Specific Performance of Option to Purchase Real Property—Tenants by the Entirety—Estoppel—Fraud—Rescission

Two individual defendants, "A" and "B" (defendants) moved for partial summary judgment dismissing certain of the plaintiff’s causes of action, which sought specific performance of an option to purchase several buildings and specific performance of a contract of sale (contract), as against them.

The defendants owned property as tenants by the entirety (TBE). The plaintiff leased space in the property. Thereafter, the plaintiff, by its president and "A" entered into a five-year lease for the ground floor of building No. 1. The lease was subsequently amended by an oral agreement between the plaintiff and "A," pursuant to which the plaintiff leased additional space. The plaintiff and "A" subsequently discussed the potential sale to the plaintiff of building No. 1. However, the parties had concluded that building No. 1 "could not readily be severed from the remainder of the Property." During those conversations, the plaintiff dealt primarily with "A" and only had "passing interactions with…['B']."

Thereafter, the defendants and the plaintiff executed the contract. Although the contract was signed by "A" and "B," it did not refer to their status as TBE. The contract provided that the defendants "agreed to convey title in the Property…to plaintiff for the sum of $2,215,000, contingent upon plaintiff securing a commitment for funding or a mortgage loan."

The plaintiff’s obligation to close was conditioned upon "the defendants’ ability to deliver title to the Property free of encumbrances (aside from specified permitted encumbrances)." The contract required that the defendants "pay into escrow any funds, up to $25,000, necessary for curing and removing outstanding code violations." Upon execution of the contract, the plaintiff paid money into an escrow account with the defendants’ attorney (down payment).

The plaintiff thereafter obtained a title report which indicated numerous code violations and that a new certificate of occupancy (C of O) would be required to reflect a change in use. The plaintiff sent four letters to the defendants’ counsel demanding that defendants cure various code violations. However, it appeared that the defendants had not taken "any action to cure the code violations…." Thereafter, the plaintiff retained an engineering firm ("C") to review the violations. "C" estimated that curing violations would cost more than $35,000.

The plaintiff thereafter advised the defendants that "it would be ready to close." however, code violations had not been remedied and a C of O for one of the buildings had not been obtained. The plaintiff and "A" then agreed to move forward with obtaining a C of O for building No. 1, with half of the cost being deducted from the sale price. "A" thereafter offered to terminate the lease of persons living on the second floor of the subject building, so as to allow the plaintiff to lease such area "for use as office space pending the sale of the Property." The plaintiff "agreed to lease the second floor, and requested that plaintiff be granted a long-term lease on that space ‘to protect [it] in the event there are further difficulties or obstacles for closing.’"

The plaintiff thereafter notified the defendants that the plaintiff had received a mortgage loan commitment for the purchase and demanded that the defendants clear the code violations and obtain a C of O, so that the closing could be scheduled. The plaintiff and "A" then began negotiating a long term lease for an expanded area to be occupied by the plaintiff.

Thereafter, the plaintiff and "A" executed an addendum which "granted a lease to plaintiff" for all the space contained within building No. 1, as well as certain spaces that the plaintiff had been leasing in other areas of the property, with renewal options for three terms of five years each. The addendum specified that the plaintiff maintained the "exclusive right to purchase" the subject properties at the price previously specified. That clause also purportedly granted the plaintiff "an option to purchase the Property at any time during the lease, after January 2013, for fair market value," and "a right of first refusal to purchase the Property." The addendum was signed only by the plaintiff and "A" and not by "B."

On the day that the plaintiff and "A" executed the addendum, the plaintiff sent an e-mail to the defendants noting that the contract had expired and demanded return of the down payment. The defendants returned the down payment. However, during the following months, the plaintiff continued to communicate with both "C" and a prospective mortgage lender in an effort to bring about the sale of the property.

Thereafter, the plaintiff sent the defendants a notice purporting to exercise its right to purchase the premises. The notice demanded that the defendants take all steps necessary to clear title and convey the property under the terms of the addendum and the contract. The defendants refused to recognize the plaintiff’s purported right to purchase the property. The plaintiff then commenced the instant action, asserting causes of action for specific performance of the contract and the option clause in the addendum, as well as an injunction barring the defendants from "transferring or encumbering the Property during the action, damages for breach of contract, rescission of any potential mutual discharge of the…(contract), a declaration that plaintiff is entitled to cure all defaults of the…defendants under the Lease and Addendum and to withhold the costs of doing so from rent payments, damages for negligent misrepresentation and fraud, damages for lost business opportunities, restitution for unjust enrichment, damages for deceptive acts or practices, and damages premised on the fact that the…defendants leased the second floor…to plaintiff for use as an office space, but have not obtained a [C of O] for commercial use of that area." The defendants asserted numerous affirmative defenses and a counterclaim for abuse of legal process.

The defendants argued, inter alia, that the purported option to purchase in the addendum is "void" since the defendants owned the property as TBE and the addendum was subscribed to only by "A" and not by "B." "B" alleged that "she had no knowledge of the addendum, or the option clause it contained, at the time of its execution, and that she did not authorize ['A'] to sign on her behalf." The defendants further asserted that "B" did not ratify the purported purchase option clause and had not taken any actions in order to fraudulently induce the plaintiff to rely on the purported option.

Additionally, the defendants argued that the plaintiff could not show that "B" had ratified the option clause since "A" "did not hold himself out as ['B''s] agent in the transaction and ratification of a conveyance of real property must be in a signed writing." "A" further asserted that "he understood the purported option clause to be a mere reflection of the fact that he and [the plaintiff] would attempt to enter into a new contract of sale, and that he never indicated to [the plaintiff] that he was signing the Addendum on behalf of ['B']."

Thus, the defendants argued that under the Statute of Frauds [SOF] and relevant case law, "they, as [TBE], may not be bound by an option to purchase the Property signed only by ['A'], nor may plaintiff estop them from asserting the [SOF] as a defense." The defendants acknowledged the validity of the contract, but claimed that it had been rescinded by mutual agreement of the parties and that they had returned the down payment.

The plaintiff countered that there were triable issues of fact as to whether "B" had "authorized or ratified the purchase option as executed by ['A'], whether ['B''s] knowledge of the Addendum was sufficient to estop a defense under the [SOF], and whether plaintiff’s agreement to rescind the [contract] was induced by fraud or mutual mistake."

The plaintiff further argued, inter alia, that although "B" generally did not take part in any negotiations or business regarding the lease or sale of the property, "she was in the room during discussion and execution of the Addendum," and did not object to "A"’s execution of same. The plaintiff also asserted that it lacked knowledge that the defendants owned the property as TBE and that it had "no reason to question the legal validity of the purported option clause in the Addendum."

The plaintiff further denied that the contract had been rescinded, claiming that the plaintiff had referred to it as "being ‘expired’ only because ['A'] had referred to it as such, and [the plaintiff] [asserted] that [it] agreed to give up some rights under that agreement only because he believed that the Addendum preserved and extended plaintiff’s right to purchase the Property."

The court explained that "real property held as a [TBE] generally cannot be conveyed, nor may an option to purchase be granted, by only one owner, unless the signer has written authorization to convey on behalf of the other owner…. Nevertheless, a [TBE] may be estopped from invalidating a conveyance under the [SOF] if the non-signing owner had complete knowledge of and actively participated in the conveyance, if the non-signing owner later ratified the contract execution by the signer, or if the absence of the non-signing owner’s signature is a product of fraud or misrepresentation…."

The court found that it was "unclear to what extent ['A' and 'B'] may have discussed the potential conveyance." Therefore, there were questions of fact as to "B"’s "knowledge of and participation in creating the purported option, and as to whether she may thus be estopped from asserting the [SOF] as a bar to its validity."

The court further explained that:

parties to a contract may rescind that contract by mutual agreement…. A contract of sale is considered rescinded where the prospective purchaser demands return of a down payment, and the prospective seller agrees to return that amount…. Once a contract has been rescinded by agreement, a court may not grant specific performance upon the terms of that contract…. However, a mutual rescission of a contract is itself treated as a contract, and where such a rescission was procured by fraud or entered into under mutual mistake of fact, said rescission may be invalidated by the court, in which case the terms of the original contract would be enforced…. In order for a court to rescind a contract on the basis of fraudulent inducement, a party seeking rescission must show that the other party made a knowing misrepresentation of material fact, intended to induce the first party to enter into the contract, and that such inducement caused injury to the reliant party…. A material misrepresentation of fact may be, in addition to an affirmative statement, a concealment of a fact by a party with superior knowledge, where the transaction without disclosure is inherently unfair…. In order for a court to rescind a contract on the basis of mutual mistake of fact, the party seeking rescission must show that both parties were mistaken as to a material fact at the time the contract was executed; the fact must be so material that it affects the foundation of the agreement….

The court also observed that the plaintiff had asserted, "quite plausibly, that it would not have given up its rights under the [contract] for which it had tendered performance had it not believed that the purchase option in the Addendum would be effective." If "A" had not shared the plaintiff’s mistake of fact, "i.e., he knew at the time of execution that the option clause could not be legally effective in the absence of ['B''s] subscription, it is difficult to see how he could have withheld this information in good faith."

Thus, the court stated that "A"’s "signature to a contract that he knew was partially void or his silence as to that fact might be interpreted as a material misrepresentation intended to induce reliance." Additionally, the court found that there were issues of fact regarding, inter alia, "mutual mistake" which prevented the granting of that part of the defendants’ summary judgment motion which sought dismissal of the cause of action based upon the contract. Accordingly, the defendants’ motion for summary judgment was denied.

Mad Scientists Brewing Partners v. Deptula, 655/12, NYLJ 1202592120579, at *1 (Sup., KI, Decided Feb. 13, 2013), Schmidt, J.

Landlord-Tenant—Tenant’s Harassment Claims Dismissed—Landlord’s Entitlement to Attorney Fees Under Local Law 7 Should Be Strictly and Narrowly Construed

This case involved a housing part proceeding where the petitioner tenant sought "an order finding harassment and restraining the respondent from harassing the tenant." Following a trial, the court granted the landlord’s motion to dismiss the proceeding based on the tenant’s failure to provide proof to support her allegations of harassment. The landlord then moved for an order awarding attorney fees.

Section 27-2115(m)(3) provides in pertinent part "[w]here the court determines that a claim of harassment by a tenant against an owner is so lacking in merit as to be frivolous, the court may award attorneys fees to such owner in the amount to be determined by the court." The law (hereinafter, "Local Law 7"), which became effective on March 13, 2008, amended portions of New York City Administrative Code, Title 27, chapter 2, which contains the Housing Maintenance Code, to provide new and greater protection for tenants experiencing harassment by landlords attempting to force them to abandon their apartments….

The Local Law did not define the word "frivolous" of delineate the factors to be considered when a party claims that "a harassment claim is so devoid of merit as to trigger an award of attorney’s fees." The court explained that judges have a "duty to prevent the harassment of innocent victims and to prevent the waste of judicial resources by a party who knows that his lawsuit has no legitimate basis in law or fact."

Section 130-1.1 of the Rules of the Chief Administrative Judge provides:

conduct is "frivolous" if:

(1) it is completely without merit in law or fact and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; or

(2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or

(3) it asserts material factual statements that are false.

Subdivision [c] requires the court,

"[i]n determining whether the conduct undertaken was frivolous, the court shall consider the circumstances under which the conduct took place, including the time available for investigating the legal or factual basis of the conduct, and whether or not the conduct was continued when its lack of legal or factual basis was apparent, or should have been apparent, or was brought to the attention of counsel or the party."

The court noted that in considering sanctions, courts must "weigh the potential effect on inhibiting good-faith arguments to modify existing law, noting that ‘this traditional method of common-law jurisprudence is the means whereby courts can reexamine existing precedent in the light of changing circumstances.’" The court then explained that "[t]he rule regarding the entitlement to attorney’s fees embodied in Local Law 7 should, like the ‘frivolous sanction’ rules, be strictly and narrowly construed."

The court further explained that "Local Law 7 was enacted to provide legal remedies for tenants experiencing harassment by landlords attempting to force them out" and in considering a request for legal fees pursuant to Local Law 7, courts "must be concerned with the possible chilling effect on future self-represented litigants." Thus, courts have to balance the policy of "extending to plaintiffs who perceive themselves as aggrieved their ‘day in court’ and…shielding ‘innocent’ defendants from the expense and anxiety of baseless litigation."

Here, the court found that an award of attorney fees was not warranted. Although the tenant did not establish her claim for harassment, the court opined that the petitioner lacked the intent "to harass or annoy" the landlord. Rather, the tenant believed that the landlord had "engaged in a prior pattern of harassing conduct although the prior holdover and nonpayment proceedings were decided in favor of the landlord." The court explained that the Civil Court "has been called the ‘people’s court,’" and "judges will often struggle to draw the line between frivolous actions and those cases motivated by strong convictions with little support in law or fact."

Moreover, "many of the events crucial to the [tenant's] claim for harassment had occurred well over two years prior to the instant proceeding and after signing of an intervening renewal lease." The court had ruled that testimony regarding such events was inadmissible. Additionally, the subject proceeding for harassment was "a single-shot litigation with no pattern of similar litigation."

Accordingly, the court rejected the landlord’s argument that the tenant had engaged in "a pattern of conduct asserting baseless claims to one or more courts" and denied the landlord’s motion for attorney fees.

Huss v. Fried, HP 6370/12, NYLJ 1202593427041, at *1 (Civ., KI, Decided Feb. 28, 2013), McClanahan, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.