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Thursday, December 17, 2009

What Happens When the Buyer of an Apartment Dies Between the Contract of Sale and Closing?

Screen shot 2009-12-17 at 10.33.35 AM Here’s a worst-case-scenario story to take into account when contracting to purchase real estate.  Buyer of a $2,300,000 Manhattan co-op apartment dies after contract of sale and approval by the co-op’s board of directors, but before closing.  The buyer's estate does not want to consummate the deal.  Do the sellers get to keep the $230,000 deposit?  New  York's Appellate Division (First Department) recently held: yes, the sellers are entitled to keep the $230,000.

The court reasoned: 

The crux of this matter lies in contract paragraph 15.2, which expressly makes the contract binding on the parties' "heirs, personal and legal representatives and successors in interest." The inclusion of this provision indicates that the parties explicitly contemplated, and provided for, the possibility of either party's death before closing, by specifying that the death would not terminate the contract, but that the contract would survive, to be performed by the successors or heirs of the deceased party. This provision makes the contract binding on [the buyer's] estate.

While a contract for personal services is terminated by the death of the servant (see Minevitch v. Puleo, 9 AD2d 285, 287 [1959]), a contract of sale is not terminated by the death of the purchaser. On the contrary, as a general rule,

"[w]here the proposed purchaser dies before the closing of title, his executor or administrator may pay the balance of the purchase price and take the deed in his own name holding it in trust for the heirs at law or devisees. It is the duty of the fiduciary for a deceased vendee to complete payments under a contract entered into by such vendee for the purchase of real property" (4-35 Warren's Weed New York Real Property §35.24 [2009] [footnote omitted]; see Di Scipio v. Sullivan, 30 AD3d 660 [2006]).

What about frustration of purpose?  No dice:

We also reject [the estate's] contention that [buyer's] death before closing justifies nonperformance under the defense of either impossibility or frustration of contract.

"Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract" (Kel Kim Corp. v. Central Mkts., 70 NY2d 900, 902 [1987]). Paragraph 15.2 of the contract conclusively disproves the theory's applicability here. [The estate relies] on a case in which the very subject matter of the contract was destroyed, making performance impossible (see Stewart v. Stone, 127 NY 500 [1891]). However, where performance is possible, albeit unprofitable, the legal excuse of impossibility is not available (see 407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 NY2d 275, 282 [1968]). The other cases [the estate relies] on for application of the impossibility defense are also not on point.

Similarly, although at first blush the general definition of "frustration of contract purpose" would seem to suit these circumstances, closer examination reveals that the defense cannot be applied here. "In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense" (22A NY Jur 2d, Contracts §375). Since it is agreed that [the buyer] was purchasing the apartment solely for her own residence, her death would, by this definition, frustrate the purpose of the contract. However, "the doctrine of frustration of purpose…is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence" (Matter of Rebell v. Trask, 220 AD2d 594, 598 [1995], citing 407 E. 61st Garage, 23 NY2d at 282). Since the contract actually made explicit provision for the event of either party's death, the doctrine is not available here.

Looks like the sellers ended up getting $2,125,000 from another buyer.  

Warner v. Kaplan (N.Y. App. Div. 1st Dep't Dec. 10, 2009).

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2009/12/what-happens-when-the-buyer-of-an-apartment-dies-between-the-contract-of-sale-and-closing.html

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