Danyluk v Glashow (2004 NY Slip Op 50154(U))

Danyluk v Glashow

2004 NY Slip Op 50154(U)

Decided on February 20, 2004

Civil Court Of The City Of New York, New York County

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and will not be published in the printed Official Reports.

On October 8, 1997, Petitioner-Lessor, an individual, entered into a five-year commercial lease for a professional condominium with Respondent-Lessee, a professional corporation.

The lease contained no personal guarantee by the principal of the lessee corporation.

Paragraph 52 of the rider to the lease, the provision giving rise to the present action, states:

duringthe initial term hereof to a third-party pursuant to an offer by said third-

to match the sales price and terms as offered by said third-party. The right to

Landlord gives tenant notice and a summary of the material terms of such third-

party offer and such right granted to Tenant hereunder shall automatically expire

notice via certified return receipt mail of Tenant's intent to so match said offer

liable to Landlord for the full amount of the sales price as contained in such

third-party offer and shall have thirty (30) days after the giving of such notice

within which to close the purchase of the Premises. If Tenant shall fail to close

the purchase within said thirty (30) day period, Landlord may, in his sole and

absolute discretion, sell the Premises to any other party upon such terms and [*2]

equal to the purchase price of the Premises as contained in the foregoing notice

Petitioner-Lessor decided to sell the premises and began negotiations with a third-party. On July 31, 2002, Petitioner notified Respondent of the third-party's offer in a note which stated:

of and upon the terms and conditions set forth in Landlord's Notice dated July

Shortly thereafter Petitioner notified Respondent of another offer that had been made for the premises of $545,000, but Petitioner later withdrew his request that Respondent match that purchase price, so the effect of that proposal is not relevant to these proceedings.

On September 9, 2002, Petitioner forwarded to Respondent a draft of the proposed contract of sale. The draft sales agreement provided, in pertinent part, that:

that the purchaser shall not be permitted to repay same prior to its due date [*3]

The proposed contract also required Respondent's principal to guarantee the agreement personally.

In response to this proposed sales agreement, Respondent requested the name and address of the third-party offeror in order to confirm the terms that had been agreed upon by said offeror and Petitioner.

On September 25, 2002, Petitioner wrote to Respondent inquiring as to its intentions, and indicated that if the proposed sales agreement were not signed by October 7, 2002, Respondent would need to vacate the premises according to the lease provisions.

On October 3, 2002, Petitioner sent Respondent a letter dated October 2, 2002, from the third-party offeror that stated:

On July 31, 2002, I as an individual, offered to purchase the office condominium

Also on October 3, 2002, Petitioner returned Respondent's rent check for that month, saying that Respondent was to vacate the premises on or before October 7, 2002 (the date on which the lease terminated), so that the premises could be re-let.

On July 31 you exercised your right to match the purchase price of an existing

consequently a liability to me. As you have failed to close on the purchase of

When Respondent failed to close on the sale or to vacate, Petitioner commenced the instant holdover proceeding against it without serving Respondent with any predicate notice. Respondent moved for summary judgment, basing its claim on the fact that it was a vendee in possession and therefore must receive a ten-day notice to quit as a predicate to commencing the summary proceeding. The court denied the motion for summary judgment because of the questions of fact and law that we must now address.

Both parties agree that Respondent exercised its right of first refusal based on the July 31, 2002, communications between them. Further, all sides agree that the "summary of the material terms of the third-party's offer" as stated in Petitioner's note of July 31, 2002, consists of: [*4]

c) the remainder of the purchase price to be financed by Petitioner at an interest

Petitioner contends that the amortization period appearing in the proposed contract for the sale of the premises is neither a material term nor a variance from the summary of material terms appearing in his note of July 31, 2002. Petitioner stated that the third-party offeror was an individual who would be personally liable for the sale. Therefore, the requirement that Respondent's principal agree to guarantee the sale is not a material term nor an alteration of the terms that appeared in his July 31, 2002, communication. Respondent disputes both these assertions.

Respondent argues that this proceeding must be dismissed because, as a vendee in possession, it must be given a ten-day notice to quit as a predicate to commencing a holdover action against it pursuant to section 713(9) of the Real Property Actions and Proceedings Law. Petitioner avers that no predicate notice is necessary because when the sales contract did not go through Respondent lost its status as a vendee in possession and remained on the premises as a holdover tenant.

DISCUSSION

The threshold question for this court is the determination of Respondent's status with respect to the subject premises. If it is a vendee in possession, it may be entitled to a predicate notice prior to instituting any summary proceeding against it. Conversely, if it is merely a tenant in possession after the natural termination of its lease no predicate notice may be required. The determining factor in arriving at the answer is the state of the contractual relationship between the parties.

Paragraph 52 of the lease agreement executed between the parties gave Respondent a right of first refusal to purchase the leased premises if Petitioner decided to sell the premises during the period of the leasehold and received a bona fide offer for the property from a third party.

A right of first refusal or preemptive right as distinguished from an option does not give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer. LIN Broadcasting Corp. v. Metromedia, Inc., 74 N.Y. 2d 54, 544 N.Y.S. 2d 316 (1989). This right of first refusal binds the owner who wishes to sell his property not to do so without giving the holder of the right the opportunity to purchase such property. Kreiger v. Cornelius, 259 A.D. 2d 10, 697 N.Y.S. 2d 766 (3d Dept. 1999). [*5]

Simply stated, a right of first refusal is a right to receive an offer. Cipriano v. Glen Cove Lodge # 1458, B.P.O.E., 1 N.Y. 3d 53, 801 N.E. 2d 388 (2003). However, once the holder of the right elects to purchase the property according to the terms of the offer presented by the seller, that right of first refusal is converted into a binding contract. C & D Food Enterprises, Inc. V. Fudoli, 305 A.D. 2d 1093, 759 N.Y.S. 2d 425 (4th Dept. 2003); Yudell Trust I v. API Westchester Associates, 227 A.D. 2d 471, 643 N.Y.S. 2d 161 (2d Dept. 1996).

Both parties agree that Respondent accepted the offer proffered by Petitioner on July 31, 2002. This is evidenced not only objectively by the documents submitted, but is specifically stated by Petitioner in his letter to Respondent dated October 9, 2002.

Therefore, the primary question for this court is the determination as to whether the terms appearing in the proposed contract for sale represent a material alteration of the terms of the contract formed on July 31, 2002. Petitioner claims that the proposed contract of sale did not alter any material terms of the July 31, 2002, agreement, and Respondent's failure to close on the sale constitutes a breach of that agreement. Respondent argues that Petitioner breached the July 31, 2002, contract by insisting on terms that were not agreed to by the parties.

In order to be capable of being accepted, an offer must be certain and definite with respect to all of its material terms. See 1 Corbin, Contracts Sec. 95 at 394. This doctrine of definiteness states that if an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract. Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y. 2d 475, 548 N.Y.S. 2d 920 (1989). Further, a mere agreement to agree in which a material term is left for future negotiations is unenforceable. Martin Delicatessen, Inc v. Schumacher, 52 N.Y. 2d 105, 436 N.Y.S. 2d 247 (1981).

The terms of a mortgage subject to which a purchaser is to take title to real property are generally held to be essential and material elements of a contract. Marder's Nurseries, Inc. v. Hopping, 171 A.D. 2d 63, 573 N.Y.S. 2d 990 (2d Dept. 1991). One essential provision of a mortgage is the term of the loan or the method of amortization. Id. In Ashkenazi v. Kelly, 151 A.D. 2d 578, 550 N.Y.S. 2d 322 (1st Dept. 1990), the court held that an agreement for the sale of real estate that stated that the seller would hold the mortgage for "15 or 20 years" was too indefinite to be enforceable.

As a general proposition, the courts have not applied the doctrine of definiteness enunciated above rigidly. Contracting parties often use fluid language, and imperfect expression does not necessarily indicate that the parties to an agreement do not intend to form a binding contract. As stated in Cobble Hill Nursing Home v. Henry & Warren Corp., op cit., a strict application of the definiteness doctrine could defeat the underlying expectations of the contracting parties.

An offer that might otherwise be deemed unenforceable because of the indefiniteness of [*6]one or more of its material terms may be made definite if the agreement invites recourse to an objective extrinsic standard which could make such term or terms explicit. Martin Delicatessen, Inc. v. Schumacher, op cit.

In the instant case, the lease provision affording Respondent the right of first refusal refers to an offer to purchase made to Petitioner by a third-party. To exercise that right, Respondent must match the terms proffered by said third-party.

On October 3, 2002, Petitioner forwarded to Respondent a letter from the third-party potential purchaser that stated that the term of the loan in her offer was for ten years. This offer by the third-party which Respondent had to match can be considered an objective standard articulated in the original lease that establishes the essential terms of the contract. Therefore, by the parties referring to the third-party offer as establishing the material terms of the offer, that offer, which might otherwise be considered indefinite, was made certain and enforceable. Ashkenazi v. Kelly, op cit. The court also notes that both parties have always agreed that the term of the loan was to be ten years.

"Amortization" is defined as a reduction in a debt by periodic payments covering interest and part of the principal. Amortization involves the operation of paying off an indebtedness by installments, at the expiration of which the entire indebtedness will be extinguished. Ansonia Residents' Association, Inc. v. New York State Division of Housing and Community Renewal, 141 Misc. 2d 224, 533 N.Y.S. 2d 175 (New York County 1988)

With a traditional mortgage, the advance of funds is amortized over the life of the loan by regular monthly payments, which continually decrease the outstanding principal balance. Merrill Lynch Equity Management, Inc. v. Kleinman, 246 A.D. 2d 884, 668 N.Y.S. 2d 776 (3d Dept. 1998). Therefore, the term of the mortgage loan is, in effect, the length of the amortization of the loan.

Fully amortized: the payment of a constant amount for the duration of the loan, each payment representing a set proportion of interest and principal, see generally Carver Federal Savings & Loan Ass. v. Glanzer, 186 A.D. 2d 706, 588 N.Y.S. 2d 905 (2d Dept. 1992);

Straight line amortization: payments decrease as the loan is repaid, the first amount attributable to principal, the rest to interest;

Term loan: payments are attributable to the interest first, then to the principal, see generally Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y. 2d 138, 596 N.Y.S. 2d 752 (1993);

Graduated payment mortgage: payments are lower in the first few years and increase over [*7]the term of the loan, RPL sec. 279(1);

Partially amortized: payments are small for the bulk of the term of the loan, representing the payment of interest, and the principal is due at the end in a larger payment known as a balloon payment, see generally 1300 Avenue P realty Corp. v. Stratigakis, 186 Misc. 2d 745, 720 N.Y.S. 2d 725 (2d Dept. 2000); and

Negative amortization loan: each payment only lowers a portion of the interest, so that the unpaid portion of the interest gets added to the remaining balance, and interest is charged to this amount, see generally Steinberg v. Williams, 163 A.D. 2d 516, 558 N.Y.S. 2d 188 (2d Dept. 1990).

However, regardless of the method of amortization employed, there is no difference between the period of the loan and the period of the amortization of the loan; "amortization" merely refers to the amount and attribution between principal and interest of the installment payments over the loan term.

In the instant case Petitioner asserts that the term of the loan was to be ten years, amortized over thirty years. Such a statement is oxymoronic. The duration of the loan and the duration of the amortization period, as indicated by the statutes and cases noted above, are one and the same.

In Krinsky v.Title Guarantee and Trust Co., 163 Misc. 833, 298 N.Y.S. 31 (1st Dept. 1937),

(a case involving the rescision of a real estate contract), the court held that a purchaser did not receive what she had bargained for when she was given a mortgage that matured in five years when her agreement of purchase called for a mortgage maturing in not more than three years. The court stated that there is a substantial difference between a mortgage maturing in three years and one that becomes due long thereafter. Such would be the situation in the case at bar.

Petitioner offered, and Respondent accepted, a mortgage that would have a ten year term. The final contract said that the mortgage would amortize over a thirty year period. This amortization period would increase Respondent's repayment time period obligation three-fold, and would increase its actual cost of purchase by approximately $80,000. Therefore, Petitioner's attempt to reconstruct the repayment period to thirty years constitutes a variance of a material term of the accepted offer of sale.

In his proposed contract of sale Petitioner demanded that Respondent have its principal guarantee the purchase of the premises. Petitioner maintains that because the prospective third-party purchaser was a natural person who would be personally liable under the contract, Respondent, a professional corporation, should also be required to provide for an individual to be [*8]personally liable. This argument is specious at best.

The third-party's offer, the terms of which were provided by Petitioner, did not include any provision for an outside person's guarantee of the contract. The third-party, as an individual, was the only person who would be obligated under the agreement.

It is a long established tenet of corporate law that a corporation is a legal entity, separate and distinct from its shareholders, and is legally treated as an individual. See generally Morris v. New York State Dept. Of Taxation & Finance, 82 N.Y. 2d 135, 603 N.Y.S. 2d 807 (1993). New York's General Obligations law makes no distinction between an individual and a corporate entity. Fischer v. Panasian Communs., Inc., 87 N.Y. 2d 958 , 641 N.Y.S. 2d 590 (1996). Therefore, Respondent, as a corporate individual, would be obligated under the contract in the same manner as the natural person third-party.

Petitioner provided no additional consideration that would warrant Respondent's agreement to add a guarantee to the contract for the sale of the premises. No such requirement appeared in the July 31, 2002, offer and acceptance. Consequently, Petitioner's insistence on such a clause constitutes a material alteration of the terms of the contract as expressed in the correspondence of July 31, 2002.

Other Clauses

Respondent has also questioned the propriety of Petitioner adding a $600 attorney's fee and refusing to permit a prepayment option. However, both parties at trial have agreed that the $600 fee is de minimus, and therefore need not be addressed by the court. Respondent's request for a prepayment clause came into existence when Petitioner attempted to extend the term of the mortgage from ten to thirty years, which the court has determined he cannot do. Therefore, this issue is now moot.

Based on the foregoing, the court concludes that the term of the mortgage and the requirement to add a guarantee to the terms of the contract for the sale of the premises are material alterations in the terms of the binding contract entered into between the parties on July 31, 2002.

Petitioner has argued that because Respondent failed to close on the contract within the time stated in the lease provision providing for the right of first refusal, Respondent has breached the contract entered into between them on July 31, 2002. This argument must fail on three grounds.

First, courts have held that the date of closing of a real estate transaction is not generally considered to be an essential element to establish an enforceable contract. Safier v. Kassler, 134 A.D. 2d 944, 508 N.Y.S. 2d 352 (3d Dept. 1986). [*9]

Second, Petitioner continued to negotiate with Respondent after the presumptive closing date which would estop him from arguing that the closing date is a material term. Also, the court notes that the lease did not contain a time of the essence clause which might have made Respondent's failure to close on that date a material breach.

And third, Petitioner's attempt to insert "creative financing" provisions in the proposed sales contract justifies Respondent in refusing to sign an agreement that materially alters the terms of the parties' contract. F & S Pharmacy, Inc. v. Dandra Realty Corp., 302 A.D. 2d 204, 754 N.Y.S. 2d 256 (1st Dept. 2003).

Respondent maintains that it is a vendee in possession, whereas Petitioner asserts that Respondent, having failed to close on the contract for sale, is a holdover tenant.

Once Respondent exercised its right of first refusal, a binding contract was formed between the parties. The exercise of a preemptive right to purchase causes the person who exercised the right to became a vendee in possession and the landlord-tenant relationship terminates, Fulgenzi v. Rink, 253 A.D. 2d 846, 678 N.Y.S. 2d 360 (2d Dept. 1998).

Petitioner commenced this proceeding pursuant to section 711(1) of RPAPL which states:

1. The tenant continues in possession of any portion of the premises after the

Pursuant to this section of RPAPL, no predicate notice is necessary to commence the holdover proceedings. Bogatz v. Extra Touch International, Inc., 179 Misc. 2d 1029, 687 N.Y.S. 2d 558 (Kings County 1999). However, in the instant case Respondent became a vendee in possession on July 31, 2003, and so this section of RPAPL does not apply.

Respondent asserts that, as a vendee in possession, it is entitled to a ten-day notice to quit pursuant to the provisions of section 713(9) of RPAPL.

Section 713 of the Real Property Actions and Proceedings Law states, in pertinent part:

all or a part thereof, and having defaulted in the performance of the terms [*10]

Section 713(9) of RPAPL would only be applicable if Respondent defaulted in its performance of the terms of the contract for sale. Such is not the case in the present situation. No contract of sale was ever executed due to Petitioner's failure to perform according to the terms of the agreement entered into on July 31, 2002.

Every contract has an implied covenant that the party will act in good faith. Dalton v. Educational Testing Service, 87 N.Y. 2d 384, 639 N.Y.S. 2d 977 (1995). This implied covenant mandates that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. 1-10 Industry Associates, LLC v. Trim Corporation of America., 297 A.D. 2d 630, 747 N.Y.S. 2d 28 (2d Dept. 2002). In the present situation, as discussed above, after Respondent accepted the offer proffered by Petitioner, based on the offer made to Petitioner by a third-party, a contract between Petitioner and Respondent came into effect. Petitioner's subsequent attempts to change or modify the terms of that agreement in the final contract of sale is the factor that caused the closing to be delayed. Therefore, Section 713(9) of RPAPL is inapplicable to the case at bar.

CONCLUSION

As this court stated in Montgomery Trading Co. V. Cho, 2003 N.Y. Slip Op. 50665 (U), 2003 N.Y. Misc. Lexis 316 (2003):

relationship exists. According to this section of RPAPL, the instant Tenants do

Under the circumstances that exist in the instant case, Landlord cannot maintain

action to eject Tenants from the subject premises. 2955 Shell Associates, L.P. v.

may be terminated pursuant to a provision of the lease, the landlord must proceed

against the former tenant who remains in possession by way of ejectment rather

jurisdiction to maintain an action of ejectment where the assessed value of the

The Respondent in the instant matter does not fall within the purview of this court's jurisdiction. It is neither a tenant, because that relationship merged into the vendor-vendee relationship when the parties entered into a contract on July 31, 2002, nor a vendee who breached the contract of sale as is categorized under section 713 (9) of RPAPL . Therefore, this instant holdover proceeding must be dismissed.

In the court's earlier decision in this matter, dealing with Respondent's motion for summary judgment, the court addressed the problems surrounding a petitioner's failure to serve a respondent with a predicate notice. However, in addressing this matter, the earlier Danyluk court inadvertently mischaracterized our earlier decision in Montgomery Trading Co. v. Cho, supra. Citing Rosen v. Wade, 99 Misc. 2d 1114, 418 N.Y.S. 2d 258 (New York County 1979), the Montgomery court stated that the failure to serve a Notice of Termination deprives the court of subject matter jurisdiction [emphasis added]. In analyzing Montgomery, the earlier Danyluk court confused the concept of immediate deprivation with permanent deprivation. As a predicate to commencing a holdover proceeding, to invoke the court's subject matter jurisdiction, the tenant must be served with the appropriate notice. Failure to do so results in the court's inability to adjudicate the matter, i.e., it lacks the jurisdictional pre-requisite. The court does not lose subject matter jurisdiction, it simply must wait until that jurisdiction is properly initiated. This in no way implies that this jurisdictional defect may not be cured at a later date.

The Montgomery decision did not address the amendable aspects of that lack of jurisdictional predicate. As the court correctly noted, the citation to Rosen v. Wade was merely introductory dicta and in no way affected the court's ultimate conclusion. The decision in Montgomery was based on the fact that the respondent did not come within the category of persons against whom a holdover proceeding may be maintained. Consequently, a predicate notice is irrelevant because the court lacks statutory subject matter jurisdiction.

Another word of clarification is necessary regarding the earlier Danyluk decision. That court said "non-amendable defects that do not implicate the court's jurisdiction, however, may be amended in a future proceeding within the court's jurisdiction." What the court apparently meant to say is that certain defects that cause the court to deny (be deprived of) jurisdiction may be amended so as to invoke that jurisdiction at a later date. Something that is "non-amendable" is incapable of being amended.

Based on the foregoing, this action is dismissed.

Dated: February 20, 2004 [*12]