French philosopher Simone de Beauvoir famously remarked “[t]here is something in the New York air that makes sleep useless.” That maxim is particularly resonant in the intense world of real estate disputes, especially when a condominium or coop’s board of managers engages in obstructionist behavior that, if not swiftly addressed, can quickly decimate a high-value sale. A recent engagement handled by Adam Leitman Bailey, P.C.’s senior litigation team demonstrates how the firm’s ability to deploy quickly and aggressively saved a transaction that would have otherwise forced our clients to go back to an expensive and burdensome “square one” in connection with their apartment’s sale.
Adam Leitman Bailey, P.C. was engaged by a married couple in Manhattan who had contracted to sell their condominium apartment for several million dollars. The buyer was an existing rental tenant in the building, who had already obtained a loan commitment to purchase the property. The buyer had locked in their mortgage’s interest rate, but the clock was ticking on the rate’s expiration. Everything was lined up to close the sale. The only pending item was an action by the condo board to waive their “Right of First Refusal”, which grants the board an option to acquire a unit upon which an offer has been made for the condo association itself. Here, though, the board had been baselessly dragging its heels with respect to exercising or waiving its right of first refusal, and then demanded a condition on the waiver it was not permitted to make in the form of a separately funded escrow. The buyer’s patience was nearly exhausted, and he had no obligation to agree to that term. The sale was in peril. Adam Leitman Bailey, P.C. had to move fast.
THE RACE IS ON
Adam Leitman Bailey, P.C. was retained late on a Thursday afternoon by the sellers, who believed the board was unreasonably and inexplicably dragging its collective feet in issuing the Right of First Refusal Waiver. The buyer was becoming understandably impatient, and the sellers reasonably feared the board would continue to “slow play” matters until the buyer, in sheer, perfectly justifiable frustration, canceled the deal. The Adam Leitman Bailey, P.C. litigation team, consisting of managing partner Adam Leitman Bailey, Real Estate Litigation Department head John M. Desiderio, and Real Estate Litigation partner Joshua D. Glatter snapped into action. They reviewed the sale contract and confirmed that the buyer had no obligation to remain bound to the deal if the Right of First Refusal Waiver did not issue, and reviewed prior correspondence between their clients’ transactional counsel and the board’s managing agent to evaluate the current state of play. Alarmingly, the board was taking the position that the buyer had supposedly failed to submit a complete application, and therefore – according to the managing agent – the time for the board to exercise its Right of First Refusal had not accrued. But Adam Leitman Bailey, P.C. needed some more information to determine the correct strategy and was awaiting copies of the governing documents.
ADAM LEITMAN BAILEY, P.C. FIRES THE FIRST SHOT ACROSS THE BOARD’S BOW
The next morning, Friday, Adam Leitman Bailey, P.C. learned that the board intended to condition its Right of First Refusal Waiver on the buyer escrowing thousands of dollars of funds in what, for all practical purposes, would be a security deposit for the board. Adam Leitman Bailey, P.C. promptly reviewed the condo’s by-laws and determined that they did not provide the board any such right. But the situation called for a careful approach; the clients’ goal was to consummate their apartment’s sale, not get embroiled in litigation of indeterminate length against, literally, their neighbors in the building.
Accordingly, that same day, Adam Leitman Bailey, P.C first expeditiously emailed a letter to the Board’s managing agent (who the board had designated to communicate on this issue) setting forth Adam Leitman Bailey, P.C.’s position and warning the board to not demand an escrow or any other condition on the Right of First Refusal Waiver not permitted under the governing documents. Knowing that the board would claim that conditioning the Right of First Refusal Waiver on an escrow was a valid exercise of its business judgment, Adam Leitman Bailey, P.C. pre-empted that argument. Adam Leitman Bailey, P.C. directed the board’s attention to long-standing jurisprudence demonstrating that the board’s demand would not be regarded by a court as merely a request for information to enable the board to vet the question of whether to exercise its Right of First Refusal, but was instead an improper condition precedent the board had no right to demand under the current governing documents. Adam Leitman Bailey, P.C. also warned the board that its foot-dragging would not be tolerated any further, that its information demands appeared superfluous and pretextual, and that its conduct threatened to tank the deal and cause the buyer to walk away.
Adam Leitman Bailey, P.C. made clear that, although the goal was to simply close the transaction and avoid a fight, Adam Leitman Bailey, P.C. would have no qualms about initiating formal action. Adam Leitman Bailey, P.C. continued to gather documents and prepare for its next move while awaiting the board’s response.
THE COMPLAINT IS RAPIDLY PREPARED
The weekend came and went without any word from the board. On Monday morning, Adam Leitman Bailey, P.C. learned that, notwithstanding its letter, the board had sent the buyer’s attorney a draft escrow agreement, which made clear that it was conditioning the Right of First Refusal Waiver on the escrow. The draft imposed the escrow on the buyer for the life of his ownership, and while the draft permitted the buyer to apply in two years for the right to remove the condition and have the funds returned to him, it granted the board almost unfettered discretion to refuse that application, and allowed it to further probe his finances and circumstances in the future.
The board and its agents had either ignored Adam Leitman Bailey, P.C.’s litigation, or doubted Adam Leitman Bailey, P.C.’s ability to expeditiously assemble a hard-hitting complaint. There was no time to waste. In the space of a single day, the Adam Leitman Bailey, P.C. team drafted and finalized a detailed, nearly 30-page complaint that summarized the governing documents’ metes and bounds, detailed the board’s obstructionist conduct, and explained why imposing an escrow condition upon the Right of First Refusal was impermissible. Adam Leitman Bailey, P.C. was prepared to bring 5 claims against the board and its individual directors: a declaratory judgment (asking the Court to declare the board’s conduct was improper and requiring it to issue a Right of First Refusal), breach of the board’s various fiduciary duties, negligence, breach of contract (i.e. – the board was violating the terms of the governing documents), and tortious interference with contract (i.e. – the board was illegally interfering with the contract running between the sellers and buyer).
THE BOARD THROWS IN THE TOWEL
The complaint was filed the next morning, Tuesday. Virtually contemporaneous with that filing, Adam Leitman Bailey, P.C. was contacted by the board’s attorney, a lawyer who well knew that Adam Leitman Bailey, P.C. does not bluff, and was fully capable of litigating the matter aggressively and efficiently. In the space of only a few communications, the board agreed to withdraw its escrow demand, and asked that the closing be scheduled as soon as possible. Adam Leitman Bailey, P.C. in turn agreed to voluntarily dismiss the lawsuit once the closing occurred. As a result of the firm’s speedy action, Adam Leitman Bailey, P.C.’s clients have avoided significant legal fees and costs, along with the inexorable headaches and burdens litigation carries even under the best circumstances.