Purchaser May Be Allowed To Terminate Contract To Acquire Unit Given Cooperative’s Change Of Position On Terrace Access
The contract purchaser of a Fifth Avenue penthouse apartment, who terminated the contract after uncertainty arose as to whether he would enjoy exclusive access to the apartment’s terrace, may be entitled to rescind the contract and recover his down payment. Pastor v. DeGaetano, 2015 App. Div. LEXIS 3268, 2015 N.Y. Slip Op. 3307 (1st Dep’t Apr. 21, 2015).
Under the purchase contract, signed in March 2012, the purchaser agreed to pay $27.5 million for the apartment. A deposit of 10% or $2.75 million was made at signing, with the balance due at closing. According to the Appellate Division decision, “[a] crucial element of the transaction related to [the purchaser’s] exclusive use of the apartment’s terrace, a right emanating from the proprietary lease.” The proprietary lease provided in relevant part that the owner of shares appurtenant to the subject apartment “shall have and enjoy the exclusive use of the roof appurtenant to such apartment [i.e. the terrace] as shown on the plan of the penthouse,” with exceptions only for limited purposes such as maintenance.
In May 2012, after the purchase contract had been signed but before the purchase had closed, the managing agent informed the purchaser that “the upper roof [above the penthouse] accessible by the stairs on the terrace may be used by shareholders at any time as a common area of the building.” This stairway had previously been used only for maintenance purposes, and other shareholders had never been granted access to the roof as a common area, because the only way they could reach the roof area would be to traverse the terrace of which the penthouse apartment owner had exclusive use.
The purchaser testified that the Cooperative’s position “came as a complete shock to him.” The Board of Directors unconditionally approved the purchaser’s application to become a shareholder, but a few weeks later, it proposed a “conditional consent agreement” to be signed by both the purchaser and the seller, an Estate. The proposed agreement provided, among other things, that “[t]he entire Penthouse Roof is a common area”; that “the Cooperative and its shareholders have the right to use [the maintenance stairway] . . . in their sole discretion for the purpose of obtaining access to the Penthouse Roof”; and that the Cooperative and its shareholders also “have the right to use a pathway . . . leading from the internal Building stairs” to the stairs used to access the roof.
The purchaser and the Estate both refused to sign the conditional consent agreement. The Estate then sued the Cooperative and the managing agent, seeking a declaratory judgment that, among other things, the penthouse unit owner enjoys exclusive use of the terrace, and that other shareholders may not traverse the terrace or maintenance stairs for the purpose of reaching the roof. The Estate alleged in its Complaint that roof access had never been permitted to anyone other than the occupants of the penthouse unit, other than for authorized maintenance, during the entire 53-year period during which the deceased shareholder-tenant had owned and occupied the unit. The Estate further contended that “[p]ermitting [other] residents of the Building to regularly access the Upper Roof via the Terrace staircase destroys an obvious and critical component of the value of the Penthouse and also violates the right to the exclusive use and enjoyment granted under the [Proprietary] Lease.” The Estate asserted that the Board’s position “threaten[ed] the Buyer that the private and exclusive use of the Terrace will be terminated, thereby irreparably harming the value of the Penthouse and potentially inducing the Buyer to cancel the Contract of Sale.”
While the Estate’s lawsuit against the Cooperative was pending, the Cooperative produced floor plans that the purchaser contended were not substantially similar to those annexed to the purchase contract, because they depicted the maintenance stairs. As a result, the purchaser notified the Estate that he was cancelling the contract. Soon thereafter, the Cooperative produced new floor plans omitting the staircase, which the court ruled were substantially similar to those annexed to the contract. The Cooperative also withdrew its request that the parties execute the conditional consent agreement, but refused to unequivocally acknowledge the penthouse owner’s exclusive right of access to the terrace. The litigation between the Estate and the Cooperative then settled. As a result, the court never ruled on the merits of the dispute, and the Estate did not receive the declaratory judgment it had sought.
This outcome was not satisfactory to the purchaser, because the uncertainty concerning exclusive use of the terrace had not been resolved. The Estate rejected the purchaser’s notice of cancellation and set a “time of the essence” closing date. The Estate appeared at the closing, but the purchaser did not. The purchaser then sued the Estate for the return of his $2.75 million down payment, and the Estate counterclaimed for a determination that it was entitled to keep the down payment. Prior to any discovery, the Estate moved for summary judgment, which the lower court granted.
The Appellate Division reversed and held that the Estate was not entitled to summary judgment. In its view, the Estate had not shown that it was “ready, willing and able” to close the purchase agreement on the closing date. Given the importance of exclusive access to the terrace, the Estate was required to show that the Cooperative Board had “categorically recognized [the purchaser’s] right to exclusively use the terrace or stated that it would not seek to abrogate that right in the future.” To the contrary, the Cooperative had repeatedly attempted to interfere with such right of exclusivity and thereby “cast a pall over the transaction” and “understandably gave [the purchaser] trepidation about proceeding….” The Board’s conduct was particularly problematic to the purchaser “given that [the purchaser] was not purchasing a house or condominium, in which case he would have essentially unrestrained ownership, but instead contracted to purchase shares in a coop…. The lingering specter of a coop board’s refusal to comply with the governing document’s provision regarding the owner’s right to exclusive access over the subject property would make any reasonable purchaser uneasy.” Indeed, in its own lawsuit, the Estate had acknowledged that the threatened loss of exclusivity over the terrace threatened the value of the apartment.
Under these circumstances, the court concluded, “the Estate needed to obtain a full retraction of the Coop’s position before it could close the sale.” However, the court acknowledged that in discovery, the Estate might be able to show that sufficient assurances were in fact given to the purchaser. The purchaser was also entitled to discovery as to whether there was collusion between the Estate and the Board, as he claimed. The court also held that discovery should take place on the purchaser’s claim that the Board had not acted in good faith when it added the stairway to the floor plans, allegedly for the purpose of buttressing its claim that all shareholders were entitled to access to the roof.