Can a Purchaser Lie with Impunity?

In Board of Managers, Soundings Condominium v. Foerster, a case decided by an appellate court, a condominium board did what we suspect many have wanted to do: it sued to rescind the transfer of a unit based upon misrepresentations made by the purchaser.

Shortly after she entered into a contract for a one-bedroom apartment at Soundings Condominium, at 280 Rector Street in Manhattan, Sonja Foerster applied to the state Office of Children and Family Services (OCFS) for a license to operate a group family day-care center in the unit.

In her purchase application to the board, Foerster acknowledged that she had reviewed the condominium’s governing documents, which include a requirement that residential units are only for “private residential use.” In her application, Foerster, who lives in a nearby building, stated that no “business or profession” would be conducted in the Soundings unit and that she was purchasing the apartment for her child’s nanny.

The board waived its right of first refusal and the unit was sold. Foerster then submitted an application to remove the wall between the bedroom and the living room. The board approved the application. It was later learned that Foerster had informed OFCS that her proposed day-care premises would be a large open space. Two months after she bought, Foerster wrote to the managing agent, saying that she planned to move “a language program for kids” from her other apartment into her Soundings apartment, and that such use was consistent with residential use and did not need to be reviewed or approved.

The Legal Action

The board initiated legal action, arguing that Foerster lied by stating in her purchase application that the apartment would not be used for business purposes – even as she was applying for a business license with OFCS. Had it known that Foerster was going to purchase the apartment to operate a business, the board claimed, it would have rejected the application as not being from a “bona fide” purchaser, and it would have exercised its right of first refusal. The board sued Foerster for fraud, asking the court to rescind the deed and the board’s waiver of its right of first refusal. The board also sought an order requiring Foerster to restore the unit to its former condition.

Foerster moved for summary judgment to dismiss the complaint. She contended that the board’s claims violated Social Services Law Section 390(12), in that the board sought to prohibit the use of a licensed group family day-care facility. The basis of the argument is that the board’s fraud claim cannot be sustained because the board did not suffer any damages. And damages, Foerster argued, were essential to the board’s claim.

The court pointed out that damages are not necessary to sustain a claim for rescinding the deed; all that’s needed is a misrepresentation that induces a party to enter into a contract detrimental to its own interests. The board did not need to prove that it had suffered monetary loss, or that the accused party knew the action was wrong before committing it. The court said that even an innocent misrepresentation will support the rescinding of the sale.

Thus, the court acknowledged that the board’s claim against Foerster had a “sound basis in the record.” As a result, Foerster’s motion for summary judgment was denied.

The Takeaway

It’s unusual for a co-op or condo board to initiate a legal action based on misrepresentations in the purchase application. The case merely denied Foerster’s motion for summary judgment.

Accordingly, there remain many issues and unanswered questions. In this case, the misrepresentations were plain and undeniable. But what happens when the misrepresentation is less obvious? And how long can a person be held to a representation made in a purchase application? Clearly, no one believes that a representation made 20 years earlier should be binding.

Another question is whether the Social Services Law requires a condo or co-op to allow a group home to be in place even if the governing documents require that apartments be used only for residential purposes. And what rights – or obligations – will the initial sellers have? We don’t have the answers to all of these questions, but the board’s decision to sue here – and the court’s refusal to dismiss the claim for rescinding the sale – should be taken into account by any purchaser seeking to “put one over” on a board.

Attorneys For the board: Belkin Burden Wenig & Goldman LLP

For Foerster: A.M. Richardson