Co-op Sale Contracts: Allocating the Risk of Potential Co-op Board Interference

When may a coop buyer escape from a sale contract based on erroneous statements made by the coop board that would, if accurate, interfere with the buyer's right to occupy space associated with the coop shares the buyer has contracted to purchase? The First Department recently faced that issue in Pastor v. DeGaetano' 2015 WL 1781530, and held that the seller was not entitled to summary judgment on the buyer's claim for return of his down payment, emphasizing that a coop buyer is entitled to an assurance that the coop corporation would not disturb his exclusive possession if he consummates the sale.

The Facts

In March 2012, the buyer contracted to purchase shares associated with a penthouse apartment. The buyer paid the seller (an estate) a down payment of $2.75 million on a purchase price of $27.5 million. The proprietary lease associated with the shares provided that the owner of the penthouse “shall have and enjoy the exclusive use of the roof appurtenant to such apartment [i.e.' the terrace] as shown on the plan of the penthouse,” subject to the coop's right to access the roof for maintenance. The contract of sale included a rider requiring the seller to deliver to the buyer, “at or prior to Closing the 'plan of the penthouse' ('Plan') referred to in the Proprietary Lease ' from the [Coop] or an agent thereof, ' which Plan shall be substantially similar to that of the floor plan annexed hereto as Exhibit A.”

In May 2012, the coop board's managing agent informed the buyer that the roof above the penthouse constituted a common area of the building accessible to shareholders at any time by means of a staircase and a path that traverses the penthouse terrace. The staircase had previously been used only for maintenance purposes. Although the coop board approved the sale in June 2012, the board then proposed that the buyer and seller sign an agreement acknowledging that the penthouse plan was lost, that the penthouse roof is a common area, and that coop shareholders have the right to use the pathway along the penthouse terrace to obtain access to the stairs leading to the penthouse roof. Neither the buyer nor the estate's representatives signed the proposed agreement.

Instead, the estate brought an action against the coop board for an order directing the coop to provide a copy of the plan of the penthouse and declaring that the terrace is for the exclusive use of the penthouse tenant, not available to other residents of the building as a pathway to the upper roof. In response to a court order, the coop provided the estate with a copy of the floor plan for the penthouse unit (the May plan), but the buyer informed the seller that it was cancelling the contract because the May plan was not substantially similar to the plan attached to the sale contract. The Estate then went back to court and, after seeking partial summary judgment, obtained a new floor plan (the June Plan) that omitted the maintenance staircase. The court concluded that the June Plan was substantially similar to the contract plan.

The Estate then sent the June plan to the buyer, along with a notice scheduling a time-is-of-the-essence closing date. The estate warned the buyer that failure to appear at the closing would be deemed a breach, entitling the estate to retain the down payment. The buyer rejected the estate's attempt to set a closing date, asserting that the contract permitted the seller to submit one plan at or prior to closing, and the estate did that when it submitted the May plan ' which, in the buyer's view, was not substantially similar to the contract plan. The buyer did not show up at the scheduled closing, and then brought this action seeking to recover its down payment. Supreme Court granted the estate's summary judgment motion, and the buyer appealed.

The Opinion

In reversing, the Appellate Division emphasized the lingering doubt that remained about whether the coop would recognize the owner's right to exclusive use of the terrace. In light of that lingering doubt, the court held that the estate had not demonstrated that it was ready, willing, and able to perform on the closing date, and was therefore not entitled to summary judgment. In reaching that conclusion, the court invoked language from real estate cases dealing with marketable title: “[A] purchaser ought not to be compelled to take property, the possession or title of which he may be obliged to defend by litigation.” (Voorheesville, Rod & Gun Club v. Tompkin , 82 NY2d 564, quoting verbatim from Dyker Meadow Land & Improvement Co. v. Cook, 159 NY 6, decided in 1899).

The court conceded that discovery might reveal that the buyer was given adequate assurances that the board would not interfere with exclusive use of the terrace, and that discovery might reveal that, at closing, the estate offered a plan “substantially similar” to the contract plan. But buyer had raised enough questions to preclude summary judgment.

Outstanding Issues

In the Pastor case, by the time of the scheduled closing, neither the buyer, nor the seller, nor even the co-op board set forth any affirmative evidence that the shareholders had a right to use the disputed terrace. However, in light of the contract's express provision requiring the seller to produce a plan of the penthouse from the co-op, the absence of affirmative evidence was irrelevant; the fact question was whether the seller could or did produce the required plan.

Suppose, however, that the sale contract had not included the rider requiring the plan. Suppose further that, as in the Pastor case, the co-op board or one of its agents threatened to interfere with a right of the proprietary lessee. Would that threat suffice to enable the buyer to escape from the sale contract? The court in Pastor never confronted that question, but its invocation of marketable title doctrine should put lawyers for coop sellers and buyers on notice that they ought to be careful to draft sale contracts to allocate the risk of coop misbehavior.

Stewart L. Sterk , Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of this newsletter.

When may a coop buyer escape from a sale contract based on erroneous statements made by the coop board that would, if accurate, interfere with the buyer's right to occupy space associated with the coop shares the buyer has contracted to purchase? The First Department recently faced that issue in Pastor v. DeGaetano' 2015 WL 1781530, and held that the seller was not entitled to summary judgment on the buyer's claim for return of his down payment, emphasizing that a coop buyer is entitled to an assurance that the coop corporation would not disturb his exclusive possession if he consummates the sale.

The Facts

In March 2012, the buyer contracted to purchase shares associated with a penthouse apartment. The buyer paid the seller (an estate) a down payment of $2.75 million on a purchase price of $27.5 million. The proprietary lease associated with the shares provided that the owner of the penthouse “shall have and enjoy the exclusive use of the roof appurtenant to such apartment [i.e.' the terrace] as shown on the plan of the penthouse,” subject to the coop's right to access the roof for maintenance. The contract of sale included a rider requiring the seller to deliver to the buyer, “at or prior to Closing the 'plan of the penthouse' ('Plan') referred to in the Proprietary Lease ' from the [Coop] or an agent thereof, ' which Plan shall be substantially similar to that of the floor plan annexed hereto as Exhibit A.”

In May 2012, the coop board's managing agent informed the buyer that the roof above the penthouse constituted a common area of the building accessible to shareholders at any time by means of a staircase and a path that traverses the penthouse terrace. The staircase had previously been used only for maintenance purposes. Although the coop board approved the sale in June 2012, the board then proposed that the buyer and seller sign an agreement acknowledging that the penthouse plan was lost, that the penthouse roof is a common area, and that coop shareholders have the right to use the pathway along the penthouse terrace to obtain access to the stairs leading to the penthouse roof. Neither the buyer nor the estate's representatives signed the proposed agreement.

Instead, the estate brought an action against the coop board for an order directing the coop to provide a copy of the plan of the penthouse and declaring that the terrace is for the exclusive use of the penthouse tenant, not available to other residents of the building as a pathway to the upper roof. In response to a court order, the coop provided the estate with a copy of the floor plan for the penthouse unit (the May plan), but the buyer informed the seller that it was cancelling the contract because the May plan was not substantially similar to the plan attached to the sale contract. The Estate then went back to court and, after seeking partial summary judgment, obtained a new floor plan (the June Plan) that omitted the maintenance staircase. The court concluded that the June Plan was substantially similar to the contract plan.

The Estate then sent the June plan to the buyer, along with a notice scheduling a time-is-of-the-essence closing date. The estate warned the buyer that failure to appear at the closing would be deemed a breach, entitling the estate to retain the down payment. The buyer rejected the estate's attempt to set a closing date, asserting that the contract permitted the seller to submit one plan at or prior to closing, and the estate did that when it submitted the May plan ' which, in the buyer's view, was not substantially similar to the contract plan. The buyer did not show up at the scheduled closing, and then brought this action seeking to recover its down payment. Supreme Court granted the estate's summary judgment motion, and the buyer appealed.

The Opinion

In reversing, the Appellate Division emphasized the lingering doubt that remained about whether the coop would recognize the owner's right to exclusive use of the terrace. In light of that lingering doubt, the court held that the estate had not demonstrated that it was ready, willing, and able to perform on the closing date, and was therefore not entitled to summary judgment. In reaching that conclusion, the court invoked language from real estate cases dealing with marketable title: “[A] purchaser ought not to be compelled to take property, the possession or title of which he may be obliged to defend by litigation.” ( Voorheesville, Rod & Gun Club v. Tompkin , 82 NY2d 564, quoting verbatim from Dyker Meadow Land & Improvement Co. v. Cook , 159 NY 6, decided in 1899).

The court conceded that discovery might reveal that the buyer was given adequate assurances that the board would not interfere with exclusive use of the terrace, and that discovery might reveal that, at closing, the estate offered a plan “substantially similar” to the contract plan. But buyer had raised enough questions to preclude summary judgment.

Outstanding Issues

In the Pastor case, by the time of the scheduled closing, neither the buyer, nor the seller, nor even the co-op board set forth any affirmative evidence that the shareholders had a right to use the disputed terrace. However, in light of the contract's express provision requiring the seller to produce a plan of the penthouse from the co-op, the absence of affirmative evidence was irrelevant; the fact question was whether the seller could or did produce the required plan.

Suppose, however, that the sale contract had not included the rider requiring the plan. Suppose further that, as in the Pastor case, the co-op board or one of its agents threatened to interfere with a right of the proprietary lessee. Would that threat suffice to enable the buyer to escape from the sale contract? The court in Pastor never confronted that question, but its invocation of marketable title doctrine should put lawyers for coop sellers and buyers on notice that they ought to be careful to draft sale contracts to allocate the risk of coop misbehavior.

Stewart L. Sterk , Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of this newsletter.