A recent case in New York's Supreme Court, Kings County is illustrative of how litigation can occur when ambiguous language in a document is used to define expectations in a contract for a condominium conversion.
The case, Board of Mgrs. of the Chocolate Factory Condominium v Chocolate Partners, LLC, decided on May 13, involved New York's "J-51 program" (now reclassified as §11-243). This program offers tax benefits to eligible residential condominiums that have been converted from industrial use. The J-51 program involves both a tax exemption and a tax abatement. The tax exemption allows the owner to freeze a building's assessed value for tax purposes so that ownership does not have to pay property tax on the increased value of the property after renovation.
In this case, language of the contract held that "[Chocolate Partners] is applying for the J-51 Tax Abatement and Exemption. The Sponsor will use [its] best effort to obtain these tax benefits but does not guarantee that they will be obtained. The Sponsor makes no representation that its application will be granted. Purchasers are purchasing with no guarantee of obtaining tax benefits. The Sponsor does not anticipate obtaining the tax benefits before the first closing of a Unit."
Discussion of the case
The Board of Managers sued Chocolate Partners after it failed to obtain J-51 status, claiming it did not use its "best efforts" to secure the tax exemptions because it did not take all possible steps to timely file its J-51 application. Chocolate Partners subsequently moved to dismiss, claiming that because "best efforts" were not defined in the contract, the contract language was unenforceable.
The court disagreed and failed to dismiss the case. The court noted that if "external standards or circumstances that impart a reasonable degree of certainty to the meaning of the phrase 'best efforts,' the clause can be enforced." The case will therefore move on to discovery and potentially trial to determine if Chocolate Partners did use its "best efforts" as determined by external circumstances.
Condo conversions regaining momentum
Two-thirds of condo conversions in the U.S. are taking place in Manhattan, according to Real Capital Analytics. Developers spent over $1 billion in 2013 on condo conversions in New York City, the most since pre-recession days. 2014 is also shaping up to be a banner year, with over $500 million invested by mid-May.
But as the recently decided case shows, condo conversions can suffer from myriad complications. Developers in a dispute over contract terms should consult with an experienced Manhattan real estate law firm to discuss legal options.