Mold Reversal

The Habitat “Case Notes” for June 2005 discussed two cases involving mold conditions in New York City apartments. Shortly after that column appeared, the court, in Litwack v. Plaza Realty Investors, changed its decision and dismissed the complaint on the ground that the defendants did not have actual or constructive notice of the condition at the premises that caused Litwack’s injuries. The decision on reargument follows.

The plaintiff was formerly a tenant at 200 East 33rd Street, Apartment 30G, in New York City, owned and managed by the defendants. She claimed that she suffered personal injuries from a toxic mold condition at the premises from April 1999 to July 2001, when she moved out. She said that the condition was caused by water leaks. The defendants moved for summary judgment, asserting that they did not have notice of the alleged toxic mold condition. That motion was denied.

The defendants then moved to renew and reargue based upon the recent decision of the appellate division in Beck v. J.J.A. Holding Corp. , decided on November 16, 2004, several days after the order in this case (discussed in the June 2005 “Case Notes”). They asserted that Beck, also a toxic mold case, supported their position that Litwack could not set forth a prima facie case of negligence, because it was undisputed that the defendants did not have notice of the mold condition until four months after she vacated the premises. Litwack contended that Beck was inapplicable.

This court granted renewal, and, upon doing that, granted the defendants’ motion for summary judgment, dismissing the complaint. It said that, in Beck, the court, for the first time, had clarified the issue of the landlord’s duty in a case where the tenant was alleging a mold condition in the premises caused personal injuries. In that case, the plaintiff’s apartment was flooded in September 1998, severely damaging the floor and the walls. The defendant landlord, at the plaintiff’s request, repainted the premises, and the plaintiff replaced the carpeting. The plaintiff claimed that afterwards, as a result of the flooding, hazardous mold contaminated her apartment. She alleged that, because it was foreseeable that water seeping into the walls would cause a dangerous accumulation of mold, the landlord breached its duty to maintain the premises in a safe condition by failing to abate the mold. She testified at her deposition that she was not aware of the mold condition until she received a report from Johns Hopkins Hospital in November 1999. She then moved out in December 1999.

In moving for summary judgment, the defendants argued that they did not create the condition, and had no actual notice of it prior to November 1999. They also contended that they did not have sufficient time to remedy the situation before the plaintiff moved out. The plaintiff then asserted that there was discoloration on the walls, which, along with the defendants’ knowledge of the water damage, should have put defendants on notice of the likelihood of mold contamination.

In affirming the lower court’s dismissal, the court held that Litwack failed to meet her burden to show that the defendants had either created or had actual notice of the mold hazard, and also failed to establish any other act or omission by the defendants which could have caused her respiratory ailments. It reiterated the lower court’s finding that the landlord did not have an ongoing duty to monitor the premises for the possible development of environmental hazards.
As in Beck, the defendants had demonstrated that they were first notified of the hazardous mold condition in November 2001, when Litwack’s attorney sent them a letter, demanding damages and remediation. This was four months after the plaintiff had moved out of the apartment.

At her deposition, the plaintiff admitted that she did not discuss her concerns with the defendants that there might be an environmental problem with the premises. There was an insufficient time period in which the defendants could be charged with constructive notice. The court said that Litwack’s evidence of the notice of water leaks and brownish spots on the dining room wall were insufficient to create notice. As the court in Beck found, the court here held that the defendants did not have an ongoing duty to monitor Litwack’s apartment for the possible development of an environmental hazard. Therefore, the defendants’ motion for summary judgment was granted and the claims for negligence were dismissed.

Comment: The coincidence of the decisions in the two cases with different results led to reconsideration of the lower court case which was at variance with the one decided by the appellate division. As a result, the decisions were reconciled and the Litwack action was dismissed based on Beck. Despite this reconciliation, which provides that actual knowledge or notice of a mold condition itself is required to impose liability on a landlord, a landlord’s liability for mold conditions remains an emerging legal issue and further decisions can be expected.
In the interim, steps can be taken by co-op and condo managers and boards to control both damage and liability. Preventive maintenance and prompt and appropriate remediation, using experienced specialists where indicated, are key. Identifying and repairing the source of water leaks will prevent recurrence.

Deal-Breaker

What if a co-op board is not satisfied with the financial condition of a prospective apartment purchaser and requires a security deposit as a condition to approving the purchaser? If the prospective purchaser does not have the funds or is unwilling to provide the security deposit, according to Sit v. Schnaps, the purchaser may cancel the contract and obtain a refund of the downpayment.

On May 6, 2004, Sit, the plaintiff-prospective purchaser, and Schnaps, the defendant-seller, entered into a contract for the transfer of the shares of Apartment 7-D, of a co-op located at 69-10 108th Street, in Forest Hills, New York, with the closing to take place on June 1, 2004. The contract provided that “[t]his sale is subject to the approval of the Corporation,” referring to Woodrow Wilson Owners Corp. The closing date was adjourned for 30 days for the purchasers to obtain the required approval of the corporation.

The potential purchasers submitted an application to the corporation, along with all required documentation, and were interviewed on June 24, 2004. On July 2, the corporation sent them a letter, conditioning the approval upon the would-be purchasers putting the sum of $13,556.16, representing the equivalent of 18 months of maintenance, in escrow for an indefinite period of no less than 18 months.

Unable to come up with the money, the prospective purchasers attempted to negotiate the escrow amount and other terms of the agreement with the corporation. On July 13, 2004, the seller’s counsel sent the potential purchasers word that the seller was making time of the essence on August 2. On July 15, the potential purchasers cancelled the contract because the corporation had not unconditionally approved their application within the 30-day time period required, and demanded the return of their downpayment.

On July 23, the corporation notified the would-be purchasers that it would not negotiate the terms of the escrow. On July 28, 2004, the corporation notified them that the sale of the premises was not approved.

In analyzing the failed purchasers’ motion for summary judgment to recover their deposit, the court noted that a party moving for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law, offering sufficient evidence to demonstrate the absence of an issue of fact that could be weighed during a trial.

As to the threshold question, the court concluded that the prospective purchasers had demonstrated their prima facie entitlement to the return of their downpayment, based upon their good-faith efforts to comply with the express terms of the contract. The burden on a summary judgment motion then shifted to the seller, and, as the opponent of a motion for summary judgment, the seller had the burden of producing evidence that demonstrated that there was an issue of fact that had to be tried. The court said that the seller here had not successfully proven that point.

That the potential purchasers had acted in good faith and were duly diligent in attempting to procure the approval of the co-op board for the purchase of the subject cooperative apartment was undisputed. After receiving their loan commitment, the would-be purchasers duly submitted their application to the corporation, provided all requested information therein, and were interviewed.

The corporation’s July 2, 2004 approval letter, conditioned upon the potential purchasers’ advancing a substantial escrow, in excess of $13,500, representing 18 months of maintenance charges, to be held by the corporation for an indefinite period of no less than 18 months, was clearly an unanticipated deal-breaker in the court’s view. The unduly burdensome nature of this condition, the lack of prior notice thereof, the purchasers’ inability to comply because of financial hardship, coupled with the unreasonable refusal of the corporation to negotiate or compromise its position, effectively eviscerated the corporation’s consent.
Thus, the seller did not carry his burden of demonstrating that the corporation approved the purchasers and that the purchasers breached the contract of sale by nonetheless refusing to complete the transaction. Indeed, the record indicated the contrary, that Woodrow Wilson Owners Corp. had only conditionally approved the purchasers and eventually rejected them on July 28, 2004.

The court cited an authority which had observed: “… [a] board of directors is often placed in a dilemma where it wishes to approve a sale by a shareholder, but the applicant does not meet the financial or other criteria established by the board. To resolve this problem, many boards will render a conditional approval. These special conditions can include a request that the applicant obtain a guarantor of the proprietary lease obligations or deposit funds in escrow, as security for the performance of the applicant’s obligations to the cooperative… Conditional approvals may backfire. Since there was no final agreement between buyer and co-op board as to specific conditions demanded by the board for its approval of the buyer as a shareholder, buyer was entitled to return of deposit under terms of contract of sale....”

In interpreting a substantially similar provision to that in the sale contract, the court cited a previous decision that had held that, where no board approval was obtained within the adjourned period of time, the contract was considered cancelled. In Corazza v. Jacobs, which the court found controlling under the facts at bar, the appellate division, interpreting a contract provision requiring board approval, held that a sales contract should have been cancelled and the downpayment returned when the board’s failure to give its approval was caused, not by any bad-faith conduct by the potential buyer, but by the imposition of an unreasonable residency restriction.

Similarly, in Rossi v. Simms, the potential purchaser’s downpayment was ordered returned by the trial court where the would-be purchaser refused to comply with a condition of the co-op board requiring him to pay a surcharge for use of the apartment as a professional office. The seller had not cited a single case supporting his position.

Applying the above-referenced instructive and binding precedents to the case fostered the court’s conclusion that the seller ought to have permitted rescission of the contract and returned the downpayment. There was also no agreement between the purchasers and the co-op board as to the conditions unilaterally imposed by the board in exchange for its approval, since the purchasers were both unaware of the escrow conditions at the time they applied, and were unable to comply with the board’s escrow requirement, which the board was unwilling to negotiate. The seller had failed to offer any evidence, other than the mere speculation of counsel, that the escrow condition was “routine” or that the prospective purchasers were aware of it.
The sale did not occur, the court found, because of an unforeseen and onerous condition imposed by a third party, the corporation, in exchange for its approval. The unique facts of this case, applicable case law, and principles of fairness and equity, all militated in favor of restoring the parties to the status quo in this matter. A contrary holding would subject the purchasers to the loss of their downpayment because of their financial inability to pay an additional non-negotiable escrow, of which they had no awareness at the time they entered into the contract of sale. Thus, the court held that the purchasers had properly exercised their right to rescind the transaction.
The court declined to award the failed purchasers attorney’s fees and compensatory and punitive damages. Paragraph 13.2 of the contract provided that “[i]n the event of a default or misrepresentation by Seller, Purchaser shall have such remedies as Purchaser is entitled to at law.” The court did not find any evidence of default (or misrepresentation) on the part of the seller.

Moreover, the escrow-holder, in good faith and correctly, in the court’s view, retained the contract deposit, pending the judgment of the court. The contract subjected the sale to approval by the corporation, rather than unconditional approval.

Accordingly, the court granted the failed purchasers’ motion to the extent noted, and seller’s cross-motion was denied in all respects. It was further declared that the sales contract was null and void, and that the purchasers were entitled to the return of their contract deposit, plus interest accrued from the date of deposit into the escrow account to the present.

Comment: This case reaffirms established co-op law that a purchaser of an apartment that is approved subject to compliance with certain conditions may cancel the purchase agreement and receive a full refund of the contract deposit if those conditions are not met. This is a harsh and sometimes unexpected dilemma for a co-op seller who frequently has waited for many weeks to learn if a co-op board approves his purchaser. It suggests that a seller has a strong interest in seeing that his purchaser is well-qualified to acquire the apartment and likely to be approved by the board. This issue should be considered before a seller signs a sale contract.