By Victor Metsch
DUE DILIGENCE WAIVERS SURRENDER EVEN THE NOMINAL DEFENSES
In Diplomat Properties L.P. v. Komar Five Associates LLC, 899 N.Y.S.2d 237 (1st Dept. April 29, 2010), the First Department considered the sale of the $620 million Diplomat Hotel and Convention Center and related facilities in Hollywood and Hallandale Beach, Fla.
The defendant purchaser, in connection with an extension of the closing date from Aug. 1, 2007, executed an amendment to the lease acknowledging that its due diligence period had ended on June 4, 2007.
The defendant then failed to close. It argued that the plaintiff had violated numerous contract provisions, the most notable of which was a failure to disclose an alleged agreement with the city of Hallandale that future development of the property be phased in over a 10-year period.
But the city of Hallandale twice confirmed that, notwithstanding discussions of any restrictions, there was no agreement between it and the seller to limit development on the building in any way.1
Given this position by the city, Komar’s claim that its obligations under the contract never came due because of the plaintiff seller’s nonperformance was little more than a nominal defense, thrown up in the slim hope of recovering $30 million in contract deposits.
But by agreeing, in connection with the extension of the closing date, to waive due diligence objections, Komar effectively offered its nominal defense to the court in one hand while offering $30 million to the plaintiff with the other.
The lesson here? Before waiving due diligence objections, consider the whole deal and, if the client might want to back out, keep in mind that the waiver will surrender many nominal defenses.
TALK TO THE ARCHITECT BEFORE YOU BUY, OR WAIVERS DEEMED MADE MAY MAKE YOU CRY
In Venetoklis Family Ltd. Partnership v. Kora Developers LLC, 2010 NY Slip Op 05387 (2d Dep’t, June 15, 2010), the Second Department granted a plaintiff seller’s motion for summary judgment to retain its down payment.
Kora Developers LLC contracted to purchase 1821 Emmons Avenue in Brooklyn for $21 million. A title search prior to the signing showed an easement for sewer pipes, and purchaser Venetoklis obtained a certificate of title insurance which did not cover loss or damage due to the sewer easement.
The purchaser agreed to convey written notice of objection to any title defects within 10 days of receipt of any title report, and any objection to such defects not so noticed was deemed waived under the contract.
Venetoklis supplied a written notice of its objections to several title defects not covered by its title insurance company, but failed to mention the exception for the sewer easement. Nearly 10 months after Venetoklis first learned about the sewer easement, its architect learned of the easement and informed the Family Partnership that designing the project to allow access to the easement area would add prohibitively to construction costs.
The purchaser informed the seller that it deemed the easement to be an incurable defect, and the seller succeeded in removing the easement as an exception to the purchaser’s title insurance; the purchaser was not satisfied the title was marketable and refused to close.
The seller then commenced the action in Venetoklis to retain the $2.1 million down payment as liquidated damages. The Supreme Court, King’s County, denied summary judgment, rejecting the argument that Venetoklis had waived any objection to marketable title.
The Second Department reversed, finding that Venetoklis was aware of and failed to give written notice of its objection to the defect in title within the time specified in the contract. Venetoklis thus waived any objection to title defect.
DON’T RELY ON GENERALLY NOT RELYING; AND LOOK BEFORE YOU BUY
In Hiralion Real Estate Inc. v. 225 5th LLC, 27 Misc.3d 1208(A), (Sup. Ct. NY Co., March 23, 2010), the plaintiff purchaser of a penthouse condominium sought recission of its $6.6 million purchase contract and return of its $990,000 deposit, claiming that the sponsor had fraudulently induced the purchaser to enter into the contract by concealing the presence of an eight-foot eight-inch parapet wall that would allegedly completely obscure the views of the park.
The plan contained a written description of the parapet, but the court found its first issue of fact in asking whether the description was ambiguous: notably, an architect testified that under commonly accepted standards, the parapet should have been shown as a thick blackened line if it was in reality a nine-foot wall.
Additionally, the sponsor’s representative allegedly convinced purchasers to buy in part based on oral representations that the views from the penthouse would be spectacular.
A merger clause in the contract expressly waived any claim by the purchaser of reliance on plans, warranties, brochures, advertisements, or statements of any nature, including reliance on such as they related to physical characteristics of the unit.
The merger clause neglected to mention explicitly any reliance on representations about the views from the penthouse. Because a general merger clause is ineffective to exclude parol evidence of fraud, only an express waiver of reliance on statements related to such views might have allowed for summary judgment.2
The court thus found a second issue of fact. The court noted that, had the sponsor wished, it could easily have precluded purchasers from relying on representations about the penthouse view in the merger clause.
The case also raised an issue of fact as to whether the sponsor deliberately prevented the purchaser from viewing the floor during construction in order to conceal the nonexistence of the view of the park.
The lesson for the sponsor is not to rely on clauses showing general non-reliance, but to write clauses to show specific non-reliance on every itemized sort of representation the buyer might rely on.
The lesson for the buyer is a caveat emptor: if you’re buying for the view, look at the apartment before you pay, and to the extent reasonable, put the view in the contract.
THINK OF AMENDMENTS AND RENT LIKE A PORCUPINE
In Park v. 426 West 25th Street, LLC, No. 100318/10 (Sup. Ct. NY. Co., June 4, 2010), the Supreme Court, New York County, dismissed a pleading relating to a contract of sale of 426 West 25th Street for $5,455,000 for residential use. As part of the agreement, plaintiffs and the defendant LLC would enter into a lease agreement for a term of one year beginning five days after the issuance of a Temporary Certificate of Occupancy, or TCO.
But the down payment was paid on Aug. 16, 2007, and the TCO did not issue until March 27, 2009. When it did issue, it issued only for use as a single-family dwelling, while the plaintiffs alleged the contract had required a TCO for use as a multiple dwelling.
Plaintiff buyers thus sought to recover both their $545,500 initial down payment and a $272,750 subsequent payment, alleging that the seller failed to exercise good faith and due diligence in obtaining the TCO.3
But the defendant’s documents flatly refuted the plaintiffs’ basic claims. The plaintiffs asserted the subsequent payment was not part of the down payment and therefore should not be included in liquidated damages; but the documents showed the $272,750 payment was an additional down payment, reflected in agreed-to amendments to both the lease and the contract of sale, and thus was part of liquidated damages.
Furthermore, the contract specified that a Certificate of Occupancy be procured by the seller for use of the building as a one-family dwelling — not a multiple dwelling — within 12 months of the issuance of the TCO. No other provision in the contract or of the lease implied or stated that the TCO was to be for a multiple dwelling.
Up until this point the plaintiffs were, perhaps, simply in a bad position with documents that did not support their claim — perhaps the documents had not reflected the agreement.
But now the plaintiffs made a clear error: the plaintiffs, by allowing amendments to the lease to address the problem and by paying a month’s rent, waived their claim for breach of contract.
When $5 million is at stake, never, never, never pay (or accept) amendments or the rent, even a little rent, without reserving your right to other remedies. Think of it like a porcupine: if you get in a fight, you want to be very careful about throwing it at someone to get rid of them, or about getting it thrown at you.
1 An astute reader will note that they did not disclaim the existence of an oral agreement, but that such would violate the Statute of Frauds.
2 Given the limitations imposed by the rule against general mergers being effective against parol evidence of fraud, the court properly followed the contractual rule inclusio unius est exclusio alterius, “the inclusion of one is the exclusion of the other.” Why the court did not apply the merger clause to the first issue of fact — the potentially ambiguous plans — is unclear, although there are several possibilities.
3 The plaintiffs also alleged that the seller had breached the warranty of habitability, but the claim was ineffective because the plaintiffs provided no supporting facts.
(Victor M. Metsch is a Senior Litigation Partner at Hartman & Craven LLP. Tom White, Georgetown Law student and a Summer Associate at the firm, also contributed to this article.)