After construction delays and purchaser lawsuits, the posh Setai New York condominium has joined a growing number of city projects releasing buyers from their contracts.
An amendment to the offering plan dated July 8 states that buyers at The 40 Broad Street condo conversion in the Financial District have been granted the right of rescission, meaning that they may walk away from their contracts and get their deposits back. The amendment, obtained by The Real Deal, states that buyers have 15 days to exercise that option.
Purchasers learned of the change when they received a letter — addressed to all of the project’s buyers — and a copy of the amendment by an attorney representing the sponsor, 40 Broad LLC. The building is being developed by a partnership between family-owned real estate company Zamir Equities and the Setai Group, known for hotel and residential development in Miami.
Construction delays at the site prompted the sponsors to offer the right of rescission, said Kanessa Tixe, a spokesperson for the developers.
The Setai, which features a private club, rooftop cabanas and a spa, announced in September 2008 that it had set a Financial District record when a penthouse sold for $7.82 million.
Closings there were originally supposed to commence in the fall of 2007. According to the condo amendment, a temporary certificate of occupancy for the building was issued June 12, 2009, and three units have closed so far: 11A, 11G and 15D. Of the remaining 156 units, approximately 75 percent are in contract, Tixe said, who added that buyers who choose not to rescind their contracts may begin closings Aug. 1. The restaurant in the building, Sho Shaun Hergatt, is now open.
By law, if there is a material change to the offering plan adversely impacting the purchasers, the sponsors must grant buyers a right of rescission. The law specifically mentions construction delays, stating that if the sponsor does not close at least one unit within a year of the date it had originally projected for the commencement of the closings — known as the “outside” date — all of the buyers must be offered the right of rescission. The outside date for the Setai was June 30, 2008, according to court documents.
A growing number of new condos — Including Condo Conversion Project 45 John Street in the Financial District and Upper West Side condo Linden78 — are being forced to offer their buyers the right of rescission as sales slow and the credit crisis limits the amount of construction financing available.
The amendment to the Setai’s offering plan also noted five pending lawsuits in which buyers have sued the sponsor, seeking to void their contracts and get their deposits back. Several of the suits claim that the buyers are entitled to receive their deposits back because the sponsor conducted a “sham” closing of unit 11A on June 30, 2008, in hopes of making the outside date.
A suit filed by the buyer of penthouse 2D, a Florida corporation known as TFI, LP, claimed that the buyer of 11A, Irving Feldman, is related to an “affiliate of the sponsor,” Nathan Feldman.
The law requires that the first closing in a new condo must be an “arm’s length” sale, meaning that the buyer is not related to the sponsor by a family or business relationship, explained real estate attorney Jeffrey Reich, a partner at Wolf Haldenstein Adler Freeman & Herz, who was not familiar with the specifics of the situation at the Setai.
Feldman is “a ‘straw man’ acting secretly on behalf of [the] defendant,” claimed a suit by another Setai buyer referred to as the Ronson Family.
A suit filed by Setai purchaser Jean-Philipe LeCourt and his wholly owned liability company, Salengro Realty Management, also claimed the closing of unit 11A was a ruse.
On June 26, New York State Supreme Court Judge Doris Ling-Cohan denied the sponsor’s motion to dismiss LeCourt’s complaint but granted the sponsor’s motion to dismiss punitive damages.
“The first closing was a proper arm’s length closing, and therefore it should count,” Y. David Scharf, the attorney who is representing the sponsor in the case, told The Real Deal. “The person that bought it was not related in the manner that would be violative of the attorney general’s regulations.”
The case is now in the discovery phase, said Scharf, a partner at Manhattan law firm Morrison Cohen.
Setai buyers Dhananjay Pai and Heena Pai also filed suit in Federal District Court to terminate their purchase agreement for a unit in the building.
Claims of “sham closings” are growing more common as construction projects are increasingly delayed in the rocky economy.
“What some developers have tried to do is have a closing in the first year even if they don’t have a [certificate of occupancy] in place,” which leads to questions about the legitimacy of those closings, the attorney Reich said.
Meanwhile, buyers are looking for ways to get out of their contracts now that economic conditions have changed.
“I think we are seeing a tremendous amount of litigation by buyers who are in contract who are having buyers’ remorse,” the attorney Scharf said. “They will try to look at everything and anything to get leverage or to bring a lawsuit to get out of an investment or a purchase decision because they have regrets because the market has changed.”