Contract Provisions

This week we wanted to bring your attention to a recent Supreme Court case out of New York County which highlights, in part, the importance of drafting Contract provisions that clearly define the Seller’s obligations with respect to crucial elements of the deal such as obtaining a Final Certificate of Occupancy or the existence of leaks into or emanating from the premises. Justice Ramseur’s decision awarded the Defendant (Seller) the retention of the disputed Contract Downpayment together with Legal Fees to be determined at a subsequent inquest hearing. The relevant facts of and a link to the case are set forth below.

The Plaintiffs, purchasers under a contract for the sale of a condominium unit, rejected a time of the essence letter sent by the seller’s counsel, claiming that they were not required to close until a final certificate of occupancy (“FCO”) was issued for the building. While no FCO was issued prior to the delivery of the time of the essence letter, Twenty-five successive temporary certificates of occupancy (“TCOs”) had been issued the last of which remained in effect. The Plaintiffs, also alleging that there was some water damage to the unit, terminated the contract and sued the seller for the return of their down payment. The Supreme Court, New York County, held that the Plaintiffs had breached the contract without a lawful excuse and, therefore, the Defendant-seller was entitled to receive the contract deposit from escrow and its attorneys’ fees, the amount to be determined at a hearing.

The contract included the following relevant provisions:
“‘Seller represents to the best of Seller’s knowledge that the Building and Unit respectively have valid and subsisting certificates of occupancy…’”

“‘To the best of Seller’s knowledge, there have been no leaks into or emanating from the Unit during the twenty-four (24) months prior to the date of this Contract.’.”

As to the need for a FCO, noting that no case on whether the issuance of a TCO satisfies a contract requirement that there be a “valid and subsisting certificate of occupancy” was cited by the parties, the Court stated:
“…a ‘valid and subsisting’ certificate of occupancy cannot be construed to be one and the same as a final certificate of occupancy…To hold otherwise – that ‘valid and subsisting’ only applies to final certificates – would require the court to insert into the contract the term ‘final’ where it has otherwise been excluded, distort the meaning of the provision, and imply an obligation where none existed.”2

As to the claim that there was a water leak in the unit which allowed the Plaintiffs to terminate the contract,
“[t]o show defendant made representations as to the apartment’s history of water leaks, plaintiffs must show that, among other things, defendants made statement of material fact it knew to be false when made [citation omitted]…The sole piece of evidence submitted in support of their motion – the email from the condominium’s superintendent – is dated after defendants entered into the contract, so it provides no evidence of plaintiffs’ knowledge at the time the parties entered into the contract…Such a dearth of information as to the origin and nature of the damage makes it impossible to determine the state of defendant’s knowledge when entering into the contract, let alone that a breach occurred.”

Sherman v. NYC 15th Street LLC, 2023 NY Slip Op 30560, decided February 10, 2023, is posted at https://www.nycourts.gov/reporter/pdfs/2023/2023_30560.pdf