Deal Dead, Down Payment Gone?

May a buyer rescind a purchase contract and receive a return of the down payment? That was the question in Ismael-Aguirre v. Wharton and Hiralion Real Estate Inc v. 225 5th LLC, two cases where the down payment was sought under very different circumstances.

In the first matter, the plaintiffs, Younes Ismael-Aguirre, and his wife, Leen Bakkali, sought to purchase a cooperative apartment at 159 Madison Avenue in Manhattan from Michael C. Wharton and Doris Wharton by a written contract for $465,000. The buyers provided a down payment of $46,500 to be held in escrow by the Whartons’ lawyer. The sale required an “unconditional consent” from the co-op corporation and the submission to the board of a loan commitment conforming to specific parameters. The closing date set in the contract was “on or about” March 23, 2009; however, if the co-op board did not approve the buyers by that date, the closing was to be adjourned for 30 days. If there was no approval by the adjourned date, either party could cancel the contract and the down payment would be returned to the buyers.

The contract also provided that the buyers could cancel if they did not receive approval from the lender; however, if the buyers canceled under this provision, notice had to be given within five business days of the rejection or there would be “a waiver of the right to cancel under” that specific paragraph.

Wells Fargo Bank was the buyers’ lender. It issued a commitment letter on February 17, 2009, subject to certain conditions, and it had the right to withdraw or modify the commitment if there were any “adverse change” in buyers’ credit, outstanding liabilities, or employment. The buyers submitted this commitment letter to the co-op. On March 13, 2009, Ismael-Aguirre lost his job and was unemployed until July 7, 2009. Bakkali, a physician, was pregnant at the time. By e-mail on March 17, 2009, the buyers’ counsel notified the sellers’ attorney, the bank, and the real estate agents that Ismael-Aguirre had lost his job. The next day, Wharton sent an e-mail to the co-op’s board president informing her of this development and offering an optimistic view of the buyers’ financial position. Wharton wrote that, according to his counsel, the buyers “want to walk away from the deal and only the board’s refusal of their application would give them a free pass.” Wharton continued: “Please don’t let them walk away, because I don’t have the cash to afford finding another buyer.”

Also on March 18, apparently unaware of the situation, the co-op’s managing agent called the buyers’ real estate broker to set up a board interview. The broker responded by e-mail, explained that Ismael-Aguirre had lost his job, and asked whether the board still wanted to interview. The managing agent forwarded the e-mail to the board president on March 19 and asked for the board’s advice. The president responded that, if the buyers agreed to place one year’s maintenance charges in escrow, it would interview them that evening.

While the managing agent and president were exchanging e-mails, the broker wrote to the managing agent that Ismael-Aguirre was “very actively seeking new employment,” that he could obtain financing upon re-employment and that he would be “very happy to move forward with the purchase, however it is uncertain at this time how long this process will take.” The message was forwarded to the president, who wrote to the managing agent that “there is no point in doing the interview if they don’t have the financing. Please ask them to resubmit their package once their financing is set.”

Wells Fargo withdrew its loan commitment by an e-mail message on March 19, 2009 (it sent a formal notice denying the application on April 10, 2009). On March 19, the buyers’ counsel sent an e-mail to the sellers’ counsel informing him of Wells Fargo’s changed position, the “potential of the rejection of the loan,” and that the buyers reserved their right to receive a refund of the down payment if the loan was retracted.

The sellers refused to return the down payment and the buyers sued for breach of contract. The sellers counterclaimed that the buyers had breached the contract by acting in bad faith in “allegedly attempting to sabotage this transaction” and by failing to meet their financial obligations. The court found that the only evidence which might fit the characterization was the exchange of e-mail messages to arrange a board interview. Nothing about that, however, suggested sabotage. The court did find that the sellers were attempting to interfere with the normal workings of the board by urging the president to preserve the deal.

The court found that evidence supported the conclusion that the transaction was terminated on March 19, 2009, in line with contract stipulations. The court pointed out that the apartment ultimately sold to another buyer on July 28, 2009, for $529,500, a gross difference of $64,500.

In Hiralion Real Estate, Inc. v. 225 5th LLC, El-Ad Properties NY LLC, Cantor & Pecorella and D’Agostino Levine & Landsman LLP, the issues concerned representations made about a new construction condominium. Hiralion had entered into a purchase agreement dated June 23, 2006 with 225 5th, the sponsor of the conversion, for the purchase of a duplex apartment at 225 Fifth Avenue for $6.6 million. The apartment was to be constructed by combining an existing unit on the 12th floor with a 13th-floor unit that was to be built. Under the purchase agreement, Hiralion tendered a $990,000 down payment and deposited $250,000 into escrow to be used by the sponsor for custom work costs in connection with the combination of the units.

Hiralion claimed that the sponsor fraudulently induced Hiralion to enter into the purchase agreement by concealing the fact that there was an eight-foot, eight-inch parapet wall on the 12th floor roof terrace that blocked the view. In support of its fraud claim, Hiralion contended that the sponsor claimed the views were “sprawling,” that the offering plan inaccurately described the parapet and that sponsor prevented Hiralion from viewing the 13th floor before executing the purchase agreement, which would have allowed Hiralion to see the 12th-floor parapet.

The sponsor did not dispute that the parapet obstructed park views from that roof and that it in effect created a courtyard in which the only views were of the sky. However, the sponsor contested the fraud claim by asserting that the parapet was fully disclosed in the offering plan and that a provision of the purchase agreement precluded Hiralion from relying on any oral representations as to the views. The sponsor contended that because Hiralion had defaulted on the closing date, the sponsor was entitled to retain the down payment as liquidated damages.

The court found that there was an issue of fact that could be decided at trial: whether the sponsor had failed to describe accurately the parapet in the offering plan. While the court rejected Hiralion’s contention that the written description was ambiguous as to the location of the parapet, the court found that there was an issue that needed to be resolved: whether the floor plan created an ambiguity as to the height of the parapet.

The court further found that Hiralion raised an issue of fact as to whether the sponsor made oral representations that there were park views from the 12th floor. Hiralion also represented that Hiralion engaged an architect to create an apartment design that would have moved the entertaining space to take advantage of the views and that plans for this change were presented to the sponsor prior to the execution of the purchase agreement. The sponsor did not deny any of this, but contended that Hiralion was barred by a clause from claiming reliance on oral representations by the sponsor. The court noted, however, that representations as to “views” were specifically missing from this provision. Ultimately, the court found that Hiralion raised an issue of fact as to whether the sponsor actively concealed the absence of views from the 12th floor roof.

Finally, Hiralion claimed that it requested to inspect the 13th floor before entering into the purchase agreement, but that the sponsor denied the request on the ground that an inspection would have been too dangerous because of ongoing construction. The court found that an issue of fact existed as to whether the sponsor’s refusal to permit access prevented Hiralion from ascertaining the significant extent to which the parapet obstructed the views.

Comment: These cases address when and if a prospective purchaser is entitled to a refund of the down payment. In Ismael-Aguirre, it determined that the terms of the contract were unambiguous and that, based on the board’s failure to act, the contract was terminated. As to Hiralion, the court was faced with a different issue: whether the sponsor of the conversion misrepresented that the 12th-floor terrace would have views, as opposed to an eight-foot wall which enclosed the space. Based on the ambiguity between the written words of the offering plan and the floor plans, the court was willing to consider oral representations made by the sponsor, even though they would not normally be used when interpreting a contract.

Attorneys in both cases:

Ismael-Aguirre v. Wharton

For Plaintiff: Bryan W. Kishner & Assoc.

For Defendant:

Law Office of Nicholas Bowers

Hiralion Real Estate Inc. v. 225 5th LLC

For Plaintiff: Shiboleth LLP

For Defendant: D’Agostino, Levine & Landesman LLP