Case Reflection Vol. 1 (1/6/25):
A Purchase and Sale Dispute Involving Below Grade Property
By: Israel A. Katz, Partner, Litigation Department
I previously wrote in the Spring 2023 Edition of the BBG Update about the immense power of the equitable vendee’s lien in the context of real estate contract deposit disputes, which allows a buyer to assert a claim against the real property being conveyed up to the amount of its contract deposit in order to secure the payment of the contract deposit from the seller and to file a notice of pendency clouding title to the property to foreclose on such lien. A recent case highlights how we successfully leveraged this doctrine to secure a favorable settlement for a client purchaser.
THE FACTS: A purchaser in contract to purchase a luxury residential home in Long Island sought either a purchase price discount or the return of his contract and separate furniture deposits as the result of what the purchaser claimed were material misrepresentations made by the seller (a trust) concerning the property configuration. The layout of the property was unique in that it was built into the side of an incline, so although the property appeared to completely above grade – a first floor walk-in first floor and upper level – purchaser discovered only after signing the contract and obtaining appraisals and insurance quotes that the property was classified differently, as a one story home with a finished basement, with two out of the three bedrooms comprising 1,061 out of the 2,392 total square feet below grade.
This classification negatively impacted not only the immediate value of the property and the ability to obtain adequate insurance coverage but also its resale value. Purchaser believed he was duped by the seller into entering into contract for a property that was worth less than what he agreed to pay. Seller served purchaser with a time of the essence (“TOE”) closing notice and threatened to declare purchaser in default and retain the deposit as liquidated damages in the event purchaser failed to perform and to close.
THE STRATEGY: After reviewing the contract and consulting with the client three things became apparent: (i) The contract language did not bode well for purchaser. The contract contained no financing contingency and the “as is” and “no reliance” language of the contract would be difficult to surmount; (ii) the seller was eager to sell in order to use the sale proceeds to purchase another property and could not afford the long-term carrying expenses — we knew therefore that the threat of a protracted litigation and notice of pendency clouding seller’s title would be a strong pressure point and incentivize settlement; and (iii) the Seller failed to serve purchaser prior to contract signing the required property condition disclosure statement (“PCDS”), which may have revealed further information concerning the below grade property configuration.
With the above information, we prepared a demand letter to seller arguing that purchaser was entitled to rescission because the below grade property configuration was a latent property defect that purchaser actively concealed. Our letter further argued that seller deliberately failed to deliver a PCDS before contract signing as part of seller’s scheme to actively conceal the property configuration defect and be forced to lower the purchase price. Our letter warned that the failure to return both the contract and furniture deposits would result in purchaser immediately commencing an action to compel the return of the deposit, the imposition of and foreclosure of a vendee’s lien up to the amount of the contract deposit and the filing a notice of pendency.
THE OUTCOME: Almost immediately after we sent our letter, we received a call from the seller’s counsel inquiring about the possibility of settling the matter, so we knew almost immediately that our assessment of the seller was correct and that seller could not afford protracted litigation without the ability to sell the property. After numerous rounds of discussions, on the day of the TOE closing, the seller agreed to the purchaser’s demand for a $100,000 discount off the purchase price and a complete refund of the furniture deposit, which was more closely aligned with the property’s true value.
THE TAKEAWAY: An equitable vendee’s lien is a valuable legal tool that allows buyers of real property in New York to protect their investment and secure payment of their contract deposits. By seeking to foreclose on such a lien and filing a notice pendency, the buyer can effectively prevent the seller from selling or transferring the property to anyone else, and, as the above case demonstrates, gain significant leverage in negotiations and litigation surrounding the contract deposit dispute.
Israel A. Katz (https://bbgllp.com/attorney/israel-a-katz/) is a Partner in the Firm’s Litigation Department concentrating in complex commercial real estate litigation matters, including purchase and sale disputes discussed in this article. Israel can be reached at 212-867-4466 ext.824 (ikatz@bbgllp.com).
Israel A. Katz, Partner, Litigation Department