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Purchaser Recovers Down Payment on Canceled Sale of Cooperative Apartment

When a contract to purchase real property is canceled, the parties often dispute who is entitled to the down payment. Contracts typically provide that in the event of a purchaser default, the seller may retain the down payment as liquidated damages.  In Paradise v. Wood, 2019 N.Y. Misc. LEXIS 3623, 2019 N.Y. Slip Op. 29203 (Sup. Ct. Westchester Co. July 9, 2019), the court concluded that the purchaser did not default because she did not obtain unconditional board approval for the purchase of a cooperative apartment.

The parties entered into a purchase contract for the apartment, which was subject to “the unconditional consent” of the Cooperative.  In the contract, the purchaser listed herself as the only proposed occupant for the unit.  However, in her application package submitted to the Board, the purchaser indicated that the occupants would be her parents.  The Board approved the application “upon the specific condition that [purchaser’s] parents, who will occupy the apartment, will have their names added to the stock and lease.”  The purchaser declined to add her parents’ names to the stock and lease, which would have made them co-owners of the unit.  Instead, she decided to cancel the contract and demanded the return of her down payment.  The seller’s counsel issued a “time of the essence” letter and declared the purchaser in default when she failed to close.

In the ensuing litigation, the seller asserted that the purchaser willfully failed to comply with the Board’s requirement that the intended occupants of the apartment must be included on the shareholder certificates, thus breaching the contract.  The seller also asserted a claim for fraud, on the theory that the purchaser failed to disclose her intention to have other occupants in the apartment.  The purchaser asserted that she already owns and resides, with her family, in another unit in the same building, and that she disclosed that this apartment would be occupied by her parents both to the seller and the Board before the contract was signed.

In its opinion, the court stated that it had not located prior caselaw dealing with this specific factual scenario.  However, in analogous cases in which a purchase contract is subject to a mortgage contingency, the purchaser is generally permitted to cancel the contract if he or she is unable to obtain a mortgage, unless it is established that the failure to obtain a mortgage commitment is due to the purchaser’s own conduct.  Applying this rule by analogy, the court held that the purchaser would be entitled to return of her down payment if she acted in good faith in seeking board approval.  The court found that the purchaser acted in good faith because there was evidence that the seller was aware that the apartment was being acquired for occupancy by the purchaser’s parents, even though the contract failed to recite such fact.

The court concluded that “[b]ecause the sale was subject to the [Cooperative] corporation’s unconditional consent and the [Cooperative] did not give its unconditional consent, and in the absence of any showing that [purchaser] acted in bad faith in order to create the lack of unconditional consent, [purchaser] had the right to cancel the contract and receive the return of her down payment.”  In addition, “[n]otably, the board’s imposed condition was not an inconsequential technicality; it would have a significant impact, which [purchaser] was reasonably entitled to reject.”  Going forward, boards may wish to bear in mind that imposing conditions on an application may result in the contract purchaser’s having the right to cancel the transaction.