Lavenderlawblog post- BEWARE, Downpayments of Sponsor sold condominium units are at risk

As an attorney who represents a fair number of purchasers of Sponsor sold condominium units, I have noticed a pattern that raises a red flag regarding my representation of purchasers. On more than one occasion, a sponsor and/or its’ attorney has refused to return the down payment deposited by a purchaser despite the existence of a seemingly unequivocal obligation under the purchase agreement to return it.

Pursuant to a typical purchase agreement in conformity with New York State General Business Law sections 352-e(2b) and 352-h, any dispute over the disposition of a down payment tendered by the Purchaser of a condominium unit can be submitted to the New York State Attorney General’s Office (“AG’s office”). The conflict can be resolved through litigation but the more “cost-effective” way is through the AG’s office.

The New York State Attorney General’s office is flooded with these types of applications. In speaking with a staff member, they are still working through applications submitted in 2008. Various accounts seem to indicate that it will take over a year to have the application processed and a determination made by the AG’s office.

Where the down payment is less than $100,000.00, it does not make sense to spend more than $50,000.00 + in legal fees to recover a $40,000.00 down payment. Additionally, seeking judicial intervention could very well take over a year to come to a resolution.

Where the contract of sale to purchase agreement has been effectively cancelled by the parties and they are disputing over who receives the down payment, purchasers are faced with making a hard business decision. Typically, the down payment deposited on contract represents all or substantially all of the life savings of a prospective purchaser. Tying up the money for such a long period of time results in the purchasers being held in limbo, prevents them from going somewhere else to purchase a home, the loss of potential income where the money was raised from liquidating stock portfolios, withdrawals from 401K plans, pensions and the loss of the first time home buyers tax credit due to expire at the end of November, 2009 (unless extended).

Developers face economic collapse where withdrawing purchasers mean, not only reduced sales but, the inability to meet guidelines established by lenders needed to fund loans of current or future purchasers of units.

Armed with this knowledge, developers have the ability to oppose the release of the down payment, seek a renegotiated purchase price (if the cause for cancellation was an insufficient appraisal of the unit) or seek money to cover the cost of keeping the project afloat (where interest on the underlying construction mortgage continues to accrue). The sponsor of a condominium project really has nothing to lose by contesting the release of a down payment. If the AG’s office decides in favor of the purchaser all the Sponsor is required to do is return the down payment and any interest that may have accrued. Due to legal fees generated from the litigious environment of condominium development paired with collection of legal fees resulting from the boiler plate closing of multiple units customarily paid by purchasers, it is very likely that the law firm who would act on behalf of the sponsor would likely discount or absorb the cost of contesting the disposition.

Rather than lose tens of thousands of dollars and be faced with the uncertainty of the decision of the dispute over the down payment (whether it is a judge or the AG’s office), some purchasers make the decision to settle with the Sponsor and negotiate the release of their money by giving them the interest earned (if there is any) or giving them a portion of the down payment.

The next logical question is how do you avoid this? I don’t know if you can really answer this question. Language could be added to a contract that awards legal fees and expenses to the prevailing party of a dispute over a down payment. This may also act as a deterrent where a purchaser seeks to get out of a contract due to the decline in value of a condominium unit being purchased by asserting a material change in the condominium project or a default in the contract by a sponsor. Some say that this may have a chilling effect on the exercise of the right to dispute of the down payment. I think it may cause a party take a really careful look at the circumstances surrounding disputing the release of a down payment and allow the AG’s office to avoid wasting time on less than meritorious disputes.

Are there any attorneys who have information or contract language that may address this problem?

Your feed back is greatly appreciated.

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