The Supreme Court of New York County recently heard the case of Bauer v. Beekman International Center which involved the market for high-end real estate properties in Manhattan, and illustrated some of the complex contractual issues present.
Background of the Case
The factual background and underlying practical issues are quite complex and only a simplified version is presented here. The defendant was the sponsor of a newly built building located at 351 East 51st Street in midtown Manhattan. Beekman filed an offering plan with the state to sell 65 residential condominium units in 2000. In 2002 the defendant purchased three of these units. Problems soon arose thereafter.
The plaintiff alleged that the defendant allowed the offering plan to lapse around 2004 by not attempting to sell unsold units, but instead by leasing them. Plaintiff contends that the offering plan contained an implied promise to sell all unsold units within a reasonable time – a promise that the defendant breached to the detriment of plaintiff and other condominium purchasers. Plaintiff then alleged certain harms, such as reduction of market value, inability of prospective buyers to obtain financing, and other items.
Now, condominiums in New York City pose some interesting wrinkles. Many, as in this case, are co-operative, which means that the owners of the units exert a great deal of power and influence. For instance, many co-ops share common costs among the owners and have powers analogous to a homeowner’s association – which is to say a great deal. They are able to exert unique influence on the character of their community, which, as one might imagine with units valued at between $1 Million and $6 Million, then affects the market for homes in the building. The offering plan contains the basis for this kind of co-operative arrangement, if desired, and thus state law requires its filing with the appropriate government department.
One of the harms plaintiff was upset about was the fact that the defendant, by retaining ownership of a large block of units, exerted a great deal of control over the co-op governing body, possibly to the detriment of owners who owned only one or a few units.
The court discussed a case that was on point: the famous case of Jennifer Realty. The appellate division found in Jennifer Realty that offering plans are a form of contract, and that for the building sponsor to keep a majority of the units defeats the purpose of the contract, which is to create a ‘viable co-op.’ In 2006, the Attorney General issued regulations in response to Jennifer Realty. These heightened the disclosure requirements of building sponsor’s offering plans, including whether the sponsor reserved the right to rent rather than to sell all units.
The defendant denied the applicability of Jennifer Realty, but the court disagreed. However, the analysis did not end there.
The court found that the defendant retained 29 of the 65 units – and focused on whether this destroyed the ‘viability’ of the co-op. Interestingly, Jennifer Realty stopped short of defining what ‘viability’ meant, saying only that retention of a majority of units qualified.
Defendant here was able to cite evidence in its favor. Residential units were recently sold or refinanced – cutting against plaintiff’s assertion of harms such as inability to sell or obtain financing at good rates.
Unfortunately, plaintiff’s pleadings were deficient. Plaintiff was, in fact, able to sell two of her three units. She did not show an inability to obtain financing, and the court viewed many of her other allegations of harm as speculative and failing to meet recognized evidentiary burdens. After weighing both sides’ assertions, the court granted summary judgment to the defendant, saying that plaintiff had failed to claim a viable issue of fact. This ruling is quite interesting, because the plaintiff made arguments quite similar to those made in Jennifer Realty. The retention of less than 50% of the units by defendant might have been the key factor, mitigating against the ‘lack of viability’ argument. Perhaps, under similar facts, if a future plaintiff were able to show more evidence of harm the disposition of the case might go in a different direction.
Co-operative condominium contracts are especially thorny and fraught with legal issues. It is imperative to retain counsel experienced with contractual and real estate matters. Please do not hesitate to contact our office for a consultation.