Case Notes: When the Co-op Interferes in a Sale

The Co-op's Actions 

Carlos Rodriguez Pastor contracted with the estate of Monique Uzielli to purchase the penthouse apartment at 1107 Fifth Avenue for $27.5 million. The apartment had a wraparound terrace of about 4,800 square feet. As part of its contractual obligation, the estate was to deliver to the purchaser the penthouse plans referred to in the proprietary lease, which were to be substantially similar to the floor plan the estate attached to the contract.

Even though, under the proprietary lease, the owner of the shares allocated to the apartment had exclusive use of the terrace, in May 2012, the managing agent wrote: "It is important to note that the upper roof [above the penthouse], accessible by the stairs on the terrace, may be used by shareholders at any time as a common area of the building." But the stairs and roof area had never been previously used by shareholders.

Notwithstanding the agent's letter, in June 2012 the board approved the sale without any conditions. Yet, in an August e-mail, the board proposed a "conditional consent agreement," i.e., an agreement whereby the estate/seller, the purchaser, and the board would agree that the penthouse plans described in the lease were missing or lost, that the entire penthouse roof was a common area, and that the co-op shareholders had the right to use the stairs for access to the roof.

The Estate/Co-op Action 

Both the purchaser and the estate refused to sign this agreement. The estate began an action against the co-op and managing agent in September 2012 requiring, among other things, that the board submit a copy of the penthouse plans, withdraw the conditional consent agreement, and acknowledge that its consent to the sale was unconditional. It sought a declaration that the roof was for the exclusive use of the owner of the penthouse apartment. Ultimately, in May 2013, the co-op withdrew the conditional consent agreement request and forwarded a copy of what it advised were the penthouse plans. 

The issue of the declaratory relief sought was not resolved and — at least according to the purchaser — the plans were different from those the estate/seller attached to the contract and were designed so that the board, perhaps, had a viable argument that shareholders could use the stairs and roof. Because the estate was required to — but did not — produce plans similar to those attached to the contract, the purchaser sent a notice to the estate cancelling the contract and demanding a return of the deposit.

The estate did what it could to allay the purchaser's concerns and preserve the sale. It moved for partial summary judgment in its action with the board and obtained from the co-op a new penthouse plan that — the court in the estate/board case ruled — was substantially similar to the plan attached to the contract. The board did not, however, withdraw its position as stated in the May 2012 letter, nor did it affirmatively acknowledge the purchaser's right to the exclusive use of the penthouse roof.

Were Good Faith and Fair Dealing Ignored?

The estate rejected the purchaser's attempt to cancel the contract and set a time of the essence closing date. The purchaser did not appear at the closing and, two months later — in September 2013 — started this action seeking return of the deposit. Before discovery, the estate moved for an order directing the release of the escrow funds to it. 

The appellate court discussed the estate's burden — it had to show that it was "ready, willing, and able" to close on the time of the essence closing date and that purchaser failed to demonstrate a lawful excuse for its failure to close. The court found that the estate did not meet this burden — it could not show that the co-op unequivocally and categorically withdrew its position with respect to the exclusive use of the roof/terrace area.

The co-op's behavior was also problematic — it had attempted to interfere with the right to exclusive use of the terrace almost immediately after the contract was signed, requested that the purchaser relinquish his exclusive right to the terrace, and submitted a plan in May and then again in June, all the while claiming that the original plan could not be located. Under the circumstances here, the estate needed to obtain a full retraction of the co-op's position before it could close. 

Indeed, even the estate understood that the co-op's position would damage the value of the penthouse and began an action in an attempt to negate the co-op's actions. But any statements made by the co-op in that action fell short of an unequivocal change in position — at no time did the co-op state that it no longer viewed the terrace/roof as being available to all shareholders. As a result, the estate could not show that it was ready to close on the closing date or that the purchaser lacked a lawful reason for failing to close.

The court then looked to the purchaser's claim that the estate breached the "covenant of good faith and fair dealing," which is implicit in all contracts in New York. The purchaser was, in effect, saying that the estate colluded with the co-op in abandoning the action it started against the co-op without obtaining the declaratory relief it sought, i.e., a court order acknowledging that the owner of the apartment had the exclusive right to use the roof.

Ultimately, the court denied the estate's motion for summary judgment and concluded that discovery may uncover facts that would determine which party was entitled to the down payment.

The Takeaway

We cannot stress enough how important it is to know what you are buying. And to make sure the board agrees! In a condo, one can — and should — always look to the tax lot drawings, which are filed with the Department of Finance (many are available on the Automated City Register Information System). In modern condominiums, the tax lot drawings will show the boundaries of what you are about to purchase, although we have found that there is often less information on older drawings.

In a co-op, however, this information is not recorded and not always readily available. The proprietary lease (which will be available) may refer to the offering plan, or one of the amendments to the plan. If the co-op was created before 1962, there may never have been an offering plan as there was no filing requirement. And if the co-op is more than ten years old, the plan and amendments may no longer be available. The attorney general's office has an official retention policy of only 12 years. 

Even worse than referring back to the plan, the lease may refer to a drawing, or even a separate agreement, of which no one has a copy (or perhaps no one has an executed copy). While it may be easy to blame the managing agent — it is, after all, the agent's responsibility to maintain documents — the reality is that when a building changes from one agent to the next, all the records often do not necessarily get transferred, and no one realizes it until years later. 

The takeaway, of course, is to make sure the seller, buyer, and board all agree on what exactly is being purchased.

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.

Illustration by Liza Donnelly. 

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