Recent Supreme Court case law in certain jurisdictions (most notably Kings County) specifically holds that a Unit Owner may seek damages for breach of the purchase agreement 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. In other words, courts are holding that the required Martin Act certifications in the Offering Plan automatically establish privity of contract between the principals of the Sponsor and the Unit Owners under the purchase agreements notwithstanding that the purchase agreements themselves are only between the Sponsor entity and the Unit Owner.
In contrast, Supreme Court case law (which includes Kings County) also holds that the Architect’s certification in the Offering Plan does not establish contractual privity between the Architect and the Unit Owners even though the Offering Plan is incorporated into the purchase agreements.
The Sponsor and its individual principals are separate and distinct persons. The principals are not the Sponsor and if they are not signatories as individuals to the purchase agreement, they should not be liable for any breach of that purchase agreement; notwithstanding the incorporation of the terms of the Offering Plan into the purchase agreement. These legal issues have not yet been fully played out in the Appellate Divisions, and we expect the issue ultimately will be decided by the Court of Appeals. Until then, the principals of Sponsors need to be wary of being drawn into litigation they believed would be avoided through the use of a separate and distinct Sponsor entity. For further information and/or assistance, please contact us at Greenberg, Trager & Herbst, LLP.