Remorseful buyers, part two

Some seek escape, but through AG's office rather than courts
By Candace Taylor | July 31, 2009 05:57PM

Much attention has been focused lately on the flurry of lawsuits filed by unsatisfied apartment buyers hoping to get out of their purchase contracts.

But attorneys say there is another, under-the-radar group of buyers looking to break their contracts and get their money back. Instead of suing, these regretful buyers have chosen to pursue the cheaper, more streamlined option of having their disputes mediated by the state attorney general’s office.

The number of buyers selecting this route has exploded in the past year, leading to a backlog of paperwork in the office’s real estate finance bureau, with buyers and developers waiting long periods of time to find out if they will get often-substantial deposits or down payments back.

“There’s been a huge increase in the number of these escrow complaints,” said Robert Braverman, managing partner at real estate law firm Braverman and Associates, adding that one of his clients has been waiting for more than a year for a decision by the AG.

According to data obtained by The Real Deal under a Freedom of Information request with the AG’s office, the bureau had received some 310 such filings by July 21 of this year. That’s almost double the number received in all of 2008 — 168 — and more than five times the 57 filed in 2007.

While these figures represent an exponential increase, the number is still too small to have much of an impact on the city’s real estate market as a whole, experts said. However, the outcomes could significantly impact the fortunes of individual projects such as 22 Renwick Street in Soho, a small building where a number of buyers have already filed applications with Attorney General Andrew Cuomo’s office.

The project has roughly 75 percent of its units in contract, so it appears to be safely beyond the 51 to 70 percent presale requirements now mandated by most lenders. But that may change if the AG’s office sides with buyers who have filed for permission to terminate their sales contracts. If that happens, it could mean more headaches for the developer and financing trouble for the rest of the buyers in the building.

These days, “just because people are in contract doesn’t mean they’re going to live there or close,” said a purchaser at 22 Renwick, who asked to remain anonymous, but was one of six buyers in the 19-unit apartment building who say they’ve filed with the AG to get their deposits back.

Helix Partners, the co-developer of the Renwick, had no comment for the story, and representatives from Cuomo’s office did not respond to requests for comment by press time.

In situations where a buyer feels that the seller has breached the terms of the offering plan and thereby triggered the right to terminate the contract, the buyer may file what’s known as an “application for a determination on the disposition of down payment,” explained real estate attorney Jeffrey Reich, a partner at Wolf Haldenstein Adler Freeman & Herz, who represents both buyers and developers.

“If the developer hasn’t returned the money or if there’s a question, the attorney general gets involved,” said Reich, who has recently filed several of these applications on behalf of clients. A relatively simple process, it requires sending in a form along with documents backing the buyers’ request.

The AG’s office then contacts both the buyer and seller, evaluates the case and issues a decision.

If either party disagrees with the result, they could sue, but the AG’s determination would “carry a lot of weight” in court, said Steven Sladkus, a partner at Wolf Haldenstein Adler Freeman & Herz, who said he, too, has filed several applications to the AG’s office on behalf of clients.

Sladkus noted that the recent construction boom has created many more opportunities for these kinds of disputes.

“The attorney general is inundated with these things,” Sladkus said. “I have seen a significant increase over the past year in disputes over contract deposits.”

One reason for that is that filing an application with the attorney general, as opposed to suing, is a cost-effective alternative to litigation, which is especially appealing for buyers whose deposits are less than $100,000.

“You could easily go through $40,000 or more litigating one of these cases,” said Reich. “Filing a claim with the attorney general is a very inexpensive way to go forward.”

As a result, the attorney general’s office is being bombarded with these requests, and often takes a long time to respond to them, buyers and attorneys said.

“The office is not really staffed and built up and prepared for that type of interaction,” said Josh Guberman, president and CEO of Core Development Group and the developer of Lux 74 on the Upper East Side. “They don’t have the human resources to address the myriad concerns that people are having around contract disputes.”

Many buyers are simply looking for a loophole to get out of their contracts now that prices are falling, he said, and are squandering public resources in the process.

He said some are even using the application as a negotiating tool with developers.

“My observation has been that the vast majority of buyers that have contacted the AG’s office are trying to dispense with an otherwise perfectly legal and honorable contract,” he said. “It’s a little disingenuous, and it’s problematic for the [AG’s staff members] who are trying to keep the wheels turning. It’s unfair to the industry.”

However, many buyers have legitimate reasons to be displeased with their units, attorneys said.

“We discover at walk-throughs that there are huge discrepancies in square footage or ceiling heights,” Sladkus said. “There was one circumstance where an entire window was boarded up and missing.”

For wealthy buyers, or those who stand to lose a lot of money, these discrepancies often lead to litigation rather than an appeal to the AG’s office.

One of Sladkus’ clients, Linda Bloch, for example, sued the developer of the Laurel at 400 East 67th Street, asking for the return of her $481,250 deposit and claiming that the floorplan showed a large window in the living room, which was “walled up with sheetrock.” She also claimed that the unit was 48 square feet smaller than it was supposed to be, and that the condo’s recreational facilities were not finished on time.

Sladkus said Bloch decided to sue rather than file with the AG in part because she wasn’t willing to face a long delay in getting her money back.

Buyers with more limited resources, however, may have no choice but to wait or to renegotiate with the sponsor, especially if they’ve sunk their life savings into the down payment.

“If you only have $50,000 at stake, you may not have any money to splurge on a lawyer,” Sladkus said.

Braverman said one of his clients has been waiting since June 2008 for the AG’s decision on the return of his $95,000 down payment for a condo unit at 20 Bayard Street in Brooklyn after the client said mold in the apartment wasn’t properly remediated.

“For a client like mine, it puts their life in limbo,” Braverman said. “Their money is being tied up by the sponsor.”

The pileup of applications could have an adverse impact on the fate of some projects like 22 Renwick.

At that project, 14 units, or more than 70 percent of the building, are in contract. But buyers told The Real Deal that at least half-a-dozen of those purchasers have filed with the attorney general claiming their contracts — and those of all buyers in the building — are invalid due to construction delays.

While the applications wend their way through the AG’s office, the project is in a sort of limbo: If the AG requires the developer to release some or all of the buyers from their contracts, that could make it harder for the remaining buyers to get mortgages. Moreover, if a large number of buyers are allowed to terminate their contracts, it could force the developer to restart the sales process virtually from scratch — this time, in a much more difficult economy.

The situation also raises questions about how much sellers are required to disclose to potential buyers.

“They could still portray us as 14 committed buyers,” said the anonymous 22 Renwick buyer, who mentioned waiting six weeks for a verdict from Cuomo’s office. “If the developer is selling based on those numbers, they’re lying.”

Andrew Bradfield, the developer of 22 Renwick along with Helix Partners, did not respond by press time when asked if brokers at the project were telling potential buyers about complaints to the AG.

But Bradfield said buyers’ attempts to get their deposits back are meritless and based on a desire for lower prices.

“They signed a contract, they made a deal at a certain price and they don’t feel they should have to live with it,” he said. “It’s a familiar story.”