Real Property Law

Court of Appeals (5-1 decision; majority opinion by Read, J; opinion dissenting in part by Graffeo, J.)

In a mortgage foreclosure action, mortgagee appealed from a determination that its interest enjoyed lesser priority than the interest of mechanics lienors. The Court of Appeals modified to hold that the portion of the mortgage loan that was used to pay off a prior mortgage on the subject land enjoyed priority over the mechanics lien, while the remainder of the mortgage was subordinate to the lien.

Mortgagors of several interconnected properties financed their purchase with a $7 million mortgage loan from a now-defunct bank. That mortgage was executed and recorded in 2005. In 2007, the predecessor of the current mortgagees agreed to lend mortgagors $10 million secured by a first mortgage. By the terms of the 2007 agreement, the loan proceeds were to be deposited in a trust account at the time the agreement was executed, and released by the trustee on the closing date. The $10 million was to be bifurcated into two tranches, a $5.5 million tranche, which was to be used for immediate repayment of the outstanding $7 million loan, and a $4.5 million tranche, which was to be used to finance redevelopment of the buildings on the parcel into condominiums and commercial space.

The parties never filed this 2007 agreement. They did, however, close on the $5.5 million tranche. On May 3, 2007, the mortgagee recorded an assignment of the mortgage along with a Mortgage Extension and Modification Agreement. The parties did not close on the $4.5 million tranche, but instead the trustee released $2.5 million, over time, to the mortgagors, pursuant to instructions of the mortgagor and mortgagee. In 2008, the parties amended the 2007 agreement to specify how the remainder of the $4.5 million would be used. The parties also modified the 2007 mortgage to increase the amount secured to $10 million, and recorded the mortgage.

Meanwhile, in late 2007 and early 2008, a number of parties who had engaged in construction work on the premises filed mechanics liens. In December 2008, mortgagee foreclosed on the mortgage, alleging that mortgagor had breached the agreement because mechanics liens totaling $3.755 million had been filed against the building, and because mortgagor had failed to pay real estate taxes. Mortgagee sought to establish first priority on the proceeds of the foreclosure sale. Mechanics lienors, who were named defendants, objected, contending that the 2007 agreement constituted a “Building loan contract” within the meaning of Lien Law section 22, and that the mortgagee's failure to record the contract resulted in a loss in priority to subsequent mechanics liens. Supreme Court agreed and the Appellate Division affirmed, holding that mechanics lienors enjoyed first priority. The mortgaged property was subsequently sold, and one of the mechanics lienors was the purchaser, for less than $1.4 million.

On mortgagee's appeal, the Court of Appeals first held that the 2007 agreement did constitute a building loan contract within the meaning of section 22, and that failure to record the agreement resulted in a loss of priority. The court noted that the purpose of section 22 was to permit contractors to know precisely how much money was made available to the owner for the project, and failure to record both that agreement and the subsequent 2008 amendment resulted in a loss of priority. But the Court of Appeals majority then held that section 22's “subordination penalty” did not apply to the $5.5 million in loan proceeds used to refinance the existing mortgage. The majority opinion emphasized that the $5.5 million tranche closed, and the 2007 mortgage was recorded, before any contractor began work on the project. Judge Graffeo, dissenting on this last point, argued that it would often be difficult to sort out what proportion of any loan was used for acquisition and what proportion for construction. She contended that section 22 should apply to the whole of the 2007 agreement, subordinating the entire mortgage loan to the mechanics liens.

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'Time Is of the Essence'

Westreich v. Bosler

NYLJ 5/23/13, p. 24, col. 2

AppDiv, First Dept.

(memorandum opinion)

In purchaser's action for return of a down payment, purchaser appealed from Supreme Court's grant of summary judgment to seller. The Appellate Division affirmed, holding that seller had effectively made time of the essence.

After the purchaser executed a contract agreeing to purchaser the subject apartment, seller's lawyer sent purchaser's lawyer a letter, on Feb. 11, 2009, indicating that “in the event you do not close, I shall release the escrow funds ' ” to seller. Purchaser failed to appear at the closing, and subsequently brought this action for return of the down payment, contending both that the language of the Feb. 11 letter was not sufficient to make time of the essence, and that even if the language was sufficient, the timing of the letter did not provide purchaser with reasonable notice that time was of the essence. On purchaser's motion for summary judgment, Supreme Court searched the record and awarded summary judgment to seller. Purchaser appealed.

In affirming, the Appellate Division first held that purchaser waived the timing objection by not raising that objection prior to closing. The court then turned to the language of the Feb. 11 notice, and held that use of the words “time is of the essence” is unnecessary to make time of the essence, so long as the notice provides a time for closing and warns that failure to close on that date will result in default. Here, the language provided sufficient language to purchaser, and purchaser's failure to appear entitled seller to keep the down payment.

COMMENT

When a sale contract does not specify that time is of the essence, either party can make time of the essence by setting a new date for closing that gives the other party a reasonable time in which to act, and informs the other party that if he or she does not perform by the designated date, he or she will be considered in default. The notice need not explicitly recite that “time is of the essence.” For instance, in Sohayegh v. Oberlander, 155 A.D.2d 436, the court held that seller had effectively made time of the essence by sending a letter setting a closing date and warning that he would not permit any additional adjournments and would hold the plaintiff in default if he failed to close title on that day. The court explicitly noted that “[a] party need not state specifically that time is of the essence.” Similarly, in Perillo v. De Martini, 54 A.D.2d 691, the Supreme Court, Appellate Division, held that a purchaser's letter to seller's counsel made time of the essence by stating unequivocally that, if closing did not take place on a date three weeks in the future, the contract would be “cancelled and void.” On the other hand, equivocal language can lead a court to conclude that the notice did not make time of the essence even if the notice says that the contract will be null and void if not performed by the stated date. Thus, in Mazzaferro v. Kings Park Butcher Shop, 121 A.D.2d 434, the words “please let me know of your availability” appear to have made the notice ineffective even though the following sentence indicated that the contract would be declared null and void if the contract did not close by the stated date.

Although including the words “time is of the essence” is helpful in making time of the essence, those words are not always, by themselves, sufficient. For instance, in Nehmadi v. Davis, 63 A.D.3d 1125, the Second Department held that a letter dated Nov. 8, 2007, sent to purchaser advising him that the closing was scheduled for Dec. 13, 2007 and time was of the essence did not effectively make time of the essence because it did not contain language informing the buyer that he risked default by not appearing at the closing. But see 76 North Associates, Appellant, v. Theil Management Corp., 132 A.D.2d 695 (appearing to hold a notice sufficient when it provided a reasonable date and indicated that “time is of the essence.”). And when a notice indicates that time is of the essence and provides a closing date before the original closing, the notice may be ineffective. Thus, in North Triphammer Development Corp. v. Ithaca Associates, 704 F. Supp. 422, the court held that a notice was ineffective to make time of the essence, despite use of the words “time is of the essence.” because of the equivocal language used and because the date provided in the notice was earlier than the closing date provided in the original sale contract. The equivocal letter recited, “[b]y way of postscript, I merely want to note that time is of the essence for a closing and your cooperation would be greatly appreciated.” In addition to emphasizing the vague language, the court noted that “[n]o case has been cited, and none has been found, where time was unilaterally made of the essence of a contract before the date set forth in the contract has passed.

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'As Is' Clause

B&C Realty Co v. 159 Emmut Property LLC

NYLJ 6/3/13, p. 18, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by purchaser for fraud, conversion, and breach of the implied covenant of good faith and fair dealing, purchaser appealed from Supreme Court's dismissal of the complaint and vacatur of the notice of pendency. The Appellate Division modified to dismiss the claim for breach of the implied covenant without prejudice rather than with prejudice, but otherwise affirmed, emphasizing the “as is” provision in the contract of sale.

The parties entered into a contract for a two-phase deal. In the first phase, to be completed by Jan. 6, 2009, seller would transfer a 7% interest in the subject building to purchaser for $2 million. Then, seller would transfer the other 93% of the building by Oct. 6, 2009. If the closing of the second phase did not occur by the stated date, purchaser would transfer back its 7% and forfeit its $2 million. Purchaser executed the return deed and placed it into escrow. Then, on Jan. 6, 2009, the parties executed another sale contract under which purchaser agreed to take title “as is,” and providing that neither party relied on any statement not set forth in the contract. Purchaser did not, however, close on the remaining 93%. Purchaser alleges that it discovered that the eighth story of the building was illegally constructed, despite seller's alleged representation that the building was a legal eight-story building with two legal units on the top floor. When seller refused to return the $2 million and recorded the return deed for the 7%, purchaser brought this action. Supreme Court dismissed the complaint, and purchaser appealed.

In upholding Supreme Court's dismissal of the claim for fraud and fraudulent inducement, the Appellate Division held that purchaser could not have reasonably relied on seller's representations in light of the “as is” clause in the January 2009 sale contract. Moreover, any claim that seller hid the difficulty by sheetrocking the entrance to the eighth floor was precluded because purchaser could easily have discovered the problem by comparing the building's 15 temporary C of Os, all of which showed eight stories, with the “as-built” plans, which showed only seven stories. The court also dismissed the conversion claim. The court first held that no claim for conversion of real property exists. Then the court held that the claim for conversion of $2 million could not stand because purchaser tacitly conceded that the transfer of $2 million was authorized. The court did, however, concede that under certain circumstances, purchaser might be able to state a claim for breach of the implied covenant of good faith and fair dealing. As a result, the court modified to dismiss that claim without prejudice.'

Seller Had No Duty to Disclose Recorded Easement

Schotland v. Brown Harris Stevens Brooklyn LLC

NYLJ 6/7/13, p. 27, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In purchaser's action for fraud, misrepresentation, and breach of a deed covenant, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division modified to reinstate the claim for breach of the deed covenant against grantor's acts, but otherwise affirmed, holding that seller had no duty to disclose a recorded easement to purchasers.

Sellers sold the subject residential property to purchaser in 2010 for $3.2 million. The deed included a covenant against grantor's acts. Eight years earlier, sellers had conveyed a conservation easement to the National Architectural Trust. The easement precluded all changes to the property's fa'ade and exterior without express written consent of the trust. That easement was recorded in 2003, but purchasers contend that they did not learn of the easement until after their purchase. They then brought this action for fraud, negligent misrepresentation, and breach of the covenant against grantor's acts. Supreme Court dismissed the complaint.

The Appellate Division upheld dismissal of the fraud and misrepresentation claims, noting that New York generally adheres to the doctrine of caveat emptor except in cases of active concealment. Here, at the time of the sale, the easement was a matter of public record, precluding any active concealment claim. On the other hand, the court indicated that sellers had not submitted documentary evidence that would conclusively establish a defense to the claim that they breached the deed covenant against grantor's acts. The court noted that the covenant recited that sellers had not done anything to encumber the property, and purchasers alleged that by selling the property subject to the easement, sellers violated that covenant.

COMMENT

Unlike a covenant against encumbrances, which a grantor can breach by transferring title that turns out to be subject to an encumbrance of which the grantor is entirely unaware, a grantor can only breach a covenant against grantor's acts if the grantor is responsible for creation of the encumbrance. Real Property Law ' 253(3) provides expressly that a covenant that the land is free from encumbrances (covenant against encumbrances) promises that the land is clear of all former gifts, judgments, taxes, assessments, liens, and encumbrances of any kind. Conversely, ' 253(6) construes a covenant that the grantor has not encumbered the property (covenant against grantor's acts) to provide that the grantor, specifically, has not made, done, committed, executed, or suffered any act causing the property, or any part of the property to be impeached, charged, or encumbered in any manner.

Aside from the obvious breach when the grantor conveys an easement or creates a lien before transferring title, a grantor can breach the covenant against grantor's acts by taking action that significantly limits the grantee's use of the conveyed land. For instance, in Costa v. Breslow, 125 Misc.2d 424, the court held that grantors breached the covenant against grantor's acts when the grantors negotiated payment for consequential damages resulting from a neighboring condemnation, and then transferred the land without mention of the damages or the condemnation. Additionally, in Bronen v. Marmer, 27 Misc.2d 868 the court held that grantor's subdivision of the land, which made it unlawful to use an existing building on the land, was sufficient to breach the covenant against grantor's acts.

On the other hand, there are at least three circumstances in which a grantor's actions would not constitute a breach of the covenant: first, cases in which the grantee has knowledge of the encumbrance at the time of the conveyance, second, cases in which grantor's actions affect title only to neighboring land, not the land described in the deed, and third, cases in which the alleged encumbrance would obligate the grantee to make payments only if the grantee made a particular use of the land.

Bibbo v. 31-30, LLC, 105 A.D.3d 791, illustrates the principle that a grantee who takes a deed with actual or record notice of a grantor's acts may not later sue for breach of the covenant. In Bibbo, the court dismissed a claim by purchaser of a two-family house located on a portion of grantor's larger parcel who sued when he learned that he could not expand the house because grantor had recorded a zoning lot declaration allocating most of the parcel's development rights to the grantor's retained land. The court noted that the contract itself indicated that the property was being conveyed subject to a zoning lot declaration allowing construction on the grantor's retained land, and that the grantor had recorded the zoning lot declaration before executing the deed.

A grantor also does not breach the covenant against grantor's acts by making improvements to neighboring land that would lead a purchaser to believe that the deed conveys more land than the deed actually describes. Thus, in Reddy v. Scubla, 34 Misc.3d 1215(A), the court held that the grantors' installation of a fence and deck on neighboring property did not breach the covenant against grantor's acts because the grantor never purported to convey the neighboring land by deed.

Last, a financial obligation imposed against conveyed property that would be triggered only by a specific act by the transferee does not constitute a burden encompassed by the covenant against grantor's acts. Thus, in Bay Pasture Co. v. Schwartz, 116 Misc.2d 48, the court held that a grantor's agreement that any owner of the land would pay a sewer assessment prior to issuance of a certificate of occupancy did not breach the covenant against grantor's acts because no lien existed at the time of closing. The court noted that payments would never become due unless the grantee sought a certificate of occupancy.''

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Title Insurer Liable

Nastasi v. County of Suffolk

NYLJ 5/31/13, p. 28, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In landowner's action against its title insurer for breach of its title insurance policy, landowner appealed from Supreme Court's grant of summary judgment to the title insurer. The Appellate Division modified, holding that landowner had established breach, but that questions of fact remained about whether landowner had suffered harm.

In 2002, landowner purchased the subject property located on Dune Road in the Town of Southampton, and purchased a title insurance policy. Apparently, neither landowner nor the title insurer knew of a boundary line agreement that had been reached between landowners in the area and the State of New York to resolve a prior litigation over maintenance of the beach area. That agreement, dated in 1996, conveyed to the state title to portions of the affected properties on Dune Road, in return for the state's agreement that it would maintain and renew beach areas. Although dated in 1996, the agreement was not recorded until 2003. After landowner's purchase, landowner discovered that, as a result of the boundary line agreement, landowner had purchased less than one-half of the property described in their deed. They then brought this action against their title insurer. From Supreme Court's grant of summary judgment to the title insurer, landowner appealed.

The Appellate Division started by holding that the title insurer had failed to establish that the title defect fell within an exclusion of the policy for defects created subsequent to the date of the policy. The court noted that the boundary line agreement was “created” in 1996, not when it was recorded in 2003. But the court held that questions of fact remained about whether the defect fell within an exclusion for defects “resulting in no loss or damages to the insured claimant.” The court observed that title insurer's appraiser opined that the boundary agreement actually increased the value of landowner's parcel, while landowner's appraiser concluded that the reduction in square footage reduced the market value of the parcel, raising an issue of fact that precluded grant of summary judgment.

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Homeowner Impliedly Consented to Pay Association Fee

Sea Gate Association v. Vozny

NYLJ 6/5/13, p. 21, col. 3

Supreme Ct., Kings Cty.

(Schmidt, J.)

In an action by homeowners association against a homeowner to recover outstanding dues and charges, the association moved for summary judgment. The court granted the motion, holding that the owner had impliedly consented to pay the charges by purchasing a home in the community, even though no obligation to pay fees appeared in owner's chain of title.

Owner purchased a home in the Sea Gate neighborhood of Coney Island in December 2002. Owner executed a mortgage to Chase to secure a loan of $330,000. Owner paid all dues and charges assessed by the homeowners association until 2007, when owner stopped paying. Chase, as mortgagee, then began making payments from owner's escrow account, but ultimately owner fell into default, and the association brought this action. Owner contends that it is not liable for fees because it had never agreed to pay the fees and no covenant obligating it to pay fees appeared anywhere in its chain of title. Owner also contended that the fees assessed were out of proportion to any services provided by the association.

In granting summary judgment to the association, the court noted that because the community is a gated community, owner must have been aware, at the time of purchase, that someone was paying for maintenance of common facilities. The court indicated that purchase of the property with that knowledge created an implied in fact agreement to pay a proportionate share of the cost of maintaining the facilities, even if no express covenant appeared in owner's deed. The court emphasized that the owner had in fact paid the charges for five years without any protest, suggesting that the owner understood its obligation to pay.

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Mortgagee Breached by Accelerating Without Complying with Condition Precedent

Seidman v. Industrial Recycling Properties, Inc.

NYLJ 5/24/13, p. 22, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's denial of its motion for summary judgment on its counterclaim for damages for breach of contract. The Appellate Division modified to grant the motion as to liability, but held that questions of fact remained about mortgagor's damages.

Mortgagee brought this foreclosure action after accelerating the mortgage due to mortgagor's failure to maintain insurance on the property. On a prior appeal, the Appellate Division had held that the foreclosure action should have been dismissed because mortgagee did not comply with a condition precedent permitting acceleration of the mortgage debt. By that time, however, the property had been sold pursuant to Supreme Court's judgment of foreclosure, which had not been stayed pending appeal. Remaining before Supreme Court, however, was mortgagor's counterclaim for damages as a result of mortgagee's alleged breach. Supreme Court denied the motion, and mortgagor appealed.

In modifying, the Appellate Division held that mortgagor had established breach by the mortgagee, and mortgagee had not demonstrated how discovery would lead to relevant evidence to support its position. But the court held that mortgagor was not entitled to summary judgment on an award of damages in a specific amount. The court rejected mortgagor's argument that damages should be assessed in the amount of the value of the property on the date of the foreclosure sale, plus interest. The court indicated that damages should be assessed in an amount that would put mortgagor in as good a position as it would have been had mortgagee performed, but a trial would be necessary to determine that amount.

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Failure to Record Loan Agreement

Altshuler Shaham Provident Funds, Ltd. V. GML Tower, LLC

NYLJ 6/12/13, p. 22, col. 5

Court of Appeals (5-1 decision; majority opinion by Read, J; opinion dissenting in part by Graffeo, J.)

In a mortgage foreclosure action, mortgagee appealed from a determination that its interest enjoyed lesser priority than the interest of mechanics lienors. The Court of Appeals modified to hold that the portion of the mortgage loan that was used to pay off a prior mortgage on the subject land enjoyed priority over the mechanics lien, while the remainder of the mortgage was subordinate to the lien.

Mortgagors of several interconnected properties financed their purchase with a $7 million mortgage loan from a now-defunct bank. That mortgage was executed and recorded in 2005. In 2007, the predecessor of the current mortgagees agreed to lend mortgagors $10 million secured by a first mortgage. By the terms of the 2007 agreement, the loan proceeds were to be deposited in a trust account at the time the agreement was executed, and released by the trustee on the closing date. The $10 million was to be bifurcated into two tranches, a $5.5 million tranche, which was to be used for immediate repayment of the outstanding $7 million loan, and a $4.5 million tranche, which was to be used to finance redevelopment of the buildings on the parcel into condominiums and commercial space.

The parties never filed this 2007 agreement. They did, however, close on the $5.5 million tranche. On May 3, 2007, the mortgagee recorded an assignment of the mortgage along with a Mortgage Extension and Modification Agreement. The parties did not close on the $4.5 million tranche, but instead the trustee released $2.5 million, over time, to the mortgagors, pursuant to instructions of the mortgagor and mortgagee. In 2008, the parties amended the 2007 agreement to specify how the remainder of the $4.5 million would be used. The parties also modified the 2007 mortgage to increase the amount secured to $10 million, and recorded the mortgage.

Meanwhile, in late 2007 and early 2008, a number of parties who had engaged in construction work on the premises filed mechanics liens. In December 2008, mortgagee foreclosed on the mortgage, alleging that mortgagor had breached the agreement because mechanics liens totaling $3.755 million had been filed against the building, and because mortgagor had failed to pay real estate taxes. Mortgagee sought to establish first priority on the proceeds of the foreclosure sale. Mechanics lienors, who were named defendants, objected, contending that the 2007 agreement constituted a “Building loan contract” within the meaning of Lien Law section 22, and that the mortgagee's failure to record the contract resulted in a loss in priority to subsequent mechanics liens. Supreme Court agreed and the Appellate Division affirmed, holding that mechanics lienors enjoyed first priority. The mortgaged property was subsequently sold, and one of the mechanics lienors was the purchaser, for less than $1.4 million.

On mortgagee's appeal, the Court of Appeals first held that the 2007 agreement did constitute a building loan contract within the meaning of section 22, and that failure to record the agreement resulted in a loss of priority. The court noted that the purpose of section 22 was to permit contractors to know precisely how much money was made available to the owner for the project, and failure to record both that agreement and the subsequent 2008 amendment resulted in a loss of priority. But the Court of Appeals majority then held that section 22's “subordination penalty” did not apply to the $5.5 million in loan proceeds used to refinance the existing mortgage. The majority opinion emphasized that the $5.5 million tranche closed, and the 2007 mortgage was recorded, before any contractor began work on the project. Judge Graffeo, dissenting on this last point, argued that it would often be difficult to sort out what proportion of any loan was used for acquisition and what proportion for construction. She contended that section 22 should apply to the whole of the 2007 agreement, subordinating the entire mortgage loan to the mechanics liens.

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'Time Is of the Essence'

Westreich v. Bosler

NYLJ 5/23/13, p. 24, col. 2

AppDiv, First Dept.

(memorandum opinion)

In purchaser's action for return of a down payment, purchaser appealed from Supreme Court's grant of summary judgment to seller. The Appellate Division affirmed, holding that seller had effectively made time of the essence.

After the purchaser executed a contract agreeing to purchaser the subject apartment, seller's lawyer sent purchaser's lawyer a letter, on Feb. 11, 2009, indicating that “in the event you do not close, I shall release the escrow funds ' ” to seller. Purchaser failed to appear at the closing, and subsequently brought this action for return of the down payment, contending both that the language of the Feb. 11 letter was not sufficient to make time of the essence, and that even if the language was sufficient, the timing of the letter did not provide purchaser with reasonable notice that time was of the essence. On purchaser's motion for summary judgment, Supreme Court searched the record and awarded summary judgment to seller. Purchaser appealed.

In affirming, the Appellate Division first held that purchaser waived the timing objection by not raising that objection prior to closing. The court then turned to the language of the Feb. 11 notice, and held that use of the words “time is of the essence” is unnecessary to make time of the essence, so long as the notice provides a time for closing and warns that failure to close on that date will result in default. Here, the language provided sufficient language to purchaser, and purchaser's failure to appear entitled seller to keep the down payment.

COMMENT

When a sale contract does not specify that time is of the essence, either party can make time of the essence by setting a new date for closing that gives the other party a reasonable time in which to act, and informs the other party that if he or she does not perform by the designated date, he or she will be considered in default. The notice need not explicitly recite that “time is of the essence.” For instance, in Sohayegh v. Oberlander, 155 A.D.2d 436, the court held that seller had effectively made time of the essence by sending a letter setting a closing date and warning that he would not permit any additional adjournments and would hold the plaintiff in default if he failed to close title on that day. The court explicitly noted that “[a] party need not state specifically that time is of the essence.” Similarly, in Perillo v. De Martini, 54 A.D.2d 691, the Supreme Court, Appellate Division, held that a purchaser's letter to seller's counsel made time of the essence by stating unequivocally that, if closing did not take place on a date three weeks in the future, the contract would be “cancelled and void.” On the other hand, equivocal language can lead a court to conclude that the notice did not make time of the essence even if the notice says that the contract will be null and void if not performed by the stated date. Thus, in Mazzaferro v. Kings Park Butcher Shop, 121 A.D.2d 434, the words “please let me know of your availability” appear to have made the notice ineffective even though the following sentence indicated that the contract would be declared null and void if the contract did not close by the stated date.

Although including the words “time is of the essence” is helpful in making time of the essence, those words are not always, by themselves, sufficient. For instance, in Nehmadi v. Davis, 63 A.D.3d 1125, the Second Department held that a letter dated Nov. 8, 2007, sent to purchaser advising him that the closing was scheduled for Dec. 13, 2007 and time was of the essence did not effectively make time of the essence because it did not contain language informing the buyer that he risked default by not appearing at the closing. But see 76 North Associates, Appellant, v. Theil Management Corp., 132 A.D.2d 695 (appearing to hold a notice sufficient when it provided a reasonable date and indicated that “time is of the essence.”). And when a notice indicates that time is of the essence and provides a closing date before the original closing, the notice may be ineffective. Thus, in North Triphammer Development Corp. v. Ithaca Associates, 704 F. Supp. 422, the court held that a notice was ineffective to make time of the essence, despite use of the words “time is of the essence.” because of the equivocal language used and because the date provided in the notice was earlier than the closing date provided in the original sale contract. The equivocal letter recited, “[b]y way of postscript, I merely want to note that time is of the essence for a closing and your cooperation would be greatly appreciated.” In addition to emphasizing the vague language, the court noted that “[n]o case has been cited, and none has been found, where time was unilaterally made of the essence of a contract before the date set forth in the contract has passed.

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'As Is' Clause

B&C Realty Co v. 159 Emmut Property LLC

NYLJ 6/3/13, p. 18, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by purchaser for fraud, conversion, and breach of the implied covenant of good faith and fair dealing, purchaser appealed from Supreme Court's dismissal of the complaint and vacatur of the notice of pendency. The Appellate Division modified to dismiss the claim for breach of the implied covenant without prejudice rather than with prejudice, but otherwise affirmed, emphasizing the “as is” provision in the contract of sale.

The parties entered into a contract for a two-phase deal. In the first phase, to be completed by Jan. 6, 2009, seller would transfer a 7% interest in the subject building to purchaser for $2 million. Then, seller would transfer the other 93% of the building by Oct. 6, 2009. If the closing of the second phase did not occur by the stated date, purchaser would transfer back its 7% and forfeit its $2 million. Purchaser executed the return deed and placed it into escrow. Then, on Jan. 6, 2009, the parties executed another sale contract under which purchaser agreed to take title “as is,” and providing that neither party relied on any statement not set forth in the contract. Purchaser did not, however, close on the remaining 93%. Purchaser alleges that it discovered that the eighth story of the building was illegally constructed, despite seller's alleged representation that the building was a legal eight-story building with two legal units on the top floor. When seller refused to return the $2 million and recorded the return deed for the 7%, purchaser brought this action. Supreme Court dismissed the complaint, and purchaser appealed.

In upholding Supreme Court's dismissal of the claim for fraud and fraudulent inducement, the Appellate Division held that purchaser could not have reasonably relied on seller's representations in light of the “as is” clause in the January 2009 sale contract. Moreover, any claim that seller hid the difficulty by sheetrocking the entrance to the eighth floor was precluded because purchaser could easily have discovered the problem by comparing the building's 15 temporary C of Os, all of which showed eight stories, with the “as-built” plans, which showed only seven stories. The court also dismissed the conversion claim. The court first held that no claim for conversion of real property exists. Then the court held that the claim for conversion of $2 million could not stand because purchaser tacitly conceded that the transfer of $2 million was authorized. The court did, however, concede that under certain circumstances, purchaser might be able to state a claim for breach of the implied covenant of good faith and fair dealing. As a result, the court modified to dismiss that claim without prejudice.'

Seller Had No Duty to Disclose Recorded Easement

Schotland v. Brown Harris Stevens Brooklyn LLC

NYLJ 6/7/13, p. 27, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In purchaser's action for fraud, misrepresentation, and breach of a deed covenant, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division modified to reinstate the claim for breach of the deed covenant against grantor's acts, but otherwise affirmed, holding that seller had no duty to disclose a recorded easement to purchasers.

Sellers sold the subject residential property to purchaser in 2010 for $3.2 million. The deed included a covenant against grantor's acts. Eight years earlier, sellers had conveyed a conservation easement to the National Architectural Trust. The easement precluded all changes to the property's fa'ade and exterior without express written consent of the trust. That easement was recorded in 2003, but purchasers contend that they did not learn of the easement until after their purchase. They then brought this action for fraud, negligent misrepresentation, and breach of the covenant against grantor's acts. Supreme Court dismissed the complaint.

The Appellate Division upheld dismissal of the fraud and misrepresentation claims, noting that New York generally adheres to the doctrine of caveat emptor except in cases of active concealment. Here, at the time of the sale, the easement was a matter of public record, precluding any active concealment claim. On the other hand, the court indicated that sellers had not submitted documentary evidence that would conclusively establish a defense to the claim that they breached the deed covenant against grantor's acts. The court noted that the covenant recited that sellers had not done anything to encumber the property, and purchasers alleged that by selling the property subject to the easement, sellers violated that covenant.

COMMENT

Unlike a covenant against encumbrances, which a grantor can breach by transferring title that turns out to be subject to an encumbrance of which the grantor is entirely unaware, a grantor can only breach a covenant against grantor's acts if the grantor is responsible for creation of the encumbrance. Real Property Law ' 253(3) provides expressly that a covenant that the land is free from encumbrances (covenant against encumbrances) promises that the land is clear of all former gifts, judgments, taxes, assessments, liens, and encumbrances of any kind. Conversely, ' 253(6) construes a covenant that the grantor has not encumbered the property (covenant against grantor's acts) to provide that the grantor, specifically, has not made, done, committed, executed, or suffered any act causing the property, or any part of the property to be impeached, charged, or encumbered in any manner.

Aside from the obvious breach when the grantor conveys an easement or creates a lien before transferring title, a grantor can breach the covenant against grantor's acts by taking action that significantly limits the grantee's use of the conveyed land. For instance, in Costa v. Breslow, 125 Misc.2d 424, the court held that grantors breached the covenant against grantor's acts when the grantors negotiated payment for consequential damages resulting from a neighboring condemnation, and then transferred the land without mention of the damages or the condemnation. Additionally, in Bronen v. Marmer, 27 Misc.2d 868 the court held that grantor's subdivision of the land, which made it unlawful to use an existing building on the land, was sufficient to breach the covenant against grantor's acts.

On the other hand, there are at least three circumstances in which a grantor's actions would not constitute a breach of the covenant: first, cases in which the grantee has knowledge of the encumbrance at the time of the conveyance, second, cases in which grantor's actions affect title only to neighboring land, not the land described in the deed, and third, cases in which the alleged encumbrance would obligate the grantee to make payments only if the grantee made a particular use of the land.

Bibbo v. 31-30, LLC, 105 A.D.3d 791, illustrates the principle that a grantee who takes a deed with actual or record notice of a grantor's acts may not later sue for breach of the covenant. In Bibbo, the court dismissed a claim by purchaser of a two-family house located on a portion of grantor's larger parcel who sued when he learned that he could not expand the house because grantor had recorded a zoning lot declaration allocating most of the parcel's development rights to the grantor's retained land. The court noted that the contract itself indicated that the property was being conveyed subject to a zoning lot declaration allowing construction on the grantor's retained land, and that the grantor had recorded the zoning lot declaration before executing the deed.

A grantor also does not breach the covenant against grantor's acts by making improvements to neighboring land that would lead a purchaser to believe that the deed conveys more land than the deed actually describes. Thus, in Reddy v. Scubla, 3 4 Misc.3d 1215(A), the court held that the grantors' installation of a fence and deck on neighboring property did not breach the covenant against grantor's acts because the grantor never purported to convey the neighboring land by deed.

Last, a financial obligation imposed against conveyed property that would be triggered only by a specific act by the transferee does not constitute a burden encompassed by the covenant against grantor's acts. Thus, in Bay Pasture Co. v. Schwartz, 116 Misc.2d 48, the court held that a grantor's agreement that any owner of the land would pay a sewer assessment prior to issuance of a certificate of occupancy did not breach the covenant against grantor's acts because no lien existed at the time of closing . The court noted that payments would never become due unless the grantee sought a certificate of occupancy.''

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Title Insurer Liable

Nastasi v. County of Suffolk

NYLJ 5/31/13, p. 28, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In landowner's action against its title insurer for breach of its title insurance policy, landowner appealed from Supreme Court's grant of summary judgment to the title insurer. The Appellate Division modified, holding that landowner had established breach, but that questions of fact remained about whether landowner had suffered harm.

In 2002, landowner purchased the subject property located on Dune Road in the Town of Southampton, and purchased a title insurance policy. Apparently, neither landowner nor the title insurer knew of a boundary line agreement that had been reached between landowners in the area and the State of New York to resolve a prior litigation over maintenance of the beach area. That agreement, dated in 1996, conveyed to the state title to portions of the affected properties on Dune Road, in return for the state's agreement that it would maintain and renew beach areas. Although dated in 1996, the agreement was not recorded until 2003. After landowner's purchase, landowner discovered that, as a result of the boundary line agreement, landowner had purchased less than one-half of the property described in their deed. They then brought this action against their title insurer. From Supreme Court's grant of summary judgment to the title insurer, landowner appealed.

The Appellate Division started by holding that the title insurer had failed to establish that the title defect fell within an exclusion of the policy for defects created subsequent to the date of the policy. The court noted that the boundary line agreement was “created” in 1996, not when it was recorded in 2003. But the court held that questions of fact remained about whether the defect fell within an exclusion for defects “resulting in no loss or damages to the insured claimant.” The court observed that title insurer's appraiser opined that the boundary agreement actually increased the value of landowner's parcel, while landowner's appraiser concluded that the reduction in square footage reduced the market value of the parcel, raising an issue of fact that precluded grant of summary judgment.

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Homeowner Impliedly Consented to Pay Association Fee

Sea Gate Association v. Vozny

NYLJ 6/5/13, p. 21, col. 3

Supreme Ct., Kings Cty.

(Schmidt, J.)

In an action by homeowners association against a homeowner to recover outstanding dues and charges, the association moved for summary judgment. The court granted the motion, holding that the owner had impliedly consented to pay the charges by purchasing a home in the community, even though no obligation to pay fees appeared in owner's chain of title.

Owner purchased a home in the Sea Gate neighborhood of Coney Island in December 2002. Owner executed a mortgage to Chase to secure a loan of $330,000. Owner paid all dues and charges assessed by the homeowners association until 2007, when owner stopped paying. Chase, as mortgagee, then began making payments from owner's escrow account, but ultimately owner fell into default, and the association brought this action. Owner contends that it is not liable for fees because it had never agreed to pay the fees and no covenant obligating it to pay fees appeared anywhere in its chain of title. Owner also contended that the fees assessed were out of proportion to any services provided by the association.

In granting summary judgment to the association, the court noted that because the community is a gated community, owner must have been aware, at the time of purchase, that someone was paying for maintenance of common facilities. The court indicated that purchase of the property with that knowledge created an implied in fact agreement to pay a proportionate share of the cost of maintaining the facilities, even if no express covenant appeared in owner's deed. The court emphasized that the owner had in fact paid the charges for five years without any protest, suggesting that the owner understood its obligation to pay.

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Mortgagee Breached by Accelerating Without Complying with Condition Precedent

Seidman v. Industrial Recycling Properties, Inc.

NYLJ 5/24/13, p. 22, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's denial of its motion for summary judgment on its counterclaim for damages for breach of contract. The Appellate Division modified to grant the motion as to liability, but held that questions of fact remained about mortgagor's damages.

Mortgagee brought this foreclosure action after accelerating the mortgage due to mortgagor's failure to maintain insurance on the property. On a prior appeal, the Appellate Division had held that the foreclosure action should have been dismissed because mortgagee did not comply with a condition precedent permitting acceleration of the mortgage debt. By that time, however, the property had been sold pursuant to Supreme Court's judgment of foreclosure, which had not been stayed pending appeal. Remaining before Supreme Court, however, was mortgagor's counterclaim for damages as a result of mortgagee's alleged breach. Supreme Court denied the motion, and mortgagor appealed.

In modifying, the Appellate Division held that mortgagor had established breach by the mortgagee, and mortgagee had not demonstrated how discovery would lead to relevant evidence to support its position. But the court held that mortgagor was not entitled to summary judgment on an award of damages in a specific amount. The court rejected mortgagor's argument that damages should be assessed in the amount of the value of the property on the date of the foreclosure sale, plus interest. The court indicated that damages should be assessed in an amount that would put mortgagor in as good a position as it would have been had mortgagee performed, but a trial would be necessary to determine that amount.

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