When the Buyer Is a Liar

In a case decided by an appellate court, a condominium board did what many have surely 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 in Tribeca, 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 board disagreed and sued Foerster for fraud, arguing that she lied by stating in her purchase application that the apartment would not be used for business purposes. Had it known that Foerster was going to purchase the apartment to operate a business, the board claimed, it would have rejected the application and exercised its right of first refusal. The board asked 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 because 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 all that’s needed to sustain a claim for rescinding the deed is a misrepresentation that induces a party to enter into a contract detrimental to its own interests. The court acknowledged that the board’s claim against Foerster had a “sound basis in the record,” and Foerster’s motion for summary judgment was denied.

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

What happens when the buyer’s misrepresentation is less obvious? And how long can a person be held to a representation made in a purchase application? 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.

(Dale J. Degenshein is a special counsel at Stroock & Stroock & Lavan.)