Was Offer to Sell Mortgaged Residence at Auction Timely Revoked?

This was originally posted on the SGR Blog.

What Was Remedy If Mortgage Balances Exceeded Winning Bid?

It is not unusual in a hot suburban residential real estate market for an offering to morph into a “bidding war”- a de facto auction. And, on occasion, an auction is the sales method of choice from the start. But, as a recent case illustrates, a real estate auction sale may raise some unique factual disputes and concomitant legal issues.

Theodore Brois and Helene Brois authorized Concierge Auction, LLC, to conduct an auction of their property located at 3 Tallwoods Road in Armonk, New York, by an agreement dated May 21, 2018. The Auction Marketing Agreement provided that the auction “shall be conducted without reserve” and that the Brois, as sellers, “shall be obligated to sell the [property] to the highest bidder.” That agreement included a provision giving the Brois the right to cancel the auction, by written notice of cancellation and certain payments, which right expired at 12:00 p.m. on the day of the auction. The Broises pre-executed a contract of sale for the property on June 26, 2018. They also signed a document entitled an Auction Sale Acknowledgment on June 26, 2018, acknowledging that the highest opening bid was $1,500,000.

On June 28, 2018, Henry C. Okere and Karen Porter registered to participate in the auction, executing and submitting the required bidding documents, and wiring the $100,000 bidding deposit to Boston National Title Agency, as Concierge required. At the time of the auction on June 29, 2018, that bid was declared the winning bid, at $1,605,000. In the days that followed, Okere/Porter wired the remainder of the contractual down payment and the auctioneer’s fee. And, and on July 2, 2018, they executed the contract of sale, which was forwarded to the Brois’ attorney on the same date.

However, the Brois took the position that they had revoked their offer before an enforceable contract existed. Helene Brois claimed to have expressed to Concierge her desire to cancel or revoke their agreement to sell the property. She claimed to have telephoned Concierge on Friday, June 29, 2018, and stated that she wanted to revoke her offer and that she sent text messages the next day, Saturday, June 30, 2018. Emails were also sent by Erik Kukk, Esq. to Concierge’s representatives on July 2, 2018, to the same effect.

The sale contract provided a closing date of July 27, 2018. When that date passed, on July 30, 2018, counsel for Okere/Porter sent a letter to the Broises directly, declaring time of the essence, and setting a new closing date of August 15, 2018. That letter was sent to the Broises themselves, rather than to counsel, because their attorney had suffered a heart attack and was unable to further represent the Broises at that time, and they had not provided the name of a new attorney. 

On August 2, 2018, Okere/Porter turned over the $1,475,000 remaining due on the contract, to their attorney to be held in escrow.

By letter dated August 9, 2018, new counsel for the Broises responded to the time of the essence letter, taking the position that the letter was defective, and further, that there was no enforceable contract of sale.

The Court rejected the Brois’ contention that no enforceable contract could have come into existence unless and until Okere/Porter countersigned the contract of sale and delivered it to the Broises, or their counsel, prior to the revocation of their offer to sell. But the Court found that, in the context of the sale of real property by auction, without reserve, where, the sellers pre-signed a contract of sale containing all the necessary terms, with the final sale price to be inserted, an enforceable contract was formed when the hammer came down at the time of the auction.

The formation of an enforceable contract was not impacted by the Brois’ post-auction communications with Concierge. The Broises failed to establish their claim that they validly revoked the auction contract, their offer to sell, or the signed contract of sale. Helene Brois’ assertion that she communicated to Concierge her desire to cancel or revoke the agreement failed to provide any basis for relief. To the extent she asserted she contacted Concierge by telephone on Friday, June 29, 2018, to state that she wanted to revoke her offer, she did not pinpoint the time when she made such a call; by referring in her affidavit to the period of time “after the attempted auction,” she appeared to indicate that it was after 12 p.m. In any event, even a timely communication by telephone would not have sufficed to revoke the Brois’ offer, since any effective revocation was required to be in writing, as well as being made before noon on the auction date. The text messages Helene Brois sent the next day, Saturday, June 30, 2018, were also ineffective, as were emails sent by Erik Kukk, Esq. to Concierge’s representatives on July 2, 2018, to the same effect. None of those asserted or proved communications could have properly, timely, or validly revoked or withdrawn the Brois’ offer to sell.

Okere/Porter’s rights to enforce the fully-executed contract of sale arose upon the acceptance of their bid, without reference to the post-auction communications between Concierge and the Broises. And it was immaterial whether or when Concierge sent a fully-executed contract to the Broises; that signed contract existed, and was enforceable before a copy was forwarded to them.

And counsel’s letter dated July 30, 2018, properly declared time of the essence. Initially, it was appropriate to mail the letter directly to the Broises, given the heart attack suffered by the attorney who had represented them. There was no question that the Broises received and understood the importance of the letter, which was confirmed by the response sent on August 9, 2018, by their new attorney.

It was also proper to set the closing date for August 15, 2018. Where a contract for the sale of real property does not provide that time is of the essence, both the vendor and the purchaser are entitled to a reasonable adjournment beyond the closing date to perform. What constitutes a reasonable time for performance depends upon the facts and circumstances of the particular case. Included within a court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties, and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance. Where the facts are undisputed, what is a reasonable time becomes a question of law for the Court.

The Court found that there was nothing unreasonable about the sixteen days’ notice given here. A short period may be treated as unreasonable if the opposing party provides a valid reason for needing more time. But when no valid objection is made to a “time of the essence” re-scheduling of the closing, the other side may be considered to have acquiesced. Here, not only did the Broises fail to express a viable need for additional time before closing, but there was no greater amount of time within which they would have been ready and willing to close. Rather, the protests contained in the responsive letter by the Brois’ new counsel, dated August 9, 2018, did not involve an insufficiency in the time provided.

Nor did that letter state any other valid grounds for declining to close. Its vague assertion that the letter was defective failed to establish any such grounds. And its denial of the existence of a contract between the parties was erroneous.

Okere/Porter sufficiently established that they substantially performed their own contractual obligations and were ready, willing, and able to fulfill their remaining obligations on August 15, 2018, at 10:00 a.m., the date and time set for closing. They also established the Brois’ anticipatory breach, based on their refusal to accept the existence of the contract and their rejection of the proposal to close on the scheduled time-of-the-essence date. Under such circumstances, Okere/Porter had no obligation to prove the Brois’ failure to appear at the scheduled closing.

As to the appropriate award of damages, the equitable remedy of specific performance is routinely awarded in contract actions involving real property, on the premise that each parcel of real property is unique.

A particular difficulty presented in this case arose out of the two mortgages on the property. The sale proceeds would have been sufficient to fully pay off those mortgages on the contract’s sale date — $921,341.38 on the first mortgage and $501,670.77 on the HELOC. But the Brois’ defaulted in payment of those two mortgages at around the time they breached the sale contract, and the sums due to satisfy the liens and convey clear title to the property significantly exceeded the sale price provided for in the contract.

There was no question that the bank had the right to have the liens paid off in their entirety at the time of the closing on the sale of the property. The Court could not issue an order that would violate the rights of a third party whose interest in the equity was superior to Okere/Porter. Therefore, any resolution of the action must simultaneously provide that Okere/Porter were entitled to take title to the property from the Broises for the contract price of $1,650,000 and that the bank was entitled to have its liens fully satisfied at the closing. Furthermore, the Broises are the only parties who were liable to the bank for the amounts due on the mortgages in excess of the contract price.

To formulate a resolution of this dispute, the Court looked to a precedent in which the Second Department awarded the buyer specific performance although the seller claimed to be unable to convey clear title at the scheduled closing, as a result of additional encumbrances on the property in an amount that exceeded the sale price, due to the seller’s own business dealings post-contract. The Court there reasoned that since the seller had a contractual obligation to discharge the liens and convey clear and marketable title, and because any professed inability to do so was its own doing, specific performance was the appropriate remedy. And directed that the seller should raise the money to pay off the second mortgage lien on the premises and convey clear title to the buyer in accordance with the contract.

Accordingly, the Court found that Okere/Porter were entitled to an award of specific performance of the contract of sale. To the extent that the sale proceeds were insufficient to pay off the mortgage liens, any additional sums that must be paid to the bank to fully satisfy the liens were the obligation of the Broises and they were directed to make such payments. 

But recognizing the possibility that the Broises would profess an inability to satisfy the mortgage liens at the closing, the Court’s judgment would include an alternative directive, as suggested by Okere/Porter: in the event, the Broises failed to pay off the mortgage and HELOC at the closing, then, to the extent the sale proceeds did not cover those liens, Okere/Porter would be entitled, at their option, to pay off the existing mortgages so that they could take the property with clear title and, upon so doing, they would be entitled to enter a supplemental money judgment against the Broises in the amount of any such payment necessary to obtain clear title, upon appropriate proof of payment.

The Court was not convinced that any other money judgment was warranted. The claim that Okere/Porter suffered losses based on their need to pay rent of $3,200 per month, as well as utilities, and the cost of a storage unit, failed to entitle them to such a judgment. The Broises would have paid utilities in any event. The need for a storage unit was not shown to have arisen out of the failure of the sale contract. And they would have been responsible for significantly more than those claimed losses in real estate taxes on the property, had they succeeded in obtaining title at the outset.

Okere/Porter’s application for an award of attorney’s fees was denied. Generally, attorney’s fees may not be awarded absent an agreement between the parties or a statute or court rule authorizing them. Okere/Porter did not allege or show that the agreement contained such a provision.

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