GANFER & SHORE, LLP CLIENT ADVISORY SEPTEMBER 2011 ILSA’S “IMPROVED LOT” EXEMPTION APPLIES TO CONDOMINIUM UNITS, FEDERAL COURT HOLDS A relatively recent development in New York real estate litigation is claims asserted by purchasers of new-construction residential real property, including condominium units, for rescission under the Interstate Land Sales Full Disclosure Act (“ILSA”), 15 U.S.C. §§ 1701-1720. (For prior discussion of ILSA, please see the April 2010 and May 2011 issues of this Client Advisory.) A recent decision from the Southern District of New York, the federal judicial district that includes Manhattan, provides further guidance on the interpretation and enforcement of ILSA. Tencza v. TAG Court Square, LLC, 2011 WL 3610582 (S.D.N.Y. Aug. 12, 2011). Unless a project is subject to an ILSA exemption (the most commonly invoked exemptions include the sale of a lot in a project comprising fewer than 100 lots), the law imposes various requirements, including that the seller provide the prospective purchaser with a detailed “property report” containing specified information in advance of the purchaser’s signing a purchase contract. If ILSA applies and is not complied with, the purchaser’s remedies include an automatic right to demand rescission of the purchase contract. As the economic downturn drove down values in many areas of New York's real estate market, purchasers who had signed pre-construction contracts during better times turned to ILSA litigation, or the threat of it, in attempts to get out of their contracts. The Tencza case addressed several procedural and substantive issues under ILSA. The first concerned the statute of limitations for filing a lawsuit seeking rescission under the statute, which is three years from the signing of the purchase contract. In this case, the purchaser had signed the purchase contract more than three years before suing, but the seller had signed it less than three years before. In a lengthy analysis of the wording of the statute as well as the execution clause of this particular contract, the court held that for purposes of the statute of limitations, the contract was deemed to be “signed” only when both parties had physically signed it. The court also followed precedent holding that where a purchaser satisfies the standards for rescission of a purchase contract under ILSA, the seller may not invoke “equitable defenses” to defeat the statutory remedy. The court added that a purchaser can rescind and obtain a full refund of the purchase price even after the purchaser has already closed and moved into the property. Finally, the court addressed the defendant’s argument that ILSA did not apply because the project was subject to an exemption relating to “improved land,” which provides that the statute generally does not apply to property that was already improved by a building before the purchase contract was entered into. Here, it was difficult to apply this exemption literally, because although there had been a commercial building on the site and there was a renovation and additional construction to create the residences that were the subject of the condominium offering, the real property in issue was a condominium unit on an upper floor (in fact, a floor that apparently did not exist in the previous commercial structure), rather than part of the “land” at all. The court recognized that an overly literal interpretation of the “improved land” exemption could render the exemption inapplicable to urban condominiums at all, a result inconsistent with the general understanding, and prior case law assuming, that ILSA applies only to new-construction projects rather than conversions or resales of units in existing buildings. However, the court also held that the exemption applies to each individual unit, rather than to the building as a whole, and would not apply here to a condominium unit that did not exist when the parties signed the contract of sale. COURT BARS BOARD OF “LOFT LAW” COOPERATIVE FROM LIMITING POTENTIAL PURCHASERS OF RESIDENTIAL UNIT A cooperative board of directors exceeded its authority under the proprietary lease and applicable law by seeking to limit potential purchasers of a unit to artists certified by the New York City Department of Cultural Affairs, because the building’s certificate of occupancy allowed the unit to be occupied as a “joint living-work quarter for artists” or as a residence. However, the tenant-shareholders’ claim that the board breached its fiduciary duties in other respects was dismissed under the business judgment rule. Wirth v. Chambers-Greenwich Tenants Corp., 928 N.Y.S.2d 288, 2011 N.Y. Slip Op. 06298 (App. Div. 1st Dep’t April 18, 2011). This case arose from a series of disputes between the plaintiff tenant-shareholders and the Cooperative. Initially, the disputes concerned a conflict over the tenant-shareholders’ right to utilize the roof of the building. The tenant-shareholders alleged that when they sought to sell their unit, the board refused to allow any sale until the roof-related disputes were resolved, and required that the unit be sold only to a certified artist. The Appellate Division held that the Board lacked authority to require that plaintiffs sell their unit only to a certified artist. Distinguishing a prior precedent involving a “Loft Law” building that was zoned exclusively for joint living-work quarters for artists, in this case, the building’s zoning allowed either that use or residential use. Moreover, the proprietary lease provided that the unit was to be occupied only for residential purposes. Hence, there was no authority for the Board to require plaintiffs to sell their unit to an artist. The court further observed that “the business judgment doctrine does not empower a co-op board to make a decision that the proprietary lease does not authorize it to make.” Accordingly, the court declined to dismiss plaintiffs’ claim for damages arising from the Board’s imposition of the requirement that any sale be to a certified artist. The court dismissed plaintiffs’ claims based on the Board’s imposition of other conditions on their proposed sale of the unit, such as that the disputes concerning the roof must first be resolved. Except for the Board’s unauthorized imposition of the artist requirement, its conditions were valid exercises of business judgment. Moreover, with regard to the artist requirement, the court noted that while the Board’s imposition of this requirement was “clearly erroneous,” the board members might be able to show that they had acted in good-faith reliance on advice from the building’s architect. The court also declined to dismiss causes of action in which plaintiffs challenged the use of the board president’s unit as a dance studio and the Board’s refusal to approve plaintiffs’ plans to renovate their unit. With respect to the dance studio, the court found that issues of fact existed as to whether this was a permissible use of the board president’s unit. With respect to the renovations, the court found that “plaintiffs raised triable issues of fact whether defendants withheld their consent due to malice or vendetta and whether they discriminated.” Finally, with respect to the ongoing disputes relating to the roof, the court determined that the Cooperative was entitled to enter onto and examine the roof, and enjoined plaintiffs from interfering with such access. |
