Real Property Law

In modifying, the Appellate Division started by noting that a buyer who defaults on a contract for the sale of real estate is not entitled to return of a down payment of 10% or less even if the contract does not include a liquidated damages clause. As a result, if contract vendee defaulted, it would not be entitled to the down payment. But the court also concluded that seller had not established that contract vendee had defaulted. In particular, the court noted that questions of fact remained about whether seller had made time of the essence so as to permit her to hold contract vendee in default.

COMMENT

Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373, reaffirmed the longstanding rule that a vendee who defaults on a real estate contract without lawful excuse is not entitled to recover his or her down payment even if the vendor has not suffered any damages as a result of the breach. In Maxton Builders, the court held that vendor was entitled to summary judgment in its action to retain the down payment after vendee breached a real estate contract. The court relied on the 100-plus-year-old rule in Lawrence v. Miller, 86 N.Y. 131, that a vendee who willfully defaults on a real estate contract cannot recover the down payment under any circumstances, and concluded that the rule applies even in cases like Maxton, where the contract does not include a liquidated damages provision. The court noted that if parties are dissatisfied with the rule of Lawrence, the time to say so is at the bargaining table. Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373 at 382.

However, the Maxton Builders opinion included a warning to sellers who obtained a down payment greater than 10% of the purchase price. In a footnote, the court indicated that it was expressing “no view concerning the parties' rights” when seller seeks to retain a deposit larger than 10% of the purchase price. The footnote, taken in combination with the opinion's discussion of the extensive criticism of the Lawrence v. Miller rule, suggests that when the seller obtains more than the 10% that has traditionally been accepted as a reasonable down payment amount, the seller may not be able to retain the deposit without proving actual damages.

Seller Not Liable for Foundation Defects When Purchaser Did Not Justifably Rely on Disclosure Statement
Gallagher v. Ruzzine
2017 WL 460705
App Div, Fourth Dept., 2/3/17
(memorandum opinion)

In an action by home purchasers against their immediate sellers, prior sellers and real estate agents for fraud, breach of contract, gross negligence, and breach of duties arising out of a foundation defect, purchaser appealed from Supreme Court's grant of summary judgment to all of the defendants. The Appellate Division affirmed, holding that sellers did not fraudulently conceal the defective condition, and that purchasers did not justifiably rely on sellers' disclosure statement.

Purchasers bought their home in 2010 from the Ruzzines, who had bought the home five years earlier from the Malchows. Before the transfer to the Ruzzines, the Malchows had provided the Ruzzines with a report indicating that there had been no evidence of vertical movement of soils at the foundation level, and that the inspector would be surprised if differential settlement were encountered in the future. The Malchows also provided a disclosure statement reciting that there had been some basement water seepage issues, and some drainage problems on the property, and also reciting that basement cracks were repaired.

While they lived in the house, the Ruzzines repaired a crack in the basement wall. When they sold the property to purchasers, they provided purchasers with a disclosure report stating that there were no problems with water seepage into the basement and that there were no known material defects on the subject property. Purchasers hired a home inspector, who concluded that there were no concerns with the property. A month after purchasers moved in, cracks began appearing in the walls and water leaked into the basement. Seven months after purchase, the house “popped,” as cracks in the basement walls shifted. As a result, doors and windows no longer closed properly, a toilet fell off its flange and flooded the bathroom, and the front porch pulled away from the house. Purchasers then brought this action against the Malchows, the Ruzzines, and the real estate agents who facilitated their purchase. Supreme Court awarded summary judgment to all defendants.

In affirming, the Appellate Division first dismissed the claims against the Malchows, noting the absence of any relationship between purchasers and the Malchows, and concluding also that they could not have had any knowledge of any purported fraud committed by the Ruzzines. The court then held that the Ruz- zines were entitled to dismissal of the fraud and breach of contract claims against them. The court noted that to the extent that the Ruzzines had repaired the crack in the basement foundation that caused dampness, a fraud claim against them could not succeed, and went on to note that in any event, purchasers could not establish justified reliance on the property condition disclosure statement's failure to mention water seepage or dampness because their own home inspection report put them on notice of the issue.

The court also concluded that, for the same reasons, the breach of contract claim against the Ruzzines could not succeed. Finally, the court concluded that the gross negligence claims and the breach of fiduciary duty claims against the realtors failed because the realtors did not actively conceal or have any know- ledge of any defects in the premises.

Purchaser Entitled to Return of Deposit When Seller Was Unable To Close By 'Time Is of the Essence' Closing Date
Shimuro v. Preston Taylor Products, LLC
146 A.D.3d 729
AppDiv, First Dept., 1/31/17
(memorandum opinion)

In an action by purchaser for a return of a deposit on a commercial condominium, seller appealed from Supreme Court's grant of purchaser's summary judgment motion. The Appellate Division affirmed, concluding that seller was unable to close by the closing date purchaser had fixed in a “time is of the essence” letter.

The parties' sale contract required seller to deliver title at closing free of all liens and encumbrances, and to deliver a statement from the condominium or managing agent that all common charges and assessments had been paid to the date of the closing. The contract also required seller to obtain a waiver of the condominium's right of first refusal over the unit. At the time of the contract, seller and the condominium board were involved in a pending action about seller's assessment, and that action did not settle until seven months after purchaser's scheduled closing date of Jan. 19, 2015. As a result, seller was unable to close, provoking purchaser to bring this action for return of the deposit. Supreme Court awarded summary judgment to purchaser, and seller appealed.

In affirming, the Appellate Division rejected seller's challenge to the closing date. The court noted that purchaser's Dec. 19, 2014 letter recited that seller was in default, that purchaser was ready, willing and able to close, and set a closing date of Jan. 19, 2015, with time being of the essence. The court held that the notice was sufficient to make the closing date time of the essence, and that seller's failure to object to the date before the closing date made the date reasonable as a matter of law. The court also dismissed seller's argument that purchaser had waived the closing date by responding to seller's bankruptcy filing by asserting that “with the automatic stay in place, there is nothing further we can do with our proposed transaction at this time.”

COMMENT

When a contract does not explicitly indicate that time is of the essence, any party may unilaterally declare time to be of the essence. The phrase, “time is of the essence,” is not always necessary, so long as the notice provides warning that failure to close by the date specified will result in legal consequences. For instance, in Zev v. Merman, 134 A.D.2d 555, (1987), aff'd, 73 N.Y.2d 781, (1988), the court held that seller made time of the essence by notifying the buyer that failure to close at a specific date would result in default. Similarly, in Guippone v. Galas, 13 A.D.3d 339, the court held that buyers had made time of the essence by notifying seller that buyers would commence legal action if seller did not reschedule the closing by a specified date. Moreover, a chain of correspondence in which one party notifies the other that it will not extend the closing beyond a specified date provides sufficient notice that legal consequences will flow from failure to close. Thus, in E.C., LLC v. Eaglecrest Manufactured Home Park, Inc., 275 A.D.2d 898, the court held that when buyer twice requested contract extensions from seller, and seller twice reiterated that it would not extend the closing past a specified date, seller had effectively made time of the essence.

If the contract itself does not make time of the essence, a number of courts have, in recent years, held that a subsequent “time is of the essence” notice is premature, and therefore ineffective, if it is sent before the closing date specified in the sale contract. For instance, in Revital Realty Group, LLC v. Ulano Corp., 112 A.D.3d 902, the Second Department held that seller's March 13, 2012 letter purporting to make time of the essence was premature as a matter of law when the original closing was scheduled for March 29, 2012. See also Highbridge Development BR, LLC v. Diamond Development, LLC, 67 A.D.3d 1112 (Third Department holds that a July 1, 2008 letter purporting to make time of the essence was ineffective when the original closing date was July 9, 2008). Some older cases, however, had held such notices effective when the notices provided for closing on the date specified in the original contract, but indicated that time was of the essence. See Charchan v. Williams, 231 A.D.2d 668.

An otherwise effective “time is of the essence” notice will be ineffective if the notice does not provide for a reasonable time period. New York courts have provided little guidance about what constitutes a reasonable period. In Zev v. Merman, 73 N.Y.2d 781, the Court of Appeals indicated that the “determination of reasonableness must by its very nature be determined on a case-by-case basis, but indicated that relevant factors include the good faith of the parties, the possibility of prejudice or hardship, and the specific number of days provided for performance. Miller v. Almquist, 241 A.D.2d 181, is one of the few cases to find the time period unreasonable. After the co-op buyers, on March 31, sought an adjournment of the closing until April 16, the sellers agreed to that date, but purported to make time of the essence. On April 14, the buyers' lender, for the first time, raised questions about how certain tax liens would be resolved. Those questions were resolved on April 15, but the lender could not schedule a closing until the 18th. When the buyers did not show up for the April 16 closing, the sellers declared the buyers in default. The court, however, concluded that the 16-day time period was unreasonable in light of the potential loss to the buyers, who had acted in good faith, and the absence of prejudice to sellers.

Seller Not Obligated to Bring Legal Proceeding to Clear Title
Horrigan Development LLC v. Drozd
NYLJ 2/24/17
Supreme Ct. Kings Cty.
(Ash, J)

In an action by contract vendee for specific performance of a contract to sell real property, both parties moved for summary judgment. The court granted seller's motion, holding that seller's inability to convey clear title did not obligate the seller to bring legal proceeding to clear title.

In December 2010, seller contracted to sell the subject property to purchaser for $1,650,000. Purchaser paid a deposit of $82,500, with the remainder of the purchase price to be paid at closing, which was scheduled for Feb. 25, 2011. At the time of the contract, seller owned only a 71.34% interest in the property; the remainder was owned by seller's two brothers. Purchaser's title insurer required seller to obtain the signatures of his two brothers on the deed as grantors in order to clear title.

Meanwhile, one of purchaser's brothers died in Poland. The title insurer informed seller that it would require probate of the brother's estate in Poland and commencement of an ancillary probate proceeding in New York. When seller's lawyer informed him that it would cost more than $35,000 in legal fees to obtain the approvals required by the title insurer, seller informed contract vendee of the cost, and informed contract vendee that under the terms of the sale contract, seller was not required to incur any expenses in excess of $5,000 to clear title. Seller indicated that it would be willing to take the necessary steps to clear title if contract vendee increased the purchase price to $2,100,000, the appraised value of the property in 2013, at the time seller notified the contract vendee of the cost of removing title defects. Contract vendee responded by bringing this action for specific performance.

In awarding summary judgment to seller, the court relied on the contract provision limiting seller's title-clearing expenditures to $5,000. The court held that in light of that provision, contract vendee had two options: cancel the contract and obtain a refund of the down payment or take title as is, with a credit for $5,000. Because the contract vendee took neither option, but instead brought this action for specific performance, contract vendee was in breach of the contract, and seller was entitled to dismissal of the claim.

COMMENT

When a sale contract includes a provision limiting buyer's remedies in case seller is unable to convey good title, the buyer is not entitled to specific performance of the contract when seller makes a good-faith, but unsuccessful, effort to clear title. For example, in Karl v. Kessler, 47 A.D.3d 681, in affirming the lower court's decision to dismiss an action for specific performance, the Second Department relied on seller's good-faith effort to clear a notice of pendency placed on the subject property due to pending litigation. The seller immediately extended a settlement offer, and diligently defended the lawsuit when settlement efforts failed. The court held that the seller could refund the down payment to the buyer and terminate the contract without incurring liability, as provided under the contract of sale. Similarly, in Emptage & Assoc., Inc. v. Cape Hampton, LLC, 19 A.D.3d 536, the Second Department affirmed the lower court's decision to deny specific performance when the seller tried unsuccessfully to dismiss a suit brought by an earlier buyer for specific performance of the earlier sale contract. The court emphasized that seller had entered into the contract of sale not knowing that the previous buyer had sorted out his financial problems, and that seller subsequently made every reasonable effort to dismiss the suit.

If, however, a seller has power to clear title at minimal or no cost, yet refuses to do so, the buyer is entitled to specific performance even if the sale contract limits buyer's remedy to return of the down payment. For instance, in Sevilla v. Valiotis, 29 A.D.3d 775, the Second Department awarded specific performance to a buyer despite seller's claim that he could clear title because title was held in the name of seller's defunct partnership, an entity controlled by seller. The court held that seller's invocation of the title defect was not made in good faith because the seller could, with little to no expenditure of money, transfer title.

Even when clearing title would involve a significant expenditure of funds, the buyer is entitled to specific performance if the title defect was created by the seller after the seller entered into the sale contract. Thus, in Green Point Sav. Bank v. Litas Inv. Co., Inc., 124 A.D.2d 555 the court granted specific performance to a buyer when, after contracting to sell the property, seller took out a second mortgage on the property to satisfy unrelated debts and then claimed that it was “unable” to discharge all liens on the property because of insufficient funds. The court held that the seller could not hide behind “self-created” defects in title as a means to escape performance of the contract and limit his liability.

Recordation of Memorandum of Agreement Did Not Provide Recording Act Protection Vanderbilt Brookland, LLC. V. Vanderbilt Myrtle, Inc.
NYLJ 2/24/17, p. 28, col. 1
AppDiv, Second Dept.
(memorandum opinion)

In an action by an assignee of a purchase and sale agreement to enjoin assignor from transferring any of its rights to any party other than assignee, and for a declaration that a third party who took a transfer from the assignor did not acquire rights to the purchase and sale agreement, assignor and third-party transferee appealed from Supreme Court's award of a preliminary injunction. The Appellate Division affirmed, holding that the third party's recordation of a memorandum of agreement did not afford third party with the protection of the recording act.

Assignor Myrtle held a right of first refusal over property Myrtle leased from Cumberland Farms. On Dec. 4, 2013, Cumberland agreed to sell the property to Myrtle for $10 million, and Myrtle agreed to make a $1 million deposit. Before Myrtle executed the purchase and sale agreement, Myrtle agreed to assign its rights under the purchase and sale agreement to assignee Brookland. The latter agreed to make the $1 million deposit, and also agreed to purchase 5% of Myrtle's common stock for $500,000. In January 2014, Brook- land brought this action for declaratory and injunctive relief, contending that Myrtle had repudiated the stock sale agreement after Brookland made the $1 million deposit. Brookland sought an injunction prohibiting Myrtle from transferring its rights under the purchase and sale agreement to anyone other than Brookland.

Supreme Court granted a preliminary injunction to Brookland, but after the court issued the injunction, Brookland learned that Myrtle had, on Dec. 23, 2013, assigned its rights under the purchase and sale agreement to third party, All Year. The latter was a good-faith purchaser for value, and, in April 2014, recorded a memorandum of the purchase and sale agreement and of its assignment. The memorandum was executed by Cumberland and by All Year. Assignee Brookland then sought to add All Year and Cumberland as defendants, and Supreme Court issued a preliminary injunction against those parties as well. Myrtle, All Year and Cumberland Farms appealed.

In affirming, the Appellate Division concluded that Brookland had demonstrated a likelihood of success on the merits because All Year's recordation of the memorandum of the purchase and sale agreement did not satisfy the requisites of the recording act. Although Real Property Law section 294(2) permits recording of a memorandum of an executory contract in lieu of the contract itself, the statutory requires that the memorandum be executed “by the parties.” In this case, Myrtle was a party to the purchase and sale agreement, but did not sign the memorandum. As a result, the memorandum did not constitute a proper recording and as a result, even though All Year was a good faith purchaser, it did not first record, and could not therefore acquire the protection of the recording statute.

Reduced Tax Lien Enforceable
NYCTL 1997-1 Trust v. Denis
NYLJ 2/17/17, p. 33, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action to foreclose a tax lien, fee owner appealed from Supreme Court's grant of summary judgment to holders of the tax lien. The Appellate Division affirmed, holding that a reduced tax lien is enforceable as to the remaining sum of the lien.

The original tax lien was for $8,275 in unpaid property taxes, $27,168.58 in unpaid water and sewer charges, $686.17 for a fire prevention inspection, and a 5% surcharge of $1806.49. During discovery, lien holders agreed to reduce the water and sewer charge component from $27,168.58 to $7089.86, and to reduce the surcharge accordingly. Lien holders then sought summary judgment, and fee owner cross-moved for summary judgment. Supreme Court granted lien holders' motion and referred the matter to a referee for the computation of damages. Owner appealed.

In affirming, the Appellate Division started by noting that a tax lien certificate is presumptive evidence that the lien transferred by the certificate is valid and enforceable. The court then concluded that the reduction in lien does not affect the enforceability of the lien for the remaining amount. Here, holders of the certificate offered evidence that the fee owner had not satisfied the unpaid amount, and the fee owner did not submit evidence to rebut that conclusion. As a result, holders of the certificate were entitled to enforce them.

Seller Entitled to Retain Breaching Buyer's Deposit Even if Breach Did Not Harm Seller Pizzurro v. Guarino
NYLJ 2/10/17, p. 32, col. 3
AppDiv, Second Dept.
(memorandum opinion)

In an action by seller against contract vendee to retain contract vendee's deposit, seller appealed from Supreme Court's grant of summary judgment to contract vendee. The Appellate Division modified, holding that seller is entitled to retain a breaching contract vendee's deposit even when seller has not been injured, but observing that in this case, questions of fact remained about whether contract vendee had breached.

When seller contracted to sell the subject property to contract vendee, the latter made a down payment of $30,000, which was less than 10% of the purchase price. The contract included a no liquidated damages provision. The parties never closed on the sale, and seller resold the property to another purchaser for a higher price. Seller then brought this action to retain the down payment. Supreme Court awarded summary judgment to contract vendee and directed seller to return the down payment. Seller appealed.

In modifying, the Appellate Division started by noting that a buyer who defaults on a contract for the sale of real estate is not entitled to return of a down payment of 10% or less even if the contract does not include a liquidated damages clause. As a result, if contract vendee defaulted, it would not be entitled to the down payment. But the court also concluded that seller had not established that contract vendee had defaulted. In particular, the court noted that questions of fact remained about whether seller had made time of the essence so as to permit her to hold contract vendee in default.

COMMENT

Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373, reaffirmed the longstanding rule that a vendee who defaults on a real estate contract without lawful excuse is not entitled to recover his or her down payment even if the vendor has not suffered any damages as a result of the breach. In Maxton Builders, the court held that vendor was entitled to summary judgment in its action to retain the down payment after vendee breached a real estate contract. The court relied on the 100-plus-year-old rule in Lawrence v. Miller, 86 N.Y. 131, that a vendee who willfully defaults on a real estate contract cannot recover the down payment under any circumstances, and concluded that the rule applies even in cases like Maxton, where the contract does not include a liquidated damages provision. The court noted that if parties are dissatisfied with the rule of Lawrence, the time to say so is at the bargaining table. Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373 at 382.

However, the Maxton Builders opinion included a warning to sellers who obtained a down payment greater than 10% of the purchase price. In a footnote, the court indicated that it was expressing “no view concerning the parties' rights” when seller seeks to retain a deposit larger than 10% of the purchase price. The footnote, taken in combination with the opinion's discussion of the extensive criticism of the Lawrence v. Miller rule, suggests that when the seller obtains more than the 10% that has traditionally been accepted as a reasonable down payment amount, the seller may not be able to retain the deposit without proving actual damages.

Seller Not Liable for Foundation Defects When Purchaser Did Not Justifably Rely on Disclosure Statement
Gallagher v. Ruzzine
2017 WL 460705
App Div, Fourth Dept., 2/3/17
(memorandum opinion)

In an action by home purchasers against their immediate sellers, prior sellers and real estate agents for fraud, breach of contract, gross negligence, and breach of duties arising out of a foundation defect, purchaser appealed from Supreme Court's grant of summary judgment to all of the defendants. The Appellate Division affirmed, holding that sellers did not fraudulently conceal the defective condition, and that purchasers did not justifiably rely on sellers' disclosure statement.

Purchasers bought their home in 2010 from the Ruzzines, who had bought the home five years earlier from the Malchows. Before the transfer to the Ruzzines, the Malchows had provided the Ruzzines with a report indicating that there had been no evidence of vertical movement of soils at the foundation level, and that the inspector would be surprised if differential settlement were encountered in the future. The Malchows also provided a disclosure statement reciting that there had been some basement water seepage issues, and some drainage problems on the property, and also reciting that basement cracks were repaired.

While they lived in the house, the Ruzzines repaired a crack in the basement wall. When they sold the property to purchasers, they provided purchasers with a disclosure report stating that there were no problems with water seepage into the basement and that there were no known material defects on the subject property. Purchasers hired a home inspector, who concluded that there were no concerns with the property. A month after purchasers moved in, cracks began appearing in the walls and water leaked into the basement. Seven months after purchase, the house “popped,” as cracks in the basement walls shifted. As a result, doors and windows no longer closed properly, a toilet fell off its flange and flooded the bathroom, and the front porch pulled away from the house. Purchasers then brought this action against the Malchows, the Ruzzines, and the real estate agents who facilitated their purchase. Supreme Court awarded summary judgment to all defendants.

In affirming, the Appellate Division first dismissed the claims against the Malchows, noting the absence of any relationship between purchasers and the Malchows, and concluding also that they could not have had any knowledge of any purported fraud committed by the Ruzzines. The court then held that the Ruz- zines were entitled to dismissal of the fraud and breach of contract claims against them. The court noted that to the extent that the Ruzzines had repaired the crack in the basement foundation that caused dampness, a fraud claim against them could not succeed, and went on to note that in any event, purchasers could not establish justified reliance on the property condition disclosure statement's failure to mention water seepage or dampness because their own home inspection report put them on notice of the issue.

The court also concluded that, for the same reasons, the breach of contract claim against the Ruzzines could not succeed. Finally, the court concluded that the gross negligence claims and the breach of fiduciary duty claims against the realtors failed because the realtors did not actively conceal or have any know- ledge of any defects in the premises.

Purchaser Entitled to Return of Deposit When Seller Was Unable To Close By 'Time Is of the Essence' Closing Date
Shimuro v. Preston Taylor Products, LLC
146 A.D.3d 729
AppDiv, First Dept., 1/31/17
(memorandum opinion)

In an action by purchaser for a return of a deposit on a commercial condominium, seller appealed from Supreme Court's grant of purchaser's summary judgment motion. The Appellate Division affirmed, concluding that seller was unable to close by the closing date purchaser had fixed in a “time is of the essence” letter.

The parties' sale contract required seller to deliver title at closing free of all liens and encumbrances, and to deliver a statement from the condominium or managing agent that all common charges and assessments had been paid to the date of the closing. The contract also required seller to obtain a waiver of the condominium's right of first refusal over the unit. At the time of the contract, seller and the condominium board were involved in a pending action about seller's assessment, and that action did not settle until seven months after purchaser's scheduled closing date of Jan. 19, 2015. As a result, seller was unable to close, provoking purchaser to bring this action for return of the deposit. Supreme Court awarded summary judgment to purchaser, and seller appealed.

In affirming, the Appellate Division rejected seller's challenge to the closing date. The court noted that purchaser's Dec. 19, 2014 letter recited that seller was in default, that purchaser was ready, willing and able to close, and set a closing date of Jan. 19, 2015, with time being of the essence. The court held that the notice was sufficient to make the closing date time of the essence, and that seller's failure to object to the date before the closing date made the date reasonable as a matter of law. The court also dismissed seller's argument that purchaser had waived the closing date by responding to seller's bankruptcy filing by asserting that “with the automatic stay in place, there is nothing further we can do with our proposed transaction at this time.”

COMMENT

When a contract does not explicitly indicate that time is of the essence, any party may unilaterally declare time to be of the essence. The phrase, “time is of the essence,” is not always necessary, so long as the notice provides warning that failure to close by the date specified will result in legal consequences. For instance, in Zev v. Merman, 134 A.D.2d 555, (1987), aff'd, 73 N.Y.2d 781, (1988), the court held that seller made time of the essence by notifying the buyer that failure to close at a specific date would result in default. Similarly, in Guippone v. Galas, 13 A.D.3d 339, the court held that buyers had made time of the essence by notifying seller that buyers would commence legal action if seller did not reschedule the closing by a specified date. Moreover, a chain of correspondence in which one party notifies the other that it will not extend the closing beyond a specified date provides sufficient notice that legal consequences will flow from failure to close. Thus, in E.C., LLC v. Eaglecrest Manufactured Home Park, Inc., 275 A.D.2d 898, the court held that when buyer twice requested contract extensions from seller, and seller twice reiterated that it would not extend the closing past a specified date, seller had effectively made time of the essence.

If the contract itself does not make time of the essence, a number of courts have, in recent years, held that a subsequent “time is of the essence” notice is premature, and therefore ineffective, if it is sent before the closing date specified in the sale contract. For instance, in Revital Realty Group, LLC v. Ulano Corp., 112 A.D.3d 902, the Second Department held that seller's March 13, 2012 letter purporting to make time of the essence was premature as a matter of law when the original closing was scheduled for March 29, 2012. See also Highbridge Development BR, LLC v. Diamond Development, LLC, 67 A.D.3d 1112 (Third Department holds that a July 1, 2008 letter purporting to make time of the essence was ineffective when the original closing date was July 9, 2008). Some older cases, however, had held such notices effective when the notices provided for closing on the date specified in the original contract, but indicated that time was of the essence. See Charchan v. Williams, 231 A.D.2d 668.

An otherwise effective “time is of the essence” notice will be ineffective if the notice does not provide for a reasonable time period. New York courts have provided little guidance about what constitutes a reasonable period. In Zev v. Merman, 7 3 N.Y.2d 781, the Court of Appeals indicated that the “determination of reasonableness must by its very nature be determined on a case-by-case basis, but indicated that relevant factors include the good faith of the parties, the possibility of prejudice or hardship, and the specific number of days provided for performance. Miller v. Almquist, 241 A.D.2d 181, is one of the few cases to find the time period unreasonable. After the co-op buyers, on March 31, sought an adjournment of the closing until April 16, the sellers agreed to that date, but purported to make time of the essence. On April 14, the buyers' lender, for the first time, raised questions about how certain tax liens would be resolved. Those questions were resolved on April 15, but the lender could not schedule a closing until the 18th. When the buyers did not show up for the April 16 closing, the sellers declared the buyers in default. The court, however, concluded that the 16-day time period was unreasonable in light of the potential loss to the buyers, who had acted in good faith, and the absence of prejudice to sellers.

Seller Not Obligated to Bring Legal Proceeding to Clear Title
Horrigan Development LLC v. Drozd
NYLJ 2/24/17
Supreme Ct. Kings Cty.
(Ash, J)

In an action by contract vendee for specific performance of a contract to sell real property, both parties moved for summary judgment. The court granted seller's motion, holding that seller's inability to convey clear title did not obligate the seller to bring legal proceeding to clear title.

In December 2010, seller contracted to sell the subject property to purchaser for $1,650,000. Purchaser paid a deposit of $82,500, with the remainder of the purchase price to be paid at closing, which was scheduled for Feb. 25, 2011. At the time of the contract, seller owned only a 71.34% interest in the property; the remainder was owned by seller's two brothers. Purchaser's title insurer required seller to obtain the signatures of his two brothers on the deed as grantors in order to clear title.

Meanwhile, one of purchaser's brothers died in Poland. The title insurer informed seller that it would require probate of the brother's estate in Poland and commencement of an ancillary probate proceeding in New York. When seller's lawyer informed him that it would cost more than $35,000 in legal fees to obtain the approvals required by the title insurer, seller informed contract vendee of the cost, and informed contract vendee that under the terms of the sale contract, seller was not required to incur any expenses in excess of $5,000 to clear title. Seller indicated that it would be willing to take the necessary steps to clear title if contract vendee increased the purchase price to $2,100,000, the appraised value of the property in 2013, at the time seller notified the contract vendee of the cost of removing title defects. Contract vendee responded by bringing this action for specific performance.

In awarding summary judgment to seller, the court relied on the contract provision limiting seller's title-clearing expenditures to $5,000. The court held that in light of that provision, contract vendee had two options: cancel the contract and obtain a refund of the down payment or take title as is, with a credit for $5,000. Because the contract vendee took neither option, but instead brought this action for specific performance, contract vendee was in breach of the contract, and seller was entitled to dismissal of the claim.

COMMENT

When a sale contract includes a provision limiting buyer's remedies in case seller is unable to convey good title, the buyer is not entitled to specific performance of the contract when seller makes a good-faith, but unsuccessful, effort to clear title. For example, in Karl v. Kessler, 47 A.D.3d 681, in affirming the lower court's decision to dismiss an action for specific performance, the Second Department relied on seller's good-faith effort to clear a notice of pendency placed on the subject property due to pending litigation. The seller immediately extended a settlement offer, and diligently defended the lawsuit when settlement efforts failed. The court held that the seller could refund the down payment to the buyer and terminate the contract without incurring liability, as provided under the contract of sale. Similarly, in Emptage & Assoc., Inc. v. Cape Hampton, LLC, 19 A.D.3d 536, the Second Department affirmed the lower court's decision to deny specific performance when the seller tried unsuccessfully to dismiss a suit brought by an earlier buyer for specific performance of the earlier sale contract. The court emphasized that seller had entered into the contract of sale not knowing that the previous buyer had sorted out his financial problems, and that seller subsequently made every reasonable effort to dismiss the suit.

If, however, a seller has power to clear title at minimal or no cost, yet refuses to do so, the buyer is entitled to specific performance even if the sale contract limits buyer's remedy to return of the down payment. For instance, in Sevilla v. Valiotis, 29 A.D.3d 775, the Second Department awarded specific performance to a buyer despite seller's claim that he could clear title because title was held in the name of seller's defunct partnership, an entity controlled by seller. The court held that seller's invocation of the title defect was not made in good faith because the seller could, with little to no expenditure of money, transfer title.

Even when clearing title would involve a significant expenditure of funds, the buyer is entitled to specific performance if the title defect was created by the seller after the seller entered into the sale contract. Thus, in Green Point Sav. Bank v. Litas Inv. Co., Inc., 1 24 A.D.2d 555 the court granted specific performance to a buyer when, after contracting to sell the property, seller took out a second mortgage on the property to satisfy unrelated debts and then claimed that it was “unable” to discharge all liens on the property because of insufficient funds. The court held that the seller could not hide behind “self-created” defects in title as a means to escape performance of the contract and limit his liability.

Recordation of Memorandum of Agreement Did Not Provide Recording Act Protection Vanderbilt Brookland, LLC. V. Vanderbilt Myrtle, Inc.
NYLJ 2/24/17, p. 28, col. 1
AppDiv, Second Dept.
(memorandum opinion)

In an action by an assignee of a purchase and sale agreement to enjoin assignor from transferring any of its rights to any party other than assignee, and for a declaration that a third party who took a transfer from the assignor did not acquire rights to the purchase and sale agreement, assignor and third-party transferee appealed from Supreme Court's award of a preliminary injunction. The Appellate Division affirmed, holding that the third party's recordation of a memorandum of agreement did not afford third party with the protection of the recording act.

Assignor Myrtle held a right of first refusal over property Myrtle leased from Cumberland Farms. On Dec. 4, 2013, Cumberland agreed to sell the property to Myrtle for $10 million, and Myrtle agreed to make a $1 million deposit. Before Myrtle executed the purchase and sale agreement, Myrtle agreed to assign its rights under the purchase and sale agreement to assignee Brookland. The latter agreed to make the $1 million deposit, and also agreed to purchase 5% of Myrtle's common stock for $500,000. In January 2014, Brook- land brought this action for declaratory and injunctive relief, contending that Myrtle had repudiated the stock sale agreement after Brookland made the $1 million deposit. Brookland sought an injunction prohibiting Myrtle from transferring its rights under the purchase and sale agreement to anyone other than Brookland.

Supreme Court granted a preliminary injunction to Brookland, but after the court issued the injunction, Brookland learned that Myrtle had, on Dec. 23, 2013, assigned its rights under the purchase and sale agreement to third party, All Year. The latter was a good-faith purchaser for value, and, in April 2014, recorded a memorandum of the purchase and sale agreement and of its assignment. The memorandum was executed by Cumberland and by All Year. Assignee Brookland then sought to add All Year and Cumberland as defendants, and Supreme Court issued a preliminary injunction against those parties as well. Myrtle, All Year and Cumberland Farms appealed.

In affirming, the Appellate Division concluded that Brookland had demonstrated a likelihood of success on the merits because All Year's recordation of the memorandum of the purchase and sale agreement did not satisfy the requisites of the recording act. Although Real Property Law section 294(2) permits recording of a memorandum of an executory contract in lieu of the contract itself, the statutory requires that the memorandum be executed “by the parties.” In this case, Myrtle was a party to the purchase and sale agreement, but did not sign the memorandum. As a result, the memorandum did not constitute a proper recording and as a result, even though All Year was a good faith purchaser, it did not first record, and could not therefore acquire the protection of the recording statute.

Reduced Tax Lien Enforceable
NYCTL 1997-1 Trust v. Denis
NYLJ 2/17/17, p. 33, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action to foreclose a tax lien, fee owner appealed from Supreme Court's grant of summary judgment to holders of the tax lien. The Appellate Division affirmed, holding that a reduced tax lien is enforceable as to the remaining sum of the lien.

The original tax lien was for $8,275 in unpaid property taxes, $27,168.58 in unpaid water and sewer charges, $686.17 for a fire prevention inspection, and a 5% surcharge of $1806.49. During discovery, lien holders agreed to reduce the water and sewer charge component from $27,168.58 to $7089.86, and to reduce the surcharge accordingly. Lien holders then sought summary judgment, and fee owner cross-moved for summary judgment. Supreme Court granted lien holders' motion and referred the matter to a referee for the computation of damages. Owner appealed.

In affirming, the Appellate Division started by noting that a tax lien certificate is presumptive evidence that the lien transferred by the certificate is valid and enforceable. The court then concluded that the reduction in lien does not affect the enforceability of the lien for the remaining amount. Here, holders of the certificate offered evidence that the fee owner had not satisfied the unpaid amount, and the fee owner did not submit evidence to rebut that conclusion. As a result, holders of the certificate were entitled to enforce them.