business of constructing residential buildings. At the time sponsors obtained the certificate of occupancy, 57 residential units were unsold in the first condominium, 47 were unsold in the second condominium, and one that had previously been sold had been sold to a person who purported to have acquired it for resale. One unit was sold on the same day the sponsor obtained the certificate of occupancy. Sponsors therefore concluded that only 98 units (132 + 72 ' 57 ' 47 ' 1 ' 1) had been sold before the certificate of occupancy had been issued. Sponsors therefore claimed that they qualified for the ILSA exemption in 15 USC ' 1702(b), which exempts developers from ILSA's disclosure obligations, but not anti-fraud obligations, for “a subdivision containing fewer than one hundred lots which are not exempt under” ' 1701(a).

In awarding summary judgment to sponsors, the court rejected purchasers' argument that the sponsors could not piggyback the statute's exemptions, and also rejected their argument that the terrace and parking units should be counted as lots. The court noted that there the statute included no timing requirements, so that sponsor's plan to sell 100 units or more was not relevant; the issue was how many undeveloped lots the sponsor actually sold. The court then concluded that both the statute itself and HUD regulations supported sponsor's contention that a developer can combine the use of the various statutory exemptions. Finally, the court concluded that the roof terrace and parking units were not separate lots because they had no functional or practical existence separate from a residential lot. As a result, sponsors qualified for exemption from ILSA's disclosure provisions, and purchasers were not entitled to rescind.

Assessment Does Not Violate RICO or FDCPA

Pu v. Charles H. Greenthal Management Corp.

NYLJ 3/23/10, p. 31, col. 1

U.S. Dist. Ct., S.D.N.Y.

(Holwell, J.)

In an action by condominium owner against the condominium association and other defendants alleging fraud and violations of RICO and the Federal Debt Collection Practices Act, (FDCPA), the various defendants moved to dismiss. The court granted the motion, finding no basis for the state or federal claims.

The condominium association imposed a $380,000 assessment on unit owners (amounting to about $4,200 per owner) for hallway repairs. The association acted after 76% of the unit owner voted in favor of the assessment. Unit owner in this case, however, relied upon a bylaw provision requiring that all assessments in excess of $100,000 be approved by “in excess of two-thirds (2/3) in Common interest of all the Unit Owners and their mortgagees.” Unit owner contends that the association never obtained the consent of mortgagees. Unit owner argued that this failure made the assessment invalid, and that the association's efforts to collect the invalid assessment constituted a violation of RICO and FDCPA. The case was referred to a federal magistrate, who concluded that the condominium association had not violated the by-laws because the association had provided notice to the mortgagees, who did not object. Unit owner sought review of that determination.

In upholding the magistrate's report, the court first contrasted the provision in the disputed bylaw with other by-law provisions that explicitly required affirmative, written approval by mortgagees. The court therefore concluded that the mortgagee consent clause in this bylaw did not require affirmative written approval of the mortgagees; notice and failure to object was sufficient to comply with the bylaw terms. The court then turned to the federal claims and suggested that the availability of treble damages might have provided the motivation for including those claims. In any event, the court dismissed the RICO claim for failure to identify circumstances indicating conscious fraudulent behavior by the association. In particular, the court emphasized that the association had provided notice to all of the mortgagees, and had informed unit owners of the notice-and-objection process, thus belying any scheme to subvert the approval process outlined in the bylaws. The court also dismissed the FDCPA claim, noting a number of deficiencies, starting with unit owner's failure to establish that the association was a “debt collector” within the meaning of the statute. Once the court dismissed the federal claims, the court concluded that rather than remanding the state claims to state court, justice would better be served by dismissing those claims outright. The court indicated that the defendants should not have to defend against these meritless claims for a second time.

Co-Op Corporation Properly Ignores Abatements and Exemptions in Computing Tenant's Liability for Real Estate Taxes

Barnan Associates v. 196 Owners Corp.

NYLJ 3/26/10, p. 47, col. 1

Court of Appeals

(memorandum opinion)

In a commercial tenant's action against landlord, a co-operative corporation, for rent overcharges attributable to tax increases, the co-op corporation appealed from the Appellate Division's reversal of Supreme Court's dismissal of the complaint. The Court of Appeals reversed, holding that the co-op corporation had properly ignored tax abatements and exemptions in calculating the tenant's liability for increased real estate taxes.

In 1979, the commercial tenant leased the subject premises pursuant to a lease requiring tenant to pay 14.5% of the dollar amount of any increase in real estate taxes over and above the base amount. The lease further provided that the “base amount” shall be the “dollar amount computed by and resulting from the application of the 'base tax rate' to the 'base assessed valuation.'” The lease also provided that the “base assessed valuation” shall be determined “without regard or giving effect to any exemption or abatement.” Subsequently, the owner converted the building to cooperative ownership, and the association became the building's owner. Since the 1998-1999 tax year, tenant shareholders have availed themselves of tax abatements and tax exemptions targeted at condominium and co-op unit owners. The city calculated the abatements and exemptions, and directs that the co-op corporation subtract the amount of the abatement and exemption from the building's real estate tax assessment, and pay that amount directly to the tenant-shareholders. When the commercial tenant became aware of the situation, it objected that the co-op corporation was continuing to charge the commercial tenant 14.5% of the difference between the current real estate tax assessment and the base assessment, without subtracting from that difference the amount of the abatements and exemptions. When the the co-op corporation disagreed, the commercial tenant brought this action. Supreme Court granted the corporation's motion for summary judgment dismissing the complaint, but the Appellate Division modified, holding that the commercial tenant was entitled to summary judgment.

In reversing, the Court of Appeals concluded that the language of the lease agreement was unambiguous in requiring increases to be based on any increase in real estate taxes. The abatements and exemptions did not result in a decrease in the co-op corporation's real estate taxes, nor did it reduce the corporation's tax liability. The court also focused on the lease language explicitly excluding exemptions or abatements from any determination of base assessed valuation, and concluded that it would be illogical to take exemptions and abatements into account in a determination of tenant's liability for tax increases.

Merger Clause Does Not Bar Purchaser Claim Against Sponsor's Concealment of
A Wall That Blocked View

Hiralion Real Estate, Inc. v. 225 5th, LLC

NYLJ 4/1/10, p. 26, col. 1

Supreme Ct., N.Y. Cty.

(Friedman, J.)

In an action by a condominium unit purchaser for a declaration that it is entitled to rescission of its contract to purchase the unit, the condominium sponsor sought summary judgment. The court denied the summary judgment motion, concluding that the merger clause in the purchase contract did not bar the purchaser from raising questions of fact about the sponsor's concealment of a wall that blocked views from the apartment.

The purchaser entered into an agreement with the sponsor to purchase a duplex penthouse apartment for $6.6 million. The apartment was to be constructed by combining an existing 12th-floor unit with a new unit to be built on the 13th floor. The purchaser contends the sponsor represented that the apartment would have sprawling views, while in fact an 8-foot parapet blocks all views except the sky. The sponsor contended that the merger clause in the sale contract bars the purchaser's claims, and sought summary judgment.

In denying the sponsor's summary judgment motion, the court noted first that the contract's merger clause included a provision in which the purchaser acknowledged that it had not relied on the sponsor's representations on issues “including, but not limited to the description or physical condition of the Building or the Unit, the size or the dimensions of the Unit ' ” and a variety of other issues. Not included on the list was any mention of views. The court invoked the doctrine of “ inclusio unius est exclusio alterius” to conclude that the merger clause did not preclude representations about views as opposed to representations about the description or physical condition of the unit. The court then held that purchaser had raised questions of fact about representations made by the sponsor, about whether the architectural plans were ambiguous about the height of the parapet, and about whether the sponsor had concealed the existence of the parapet. As a result, the court held that the sponsor was not entitled to summary judgment.