Victor M. Metsch in Legal/Financial on September 27, 2018
The owner of the cellar unit in a small Tribeca condominium decided to sell the unit, which, under the condominium’s certificate of occupancy (C of O), could be used only for storage or as a boiler room. A potential buyer planned to turn the space into a showroom for her business. The seller promised her that, by the time of closing, he would have all approvals required to change the C of O to allow for the unit’s use as a showroom – or the deal was off.
(A C of O must be changed when a space is altered in a way that will change the use, egress, or type of occupancy.)
The sale contract stated: “In the event this application [for a new C of O] is unsuccessful for any reason whatsoever, Seller shall return Purchaser's deposit made hereunder, at which time this contract shall be deemed null and void, with neither party having any rights or obligations vis-à-vis the other.”
The change to the C of O required the construction of a second means of egress from the cellar, which would impinge upon the ground-floor unit owned by Tribeca Film Center. The application to the Department of Buildings (DOB) for the C of O change required the signature of the condo board, which would have been dependent upon Tribeca Film Center providing its consent. Nonetheless, after entering into a sale contract, the seller filed an application with the DOB without first obtaining the consent of the Tribeca Film Center or the signature of the condo board. Worse, the application to the DOB did not identify the building as a condominium.
DOB approved the application under the false impression that the seller owned the entire building. After learning about the seller’s subterfuge, the board charged him with breach of his obligations under the bylaws of the condominium and advised the DOB of the situation. The DOB placed its approval of the work necessary to change the C of O on hold. Without the necessary approval to change the C of O, the contract of sale fell through.
The thwarted seller then had the temerity to sue the board for breach of contract, breach of fiduciary duty, and tortious interference with contract. The Supreme Court for Manhattan found that the breach of contract claim failed under the Business Judgment Rule, which limits judicial review of decisions made by a condominium's board of managers unless the board has failed to act “in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” The court found no evidence that the board was acting other than in good faith to fulfill its fiduciary duty. The court also found that there was no wrongful conduct by the board that was the proximate cause of injuries to the plaintiff, and the board could not be liable for tortious interference with contract because the contract, by its own terms, became null and void because a C of O change was not obtained.
There’s a lesson here. Condo boards do not have the array of relatively cost-effective remedies against misbehaving unit-owners that are enjoyed by co-op boards with respect to their shareholders. Nonetheless, condominiums are not entirely defenseless. Particularly when the condominium’s organizing documents provide that approvals are required for filings with public agencies, unit-owners trying to cut corners can be reined in fairly effectively. Condominiums whose documents do not require such approvals should consider amendments to provide for them.
Victor M. Metsch is of counsel at the law firm of Smith, Gambrell & Russell.
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