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UPDATE: LIABILITY OF INDIVIDUAL PRINCIPALS OF CONDOMINIUM SPONSORS TO UNIT OWNERS FOR BREACH OF CONTRACT CLAIMS BASED ON THE PRINCIPALS' CERTIFICATIONS IN THE OFFERING PLAN

As previously discussed in a prior blog, pursuant to the Martin Act regulations, both the Architect for the condominium and the individual principals of the Sponsor are required to provide specific certifications in the Offering Plan. The regulations provide the exact wording of the certifications for both the Architect and the principals of the Sponsor. The purchase agreements between the Sponsor (usually a sole purpose entity such as an LLC) and the Unit Owners customarily provide that the terms of the Offering Plan are incorporated by reference into the purchase agreements.

In recent years, the Appellate Division, Second Department, and the Supreme Court in certain jurisdictions (most notably Kings County as recently as April 2014) have issued decisions holding that a Unit Owner may seek damages for breach of contract against the individual principals of the Sponsor based upon their certification in the Offering Plan and the incorporation of the terms of the Offering Plan into the purchase agreement, even though those principals were not parties to the purchase agreement. At the same time, Courts have been holding that the Architect's certification in the Offering Plan provides no basis for Unit Owner claims against the Architect.

However, the Appellate Division, First Department, has in the last year issued a decision which directly contradicts the Second Department and Kings County cases. In Board of Managers v. 184 Thompson Street Owner LLC, 106 A.D.3d 542, 965 N.Y.S.2d 114 (2013), the First Department held that the principals of the Sponsor may not be held individually liable for Unit Owner claims based on violations of the Offering Plan and certification since the statements made by the principals in the certification and the plan were mandated by the Martin Act.

The issue ultimately will be decided by the Court of Appeals, but until then, individual principals of a Sponsor at least have some Appellate Division case law in their favor in the event of Unit Owner claims arising out of alleged breaches of an Offering Plan and can use the First Department case to claim a conflict within the Appellate Divisions if a motion to the Court of Appeals for leave to appeal becomes necessary.

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