Sit v. Schnaps

What if a co-op board is not satisfied with the financial condition of a prospective apartment purchaser and requires a security deposit as a condition to approving the purchaser? If the prospective purchaser does not have the funds or is unwilling to provide the security deposit, according to Sit v. Schnaps, the purchaser may cancel the contract and obtain a refund of the downpayment.

On May 6, 2004, Sit, the plaintiff-prospective purchaser, and Schnaps, the defendant-seller, entered into a contract for the transfer of the shares of Apartment 7-D, of a co-op located at 69-10 108th Street, in Forest Hills, New York, with the closing to take place on June 1, 2004. The contract provided that “[t]his sale is subject to the approval of the Corporation,” referring to Woodrow Wilson Owners Corp. The closing date was adjourned for 30 days for the purchasers to obtain the required approval of the corporation.

The potential purchasers submitted an application to the corporation, along with all required documentation, and were interviewed on June 24, 2004. On July 2, the corporation sent them a letter, conditioning the approval upon the would-be purchasers putting the sum of $13,556.16, representing the equivalent of 18 months of maintenance, in escrow for an indefinite period of no less than 18 months.

Unable to come up with the money, the prospective purchasers attempted to negotiate the escrow amount and other terms of the agreement with the corporation. On July 13, 2004, the seller’s counsel sent the potential purchasers word that the seller was making time of the essence on August 2. On July 15, the potential purchasers cancelled the contract because the corporation had not unconditionally approved their application within the 30-day time period required, and demanded the return of their downpayment.

On July 23, the corporation notified the would-be purchasers that it would not negotiate the terms of the escrow. On July 28, 2004, the corporation notified them that the sale of the premises was not approved.

In analyzing the failed purchasers’ motion for summary judgment to recover their deposit, the court noted that a party moving for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law, offering sufficient evidence to demonstrate the absence of an issue of fact that could be weighed during a trial.

As to the threshold question, the court concluded that the prospective purchasers had demonstrated their prima facie entitlement to the return of their downpayment, based upon their good-faith efforts to comply with the express terms of the contract. The burden on a summary judgment motion then shifted to the seller, and, as the opponent of a motion for summary judgment, the seller had the burden of producing evidence that demonstrated that there was an issue of fact that had to be tried. The court said that the seller here had not successfully proven that point.

That the potential purchasers had acted in good faith and were duly diligent in attempting to procure the approval of the co-op board for the purchase of the subject cooperative apartment was undisputed. After receiving their loan commitment, the would-be purchasers duly submitted their application to the corporation, provided all requested information therein, and were interviewed.

The corporation’s July 2, 2004 approval letter, conditioned upon the potential purchasers’ advancing a substantial escrow, in excess of $13,500, representing 18 months of maintenance charges, to be held by the corporation for an indefinite period of no less than 18 months, was clearly an unanticipated deal-breaker in the court’s view. The unduly burdensome nature of this condition, the lack of prior notice thereof, the purchasers’ inability to comply because of financial hardship, coupled with the unreasonable refusal of the corporation to negotiate or compromise its position, effectively eviscerated the corporation’s consent.

Thus, the seller did not carry his burden of demonstrating that the corporation approved the purchasers and that the purchasers breached the contract of sale by nonetheless refusing to complete the transaction. Indeed, the record indicated the contrary, that Woodrow Wilson Owners Corp. had only conditionally approved the purchasers and eventually rejected them on July 28, 2004.

The court cited an authority which had observed: “… [a] board of directors is often placed in a dilemma where it wishes to approve a sale by a shareholder, but the applicant does not meet the financial or other criteria established by the board. To resolve this problem, many boards will render a conditional approval. These special conditions can include a request that the applicant obtain a guarantor of the proprietary lease obligations or deposit funds in escrow, as security for the performance of the applicant’s obligations to the cooperative… Conditional approvals may backfire. Since there was no final agreement between buyer and co-op board as to specific conditions demanded by the board for its approval of the buyer as a shareholder, buyer was entitled to return of deposit under terms of contract of sale....”

In interpreting a substantially similar provision to that in the sale contract, the court cited a previous decision that had held that, where no board approval was obtained within the adjourned period of time, the contract was considered cancelled. In Corazza v. Jacobs, which the court found controlling under the facts at bar, the appellate division, interpreting a contract provision requiring board approval, held that a sales contract should have been cancelled and the downpayment returned when the board’s failure to give its approval was caused, not by any bad-faith conduct by the potential buyer, but by the imposition of an unreasonable residency restriction.

Similarly, in Rossi v. Simms, the potential purchaser’s downpayment was ordered returned by the trial court where the would-be purchaser refused to comply with a condition of the co-op board requiring him to pay a surcharge for use of the apartment as a professional office. The seller had not cited a single case supporting his position.

Applying the above-referenced instructive and binding precedents to the case fostered the court’s conclusion that the seller ought to have permitted rescission of the contract and returned the downpayment. There was also no agreement between the purchasers and the co-op board as to the conditions unilaterally imposed by the board in exchange for its approval, since the purchasers were both unaware of the escrow conditions at the time they applied, and were unable to comply with the board’s escrow requirement, which the board was unwilling to negotiate. The seller had failed to offer any evidence, other than the mere speculation of counsel, that the escrow condition was “routine” or that the prospective purchasers were aware of it.

The sale did not occur, the court found, because of an unforeseen and onerous condition imposed by a third party, the corporation, in exchange for its approval. The unique facts of this case, applicable case law, and principles of fairness and equity, all militated in favor of restoring the parties to the status quo in this matter. A contrary holding would subject the purchasers to the loss of their downpayment because of their financial inability to pay an additional non-negotiable escrow, of which they had no awareness at the time they entered into the contract of sale. Thus, the court held that the purchasers had properly exercised their right to rescind the transaction.

The court declined to award the failed purchasers attorney’s fees and compensatory and punitive damages. Paragraph 13.2 of the contract provided that “[i]n the event of a default or misrepresentation by Seller, Purchaser shall have such remedies as Purchaser is entitled to at law.” The court did not find any evidence of default (or misrepresentation) on the part of the seller.

Moreover, the escrow-holder, in good faith and correctly, in the court’s view, retained the contract deposit, pending the judgment of the court. The contract subjected the sale to approval by the corporation, rather than unconditional approval.

Accordingly, the court granted the failed purchasers’ motion to the extent noted, and seller’s cross-motion was denied in all respects. It was further declared that the sales contract was null and void, and that the purchasers were entitled to the return of their contract deposit, plus interest accrued from the date of deposit into the escrow account to the present.