Greenbaum Rowe Smith & Davis Newsletter

SELLER BEWARE - Contract Buyer's Rights to Your Property May Be Greater Than You Think

By William D. Grand

 

Is the following scenario fact or fiction?

 

A Seller enters into a contract in 1998 to sell real estate to Buyer #1. It takes Seller two years to evict a tenant from the property, which was a condition to closing. Following the eviction, in 2000, Seller sends a “time of the essence” notice to Buyer #1, demanding that he immediately close title. Buyer #1 refuses, alleging that the property is not “broom clean,” as required by the contract. Seller then proceeds to sell the property to Buyer #2 in December 2000. Upon hearing of the closing, Buyer #1 sues the Seller for specific performance of the contract to sell. The trial court dismisses the claim for specific performance, and Buyer #1 appeals. It takes several years for the case to wind its way through the judicial system. Finally, in February 2005, an appellate court rules that Seller may have breached the contract to sell to Buyer #1, and Buyer #1 may, in fact, have a right to the property, despite the fact that Buyer #2 has by then been in possession of the property for almost five years.

 

The above scenario is true. While a further explanation of the underlying facts may evoke some sympathy for the plight of Buyer #1, the case of Marioni v. 94 Broadway, Inc., et al., decided by the Appellate Division on February 8, 2005, strengthens a contract-buyer’s rights to a degree not before seen.

 

In Marioni, Buyer #1 waited patiently until the seller was able to evict the tenant. At that point, there was substantial debris remaining on the property. The buyer and seller each armed themselves with clashing provisions of the contract. The buyer argued that the contract required the property to be in “broom clean” condition at the time of closing, while the seller argued that the contract stated that the buyer was purchasing the property “as is.”

 

Seller, relying upon the fact that Buyer #1 refused to close on the time of the essence closing date, declared the contract to be terminated. Thereafter, however, counsel for buyer and seller reached an accommodation, and agreed that $12,500 of the purchase price would be placed in escrow and used to remove the debris from the property.

 

However, unbeknownst to Buyer #1, Seller engaged a different attorney to negotiate a sale to Buyer #2, and a closing with Buyer #2 took place in December 2000. Buyer #1 then promptly filed a lawsuit seeking an order for conveyance of the property to him and damages.

 

The trial court held that Buyer #1 had lost his right to specific performance. The appellate court had a different view, however. The appellate court held that the Seller’s termination of the contract was wrongful, and Buyer #1 still retained an interest in the property. Buyer #1’s refusal to close on the time of the essence closing date was proper, the court held, because the property was not “broom clean.” The court held than an “as is” provision in a contract for the sale of real estate refers to condition of the structures and fixtures on the property, while the term “broom clean” refers to the removal of dirt and debris prior to closing, which is what was involved in the case.

 

In assessing the rights of Buyer #2 versus Buyer #1, the appellate court first determined that Buyer #2 had actual notice of the contract with Buyer #1, which relegated Buyer #2 to inferior status vis a vis Buyer #1. A party who first contracts to purchase property, in the eyes of the court, has greater rights to the property than one who purchases later with notice of the claimed rights of the first party.

 

The appellate court emphasized the important equitable rights that inure to a contract purchaser of land. Those equitable rights, the court held, are not easily extinguished, even when a second buyer has been in possession of the property for almost five years. The court was not deterred by the complexities involved in unwinding the second transaction; the court remanded the case to the trial court for a balancing of the equities as between Buyer #1 and Buyer #2.

 

What lessons can an owner of property take from this case, other recent cases, and statutory law that define the rights of buyers? First, if you have a choice, choose your buyer carefully. An unscrupulous contractbuyer can tie up title for years. The Marioni case may not have dealt with an unscrupulous buyer, but there are other cases that make this point.

 

For example, New Jersey law no longer requires an agreement for the sale of real estate to be in writing; a buyer (or seller) is permitted to prove the existence of an agreement, even if it is not in writing, through “clear and convincing evidence.” Thus, a buyer can allege that negotiations reached the point of an agreement, and can then file a suit for specific performance and a lis pendens, which will effectively prevent the property from being sold until the case winds its way through the court system. As was seen in the Marioni case, that could take years.

 

Which leads to the second piece of advice-when negotiations are underway, even before counsel is retained, notify the other party in writing that there will be no agreement until a final written contract is executed by both parties.

 

And finally, with respect to contingency contracts, time limits to a buyer’s rights should be carefully considered and expressly stated. For example, in the Marioni case, the Seller would have been in a better legal position had the contract clearly stated that the contract would terminate, at the seller’s option, if the seller was not able to fulfill its obligations (in that case to remove the tenant from the property) within a specified time period.