Scott E. Mollen
Condominium Sponsor Entitled to Keep $2 Million Deposit—Repudiation and Fraudulent Inducement Claims Rejected—If a Purchaser Defaults, Down payments of 10 Percent, 25 Percent or Even 50 Percent May Be Forfeited Absent Disparity of Bargaining Position, Duress, Fraud, Illegality or Mutual Mistake—Time of the Essence Letter Not Necessary Since Contract Specified Time Was Of The Essence—Facts Peculiarly Within The Sponsor’s Knowledge
A plaintiff condominium sponsor (sponsor) moved for a judgment on the pleadings pursuant to Fed. Rule Civ. P. 12(c) and for fees and costs pursuant to a purchase agreement (contract) between the sponsor and the purchaser (purchaser). The sponsor sought release of the deposit, on the grounds that the defendant purchaser failed to close. The purchaser had agreed to buy a new construction condominium apartment and had provided a 20 percent deposit, in the amount of $2,113,000, to be held in escrow.
After the construction was completed in July 2017, the sponsor notified the purchaser of a scheduled closing date. The purchaser did not close within the time specified by the contract. The sponsor thereafter issued a Notice of Default (Notice) on Nov. 9, 2017, giving the purchaser 30 days to cure and close. The purchaser failed to close within the cure period.
Following unsuccessful discussions between the parties, on Jan. 19, 2018, the sponsor advised the purchaser that it planned to terminate the contract. The purchaser then notified the escrow agent of the purchaser’s claim that he had been fraudulently induced to enter into contract and instructed the escrow agent to hold the deposit. On Jan. 24, 2018, the sponsor terminated the contract and demanded release of the deposit. The escrow agent continued to hold the deposit. The sponsor thereafter commenced the subject action. The purchaser counter-claimed, alleging fraudulent inducement and repudiation. The court granted the sponsor’s motion and denied the purchaser’s cross-motion.
The contract provided that after the sponsor set a closing date, the purchaser had an additional 30 days to cure, and time would then be “of the essence.” If the purchaser failed to timely cure, the sponsor had “sole discretion” to cancel the contract and retain the deposit as liquidated damages, plus any interest earned thereon.
The liquidated damage provision stated that it had been entered into “voluntarily, after negotiation, without duress or coercion …” and each party had full opportunity to be, “advised by ‘counsel, … and other … advisors of its own choosing.’” The purchaser also agreed that it had not relied upon any “representations, warranties, … statements … written or oral, in deciding to enter into the (contract)…”, and that it could not be orally modified.
After the sponsor had notified the purchaser that the closing was to occur on July 24, 2017, the purchaser exercised his right to adjourn the closing by 30 days and requested that the closing “occur at a ‘mutually-agreeable date and time no later than August 23, 2017 at 2 p.m.” The purchaser did not close on or before Aug. 23, 2017 or at any time thereafter.
The sponsor sent an email to the purchaser which stated that “before our lawyer sends a default notice, I wanted to reach out to you to find out what your intentions are.” The purchaser replied, “My intention is to close.” The sponsor sent a proposed contract amendment on Oct. 12, 2017 which proposed an extension of the closing date to Jan. 5, 2018. On Oct. 26, 2017, the sponsor wrote to the purchaser that since the purchaser had not responded with respect to extending the closing date, the purchaser let sponsor know how they’d like to proceed. The purchaser stated that he would close in the new year, “but will have some proposed changes to the amendment.” The sponsor asked about such comments and said that it needed the amendment now. The purchaser responded that he would “loop back within 24 hours.”
On Nov. 9, 2017, the sponsor sent the purchaser the Notice. The Notice stated that the failure to close title constituted an Event of Default, as defined by the contract, that all rights to adjournments have been “exhausted” and if the purchaser failed to cure within 30 days, the sponsor would exercise its rights under the contract.
The purchaser wrote that he “still wanted to close.” The purchaser stated that he was working with a bank and they advised they can close by the end of February. The sponsor asked whether the purchaser could close by the end of January. The purchaser stated that he would seek an alternate lender so that he could close by the end of January. On Dec. 4, 2017, the sponsor sent a new proposed amendment, setting a closing date of Feb. 28, 2018. The purchaser wrote that he would be discussing the new amendment and get back to the sponsor.
The sponsor further advised the purchaser that it would terminate the contract if it did not receive funds by 5 p.m. on Dec. 22, 2017. The purchaser never signed the last proposed amendment, nor had transmitted funds and the parties never agreed to a new closing date. On Jan. 8, 2018, the sponsor advised that the purchaser that it would terminate the contract unless it heard from the purchaser.
Thereafter, the purchaser’s counsel instructed the escrow agent to not release the deposit. On Jan. 24, 2018, the sponsor sent a Notice of Termination of the contract. The sponsor then commenced the subject action, alleging breach of contract and seeking a declaratory judgment directing the release of escrow deposit. The purchaser asserted affirmative defenses and counter-claims, alleging “repudiation and fraud in the inducement.”
Citing the terms of the contract, including the purchaser’s representation that he would not rely on any written or oral communications conveyed prior to or simultaneous with the execution of the contract, the court granted the sponsor’s motion for a declaratory judgment.
The court explained that courts will “deny a down payment refund when the purchaser has defaulted, regardless of whether the down payment was 10 percent, 25 percent, or even 50 percent, of the purchase price…,” absent “disparity of bargaining power between the parties, duress, fraud, illegality or mutual mistake.” The subject contract was the “product of months-long negotiation, between sophisticated parties, both represented by counsel of their choosing.”
The court found that the purchaser had failed to present a “genuine issue as to any material fact” that would justify the sponsor not receiving the down payment from escrow. The sponsor’s pleadings demonstrated “an ability to close on the Closing Date designated by the closing notice; and (purchaser) failed to raise a plausible claim to the contrary.” The fraudulent inducement claim was barred by disclaimers embodied in the contract. The purchaser was a “sophisticated businessman represented by counsel” and the contract had a “merger clause.” The court found that the sponsor was “ready, willing, and able to close on the ‘closing date’” and that the purchaser’s pleadings offered “little more than speculation in response to (sponsor’s) well-pled facts.”
The purchaser’s repudiation claim was based on the sponsor wrongfully issuing the Notice of Termination. However, such act was within the sponsor’s “discretion under the (contract),” when the purchaser failed to close within 30 days of receiving the Notice. Thus, the purchaser, not the sponsor was in breach of the contract at the time when the Notice of Termination had been issued. Therefore, the purchaser could not “state a claim for anticipatory breach.” There could not be an “anticipatory repudiation of a duty not owed.” Furthermore, the purchaser could not assert repudiation when he had not pled that he had the requisite “willingness and ability to perform before the repudiation and that he would have rendered the agreed performance”, were it not for the sponsor’s “supposed repudiation.” Thus, the court dismissed the repudiation claim.
The court also dismissed the fraudulent inducement claim because it was “entirely dependent on alleged oral misrepresentations….” The purchaser had “disclaimed reliance on any” oral representations and had affirmed that the contract embodied the parties’ “entire agreement.” The court explained that “permitting such a claim in these circumstances would allow the (purchaser) to ‘deliberately misrepresent’ its purported non-reliance in the contract and would make it impossible for ‘two businessmen dealing at arm’s length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.’”
The purchaser had alleged that the seller had misrepresented that the building was “60-70 percent sold-out”, the sponsor had a “present plan to increase prices by 8-12 percent”, “though the alleged increase had not gone into effect” and the building’s well-known architect had “committed to purchasing the apartment directly above the one (purchaser) was interested in.”
The court held that each such misrepresentation was barred by the contract’s disclaimer as to reliance on oral representations. Moreover, the alleged misrepresentations “involve predicted events set to occur in the future” and the purchaser was “sophisticated business person” who had been represented by counsel in the negotiations. The court reasoned that if such misrepresentations were “truly material”, the purchaser had the “sophistication, guidance, and means to ensure that the (contract) required (sponsor) to affirm them.” The court also noted that where a party is on notice of “material facts which have not been documented and he nevertheless proceeds with a transaction without securing available documentation or inserting appropriate language in the agreement for his protection, he may truly be said to have willingly assumed the business risk that the facts may not be as represented. (Purchaser) cannot now complain that he has been defrauded when his own lack of due care is responsible for his predicament.”
Additionally, the purchaser had argued that he’s entitled to an “indefinite” adjournment of the closing date, since the sponsor had not sent a “time of the essence” letter specifying a law day for closing. However, the contract clearly specified that “time was of the essence” and that the “‘on or before’ date must be complied with.” Thus, the sponsor did not need to send a time of the essence letter.
Since the sponsor was within its rights, the court dismissed the purchaser’s repudiation claim. If the sponsor did not breach the contract, the anticipatory repudiation claim had to fail. Only a party who is not in breach of the agreement may bring an anticipatory repudiation claim.
The purchaser’s fraud in the inducement claim was based on the aforementioned alleged misrepresentations and facts that, allegedly, were “peculiarly within” the sponsor’s knowledge. The court held that the “peculiar knowledge” exception was inapplicable. The parties are “sophisticated companies or businessmen” and the purchaser “had a low-cost alternative such as insisting that the written contract terms reflect any oral undertaking on a deal-breaking issue.” Decisional precedent held that a party should not be heard to complain that he had been defrauded “when it is his own evident lack of due care which is responsible for his predicament.” The sophisticated purchaser was represented by real estate counsel throughout the negotiation of the contract and afterwards. The purchaser could not disclaim reliance and then claim to have been defrauded by statements that he has already disclaimed. Accordingly, the court held that the sponsor was entitled to keep the purchaser’s down payment.
Comment: Some purchasers who perceive that the real estate market is “softening,” will try to “back out” of their contracts by alleging that the sponsor did something wrong. Such purchasers must overcome the language of their contracts, including provisions that provide there were no representations or warranties, except those expressly set forth in the contract and related documents, and merger and integration provisions that bar claims of alleged oral agreements.
28th Highline Assocs. LLC v. Roache, U.S. District Court, S.D.N.Y., Case No. 18 Civ. 1468, decided Feb. 22, 2019, Sweet, J.