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THE LAWSUIT SOUGHT RETURN OF A DOWN PAYMENT UNDER A REAL ESTATE CONTRACT; BECAUSE THE LAWSUIT DID NOT AFFECT TITLE, POSSESSION, USE OR ENJOYMENT OF THE PROPERTY A NOTICE OF PENDENCY IS NOT APPROPRIATE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the notice of pendency should have been cancelled because the lawsuit, which sought the return of a down payment under a real estate contract, did not affect title, possession, use or enjoyment of the real property:

Pursuant to CPLR 6501, “[a] notice of pendency may be filed only when ‘the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property'” … . “When the court entertains a motion to cancel a notice of pendency in its inherent power to analyze whether the pleading complies with CPLR 6501, it neither assesses the likelihood of success on the merits nor considers material beyond the pleading itself; ‘the court’s analysis is to be limited to the pleading’s face'” … .

Here, the complaint, on its face, only asserts causes of action to recover monetary damages and does not seek relief that would affect the title to, or the possession, use, or enjoyment of, the property. Mallek v Felmine, 2024 NY Slip Op 02808, Second Dept 5-22-24

Practice Point: A notice of pendency is appropriate only when the underlying lawsuit involves title, possession, use or enjoyment of real property. A suit for the return of a down payment does not warrant a notice of pendency.

 

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A MANAGING AGENT IS NOT LIABLE FOR INJURY CAUSED BY A DANGEROUS CONDITION ON THE MANAGED PROPERTY UNLESS THE MANAGING AGENT EXERCISES COMPLETE AND EXCLUSIVE CONTROL OVER THE OPERATION OF THE PROPERTY (SECOND DEPT). ​

The Second Department, reversing (modifying) Supreme Court, determined the property managing agent did not exercise complete and exclusive control of the operation of the property and therefore could not be held liable for plaintiff’s trip and fall over a stub-up pipe protruding from a step:

Supreme Court should have granted that branch of the defendants’ motion which was for summary judgment dismissing the complaint insofar as asserted against CBRE [the managing agent] on the ground that CBRE does not own, operate, or control the premises. “Where, as here, a managing agent is accused of nonfeasance which causes injury to a third party, it is subject to liability only where it has complete and exclusive control of the management and operation of the property in question” … . “A managing agent is not in complete and exclusive control of the premises where the owner has reserved to itself a certain amount of control in the written agreement” … .

Here, CBRE established, prima facie, that it was a managing agent of the premises and that the management agreement was not so comprehensive and exclusive as to displace the duty of the owner of the premises to maintain the premises safely … . Quezada v CBRE, Inc., 2024 NY Slip Op 01829, Second Dept 4-3-24

Practice Point: A managing agent is not liable for injury caused by a dangerous condition on the managed property unless the agent exercises complete and exclusive control over the operation of the property.

 

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HERE THE LIQUIDATED DAMAGES CLAUSE WAS DEEMED AN UNENFORCEABLE PENALTY BECAUSE THERE WAS NO RELATONSHIP BETWEEN THE AMOUNT OF THE LIQUIDATED DAMAGES AND THE ACTUAL DAMAGES (SECOND DEPT). ​

The Second Department noted that a liquidated damages clause in a contract will constitute an unenforceable penalty if the amount bears no relation to the actual damage. Here, pursuant to the real estate purchase agreement,  $35,000 was put in escrow pending the resolution of three open building permits. The purchaser demanded the escrow funds because two of the three building permits remained open. The Second Department found there was no relationship between the $35,000 liquidated damages and the actual damage:

… [T]he record demonstrates that the sum deposited into the escrow account had no relationship to the estimated cost of “closing out” the open building permits in relation to the subject improvements to the property. Furthermore, the record demonstrates that at the time that the escrow agreement was entered into, the estimated actual damages were readily ascertainable. Under these circumstances, the purported liquidated damages clause constituted an unenforceable penalty … . Schmuelian v Bichoupan, 2024 NY Slip Op 01738, Second Dept 3-27-24

Practice Point: A liquidated damages clause will not be enforced if the amount has no relationship with the actual damages. In that circumstance the liquidate damages constitute an unenforceable penalty.

 

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A SELLER WHO BREACHES OR SABOTAGES A REAL ESTATE PURCHASE AGREEMENT CANNOT RELY ON REMEDY LIMITATION CLAUSES TO PRECLUDE A BUYER’S ACTION FOR SPECIFIC PERFORMANCE (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, noted that remedy limitation clauses in contracts will not be enforced on behalf of a party who breaches the contract,, acts in bad faith or deliberately sabotages the contract. Here the defendant argued the remedy limitation clause precluded plaintiff’s action for specific performance. But the complaint alleged defendant failed to appear at the closing and otherwise acted prevented the sale bad faith:

“Where . . . a seller sabotages efforts to close the deal, remedy limitation clauses in the contract of sale do not bar a buyer from obtaining specific performance” … . Further, “[a] vendor of real property who breaches the contract of sale in bad faith cannot limit the damages recoverable by the injured purchaser by relying on a contractual limitation” … . Saadia v National Socy. of Hebrew Day Schs., Inc., 2024 NY Slip Op 01571, Second Dept 3-20-24

Practice Point: In a real estate deal, a seller who deliberately sabotages the contract cannot rely on remedy limitation clauses to preclude a buyer’s action for specific performance.

 

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IN THIS ACTION BY A PROPERTY OWNER WHO LOST THE PROPERTY TO FORECLOSURE: (1) THE JUDGE SHOULD NOT HAVE GRANTED DEFENDANT REAL ESTATE BROKERS SUMMARY JUDGMENT ON A GROUND NOT RAISED IN THE MOTION; AND (2) THE BREACH OF FIDUCIARY DUTY, BREACH OF REAL PROPERTY LAW 441-C, AND CONSTRUCTIVE TRUST CAUSES OF ACTION SHOULD NOT HAVE BEEN DISMISSED (SECOND DEPT).

The Second Department, reversed Supreme Court in this action against real state brokers who, plaintiff alleged, did not provide plaintiff with proper documentation for a short sale of plaintiff’s property. The short sale was not approved by the lender and plaintiff lost the property in foreclosure. The Second Department determined: (1) the judge should not have granted summary judgment to defendants on the ground plaintiff suffered no damages because that issue was not raised by defendants in the motion; (2) the breach of fiduciary duty cause of action should not have been dismissed; (3) the Real Property Law section 441-c action alleging defendants acted with “untrustworthiness and incompetency” should not have been dismissed; and (4) the constructive-trust cause of action should not have been dismissed:

A court is generally limited to the issues or defenses that are the subject of the motion … . * * *

“[I]t is well settled that a real estate broker is a fiduciary with a duty of loyalty and an obligation to act in the best interests of the principal” … . * * *

… [T]he causes of action pursuant to Real Property Law § 441-c(1)(a) and 19 NYCRR 175.4, alleging that they acted with “untrustworthiness and incompetency” in dealing with the plaintiff and the property [should not have been dismissed].. … [T]here exists a private right of action for such offenses … . Perez v Mendicino, 2024 NY Slip Op 01323, Second Dept 3-13-24

Practice Point: A judge does not have the authority to grant summary judgment on a ground not raised in the motion papers;

Practice Point: Real estate brokers owe a fiduciary duty to their clients.

Practice Point: There exists a private right of action for a violation of Real Property Law 441-c for a real estate broker’s “untrustworthiness and incompetency.”

 

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THE CONDITION ATTACHED TO THE SUBDIVISION OF A LOT AND THE SALE OF ONE PARCEL BENEFITTED BOTH THE BUYER AND THE SELLER; THEREFORE THE BUYER ALONE COULD NOT WAIVE THE CONDITION WHEN IT COULD NOT BE MET; THE BUYER’S ACTION FOR SPECIFIC PERFORMANCE SHOULD NOT HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the condition attached to the sale of a lot by decedent to plaintiff, i.e., that a single-family home be built on the lot, benefited both parties and therefore could not be waived by the plaintiff alone. Plaintiff was unable to procure a building permit but elected to proceed with the sale. The decedent cancelled the sale Plaintiff then brought an action for specific performance which Supreme Court granted:

The contract of sale between the plaintiff and the decedent for the subject property provided in a rider that it was subject to the plaintiff obtaining an as-of-right building permit to build a single-family residence. The plaintiff was subsequently unable to obtain a building permit because a covenant of conditions had never been filed to complete the process of subdividing Norman’s single parcel into the two parcels referred to as 112 Jessup Lane and 114 Jessup Lane. The plaintiff’s and the decedent’s efforts to have the covenant filed so as to complete the subdivision process failed. * * *

Generally, “the party for whose benefit a condition is inserted in an agreement may waive the condition and accept performance as is” … . “However, where the relevant circumstances reveal that the condition has been inserted for the benefit of both parties to the agreement, either party may validly cancel the contract upon failure of the condition, and the condition may be waived only by the mutual assent of both parties” … . …

Inasmuch as the building permit could only be obtained if the subdivision of the property were completed, that condition cannot be interpreted as existing solely for the benefit of the plaintiff where the decedent retained an interest in the other lot to be included in the subdivision … . D&J Realty Partners, LLC v Booth, 2024 NY Slip Op 01169, Second Dept 3-6-24

Practice Point: With respect to the sale of real property, if a condition of the sale, here the construction of a single-family residence on the lot to be sold, benefits only one party, the condition can be waived by that party. Here, however, the condition benefitted both parties and could only be waived by the consent of both.

 

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PLAINTIFF REAL ESTATE BROKER’S CAUSES OF ACTION (SEEKING THE REAL ESTATE COMMISSION) AGAINST THE BUYERS WHO SUBSEQUENTLY BOUGHT THE PROPERTY USING A DIFFERENT BROKER SHOULD HAVE BEEN DISMISSED; THE QUANTUM MERUIT, TORTIOUS INTERFERENCE WITH CONTRACT AND FRAUD CAUSES OF ACTION WERE NOT MADE OUT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the quantum meruit, tortious interference with contract and fraud causes of action should have been dismissed. Plaintiff, a real estate broker, had made an offer on sellers’ property on behalf of the Sorkin defendants which was rejected. Subsequently the Sorkin defendants, using a different broker, made another offer on the sellers’ property which was accepted. Plaintiff sued for the brokerage commission. The tortious interference with contract cause of action should have been dismissed because the Sorkins did not procure a breach of contract. The quantum meruit cause of action should have been dismissed because plaintiff was not a proximate, as opposed to a remote and indirect, link to the consummation of the sale. The fraud cause of action should have been dismissed because plaintiff could not have detrimentally relied on any alleged misrepresentation by the Sorkins that they were not longer interested in the property:

… [T]he Sorkin defendants demonstrated … that the plaintiff’s sole efforts consisted of some brief contacts with the sellers and the Sorkin defendants, and that after the sellers rejected the offers obtained by the plaintiff from the Sorkin defendants, no further negotiations took place between the plaintiff and the sellers regarding a possible sale to the Sorkin defendants. Subsequently, the sellers negotiated a sale of the subject property to the Sorkin defendants through a different broker, and the sale was consummated. Consequently, the Sorkin defendants established, prima facie, that the plaintiff was “not the direct and proximate link, as distinguished from one that is indirect and remote, between the bare introduction of the sellers to the buyers and the consummation of the sale” … . * * *

[Re: fraud:] Even if the Sorkin defendants misrepresented to the plaintiff that they were no longer interested in purchasing the subject property, there could be no “specific detrimental reliance by plaintiff on this misrepresentation, inasmuch as plaintiff could not have compelled the [Sorkin defendants] to speak with plaintiff” … . City RE Group, LLC v 2633 Ocean Realty, LLC, 2023 NY Slip Op 05586, Second Dept 11-8-23

Practice Point: Although plaintiff real estate broker briefly introduced the buyers to the sellers and submitted an offer which was rejected, plaintiff could not sue for the real estate commission when the buyers submitted another offer through another broker which was accepted. Plaintiff could not make out causes of action for quantum meruit, tortious interference with contract or fraud (based upon the allegation the buyers misrepresented to plaintiff that the were no longer interested in the property).

 

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THE LETTER OF INTENT WAS NOT A BINDING REAL ESTATE CONTRACT; THE MOTION TO DISMISS THE BREACH OF CONTRACT, BASED ON “DOCUMENTARY EVIDENCE,” SHOULD HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the letter of intent was a non-binding agreement-to-agree, not a contract for the sale of real property. The letter of intent constituted “documentary evidence” which warranted dismissal of the breach of contract action:

… [T]he defendant submitted the letter of intent which conclusively established that the parties did not enter into a binding contract, but instead had a mere agreement to agree … . The letter of intent expressly stated that the letter was not contractually binding and expressly anticipated the future preparation and execution of a contract. Accordingly, the Supreme Court should have granted dismissal of so much of the complaint as was predicated upon allegations of breach of contract pursuant to CPLR 3211(a)(1). Krasnow v Catania, 2023 NY Slip Op 04584, Second Dept 9-13-23

Practice Point: This is a rare example of a successful motion to dismiss based on documentary evidence. The letter of intent was, by its terms, not a binding contract. Therefore the breach of contract action, based upon the letter of intent, should have been dismissed.

 

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ALTHOUGH THE MORTGAGE CONTINGENCY PROVISION OF THE PURCHASE CONTRACT WAS NO LONGER OPERABLE BECAUSE THE MORTGAGE COMMITMENT WAS REVOKED AFTER THE CONTINGENCY PERIOD HAD ELAPSED, THE SELLER’S BAD FAITH WARRANTED RETURN OF THE DOWN PAYMENT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff purchaser was entitled to return of the down payment after the bank refused to extend the mortgage commitment because the seller had not submitted an environmental report. Although the original mortgage-contingency clause was no longer operable (because the loan commitment had been extended pending receipt of the environmental report), it was the seller’s failure to provide the report, and not the actions or omissions of the purchaser, which resulted in the termination of the loan commitment:

“A mortgage contingency clause is construed to create a condition precedent to the contract of sale” … . “The purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser’s inability to obtain a mortgage commitment within the contingency period” … . “However, when the lender revokes the mortgage commitment after the contingency period has elapsed, the contractual provision relating to failure to obtain an initial commitment is inoperable, and the question becomes whether the lender’s revocation was attributable to any bad faith on the part of the purchaser” … . Rivkin v 1946 Holding Corp., 2023 NY Slip Op 04427, Second Dept 8-30-23

Practice Point: Here the mortgage commitment was revoked after the contingency period in the purchase contract had elapsed. Therefore the contingency provision was no longer operable. However, the seller was responsible for the revocation of the mortgage commitment for failure to submit an environmental report. Therefore the purchaser was entitled to return of the down payment.

 

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CAVEAT EMPTOR (BUYER BEWARE) DOES NOT APPLY TO JUDICIAL FORECLOSURE SALES; HERE THE BANK DID NOT DISCLOSE THE EXISTENCE OF A SENIOR MORTGAGE; SALE SET ASIDE AND DOWN PAYMENT RETURNED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the foreclosure judicial sale should have been set aside because plaintiff bank failed to disclose the existence of a senior mortgage:

“The rule that a buyer must protect himself [or herself] against undisclosed defects does not apply in all strictness to a purchaser at a judicial sale” … . “‘[A] sale of land in the haste and confusion of an auction room is not governed by the strict rules applicable to formal contracts made with deliberation after ample opportunity to investigate and inquire'” … . “‘As a general rule, a purchaser at a foreclosure sale is entitled to a good, marketable title'” … . “‘[A] purchaser at a judicial sale should not be compelled by the courts to accept a doubtful title,'” and “‘if it was bad or doubtful, he [or she] should, on his [or her] application, be relieved from completing the purchase'” … . Accordingly, since the plaintiff failed to disclose the existence of the senior mortgage at the time of sale, or otherwise, the Supreme Court improvidently exercised its discretion in denying those branches of the nonparties’ motion which were to set aside the foreclosure sale and to direct the referee to return [the buyer’s] down payment. Wells Fargo Bank, N.A. v Schepisi, 2023 NY Slip Op 03943, Second Dept 7-26-23

Practice Point: Caveat emptor (buyer beware) does not apply to judicial foreclosure sales. Here the bank’s failure to disclose the existence of a senior mortgage required the sale be set aside and the down payment returned.

 

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