THE APPELLATE DIVISION, SECOND DEPARTMENT, ADDRESSES BUYER’S SPECIFIC PERFORMANCE CLAIM UNDER A REAL ESTATE CONTRACT IN THE FACE OF SELLER’S INABILITY TO CONVEY GOOD TITLE

• Posted on: Jan 22 2021

In one of our BLOGS from last week, we addressed the remedy of specific performance in breached real estate contracts [HERE].  The BLOG noted that, under certain circumstances when monetary damages are insufficient to make one of the parties whole after a breach, the equitable remedy of specific performance may be available to require the breaching party to perform. 

On January 20, 2021, the Appellate Division, Second Department, decided W Equities Acquisitions, LLC v. Wyckoff Heights Properties, LLC, in which interesting specific performance issues were decided.  The plaintiff in W Equities was the purchaser under a real estate contract for the purchase of real property in Brooklyn.  The defendant was the seller.  Among other things, pursuant to the contract of sale, the seller “was required to deliver the premises free of any tenancies.”  In this regard, section 13.02 of the contract provided that:

If Seller shall be unable to convey title to the Premises at the Closing in accordance with the provisions of this contract . . . Purchaser, nevertheless, may elect to accept such title as Seller may be able to convey with a credit against the monies payable at the Closing equal to the reasonably estimated cost to cure the same (up to the Maximum Expense described below), but without any other credit or liability on the part of Seller. If Purchaser shall not so elect, Purchaser may terminate this contract and the sole liability of Seller shall be to refund the Down payment to Purchaser and to reimburse Purchaser for the net cost of title examination.

The contract further provided that the “Maximum Expense” that the seller was required to incur to cure title defects was $75,000. 

When the parties entered into the contract of sale, the property was encumbered with four leases that were subject to rent stabilization laws.  Accordingly, the four tenants could not be forced to leave and “could only be asked to vacate voluntarily.”  While two tenants agreed to vacate their respective units, two did not.  Indeed, seller presented evidence that it offered to pay each of the two tenants that refused to vacate: $75,000, all deposits, all moving expenses, rent for one year; and it offered assistance finding new apartments in the same neighborhood for similar rents.  The two holdout tenants rebuffed seller’s offers because, according to the tenants’ attorney at a meeting with seller, she was “advising her clients not to execute the surrender agreements because they would lose certain government benefits, would not be able to find comparable apartments with similar rents, and would have to pay income tax on the money being offered.”  The seller urged that the two holdout tenants “unequivocally refused to move out or entertain any offers…to surrender their tenancies.”  (Internal quotation marks omitted, ellipses in original.)

Purchaser’s counsel sent a “time of the essence” closing date letter for February 10, 2016.  In response, seller advised that, despite several attempts to enter into surrender agreements with all of the tenants, it was unsuccessful.  Accordingly, seller could not deliver the premises free of all tenants.  Thus, in accordance with section 13.02 of the contract, seller offered “[purchaser] the choice of either accepting such title as the [seller] was able to convey, with a credit no greater than the maximum amount specified in the contract, or terminating the contract with a refund of the down payment and reimbursement of the net cost of title examination.”  Purchaser rejected seller’s “invocation of section 13.02 and insisted on proceeding to closing.”  The parties failed to consummate the transaction on the closing date.

Purchaser commenced an action for specific performance.  Seller answered and asserted a counterclaim to retain the $190,000 deposit as liquidated damages for breach of contract.  Seller moved for summary judgment dismissing the complaint and on its counterclaim and purchaser cross-moved for summary judgment on its complaint and dismissing seller’s counterclaim.  Supreme court denied purchaser’s cross-motion and granted seller’s motion to the extent that it sought to dismiss the complaint.  However, the court denied seller’s motion to the extent that it sought summary judgment on its counterclaim.  The Appellate Division affirmed the denial of purchaser’s cross-motion for summary judgment on the complaint and the grant of the seller’s motion for summary judgment dismissing the complaint.  The Court, however, reversed the denial of seller’s motion for summary judgment on its counterclaim.  The Court found that “[b]ecause the defendant acted within its rights pursuant to section 13.02 of the contract, it is the plaintiff—not the defendant—which breached the contract by failing to elect one of the two remedies available to it under section 13.02 [and] since the defendant seeks only to retain the down payment as liquidated damages (see Maxton Bldrs. v Lo Galbo, 68 NY2d 373, 378), there are no triable issues of fact to be decided.”

The Court recognized that “[a]s a threshold matter, in light of the defendant’s obligation to deliver the premises “free of all tenancies,” the inability to obtain surrender agreements from two of the four tenants would constitute a title defect (see Segal v Kulch, 13 AD2d 1011, 1012, affd 11 NY2d 834; see also S.E.S. Importers, Inc. v Pappalardo, 53 NY2d 455, 463).”  To “trigger” section 13.02 “the defendant was required to prove the existence of a situation beyond the parties’ control, coupled with proof that the defendant acted in good faith in attempting to convey title in accordance with the terms of the contract (see SJSJ Southold Realty, LLC v Fraser, 150 AD3d 920, 921; Karl v Kessler, 47 AD3d 681, 682; see also 101123 LLC v Solis Realty LLC, 23 AD3d 107).”  The Court rejected purchaser’s assertion that seller was “required to establish impossibility of performance.”  (Citation omitted.)

The Court found that the evidence of the offer made to the two holdout tenants, coupled with the evidence of what transpired at seller’s meeting with tenants’ counsel, was sufficient to satisfy seller’s burden.  This was particularly so because purchaser failed to challenge seller’s factual assertions and, instead, merely asserted that seller’s efforts resolve the title issues were “insufficient”.  Thus, the Court determined that:

the [seller] established, prima facie, that it made a good faith effort to convey title in accordance with the terms of the contract (see SJSJ Southold Realty, LLC v Fraser, 150 AD3d at 921), and that its inability to do so justified its invocation of section 13.02, thereby requiring the [purchaser] to elect either to cancel the contract and receive a return of its down payment, or accept the property with the remaining tenancies and a credit of up to $75,000—a choice the [purchaser] refused to make (see Mehlman v 592-600 Union Ave. Corp., 46 AD3d 338; see also M&E 73-75, LLC v 57 Fusion LLC, 189 AD3d 1; 101123 LLC v Solis Realty LLC, 23 AD3d 107).