Scott E. Mollen
Scott E. Mollen ()

Contracts—Whether Time of the Essence Letter Provided A Reasonable Amount of Time for Performance Was An Issue of Fact—Changing Venue of Closing to Purchaser’s Attorney’s Office From Sellers’ Attorney’s Office Was Immaterial Change—Letter Was Sent to Purchaser’s Attorney and Not To Each Seller as Required by the Contract—Where Actual Notice Not Denied or Prejudice Caused, Notice Is Valid

THE SUBJECT DECISION involved a contract for the purchase of real estate. The contract did not contain a time of the essence (TOE) provision. This decision involved the issue of whether a party had given a post-contract TOE notice in a proper manner.

The contract was signed on or about Dec. 17, 2015. The closing date was set for on or about Jan. 29, 2016. A title report revealed certain judgments and violations against the property. The sellers indicated that they would not pay off the judgments and liens. On or about March 26, 2016, the sellers’ attorney, indicated to the purchaser’s counsel that “his clients wanted to renegotiate a higher price for the purchase of the property by requiring the…purchaser to pay off the judgments and the liens which totaled $36,893.” Although the sellers argued that the judgments and liens were “title defects, for which they had only limited responsibility,” the purchaser asserted that “the judgments and liens were encumbrances for which the contract made the sellers responsible.”

On or about March 30, 2016, the purchaser’s counsel sent a TOE letter to the sellers’ attorney, “both by email and Federal Express letter, setting a closing date of April 6, 2016 to take place at the [purchaser's] attorney’s office.” The TOE letter stated that the “[f]ailure to close on this date shall deem seller in default and breach of contract and purchaser shall have all remedies at law and in equity including but not limited to liquidated damages.” The sellers’ counsel quickly responded that the TOE letter, “received via email on March 30, 2016 is hereby rejected as untimely, improper and not in accordance with the contract of sale herein.”

The purchaser then commenced the subject action for breach of contract and specific performance. The sellers moved for summary judgment on the ground that the TOE letter was defective. The issue of whether the purchaser or the sellers are obligated to pay off the judgments and liens was not before the court. The sellers argued that the TOE letter was not served as required by the contract, improperly changed the venue for the closing and failed to give the sellers “a reasonable amount of time to perform their obligations under the contract.”

The court explained that where an initial contract of sale for real property “does not make time of the essence, a party may subsequently give notice making time of the essence.” The notice making time of the essence must “(1) provide clear, distinct, and unequivocal notice to that effect, (2) allow the other party a reasonable time in which to perform his [or her] obligations, and (3) tell the other party that a failure to perform by the designated date will be considered a default under the terms of the contract.”

The contract provided that all notices should be in writing and “delivered personally or…sent by prepaid registered or certified mail” and if sent to the sellers, should be sent to the sellers’ attorney and to each of the sellers. The sellers argued that the TOE letter violated the contract since it was sent only to the sellers’ attorney and not to them also.

Although some prior judicial precedent supported the sellers’ position, the court found that the “more recent Appellate Division, Second Department cases” were “supportive of the plaintiff’s position.” The more recent decisions held that “strict compliance with contractual notice provisions need not be enforced where the adversary party does not claim the absence of actual notice or prejudice by the deviation….” In the subject case, although the sellers alleged that they had never received a copy of the TOE letter, their attorney had received the letter and the sellers did “not allege the absence of actual notice or prejudice….” Thus, the court held that the sellers were “not entitled to summary judgment on the ground that the [TOE] letter was not sent in strict compliance with the notice provisions of the contract.”

The sellers had not cited any authority which entitled them to reject a TOE letter on the grounds that the party had changed the venue for the closing from the sellers’ attorneys’ office to the purchaser’s attorneys’ office. The purchaser had asserted that the sellers were out of state residents and would have had to fly to New York to attend the closing. “As a general rule of contract law, ‘a breach will excuse performance only if it is material or demonstrably prejudicial….’” The court concluded that “[t]he minor deviation from the contract regarding the closing venue was neither material nor prejudicial.”

The court then explained that a TOE letter must permit “the other party a reasonable time in which to act” and that “[w]hat amounts to a reasonable time to perform depends on the circumstances of the case.”

The court found that “at best for the…sellers, whether the [TOE] letter allowed them a sufficient time for performance is an issue of fact.” The TOE letter stated that the contract’s original closing date was to be on or about Feb. 15, 2016 and that title objection had been raised on Jan. 12, 2016. Thus, the seller had “nearly three months to clear the objections, which were merely obtaining payoffs and lien releases.” The court found that the sellers had failed to demonstrate that a “determination of reasonableness can be made as a matter of law,” and therefore, the court denied the sellers’ motion for summary judgment.

Comment: As this case demonstrates, a TOE letter must provide the other party with a reasonable opportunity to perform. What is reasonable will depend on specific circumstances of each case. In some cases, a somewhat longer period of time may be necessary to close, e.g., where governmental approvals are required.

11-01 36 Avenue v. Quamar, 704864/2016, NYLJ 1202775695126, at *1 (Sup., QU, Decided Nov. 28, 2016), Ritholtz, J.

Co-Ops—Shareholder Installed Air Conditioning System Without Written Approval of the Board— Defense Based On Alleged Oral Permission By Managing Agent Rejected—Alteration Application Stated “No Work Regarding HVAC”—Merger Provision Enforced

A PLAINTIFF COOPERATIVE corporation (co-op) had moved for a summary judgment of possession and to strike the respondents’ affirmative defenses and counterclaims in a holdover summary proceeding. The trial court denied the co-op’s motion. The Appellate Term (court) reversed.

The court found that the co-op’s proof demonstrated that the respondents had breached their proprietary lease, which required that shareholders obtain “written consent” from the co-op board before installing any “air-conditioning system” (HVAC). The respondents had submitted a written application for approval of certain alteration work within their apartment. Their application had been approved. However, the application stated that “No Work Regarding Building Envelope, HVAC” would be performed. The respondents had thereafter installed an HVAC system on the “façade of the building without first obtaining petitioner’s written consent….”

The respondents argued in their brief that the board had approved installation of the HVAC system. The respondents also claimed that they had followed the “directives of the managing agent [agent] when submitting their alteration request form” to the co-op and that they had “obtained the…agent’s verbal consent to the HVAC installation and “had obtained the written consent of the board of directors to the HVAC installation,” i.e., the board advised that the work was “fully approved.”

The respondents contended that the co-op was bound by the agent’s verbal consent, which had been expressed “at at least three meetings, by the [agent's] suggestion that no plans pertinent to the HVAC installation be submitted to the cooperative, and by his directing where the condenser unit of the HVAC system should be installed.” The respondents further claimed that the agent had taken the respondents’ contractor “to the outside of the building and directed where on the building’s exterior façade the HVAC system’s condenser unit should be installed….” They also alleged that the agent had advised the respondents that the HVAC system was permitted as long as it was “quiet” and had a “cooling capacity of less than three tons.”

However, the court found that such assertion was “unsupported” and “belied by” the alteration application which stated that no HVAC would be performed. The court also rejected the respondents’ reliance on a “purported oral consent to the work by the…agent.” The proprietary lease “unambiguously states that ‘written consent’ of the lessor is required.” Moreover, the alteration application embodied a merger clause which stated that “all prior…understandings between the parties concerning the work are merged in this Agreement which alone expresses the understanding between the parties.” Since the holdover petition was based upon a breach of lease, the tenant was “afforded the remedy of a post-judgment cure.” (see RPAPL 753[4]).

Comment: This case illustrates why tenants should make sure that their alteration applications accurately describe the work to be done.

Marianna L. Picciocchi, of Cornicello, Tendler & Baumel-Cornicello, attorney for the petitioner, noted that during oral argument, the court asked questions about whether the managing agent “had apparent authority to bind the board.” She explained that “if the authority is given expressly to the principal (here, the board), it is unreasonable for a third party to rely on the acts of the agent,” since “mere creation of an agent does not invest the agent with unlimited authority to bind the principal.”

She opined, inter alia, that parties “seeking to modify a proprietary lease beyond its written terms” will “waste judicial and financial resources.” Finally, she advised that there was no appeal, the shareholders removed the subject HVAC unit and an attorney’s fees hearing will be held.

Although the general rule is that the terms of a proprietary lease will be enforced, there may be situations where a lease provision, like any other contract provision, will not be enforced, i.e., where the facts would support a finding of waiver, estoppel, ratification, breach of the implied covenant of good faith and fair dealing, etc. The facts in the subject case apparently did not support any such exception. Not only is it difficult to establish such defenses, but if shareholders lose a litigation against their board, they may be saddled with legal expenses for their attorneys, as well as the legal expenses incurred by the co-op, if the co-op’s organizational documents so provide.

If purchasers contemplate substantial renovations before the purchase of an apartment, they should consider having as detailed discussions as possible with representatives of the building who have the authority to approve renovations. Of course, discussions are not the same as written consent. Moreover, there are practical problems which may preclude such discussions at the “purchase stage.” Some purchasers may not want a board to know the extent of contemplated renovations during the purchase approval process. They may fear that if the work appears to be too extensive, their purchase application may be rejected.

Additionally, purchasers may not want to spend the time and money to develop detailed architectural and/or engineering plans before they close on their purchase. Sometimes, a seller may not provide sufficient access for purchasers’ experts to verify whether the “as built” apartment and/or building conforms to the building plans or marketing materials. Some purchasers may ask to speak with the building’s managing agent to discuss their general plans. If a building is large, they may also ask to speak with the building’s engineer. Additionally, they may also ask to see units that have already been renovated.

The ability to obtain such cooperation from a seller and/or the co-op board, may be impacted by market conditions. In a weak market and where an apartment has been on the market for a long time, a seller and the board may want to facilitate a sale. This is so especially if it is at a price that may help increase the appraised values for apartments in the building. However, if buyers are lined up for an apartment in a strong market, the buyer may have no leverage with the seller and may have to take his or her chances that their alteration plan will be acceptable to the board.

Roger Morris Apt. v. Varela, App. Term, 1st Dept., Index No. 83411/2015, decided Nov. 30, 2016, Schoenfeld, J.P., Shulman, Gonzalez, JJ.