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How do bylaws allow the board’s “designee” to exercise the board’s right of first refusal?
AUTHORRichard Siegler and Dale Degenshein
Condo bylaws typically allow the board to exercise their right of first refusal. But what happens when they let a designated person purchase instead?
Right of First Refusal With a Twist
Almost all condominium bylaws allow boards to exercise their rights of first refusal. That typically means that the board must call a unit-owners’ meeting and get approval from a majority of unit-owners within a fairly short period of time. Following that, the board can purchase an apartment on behalf of all unit-owners on the same terms and conditions that have been offered to the purchaser. It is not an easy procedure; nor is it often used.
But many bylaws also allow the board’s “designee” to exercise the board’s right of first refusal, i.e., to purchase. How is that accomplished? That was the issue in The South Tower Residential Board of Managers of Time Warner Center Condominium v. The Ann Holdings LLC.
The Ann Holdings company put on the market an apartment it owned at the 55-story Time Warner Center Condominium in Columbus Circle. Jacob Wohlstadter, a next-door neighbor, wanted to buy and combine it with his apartment. Holdings and Wohlstadter were negotiating a price between $7 million and $7.8 million until Holdings became irritated by Wohlstadter’s aggressive negotiating tactics (he also went into the apartment without consent). Holdings subsequently signed a contract with an individual named Svetlana Sukhina for $7.4 million and then notified the board.
The board decided to exercise its right of first refusal with a slight twist – “by its designee, on behalf of all South Tower Residential Owners….” Who was the board’s designee? It was an “entity” (i.e., a partnership or corporation) owned by Wohlstadter. Apparently Wohlstadter had talked with the managing agent and proposed that the board exercise its right of first refusal and then assign the contract to an entity run by Wohlstadter. He would then combine the units and incorporate a common hall, which the board would license to him for almost $400,000, based on the price-per-foot charged to other owners who incorporated hallway space. He also agreed to pay additional costs.
According to the court, Wohlstadter and Holdings began further negotiations that broke down because Wohlstadter refused to guarantee no liability and to indemnify Holdings from third-party claims, particularly from Sukhina. Eventually, the board served a “time of the essence” notice on Holdings, demanding a closing. But Holdings failed to close.
The board then started this action, insisting that Holdings be required to close and convey title. Holdings claimed that Wohlstadter and his wife (a board member) interfered with the marketing and sale of the unit – that they tried to depress the sales price so that the Wohlstadters could use the board’s right of first refusal to buy.
Holdings argued that creating an “entity” to purchase the unit (which was just a cover for Wohlstadter) demonstrated self-dealing and bad faith. Holdings also stated that, if the board exercised its right to buy, it had to do so on behalf of all unit-owners and use the area for some communal purpose like a day-care center or health club. Holdings claimed that the board acted in bad faith because it failed to close within 60 days as required by the bylaws – negotiations between Wohlstadter and Holdings went on for eight months after the board exercised its right.
The court did not agree with Holdings’ arguments. Whether Wohlstadter actually offered $7.8 million was irrelevant. Holdings had contracted to sell the apartment for $7.4 million. This triggered the board’s right to purchase and/or to designate. The right of first refusal was found in the bylaws and was referenced in the contract of sale.
The court said that the board could designate Wohlstadter’s new holding company. There was nothing in the bylaws stipulating that the board was required to allow all unit-owners to use the unit. Holdings claimed that the $400,000 license fee was merely an incidental monetary benefit, but the court believed it was a benefit for all unit-owners.
Either way, the court said, the decision to designate was protected under the Business Judgment Rule (BJR) as lawful and in furtherance of a legitimate corporate purpose. As to the question of self-dealing, the court found that Wohlstadter’s wife recused herself from any decision of the board on these points.
In short, the court found that the board acted within the bylaws and the BJR. Even though it failed to close within 60 days, Holdings was negotiating and, together with Wohlstadter, charted its own course. As the board was ready, willing, and able to close on the time-of-the-essence date, the court granted judgment to the board, requiring Holdings to close.
This case is unusual. Boards rarely exercise a right of first refusal; and they rarely designate the right to purchase to another. Even when boards do it, however, sellers rarely sue. The seller is, presumably, receiving what it bargained for – the right of first refusal is set forth in the bylaws, the seller will receive the same purchase price, and the board is to purchase on the same terms and conditions as were set forth in the contract. In other words, the seller is not harmed. Any claim that Wohlstadter did anything to depress the price so that he could purchase at less than he (maybe) previously offered was rejected by the court.
All in all, the court found that the board acted consistently with its rights under the bylaws and Wohlstadter was permitted to purchase the apartment.
Belkin Burden Wenig & Goldman
Kleinberg, Kaplan, Wolff & Cohen