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Habitat Magazine July/August 2020 free digital issue

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ARCHIVE ARTICLE

When a Roof Is Not a Terrace

What if you purchased an apartment which you thought gave you the right to use a portion of a roof setback as an exclusive terrace? Could you sue the real estate brokers and the attorney for the sponsor when it was determined that this use was not provided for in the offering plan and was illegal? That was the question in Pappas vs. New 19 West LLC.

John Pappas and his wife, Lois, purchased two condominium units in an apartment building, now known as the Downtown Club Condominium, located at 20 West Street in Manhattan. In November 2005, real estate brokers met with the Pappases about the availability of apartments in the building, which was in the process of being converted to a residential condominium. The real estate brokers were retained by the sponsor for two reasons: first, to provide an opinion regarding how common element interests were allocated among units under the Real Property Law, and, second, as its selling agent to market the units for sale. The sponsor also retained attorneys to provide an opinion letter to be included with the condominium offering plan, as required under the regulations of the New York State Department of Law.

The Pappasesclaimed that they told the real estate brokers that they wanted a unit with outdoor space. The brokers showed them two adjacent apartments, Units 39-B and 39-C. Unit 39-C was located next to a setback in the roof, and it had a door that opened to the setback. The brokers provided the purchasers with a price comparison of Units 39-A and 39-C with Units 40-B and 40-C, one floor above, although there is some confusion in the court’s decision as to whether the 40th floor units were identified as having contained outdoor space.

The price for Unit 39-C was substantially greater than 40-C. This was, the brokers allegedly told the purchasers, because 39-C included a terrace that the sponsor intended to legalize to be used as exclusive outdoor recreational space. The purchasers further alleged that the brokers provided them with a floor plan of what Units 39-B and 39-C would look like if combined and that the plan did not include an indication that they might not be able to use the setback.

Before buying, the Pappases were given an offering plan, which their attorney reviewed. This had a section, “Special Risks,” which included a provision saying: “Certain Residential Units are adjacent to roof setbacks ... Such Roof Setbacks are not legal Terraces because they are not accessible to the Units by doors, due to historic preservation and other restrictions imposed by the New York City Landmarks Preservation Commission...and/or the New York City Department of Buildings... Applicable Law prohibits the Owners of Units with adjacent Roof Setbacks from installing doors in the exterior walls of such Units and from using the Roof Setbacks as Terraces in any manner...”

In addition, a terrace was defined as any terrace, balcony, or garden that sits next to a residential unit. The offering plan stated that all terraces and roof setbacks adjacent to apartments would be paved with concrete pavers, even for those roof setbacks that were not accessible.

Schedule A to the offering plan provided a general description of each unit, including area, offering price, and percentage of common interest. It included a column titled “Approx. Exterior Sq. Ft. Terrace,” which is blank for all but eight units, suggesting that very few units had the required outdoor space. The entry for Unit 39-C indicates no outdoor space.

The floor plan annexed to the offering plan labels the roof area next to 39-C as a “Roof Setback”, and specifically states that “ROOF SETBACK IS NOT A LEGAL TERRACE.” The offering plan allocated to Unit 39-C a greater percentage of the common interest than the “C” units above it.

Attached to the offering plan was a letter from the real estate brokers to the sponsor, stating that, based upon their experience with new construction luxury condominium projects, the allocation of common interests was made in accordance with the real property law and the attorney general’s regulations.

The opinion letter stated that the brokers had reviewed the required documents and that the method used to determine the common interest of each unit in the common elements was based on the approximate proportion of the floor area of the unit to the aggregate floor area of all units. This proportion reflected the advantages enjoyed by one or more units but not by all.

The offering plan also included a legal opinion letter from the sponsor’s lawyers concerning the allocation of common interests. The sole factual basis for this opinion was said to be the lawyer’s review of Schedule A and the real estate brokers’ opinion letter.

On January 26, 2006, the Pappases entered into contracts with the sponsor to purchase the two units for a total price of $1.375 million. The contracts provided that the purchaser acknowledged that he had not relied upon any representations, warranties, statements, or estimates made by the sponsor or selling agent relating to the description or physical condition of the property or the unit, except as mentioned in the plan.

The contracts did not contain any representation that the sponsor would legalize the roof setbacks. Before the closing, however, the Pappases submitted a “punch list” of work that they wanted the sponsor to perform before the closing, which included the installation of paving stones on the roof outside Unit 39-C and railing around the parapet. This work was performed, but after the closing. Notwithstanding the installation, however, the roof setback had not been legalized as a terrace for the new owners’ exclusive use, and it remained off limits to them.

The Pappases then began this lawsuit against the sponsor, the sponsor’s lawyers, the sponsor’s real estate brokers, and their own attorneys.

As to the real estate brokers, the Pappases alleged that they fraudulently misrepresented that the purchasers would have exclusive use of the roof setback, and thereby induced them to purchase not only Unit 39-C, but also Unit 39-B because the Pappases made clear their desire to combine the units and have the use of outdoor space.

The purchasers further alleged that the brokers negligently represented that the roof setback would be available for purchasers to use as their exclusive outdoor space. Finally, they alleged that the brokers had falsely certified that they had complied with the Real Property Law and that the purchasers relied upon the false certification.

The purchasers contended that the proportionate share of interest in the common elements allocated to Unit 39-C exceeded its proportionate floor area, as evidenced by the lower interests allocated to other apartments in the “C” line in floors 40 to 45. Therefore, purchasers were lead to believe that the greater allocation was attributable to the “substantially exclusive advantage” presented by the outdoor space.

The Pappases also claimed that the sponsor’s law firm was liable for fraud and negligent misrepresentation based on the contents of the legal opinion letter.

The real estate agents moved to dismiss the complaint and first argued that, under the Martin Act, the attorney general has exclusive standing to vindicate the rights of persons claiming to have been damaged by false or misleading statements contained in a condominium offering plan. This was found to be incorrect, however.

Nonetheless, the fraud claims were dismissed by the court because the offering plan accurately described the unit. The offering plan plainly stated that the roof setbacks were not terraces but common elements, and that owners of adjacent units were prohibited from using them as terraces. The floor plans in Schedule A to the offering plan labelled the roof setbacks accordingly, and the floor plan for Unit 39-C specifically stated that the roof setback was not a legal terrace.

Moreover, the complaint alleged that the brokers told the purchasers that the sponsor intended to legalize the roof setback for use as a terrace, which assumed the purchasers knew that it was not legal when it was shown to them. Pappases’ alleged reliance on the broker‘s statements was not reasonable when the statements were contradicted by the terms of the offering plan. Nothing in the contracts they subsequently signed obligated the sponsor to convey to them an interest in exclusive use of the roof area. When they signed, the purchasers represented that they did not rely upon any representations made by the selling agent or sponsor, apart from those contained in the offering plan and contracts. Therefore, the claims based upon the brokers’ alleged misrepresentations were also dismissed.

With respect to Pappases’ claim for fraud based on the opinion letter, that too was dismissed. The crux of the complaint against the real estate brokers was that the purchasers wanted to acquire a unit with the right to the exclusive use of outdoor space, and they did not get it. The opinion letter generally states that the allocation of common interest was in accordance with the real property law, i.e., that interests were allocated proportionately based on floor area, except that some units would be allocated a greater interest based upon an advantage over other units. This statement would not lead a reasonable purchaser to conclude that Unit 39-C came with the exclusive right to use the roof area, when the offering plan flatly contradicted that supposition. The submissions to the court did not reveal what “advantage” enjoyed by Unit 39-C justified its allocation of a greater interest in the common elements..

The Pappasess negligent misrepresentation claim was also dismissed by the court. The real estate brokers’ argument was based upon the text of the contracts, to which the Pappases made specific reference in the complaint and acknowledged that they did not rely upon the selling agents’ description of the units’ dimensions or physical properties, except as specifically represented in the offering plan or contracts.

The Pappases further alleged that the real estate brokers owed a duty to them to refrain from representing that the roof setback was usable as their exclusive outdoor space. The real estate brokers and the Pappases were engaged in an arms’ length transaction. The purchasers provided no authority for the idea that the brokers owed a duty to describe the legal use available for the roof area, particularly when the purchasers had legal counsel to review the transaction. Therefore, there was no basis for finding that there was a breach of duty.

The sponsor’s lawyer also moved to dismiss. The complaint alleged that the law firm fraudulently induced the purchasers to buy the units by certifying in the legal opinion letter that the allocation of common interests was made in accordance with applicable law. As with the real estate brokers’ opinion letter, the purchasers did not show negligent misrepresentation because there was no detrimental reliance on the legal opinion letter.

Also, the author of an opinion letter is not liable in tort to another for negligent misrepresentation under New York law unless there is “either actual privity of contract or a relationship so close as to approach that of privity.” No such relationship existed here.

Accordingly, the complaints were dismissed.

Comment: Once again, the courts remind purchasers to read the documents. It is not enough to rely upon oral statements, promises, or omissions by real estate brokers or counsel for the sponsor. If a purchaser wants to have exclusive use of a roof area, the purchaser must make sure that such use is legal and authorized in writing. The courts have repeatedly made it clear that representations made in an offering plan cannot be ignored, particularly by those who purchase from the sponsor of a conversion plan.

Here, the purchasers tried to ignore the plain statements made in the offering plan and sought to rely instead on oral statements made concerning the sponsor’s “intent” to legalize the roof setback for use as a terrace. This strategy was unsuccessful. Based on the disclosures in the offering plan, we believe the sponsor would also be successful were it to move to dismiss the action.

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