New York Times: What Contract?

By MICHAEL M. GRYNBAUM

Could the days of the iron-clad contract be numbered?

It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.

But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate. Buyers are demanding concessions from developers on apartments that they say have lost up to 30 percent in value. Others are hoping to back out of their contracts entirely, while keeping their down payments in the process.

The sudden demand has sent lawyers scurrying to uncover avant-garde legal tactics for ducking out of a deal. Downtown conversions like 75 Wall Street and new developments like One Hunters Point in Long Island City are facing suits from buyers seeking to break contracts on the basis of a once-obscure consumer protection law.

The number of New Yorkers filing claims with the attorney general’s office to claw back their down payments has more than tripled in the last two years, although most disputes don’t reach this step. In 2007, 57 claims were filed; in 2008, 168. By Feb. 20 of this year, the office had already recorded 74 claims.

The ultra high end is not immune. At the Brompton, a heavily marketed Upper East Side condominium designed by the architect Robert A. M. Stern, lawyers say some buyers are calling on the project’s developer to pay closing costs, cover taxes and relocation expenses, and, yes, even retroactively drop the price of apartments.

It remains unclear whether these efforts will be convincing, whether at the negotiating table or in a court of law. On the developer’s side is the legal strength of a signed contract and the financial leverage of a buyer’s deposit.

But the incentives have realigned in a market where many apartments are now worth less than their purchase prices. It may make financial sense for buyers to cut their losses and leave their deposit on the table rather than move into a money pit. And while developers would pocket the down payment, they might be stuck with a unit that eventually sells for much less — or even worse, just sits. This new math may put some developers in a negotiating mood.

“Behind this, the big elephant in the room is the price,” said Adam Leitman Bailey, a real estate lawyer who says he is representing unhappy buyers from nearly 50 buildings.

The traditional method for a buyer to break a contract is to prove that some element of the completed unit differs from the developer’s offering plan. This is why lawyers have been known to use lasers to measure square footage to within a millimeter and to debate descriptions of views and amenities.

But if the issue is more financial than material, buyers may be forced to “in essence, throw themselves at the mercy of the developer,” said Peter Graubard, a real estate lawyer.

“They are saying, ‘Hey, listen, I’m in a financial hardship and the loss of this 10 or 15 percent deposit is going to be devastating to me right now,’ ” said Mr. Graubard, explaining that every one of his clients who went to contract before October 2008 — about 30 in all — is trying to renegotiate or abandon a deal.

Officials at the attorney general’s office said they were seeing more appeals based on such emotional pleas.

But these arguments may not fly. Unless a contract includes a mortgage contingency, nothing in the law allows for a change in financial circumstances or the lending market to constitute a “right of rescission.”

Sometimes, though, a bit of saber-rattling can shake loose concessions.

“Threatening not to close, threatening legal action, maybe the threat of an attorney general’s action, all can bring a developer to negotiate,” Mr. Graubard said.

Some lawyers are looking beyond the traditional methods of arguing breach of contract.

A Web site called No-Condo.com opened in December and immediately received nearly 100 queries from New York residents who want their deposits back. It is the brainchild of Lawrence Weiner, a lawyer at Wilentz, Goldman & Spitzer in Woodbridge, N.J., whose arsenal includes the Interstate Land Sales Full Disclosure Act, a 41-year-old consumer protection law rarely applied in the city.

Created to protect against speculators selling uninhabitable plots, the act requires developers of condominiums or conversions with more than 100 units to provide buyers with a particular type of property report containing information like proof of ownership and the availability of public utilities.

“I wouldn’t categorize it as a technicality,” Mr. Weiner said. “A lot of developers, in a rush to bring things to market, chose not to comply, or maybe they didn’t even realize they needed to comply.” Since December, Wilentz has filed lawsuits on behalf of buyers at 20 Pine Street, 75 Wall Street, One Hunters Point, One Brooklyn Bridge Park and 111 Fulton Street. The developers of these buildings all declined to comment or did not return calls.

The law has its limits as a negotiation device: a developer is exempt from the act if he or she has pledged to complete the unit within two years. But for distressed buyers in certain buildings, the Land Sales Act may offer a way out.

Cynthia Ehrlich, a self-employed tax accountant in her early 50s, made an $85,000 down payment — “all the money I had” — last March on a small one-bedroom at 75 Wall Street, a full-service condominium converted from an old bank building.

The problems began almost immediately. Ms. Ehrlich said she had been attracted to the property by a 10-year tax abatement, but soon learned that the development had not yet qualified for the abatement program. In May, she lost a major source of revenue, and was consequently turned down for a mortgage. Because her contract did not have a contingency clause, she said, the developer declined to return her deposit.

She plans to file suit this month for a return of her deposit on the grounds that the property violated the Land Sales Disclosure Act by not providing the proper property report. Ms. Ehrlich said she had regained hope after learning of the existence of the act.

“It’s the only good news I got,” Ms. Ehrlich said. “It’s a lot of money to lose, and I don’t make a lot.”

The developer of 75 Wall Street, the Hakimian Organization, declined to comment.

At the Brompton, with its “Stylishly Proper” slogan, luxe location on East 85th Street and prices to match, several buyers said they were in financial straits. A group of nearly 30 buyers recently organized over the Internet and held a meeting to discuss their options.

“We just feel this is not primarily a real estate issue,” said Patricia Congiu, 45, an Upper East Sider who went to contract on a 1,900-square-foot three-bedroom in September 2007. “This is not a situation where someone signed a contract and the price went down. It’s a global recession, like nothing seen since the Great Depression.”

Ms. Congiu said she and her husband had “wanted the building to be our final home. We were looking forward to raising our family there.” But now she is not sure whether her income can support the property. Like several other buyers in the Brompton, she said she hoped the developer, the Related Companies, would sympathize with their situation and provide relief so they can move in. “If they gave us a concession,” she said, “we can have a cushion. I don’t want to hurt the building.”

Other unhappy buyers at the Brompton say financial concerns are not the issue. Marc Rossell, 54, went to contract with his wife in August 2007 for a 3,600-square-foot spread, combining three ninth-floor apartments.

He said he was told by the developer that his southern view would clear an adjacent building, but on a walk-through inspection, he found “a water tank right there outside of our windows, and an ugly rooftop.” Mr. Rossell did not think the view matched the description in the offering plan, and believed the discrepancy could help him get free of his contract.

“It didn’t seem to be of the same quality that they basically represented in the showroom,” he said. “We definitely have the money. It’s not that at all.”

Through a spokeswoman, Related declined to comment.

As buyers become more cautious, contracts may begin looking more like they did before the housing boom of the last 15 years.

“You’re going to see a shift back toward an inclusion of mortgage contingencies,” predicted Jay B. Solomon, a partner at Klein & Solomon, a real estate law firm. Such contingencies provided an out for buyers when financing was not available, but they fell out of favor in the last 15 years as buyers faced more competition for apartments.

Under New York state law, buyers in a new development have the right to get out of their contracts if the developer does not close at least one unit within a year of the originally projected start date. Developers almost always find a way to meet this requirement, but lawyers say that buyers are now putting those initial deals under a microscope.

“If you see one unit that’s closed and nothing else for three months, that seems sort of suspect,” said Meg Goble, a partner at the real estate law firm Hanley & Goble. “If you see the unit has closed and there’s no certificate of occupancy, that also looks sort of suspect.”

Ms. Goble said evidence that the sponsor had spun some sort of sweetheart deal for the unit, like giving it away to a friend, could provide a legal ground for breaking a contract.

Of course, not everyone in the industry has sympathy for the buyer who wants concessions or money back.

“I think it is the height of audacity,” said Stuart Saft, a partner in the real estate division of Dewey & Leboeuf, which represents several large developers in contract disputes. “The buyer calls and says, ‘The apartment is not worth as much as when we signed for it.’ My response for that is, if the market went up 20 percent, would you have given us 20 percent more because the market improved?”

And for his part, Mr. Graubard, primarily a buyers’ lawyer, is skeptical of efforts to undo purchase agreements. “You really can’t get that creative; there’s only so far you can go,” he said. “Without the enforceability of a signed contract — well, really, what do we have?”

Copyright 2009 The New York Times Company. All rights reserved.