Real Property Law

In modifying, the Appellate Division held that prospective purchaser had established Walsh's breach of fiduciary duty, and had also established material omissions of fact upon which prospective purchaser relied, which the court apparently concluded were sufficient to support the fraud claim. But the court held that prospective purchaser had not established a prima facie case that any transfer was made in reliance on a promise, or that he possessed a legally cognizable interest in the property with which he could have parted. As a result, Supreme Court had properly denied prospective purchaser's demand for imposition of a constructive trust. The court also upheld Supreme Court's denial of summary judgment on the specific performance claim, noting that purchaser had not been party to any contract.

Comment

While no case deals directly with the right of a buyer's broker to bid on the same property as his client, statutes dealing with the rights of seller's brokers suggest that a buyer's broker might be able to compete with a client if the broker fully discloses his actions. For example, 19 NYCRR 175.4-5 permits a seller's broker to buy his client's property with proper disclosure, and N.Y. Real Prop. Law §443 provides a dual agency form enabling a broker to represent both a seller and buyer, while in the absence of disclosure, dual representation would be a breach of the broker's duty of loyalty. (See, Wendt v. Fischer, 243 N.Y. 439, holding a seller's broker breached his fiduciary duty by failing to disclose that he was an officer of or possessed shares in the company that purchased the property.) Because disclosure allows a seller's broker to engage in otherwise impermissible actions, one might infer that a buyer's broker can cure potential breaches of fiduciary duty through proper disclosure. Whether sufficient disclosure requires informing the client of broker's intent to bid, or whether the broker must disclose each bid and its price, remains an open question.

While some courts, such as the court in Edwards, have dismissed constructive trust claims citing the plaintiff's absence of prior interest in the would-be trust property, in those cases there were other grounds for denying relief to plaintiff. For instance, in Scivoletti v. Marsala, 97 A.D.2d 401, the court found no constructive trust because the plaintiff had no prior interest in the property, but also found that plaintiff had made no expenditure in reliance on a promise. Other courts, however, have awarded constructive trusts in property where the party seeking the constructive trust had no prior interest in property, but had invested money reliance on a promise. In Lester v. Zimmer, the court found that plaintiff had demonstrated a prima facie basis for a constructive trust in a home situated on land owned by her boyfriend's mother, because she had contributed time, money, and work toward its construction in reliance on the mother's promise to convey title of the house to the plaintiff. 147 A.D.2d 342. The court emphasized that the law of constructive trusts is not confined to reconveyance situations and that prior interest in not a pre-requisite for imposing one.

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Amendment to Association Bylaws Not Effective Until They Are Recorded

Keller v. Kay NYLJ 3/22/19, p. 30, col. 6 AppDiv, Second Dept. (memorandum opinion)

In an action by a homeowner to enjoin the homeowners' association from enforcing unrecorded bylaws, the association appealed from Supreme Court's denial of the association's summary judgment motion and grant of a preliminary injunction. The Appellate Division modified to deny the preliminary injunction but otherwise affirmed, holding that amendments to the bylaws had to be recorded to be effective.

In 1997 and 2002, the association adopted bylaws eliminating cumulative voting, imposing split board elections, changing the system for proxy voting, and making other changes. In this action, a homeowner sought to enjoin the association from enforcing the amendments and proceeding with an annual election of directors. Homeowner relied on the association's declaration, which provided that amendments to the declaration “must be properly recorded to be effective.” The declaration also provided that administration of the association shall be in accordance with the bylaws “which are made a part of this Declaration ….” Homeowner contended that because the bylaws were made part of the declaration, amendments to the bylaws, like amendments to the declaration itself, had to be recorded to be effective. Supreme Court agreed, denied the association's summary judgment motion, and granted homeowner a preliminary injunction. The association appealed.

In modifying, the Appellate Division agreed with Supreme Court that by requiring that amendments to the declaration be recorded, and by making the bylaws a part of the Declaration without making an exception for amendments to the bylaws, the declaration required that amendments to the bylaws be recorded to be effective. But the court held that homeowner was not entitled to a preliminary injunction because homeowner had not demonstrated that failure to issue the injunction would cause irreparable harm. The court also emphasized that because elections had been held under the amended bylaws for more than two decades, a preliminary injunction would disturb the status quo rather than maintaining it.

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Seller Entitled to Cancel Contract When It Could Not Clear Title

Weinberger v. Estate of Escort NYLJ 3/15/19, p. 26, col. 4 AppDiv, Second Dept. (memorandum opinion)

In purchaser's action for specific performance, purchaser appealed from Supreme Court's grant of seller's summary judgment motion. The Appellate Division affirmed, holding that seller was entitled to cancel the contract when it could not clear title.

In 2011, the parties entered into a contract for the sale of residential property in Brooklyn for a purchase price of $495,000. The printed contract provided that seller would not be required to perfect any defects in title of the premises. A handwritten rider required seller to satisfy “voluntary liens, real estate tax and water sewer arrears, monies due under NYC Admin Code … [up to $2,500].” When purchaser's title report revealed multiple objections to title, including several judgments for New York State tax warrants and federal tax liens, seller cancelled the contract, returned the down payment, and paid purchaser for the cost of the title examination. Purchaser rejected the cancellation and brought this action for specific performance. Supreme Court granted seller's summary judgment motion. Purchaser appealed.

In affirming, the Appellate Division relied on the printed contract's provision excusing seller from clearing title defects and stipulating that upon return of the down payment and payment of the costs of the title search, the sale contract would be “null and void.” The court held that the handwritten provision was inapplicable because the state and federal tax liens did not qualify as “voluntary” liens or fall within the scope of the remainder of that provision.

Comment

In 1990, the Court of Appeals held that an unambiguous reciprocal cancellation clause is dispositive evidence that a cancellation right was meant to benefit both parties, and that a seller is therefore entitled to cancel, even if buyer offers extrinsic evidence that the cancellation was meant to benefit only the buyer. In W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d 157 (1990). the court granted sellers' summary judgment motion and dismissed buyers' action for specific performance where the contract provided that either party could cancel if certain litigation pending against sellers and concerning the property was not resolved by a set date. Id. at 159–60, 164. Despite buyers' contention that extrinsic evidence showed that the cancellation clause was meant to benefit them alone, the court found that evidence inadmissible because the contract unambiguously permitted either party to cancel if the litigation had not concluded by the agreed-upon date, which it had not. Id. at 161–63.

Giancontieri cast doubt on the vitality of earlier cases in which courts would bar the seller from cancelling the contract, despite a reciprocal cancellation clause, if the court concluded that the clause was intended to benefit only the buyer. In these cases, the court permitted the buyer to waive the condition and compel performance as-is. For instance, in DeFreitas v. Holley, 93 A.D.2d 852, the Second Department granted buyer's summary judgment motion for specific performance where buyer sought to waive a provision that expressly authorized either party to cancel the contract if buyer discovered termites during an inspection and seller refused to cure. The court found that the provision was meant only to protect buyer from having to purchase subject to an uncured termite condition, and if buyer sought performance in lieu of the provision, seller could not unilaterally cancel the contract. Id. at 853.

Since 1990, New York courts have typically followed Giancontieri and enforced unambiguous reciprocal cancellation clauses despite buyers' assertions that those clauses were meant to benefit them alone. Accordingly, in Manzi Homes, Inc. v. Mooney, 29 A.D.3d 748, 748-49, the Second Department granted seller's motion for summary judgment, letting seller invoke the sale contract's unambiguously reciprocal cancellation clause and denying buyer the right to unilaterally waive the contract's provision allowing either party to cancel if it were determined that neither public water nor potable water were available on the parcel.

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Buyer's Waiver of Defects In Title Precludes Cancellation By Seller

Herzog v. Marine NYLJ 3/8/19, p. 29, col. 4 AppDiv, Second Dept. (memorandum opinion)

In purchaser's action for specific performance of a contract to sell real property, seller appealed from Supreme Court's grant of specific performance to purchaser. The Appellate Division affirmed, holding that the sale contract did not give the seller a right to cancel.

In March 2014, seller and purchaser entered into a sale contract for Brooklyn real property. On Aug. 19, 2014, purchaser sent seller a notice making time of the essence and setting a closing date of Sept. 22, 2014. Seller responded with a notice purporting to cancel the contract, asserting that seller was unable to transfer title. Purchaser then brought this action for specific performance, and Supreme Court granted summary judgment to purchaser.

In affirming, the Appellate Division held that the sale contract did not permit seller to cancel where the defects in title were waived by the purchaser or where seller had expressly agreed to remove, remedy, or discharge the defects. Because seller had expressly agreed to discharge or remedy all mortgages, government violations and orders, and taxes, and purchaser had waived the remaining encumbrance on the parcel, seller's purported cancellation was not a valid cancellation, but was instead an anticipatory repudiation of the contract. As a result, purchaser was entitled to summary judgment.

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Questions of Fact Preclude Summary Judgment on Mortgage Contingency Issues

Doony Inc. v. Palmiotto NYLJ 3/22/19, p. 26, col. 6 AppDiv, Second Dept. (memorandum opinion)

In purchaser's action for return of a down payment, purchaser appealed from Supreme Court's summary judgment motion. The Appellate Division affirmed, holding that questions of fact remained about whether purchaser had complied with the terms of the contract's mortgage contingency clause.

On June 23, 2017, purchaser contracted to buy the subject property for $435,000, and tendered a down payment of $43,500. The contract was contingent upon issuance of a loan commitment from an institutional lender in the amount of $391,500 on or before 30 days from her attorney's receipt of a fully-executed contract. The contract also required borrower to apply promptly to one or more institutional lenders, and provided that a commitment conditioned on the lender's approval of an appraisal shall not be deemed a commitment until the appraisal is approved. On August 7^th, purchaser obtained a commitment conditioned on an appraisal of the property at a value not less than $435,000. The appraisal, issued on August 31, valued the property at $395,000. Purchaser then contended that no commitment as defined by the contract had been issued and demanded return of the down payment. When seller refused, purchaser brought this action and moved for summary judgment. Supreme Court denied the motion and purchaser appealed.

In affirming, the Appellate Division noted that purchaser's principal had conceded that she had delayed in filing a mortgage application, and had failed to state when she had actually made application for mortgage loans. As a result, it was not possible, on the paper record, to determine whether lender's denial was within the time period that allowed purchaser to cancel. In light of these unresolved questions of fact, purchaser was not entitled to summary judgment.

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Broker Not Entitled to Summary Judgment on Fraud Claim By Prior Owner

Reece v. SHC Equities, LLC NYLJ 4/5/19 AppDiv, Second Dept. (memorandum opinion)

In an action by former owners of property to set aside a deed to a real estate broker, the broker appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that the broker had not demonstrated its prima facie entitlement to judgment as a matter of law on former owners' claims for fraud and for imposition of a constructive trust.

Former owners owned the subject property, which was encumbered by mortgages to secure the debt of one of the former owners. When the indebted owner defaulted on the debts, broker's representative allegedly approved the former owners and advised them that their only course of action was to pursue a short sale which would ultimately relieve the indebted owner of her obligation. Relying on the broker's representations, the former owners signed the papers presented to them, which included a quitclaim deed to the broker. Former owners were not represented by counsel. Broker never arranged a short sale, and former owner was never relieved of her debt. As a result, former owners brought this action to impose a constructive trust on the property, and to recover for fraud. Supreme Court denied broker's summary judgment motion.

In affirming, the Appellate Division held that an alleged contract of sale executed 11 months before the deed was insufficient to rebut the allegation of former owners that they executed the documents presented to them in reliance on the broker's promise that it would effectuate a short sale that would satisfy the existing mortgage debt. The court also held that the broker had not met its prima facie burden on the fraud claim, which rested on former owners' justifiable reliance on an alleged material misrepresentation of fact. As a result, broker was not entitled to summary judgment.

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Easement By Prescription Established

Rensselaer Polytechnic Institute v. Schubert 170 A.D.3d 1307 AppDiv, Third Dept. 3/7/19 (Opinion by Garry, P.J.)

In an action by landowner to establish that it has acquired an easement by prescription over neighbor's land, neighbor appealed from Supreme Court's grant of landowner's summary judgment motion. The Appellate Division affirmed, holding that neighbor had failed to raise questions of fact about long-term use or hostility.

Landowner sold a parcel of land to neighbor in 2006, pursuant to a deed in which landowner warranted that landowner had “not done or suffered anything” to cause the property to be encumbered. Eight years later, landowner acquired the adjacent parcel. While landowner was renovating its property, its contractors used an existing driveway adjacent to neighbor's parcel. Neighbor complained that the contractors were parking on neighbor's land, and that the contractors were walking on neighbor's land when they exited from their vehicles. Neighbor then erected stakes connected with a chain on the actual boundary line, making it difficult for landowner to use the driveway. In 2015, landowner offered to purchase an easement, but neighbor rejected the offer. Landowner then brought this action to establish a prescriptive easement to use the driveway, relying on testimony that landowner's predecessor had used the driveway, and had stepped on the neighboring parcel upon exiting, for decades. Supreme Court awarded summary judgment to landowner, and neighbor appealed.

In affirming, the Appellate Division held that landowner had established open and notorious, continuous use of the property for the requisite 10-year period, and then noted that neighbor had not met its burden of showing that use of the driveway had been permissive or the produce of neighborly cooperation and accommodation. The court then held that landowner's 2015 offer to purchase an easement did not constitute an overt acknowledgement of neighbor's title. Finally, the court rejected neighbor's claim that the warranty deed landowner executed in 2006 was inconsistent with landowner's easement claim, noting that the remedy for breach of warranty is money damages, and would not affect the existence of the easement.