Were Buyers Entitled to Return of Down Payment Due to Seller’s Alleged Breach?
151 E. 19th St. LLC brought suit for a declaration that it was entitled to retain the $1,695,000 down payment made by Edwin Ashourzadeh and Nuchem Obstfeld in connection with the July 19, 2022 contract to sell the building at 151 East 19th Street $11.3 million. The agreement contained a time of the essence clause that set a closing date for October 27, 2022.
Seller admitted that, one week before the closing, Buyers’ counsel sent a letter claiming that the renewal of certain residential leases in the premises constituted a default. But Seller insisted that the contract of sale did not prevent a renewal of any leases and instead only prevented it from entering into any new leases. Seller claimed that Buyers knew about those lease renewals and that this was merely a pretext to avoid the closing. Seller maintained that there was no way to read the contract to require it to put existing tenants out of their homes. And claimed it was ready willing and able to close on the closing date but that Buyers refused to close on the premises.
Seller asserted that, under the contract, Buyers had to either sue for specific performance or seek to terminate the contract but that they did neither. And maintained that, based on Buyers’ counterclaim they were ready to close; scheduled another closing for March 2, 202; but that Buyers, again, refused to close.
Buyers cross-moved for summary judgment and for the return of the down payment. They claimed that the building had 14 free market units as well as 5 rent-stabilized units and a rent- controlled unit. And argued that the tenants in the free-market units did not have a contractual right to renewal upon the expiration of their leases. Insisted that the new leases entered into by Seller before the closing date (and after the parties entered into the contract of sale) constituted a default because the contract prohibited Seller from entering into new leases. And pointed out that the three leases were renewed after the contract date, were all set to expire after the closing date, were all for free market units and were at significantly below market rates.
Buyers also claimed that they sent a written notice of default on October 20, 2022—and, under the contract, seller had 20 days to remedy the default. But Seller filed suit instead of addressing the issue. And Buyers characterized the second alleged closing in 2023 as a sham.The essential facts were undisputed. The parties entered into a contract to sell the rental building on July 19, 2022 and the closing date was set for October 27, 2022. The contract prohibited Seller from entering into any contracts that would bind Buyers after the closing. Seller entered into three lease renewals within that time period even though none of those leases expired until after the closing date. The question for the Court was whether those lease renewals constituted a default under the terms of the contract of sale.
The contract provided in part that:“Provided that Purchaser is not in default under this Agreement, from and after the Effective Date until the Closing, unless required by applicable law, Seller shall not enter into any new leases, contracts or agreements affecting the Property and which would be binding on the Purchaser following the Closing. Seller agrees that Seller occupied units 63 and 64 (the “Seller Occupied Units”) and apartment units 31, 41, 51, 54 and 61 (the “Vacant Units”) will be delivered vacant at closing, free of leases, subleases, license, occupancy agreements, tenants, subtenants, licensees and occupants. Upon the occurrence of any vacancy of any residential unit at the Property (including, but not limited to, either of the Seller Occupied Units), Seller shall keep each such unit vacant”
The Court found that the second sentence clearly stated that Seller shall not enter any new leases that would bind buyers after the closing. But the Seller did just that. The three leases were set to expire after the October 27, 2022 closing – Units 34 and 52 expired on October 31, 2022 and Unit 33 expired on November 30, 2022. There was absolutely no reason cited on the record presented to the Court to renew them and bind Buyers after the closing.
The Court found that those lease renewals constituted “new” leases under the terms of the contract of sale and therefore constituted a default under the contract. The fact was that those leases were all for free-market units, which meant that Seller was not obligated to extend a renewal offer, unlike a rent-stabilized unit. If Seller did not send a notice of intent not to renew and the tenants remained in the units after the expiration of their leases, then the tenants would simply become month-to-month tenants. Instead, Seller entered into those lease renewals after the parties entered into the contract of sale but before the closing date. And there was no question that each of those lease renewals would bind Buyers after the closing (they all expired in late 2023).
Seller’s assertion that it was not supposed to force these tenants out of the units made no sense to the Court and certainly did not raise a material issue of fact. Each of the leases lasted until after the closing – so Seller would not even own the building when those leases expired. As long as Seller owned the building, those tenants had binding leases.
Seller’s other argument that buyers did not properly terminate the contract was also without merit. The contract provided that “In the event Seller defaults under a material term of this Agreement, and such default is not cured within twenty (20) days from Seller’s receipt of written notice of such default, then Purchaser’s sole remedy shall be to have the right to either (i) terminate this Agreement and receive the return of the down payment or (ii) to seek specific performance, it being understood that if Purchaser fails to commence an action for specific performance within sixty (60) days after such default then Purchaser shall be deemed to have elected the remedy provided under clause (i) of this Section 16.3”.
Buyers sent a letter dated October 20, 2022 in which they declared Seller in default and Buyers counterclaimed for return of the down payment. While Buyers’ letter on October 25, 2022 suggested that they were still interested in closing and the first counterclaim sought specific performance, Buyers demanded the down payment in their cross-motion. Buyers thereby elected their remedy and, contrary to Seller’s assertion, Buyers were not prohibited from seeking either remedy under these circumstances. Moreover, Seller did not assert that it attempted to remedy the default..
The Court held that Buyers were entitled to a return of the down payment as well as legal fees as the prevailing party, as provided for in the contract.