New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

The Waiting Game

Can a condominium condition its agreement to waive its right of first refusal for a specific unit on the purchaser’s agreement to pay the condominium a percentage of the sales price when the unit is sold? The answer was “yes” in Raimondi v. Board of Managers of Olympic Tower Condominium.

In this case, the plaintiff, John Raimondi, had purchased, renovated, and sold three units in the condominium before attempting to buy the disputed apartment. At the time Raimondi acquired title to the last unit, he executed a letter of agreement with the condominium which said: “This letter shall confirm that, in consideration for the board’s waiver of its right of first refusal to purchase Unit 28E, I agree to pay to the Olympic Tower Condominium an amount equal to 7.5% of the difference between the gross purchase price for my purchase of Unit 28E, which is reflected in the contract of sale and the gross purchase price in the contract of sale at the time that I sell the Unit, less any broker’s commission up to a maximum of 6% and the transfer fee, provided that I sell the unit within five (5) years of the original date of acquisition.”

Raimondi purchased and then renovated the apartment. He entered into a contract to sell it about four months after he purchased it. However, rather than pay the amount called for in the letter of agreement, he contended that the condominium had no legal right to condition his acquisition of the unit upon his agreement to pay the condominium money when he sold it.

Raimondi sued and asserted four causes of action in the complaint. The first and third sought a declaration that the letter of agreement was void and unenforceable because it violated the condominium’s bylaws and a section of the Condominium Act. The second action sought money damages on the grounds that the condominium breached its fiduciary duty to Raimondi. The fourth action sought money damages on the ground that the letter of agreement violated General Business Law Section 349, which addresses deceptive business practices. The condominium answered and counterclaimed for specific performance and money damages as a result of Raimondi’s anticipatory breach of the letter of agreement and attorneys’ fees.

Both parties moved for summary judgment. The condominium argued that (1) the letter of agreement did not violate the bylaws; (2) the condominium did not owe a fiduciary duty to Raimondi, and, even if it did, no fiduciary obligation was breached; (3) the condominium’s actions were protected by the Business Judgment Rule; (4) the Condominium Act was inapplicable; and (5) the letter of agreement did not violate General Business Law Section 349.

On the other hand, Raimondi claimed that the letter of agreement “was an ultra vires act of the Condominium and was solely designed to steal [his] equity in the [subject unit].” He claimed that he was “compelled to execute” the letter of agreement and that the condominium imposed an unauthorized flip tax because the condominium’s bylaws authorized only a one percent transfer fee. He asserted that the condominium had no authority to single him out and impose a flip tax higher than that which was authorized. Raimondi also argued that by virtue of the letter of agreement, the condominium “illegally usurped [his] property rights and unlawfully restricted the alienability of the [unit in question].”

The court discussed the burdens on a motion for summary judgment. In this instance, the proponent of the motion has the initial burden of setting forth evidentiary facts to prove a case that would entitle it to judgment in its favor, without the need for a trial. If the proponent meets this burden, then the party opposing summary judgment must establish the existence of material issues of fact, through evidentiary proof in admissible form, that would require a trial of this action. If the proponent fails to make out its prima facie case for summary judgment, however, then its motion must be denied, regardless of the sufficiency of the opposing papers.

The court explained that granting a motion for summary judgment is the functional equivalent of a trial and is a drastic remedy that should be avoided where there is any doubt as to the existence of an issue that could be decided at trial. The court’s function on these motions is limited to “issue finding,” not “issue determination.” When issues of law are raised in connection with a motion for summary judgment, the court may and should resolve them without the need for a testimonial hearing.

Raimondi claimed that the condominium breached its fiduciary duty to him by imposing a cost upon him with respect to the proposed sale of the subject unit that was not imposed upon other unit owners of the condominium and which violated the by-laws.

The court first explained that a condominium’s by-laws constituted a contract with the unit owners. Two fundamental principles of contract construction applied: (1) agreements are to be construed in accordance with the parties’ intent; and (2) the best evidence of what the parties intend is what they provide in their writing. A written agreement that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms.

The court then noted that a condominium board owed a fiduciary duty to the condominium and its unit-owners. The decisions and actions taken by the board were, however, protected by the Business Judgment Rule so that in order for Raimondi to trigger judicial scrutiny of the condominium’s actions, he had to show that the condominium acted: (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose, or (3) in bad faith. “So long as the board acts for the purposes of the cooperative, within the scope of its authority, and in good faith, courts will not substitute their judgment for the board’s,” the court commented.

The parties agreed that the letter of agreement was entered into before Raimondi took title to the apartment, i.e., at the time he entered into the contract to purchase the subject unit. The court found that the condominium did not owe a fiduciary duty to Raimondi at that time because he was not a unit-owner of the apartment. The court said that the letter of agreement was part of an arm’s length transaction.

Moreover, the court found that even if the condominium owed a fiduciary duty to Raimondi the condominium’s decision to enter into the agreement was a proper exercise of its business judgment and that Raimondi had failed to establish that the condominium’s act of entering into the letter of agreement was outside its scope of authority under the bylaws.

The court discussed the sections of the bylaws that related to the condominium’s right to exercise or waive its right of first refusal. The court also addressed the transfer fee obligations that appeared at Article VIII of the bylaws, and then distinguished between Article VIII, Section 12 and the letter of agreement. It found that the agreement did not provide, explicitly or implicitly, for a transfer fee to be paid. Rather, it was a negotiated forbearance fee to be paid by Raimondi, as a seller of the apartment, in exchange for the condominium’s agreement to waive a valid right of first refusal. The letter constituted an enforceable, mutual exchange of promises executed during an arm’s length transaction.

The court rejected Raimondi’s arguments, including his contention that the letter of agreement imposed an unauthorized “flip tax” or transfer fee. The court found that the bylaws were silent as to whether the condominium could impose conditions on the sale of the apartment in exchange for the waiver of its right of first refusal.

Cases cited by Raimondi for the premise that “[c]ourts routinely have rejected attempts by condominium boards to impose unauthorized fees” were inapplicable. As to Raimondi’s claim that the letter of agreement was an unlawful restraint, in violation of the Condominium Act, the court held that this section did not apply because the letter of agreement was not a bylaw provision but a separate agreement voluntarily entered into by Raimondi based on mutual consideration.

For his fourth cause of action, Raimondi contended that the condominium’s imposition of the letter of agreement upon him was a deceptive business practice that violated General Business Law Section 349. The court explained that a private right of action is available to “any person who has been injured by reason of any violation of this section.” To maintain a cause of action for violation of this statute, a party must allege and prove: [1] that defendant was guilty of a material deceptive act or practice in the conduct of a business; and [2] plaintiff was injured by reason thereof. The injury need not be pecuniary; however, the injury must be caused by the deceptive act or practice. Intent to defraud and justifiable reliance are not elements of the cause of action.

With respect to real estate sales, the court discussed that an appellate court had held in other matters that the alleged deceptive acts of a condominium must “have a broad impact on consumers at large” in order to be actionable under the statute.

Raimondi pleaded that the agreement “imposes a cost upon plaintiff that is not imposed upon other unit owners of [defendant] similarly situated.” However, private contract disputes unique to the parties were not covered by the statute. Moreover, Raimondi did not allege that the letter was misleading in a material way.

Raimondi also sought a declaration that the letter of agreement was void and unenforceable. He demanded a permanent injunction prohibiting the condominium from seeking any payment due under the letter of agreement. In the court’s view, Raimondi failed to establish any basis upon which the letter of agreement was void and unenforceable.

The court then addressed procedural questions. It was undisputed that Raimondi failed to answer the condominium’s counterclaims. The condominium moved for a default judgment on those claims. In opposition, Raimondi sought an extension of time to respond to them. The court discussed the strong public policy that matters be disposed of on their merits in the absence of real prejudice. The issue was whether Raimondi demonstrated a reasonable excuse for his delay in answering the counterclaims and whether he had a meritorious defense.

Raimondi had not set forth a justifiable explanation for why he did not answer the counterclaims in a timely manner. His time to respond expired on May 25, 2007. At no time prior to the motion had he sought an extension of time. While the delay was minimal, the court said that a late reply was unwarranted because Raimondi did not set forth a meritorious defense to the counterclaims.

By the first and second counterclaims, the condominium sought a declaration that the letter did not contravene the bylaws and that it was a valid and enforceable contract. The condominium also sought an order directing Raimondi to specifically perform the letter of agreement. The condominium established Raimondi’s liability for failing to comply with the letter and was entitled to damages, the amount to be determined. The court granted judgment in favor of the condominium but denied its request for attorneys’ fees.

Comment: The condominium here was willing to use its waiver of a right of first refusal to require a purchaser who had a history of buying, renovating, and flipping apartments in the building to pay an enhanced transfer fee on the resale of the unit. Query whether this type of fee may be demanded by another condominium to institute a de facto transfer fee without relying upon a bylaw provision approved by the unit-owners. The case also reveals yet another condominium that has adopted a flip tax despite the lack of any definitive appellate decision in New York that a flip tax does not create an unreasonable restraint on alienation.

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