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Condominium Board May Seek To Rescind Purchase Of Unit Where Purchaser Misrepresented Purpose For Which Unit Would Be Used

An appellate court has authorized a condominium board to proceed with a lawsuit seeking to rescind a purchase contract for the sale of a unit in the building. Board of Managers of Soundings Condominium v. Foerster, 2016 N.Y. App. Div. LEXIS 1263, 2016 N.Y. Slip Op. 1273 (1st Dep’t Feb. 24, 2016).


In this case, the owners of a condominium unit contracted to sell the unit to defendant.   Under the By-Laws, any sale is subject to the Condominium’s right of first refusal, under which the Board of Managers may elect to acquire the unit for the contract price.  In her purchase application submitted to the managing agent, defendant stated that no “business or profession” would be conducted in the unit, which would be used as the personal residence of her family’s “nanny/nurse so she can live in close proximity to my current home.”  The Condominium did not exercise its right of first refusal and the sale to defendant closed.


Prior to the closing, defendant submitted an application to the New York State Office of Children and Family Services to operate a licensed day-care center in the unit.  The State granted the application.  After the closing, defendant requested board approval of alterations to modify the apartment for use as a day care center and advised the managing agent that she would be operating “a language program for kids” in the unit.


Several months later, the Board of Managers sued defendant for fraud, breach of contract, and rescission. The Board alleged that defendant had submitted an application misrepresenting that the unit would be used for the nanny’s personal residence, while hiding defendant’s “true intention to operate a business at the premises.”  The Condominium alleged that the misrepresentations induced the Condominium “to refrain from exercising the preemptive right of first refusal to purchase the unit as conferred by the condominium’s bylaws,” which also provided that units shall be used only as residences.


Defendant moved to dismiss, relying on New York Social Services Law §390(12), which prohibits municipalities from blocking the use of property for state-licensed day-care centers.  Defendant argued that the courts have interpreted this provision as also precluding condominiums from barring licensed day-care centers, so that the Condominium could not have suffered any damages from the premises’ being used as a day-care center.  The court rejected this argument as a defense to the Condominium’s rescission claim, because “damages are not necessary to sustain a cause of action for equitable rescission.”  The court stated that “fraud sufficient to support rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment” and that other elements, such as intent to commit the fraud (“scienter”) and damages, are not required.  The court allowed the claim for rescission to proceed, but dismissed the fraud claim for money damages and other claims alleged by the Condominium as duplicative.


The court declined to decide whether a purchaser would have a remedy if she disclosed in her application that she intended to use the unit for a day-care center and the Board of Managers exercised its right of first refusal to stop her from doing so. According to the court, that question was hypothetical in this case, in which defendant failed to make any such disclosure and allegedly obtained the unit by “deception.”  “Had defendant wished to contest [this] issue, the proper procedure would have been to submit an honest application and, if plaintiff exercised its preemptive right, challenge the decision” at that time.