The Bona Fide Offer

May a condominium board extend the time it is given by the condominium bylaws to exercise a right of first refusal to acquire a unit? The answer was a clear “no” in Board of Managers, Kingsley Condominium v. Villinvestment A.V.V. where the court said the board had no power to vary the bylaws’ provision.

The board of managers of the Kingsley Condominium brought this action to compel defendant Villinvestment A.V.V. to convey title to unit 303 of the condominium to it for the sum of $120,000, and for a declaratory judgment to determine whether the proposed sale of Unit 303 was bona fide within the meaning of the bylaws of the condominium. Defendant Sharon Feldman, the prospective purchaser of Unit 303, moved for a summary judgment dismissing the complaint. Villinvestment cross-moved, adopting Feldman’s motion, and seeking a declaratory judgment on its first counterclaim, that the board waived its right of first refusal, and that Villinvestment could convey the unit to Feldman, as per the contract between them. The board cross-moved to dismiss the counterclaims asserted against it, and for summary judgment directing Villinvestment to convey title to Unit 303 to the board.

Villinvestment owned Unit 303 of the Kingsley Condominium, and hired TriStar Equities Inc., a real estate managing company, to manage the premises. Rod Feldman, Sharon’s husband, was the president of TriStar. In early 2002, the board’s managing agent corresponded with TriStar to arrange for the leasing of Unit 303 to a tenant. The managing agent took care of all the paperwork involved in leasing the unit, including providing a pre-printed “Notice of Intention to Sell or Lease Condominium Unit” form.

On March 27, 2002, an agent of Villinvestment notified an employee at TriStar of its intention to sell Unit 303 for $120,000, subject to the existing tenancy of the tenant in possession. Villinvestment inquired whether TriStar could find a buyer, and what documents might be needed in order to put the unit up for sale, but did not enter into any agreement with TriStar regarding the sale of the unit. The next morning, the employee at TriStar notified Villinvestment’s agent that the Feldmans were interested in purchasing Unit 303 for the offering price, and that they would be prepared to close within 90 days.

On May 8, 2002, Villinvestment entered into a contract of sale with Sharon Feldman, at which time she tendered, and Villinvestment accepted, a $12,000 down payment. The board’s managing agent provided a “Notice of Intention to Sell or Lease Condominium Unit” form and an application package, and said that the package had to be completed and returned to the managing agent’s office. Sharon Feldman followed the managing agents’ instructions, completed the application package, which required the inclusion of an executed contract, and hand delivered it to the managing agent on May 23, 2002. The agent requested additional information, which Feldman supplied on May 31, 2002.

The board did not respond to the application and notice, despite three follow-up calls that were made in June and July 2002. The bylaws of the condominium required the board to respond within 20 days if it elected to exercise its right of first refusal.

On July 22, 2002, Sharon Feldman was notified by letter dated July 19, 2002, that the board had decided to exercise its right of first refusal. Her attorney notified the board’s managing agent that the board had waived its right of first refusal, because it did not exercise it in a timely manner. In its response, the board maintained that the time period had not expired, because the board did not receive the package until July 3, 2002, and, in any event, the transaction was not bona fide.

On August 27, 2002, the board attempted to exercise its right of first refusal by delivering a check for $12,000 to Villinvestment’s counsel. The latter returned the board’s down payment check, and advised the board that its time to exercise its right had expired. The board began this action in October 2002. Under a court order, Sharon Feldman was permitted to intervene in this action.

Sharon Feldman and Villinvestment contended that the board waived its right of first refusal by not exercising it in a timely manner. The bylaws of the condominium provided that a unit-owner who receives a bona fide offer for the sale of his unit that he intends to accept must give notice of that intention, and must offer the board the unit on the same terms as the outside offer.

The bylaws stated: “Within twenty (20) days after receipt of such notice, the Board of Managers may elect, by notice given within five (5) days after making such election, and in any event, within said twenty (20) day period, to such Unit Owner, by certified or registered mail, to purchase such Unit.

“In the event the Board of Managers or its designee fail to notify the offering Unit Owner of its decision to accept such offer within twenty (20) days after receipt of notice as aforesaid or notify the offering Unit Owner within said period of its decision not to accept such offer, the offering Unit Owner shall be free to contract to sell such Unit... within thirty (30) days after the expiration of the twenty (20) day period in which the Board of Managers or its designee might have accepted such offer...”

The board first argued that the 20-day period within which to exercise the right of first refusal had not expired when the board sent the letter on July 19, 2002. It based its position on its assertion that it did not receive the package until July 3, 2002. However, there is no question that the board’s managing agent received the package, with the additional materials requested, no later than June 3, 2002, and probably by May 31, 2002. While it may be true, as asserted by the board, that the managing agent had no authority to exercise the right of first refusal, the court said that it was undisputed that it had authority to accept the papers for the board. Having given the managing agent authority, or even apparent authority, to accept the papers, the board could not now redefine the receipt of the notice of intent to sell to mean when its duly authorized agent transmitted the papers to it. Rather, the court held that the board received notice when its managing agent received notice. Thus, the board’s time to respond expired no later than June 23, 2003.

The board also argued that the business judgment rule allowed it to determine that the receipt of notice was on July 3, 2002, when the notice was actually distributed to the board members. In the court’s view, this argument was disingenuous. It said that the board could not, in the guise of the Business Judgment Rule, redefine terms and bylaws to suit its needs and to cover up for its failure to act in a timely manner. While the rule may protect the board in the event of a challenge to its determination of whether or not to exercise a right of first refusal, the failure to act within the time limits, as involved here, had nothing to do with the business judgment exercised by the board.

The board next argued that it was entitled to take advantage of an exception to the general principle that a right of first refusal must be strictly adhered to; that is, equity will intervene if the party that failed to act will suffer a forfeiture if not permitted to exercise its right of first refusal. The court said that the cases in which such forfeiture was found generally involved parties that had invested considerable sums of money in renovating premises, which they would lose if they could not exercise the option that they had, whether it was to renew the lease or to purchase the property. Here, however, the board had not made any investment in Unit 303, and would not, therefore, suffer any forfeiture as a result of its failure to act in a timely manner, the court said.

The board tried to distinguish the type of interest it had in Unit 303 at different points of time, and contended that its interest, after the offer to buy was made, ripened into an option as opposed to a right of first refusal, and its loss would constitute a forfeiture. The court found that this argument had no merit, saying that the board had a right of first refusal. It failed to exercise that right. The board could not then, by various mental gymnastics, create an interest to serve as a basis for a claim of forfeiture, thereby extending the time limit for exercising the right of first refusal. To allow such maneuvering would result in permitting any entity to overcome its failure to exercise a right of first refusal by redefining that right once a bona fide offer was made. The ensuing result would be that the exception would subsume the general rule, that rights of first refusal must be strictly construed.

The board next argued that defendants did not abide by the bylaws, because they did not enter into the contract to sell after the 20-day period elapsed, but entered into it prior to giving the board notice of the intention to sell. This argument, too, was disingenuous in the court’s view. The board required the parties to submit a fully executed contract with the notice. It could not later use the fact that the parties followed its instructions in order to avoid its own default.

Accordingly, the court held that the defendants demonstrated that the board had failed to exercise its right of first refusal, and the board had not adequately refuted that evidence.

The board also contended that the proposed transaction was not bona fide, and, therefore, could not proceed. It based its position on its assertion that the proposed purchase price was “dramatically less” than comparable prices for similar apartments. The board accused Sharon Feldman of providing the seller with some hidden compensation. The board also relied on her counterclaim, which stated that she would suffer $175,000 in damages if she was not permitted to complete the purchase. According to the board, that meant that she believed that the unit was worth $175,000 plus $120,000, or $295,000. The court concluded that the basis for this conclusion was speculative, because the issue of how the figure for damages was calculated was not stated in the counterclaim, and had never been addressed.

The court stated that the board’s argument that the offer was not bona fide was not based upon any evidence. The board failed to include any evidence in its intial papers requesting summary judgment that the proposed purchase price was under market value. Thus, its motion, insofar as based on this claim, had be denied said the court. In later “reply” papers, the board did include the sales prices of other units in the building of the same size. However, evidence that was received in reply papers could not be considered on a motion for summary judgment. The evidence must be submitted with the initial papers so that the opponent can respond to the evidence presented.

Further, even if the court were to consider the reply papers, it said that there was no evidence of any kind regarding the condition of the unit, or any other potentially value-reducing factors, so there was no basis upon which to determine whether there was a reason for a lower sales price. Hence, the board had failed to demonstrate that the offer was not bona fide.

The court said it should be further realized that, while the board was arguing that the offer was not bona fide, it was, at the same time, attempting to exercise its right of first refusal, which applied only to a bona fide offer. It said that the offer could not be bona fide for some purposes, but not for others. The board’s treatment of the offer as bona fide precluded it from asserting otherwise even if it had presented evidence to support its assertion.

The board contended that Sharon Feldman could not seek to enforce the bylaws of the condominium, because she was not a member of the condominium. However, the court found that objection moot, inasmuch as Villinvestment, which was a member of the condominium, sought the same relief.

Accordingly, it was determined by the court that the proposed sale of Unit 303 was bona fide, that the board had failed to properly exercise its right of first refusal, and that Villinvestment could convey the unit to Sharon Feldman as per their contract.

Comment: Increasingly, cases involving a condominium board’s right of first refusal are being reported. As more boards decide to exercise such rights, they are learning the pitfalls of not following precisely the procedures to accomplish this result. Rights of first refusal are limited restraints on alienation permitted by virtually all states. As such, they are always strictly construed and the rule is still caveat emptor!