Gov’t Approval Meets Condition Precedent in Rockland County: Did Seller Have Right to Cancel Real Estate Contract of Sale?

This was originally posted on the SGR Blog.

Real property purchase and sale contracts often have so-called “conditions precedent” to closing– events that must occur before a party is obligated to close. But, as a recent case illustrates, disputes often arise about which party is the beneficiary of the condition and the concomitant right to cancel.

B & A Realty Management, LLC and John Gloria entered into a purchase and sale agreement. Gloria agreed to sell an undeveloped parcel of property in Suffern to B & A Realty for $1 million. The agreement was contingent upon B & A Realty, as the purchaser, obtaining all governmental approvals for the development of the parcel within 24 months from the end of a 90-day due diligence period. The date by which B & A Realty was to obtain the approvals was referred to as the approval date. And the agreement contained a provision allowing B & A Realty to extend the approval date by three months on two occasions. The closing was to occur 30 days after the approval date.

Paragraph 7(b) of the agreement gave either party the right to cancel the agreement if all necessary approvals were not obtained by the approval date, as extended. B & A Realty subsequently assigned the agreement to 175 Lafayette Avenue, LLC. Gloria granted a 30-day extension of the due diligence period, and 175 Lafayette thereafter obtained most of the governmental approvals contemplated under the agreement.

On September 28, 2017, 175 Lafayette’s attorney advised Gloria that the final permit from the New York State Department of Transportation was expected within 60 to 90 days. By letter dated October 2, 2017, Gloria canceled the agreement and directed his attorney to return the down payment held in escrow. In response, by letter dated October 3, 2017, 175 Lafayette declared time to be of the essence, waived the contractual contingency of obtaining all governmental approvals, and stated that it was ready, willing, and able to close.

Thereafter, B&A Realty and Lafayette sue Gloria for specific performance of the agreement and simultaneously moved for preliminary injunctive relief. Gloria opposed the motion for a preliminary injunction and cross-moved to dismiss the complaint. Supreme Court granted Gloria’s cross-motion to dismiss the complaint. And denied B&A Realty/Lafayette’s motion for a preliminary injunction—from which they appealed.

To succeed on a motion to dismiss., the documentary evidence that formed the basis of the defense must have been such that it resolved all factual issues as a matter of law, and conclusively disposed of the claim in the complaint. Further, the issue of whether or not a writing is ambiguous was a question of law to be resolved by the Court. And a clear and complete writing will be enforced according to its terms.

Paragraph 7(b) of the agreement clearly and unambiguously provided that “Seller or Purchaser may terminate this Agreement” if “Purchaser has not satisfied this contingency [to secure the governmental approvals] by the end of the Approval Date as extended.”

Contract language which is clear and unambiguous must be enforced according to its terms Where, as here, a condition in a real estate contract relating to government approval expressly grants to the seller the right to cancel the contract in the event that the requisite approval is not obtained, the seller may properly exercise its right to terminate the contract if such approval is not timely obtained. However, the seller may, orally or by its conduct, waive its contractual right to cancel the contract.

It was undisputed that 175 Lafayette failed to obtain all governmental approvals within the time period expressly stated in the agreement. The effective date of the agreement was December 2, 2014. The parties agreed that the due diligence period ended on April 1, 2015. As such, the 24-month approval period began on April 2, 2015, and, without any extensions, would have expired on April 1, 2017. The two three-month extensions exercised by 175 Lafayette would have expired on July 1, 2017, and October 1, 2017, respectively. Accordingly, the approval date as extended was October 1, 2017. Since 175 Lafayette failed to obtain all governmental approvals by October 1, 2017, the appellate court agreed with Supreme Court that Gloria properly canceled the agreement on October 2, 2017, in accordance with paragraph 7(b) thereof.

B&A Realty/Lafayette did not allege any words or conduct of Gloria that reflected an intent to waive the contractual right to cancel the agreement. Gloria, therefore, properly exercised his right to cancel the agreement pursuant to its cancellation clause.

Additionally, 175 Lafayette could not unilaterally waive the governmental approval contingency in the contract, as that contingency was not inserted solely for its benefit. The language of the cancellation clause clearly provided that, if the purchaser failed to obtain the necessary governmental approvals and either party terminated the agreement, the deposit would be returned and “the parties shall have no further liability or obligation to each other except for those that expressly survive termination of this Agreement.” In any event, as the agreement was canceled, the purchaser could not exercise its right to waive the contingency, and the cause of action alleging breach of the covenant of good faith and fair dealing failed because it was predicated on Gloria’s exercise of his unambiguous contractual right to terminate the agreement. 

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