APPROVAL WAS DISCRIMINATORY, ORDERS SALE TO PROCEED

 

            Challenges to a cooperative board’s denial of an application to purchase an apartment are generally unsuccessful. However, a board was recently ordered to allow a sale to proceed after the court determined that the board had revoked its prior approval for unlawful, discriminatory reasons. Hirschmann v. Hassapoyannes, Index No. 111521/04 (Sup. Ct. N.Y. Co. June 11, 2007). 

 

            In this case, the board initially approved plaintiff’s application. However, on the day of the closing, the purchaser mentioned that he would like to install a washer-dryer in the apartment, because his clothes frequently became soiled as a result of a serious medical condition. One of the board members became upset that the purchaser had not mentioned this request at the interview. Although the purchaser’s attorney immediately withdrew the request, the board voted to revoke the approval it had previously given. The would-be purchaser then sued the board under the federal, state and city disability laws, and sought an injunction requiring the board to reinstate its approval.

 

            The court ruled for the plaintiff, finding that the board had discriminated based upon the plaintiff’s disability and his request for a reasonable accommodation. The court rejected the board’s argument that it revoked its prior approval not because plaintiff requested an accommodation, but because he had shown a lack of candor in failing to make such request at the time of his board interview. The court reasoned that the board could not lawfully have asked at the interview whether plaintiff was disabled, and concluded that it is equally unlawful to penalize plaintiff for failing to volunteer information on topics about which the board was not allowed to inquire. The court ordered the board to allow the sale to close and scheduled a hearing to assess damages and attorneys’ fees.

 

 

An increasing feature on the New York real estate scene is parties entering into agreements concerning air rights appurtenant to their parcels. One such agreement was the subject of the litigation in RM Realty Holdings, Inc. v. Moore, Index No. 603683/2006 (Sup. Ct. N.Y. Co. June 14, 2007). In this case, at the time plaintiff acquired a penthouse condominium unit, it entered into an agreement with the sponsor under which certain of the condominium’s air rights were to be reserved to allow plaintiff to expand its unit.  The agreement accorded plaintiff the right to object to the transfer of the condominium’s air rights “immediately adjacent” to plaintiff's unit.

 

Thereafter, the defendant assigned certain of the condominium’s available air rights to the owner of a hotel that was to be constructed about 96 feet away from defendant's condominium unit, and more than 50 feet from the closest point of the condominium building.  Plaintiff sued the condominium for allegedly breaching the agreement by transferring the air rights, contending that the hotel was “immediately adjacent” to its unit.

The court dismissed this action. There was, the court found, no evidence that any construction was to take place “immediately adjacent” to plaintiff’s unit. The purpose of the restriction, to protect plaintiff’s ability to increase the interior square footage of his unit, was not jeopardized by the construction of a hotel some 96 feet away. For plaintiff’s unit to be “immediately adjacent” to the hotel, the court noted, it would have to extend the interior footage of [its] Unit, 96 feet from its present location, over thin air (using air rights [it] does not claim to own) for 50 feet of that distance.” The court concluded that “this action is so baseless in law or fact as to be frivolous.” Ganfer & Shore, LLP represented the defendant in this case.

 

The recent Supreme Court, New York County, decision in PL Diamond LLC v. Becker-Paramount LLC, et al., Index No. 602405/05 (Sup. Ct. N.Y. Co. June 6, 2007), a case involving hotel operators Phil Pilevsky, Ian Schrager, and Hard Rock Hotels, reiterates that in determining whether a transaction constitutes a “sale” of real property, the court will look primarily to the “substance of the transaction and not its form.”

 

The plaintiff in PL Diamond was a 50% member of an LLC whose sole asset was a 99-year lease (the "Lease") for basement space, which had been vacant since World War II, in the Paramount Hotel in Times Square. The operating agreement of the LLC provided that the managing member of the LLC could terminate the Lease if the Lease was assigned in connection with a “sale” of the Hotel.

 

In July 2004, ownership of the hotel was transferred to Hard Rock. For tax reasons, rather than simply sell the property, the seller and purchaser formed a joint venture. Under a Contribution Agreement, seller contributed its interest in the hotel to the joint venture, while the purchaser assumed the seller's debt and other liabilities in the amount of the purchase price. The Contribution Agreement provided that the purchaser was to own 90% of the joint venture, enjoy a preferred right to its profits and losses, and have total control over the joint venture and the hotel. The seller retained a 10% “subordinated,” passive interest in the joint venture, under which it was to have no participation in its business income or losses or in managing the hotel. At the time the Contribution Agreement was signed, the Lease was assigned to the joint venture, and subsequently terminated. 

 

Plaintiff challenged the transaction, claiming that the “contribution” was not a sale of the hotel, and therefore the seller had no right to terminate the Lease. Plaintiff further argued that because the seller took the tax position that the transfer was a contribution of property to a joint venture, it was estopped from taking the position in court that the transfer was a sale.

The court granted summary judgment holding that the transaction was a sale. Among other things, the court observed that the seller had transferred a 90% interest in the hotel for a substantial amount of money; transferred the deed to the hotel; paid transfer taxes and executed a transfer tax form; assigned various contract rights, warranties, guaranties, development rights, names, goodwill and other intangible property of the hotel to the purchaser; and, most importantly, agreed to play no role in the management of the hotel. The court also rejected plaintiff’s argument that because seller had not reported the transaction as a sale on its tax returns, it was estopped from arguing that a sale had occurred. The court found that the seller was not taking inconsistent positions on the same issue, but was simply asserting that the same facts had different legal consequences in different settings, which is permissible. The court also observed that it is entirely lawful for parties to seek to structure a transaction so as to minimize tax liability. The court concluded that the “economic realities” of the transaction were those of a sale and that the Lease was therefore validly terminated. Ganfer & Shore, LLP represented the defendant-purchasers in this case.