Total existing-home sales—completed transactions that include single-family homes, townhomes, condominiums and co-ops—rose 3.1% from December to a seasonally adjusted annual rate of 4.00 million in January.
LEGAL CORNER: Real Estate Contracts, Leases and the Statute of Frauds
Over the years there have been a multitude of lawsuits filed involving whether a valid contract was entered into between purchasers and sellers of real property. Recently, in Cohen v. Holder, the Appellate Division, Second Department, issued an opinion dealing with this issue once again. The Statute of Frauds is a common law concept that has been codified which requires written contracts for certain agreements to be binding. In New York, all contracts involving the sale of real property and leases for more than one year in length must be in writing. This article will review the decision in Cohen v. Holder, and review the specific statute of frauds requirements under New York’s General Obligations Law.
Statute of Frauds Under N.Y. GOL § 5-701
Generally, Section 5-701 subsection a. of the N.Y. GOL [see https://bit.ly/3ypV7bq], in part, provides that “every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking: 1. By its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime.”… Therefore, any agreement the term of which is longer than one year in term must be in writing. However, notwithstanding the provisions of § 5-701, contracts involving the sale or transfer of real property contracts are always required to be in writing under § 5-703 regardless of the length of its term.
It is important to note that under New York law an agreement for the payment of a commission to a real estate broker does not need to be in writing. Under Section 5-701 subsection a., a written agreement is required where there:
“10. Is a contract to pay compensation for services rendered in negotiating a loan, or in negotiating the purchase, sale, exchange, renting or leasing of any real estate or interest therein, or of a business opportunity, business, its good will, inventory, fixtures or an interest therein, including a majority of the voting stock interest in a corporation and including the creating of a partnership interest. ‘Negotiating’ includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction.”
While subsection 5-701[a] provides that “it shall apply to a contract implied in fact or in law to pay reasonable compensation…”, it does “not apply to a contract to pay compensation [to] a duly licensed real estate broker or real estate salesman.” Therefore, while it is always recommended that a written agreement be entered into by and between a seller and broker, so that the terms of the engagement and arrangement are clearly spelled out, a broker may be entitled to “reasonable compensation” even where no written agreement exists, if the broker introduces a ready, willing, and able purchaser to a seller, and there is a meeting of the minds.
Real Estate Contracts & Leases Longer Than One Year Must in be Writing Under N.Y. GOL § 5-703
Under N.Y. GOL § 5-703 [see https://bit.ly/3kZeUqo] “[a] contract for the leasing for a longer period than one year, or for the sale, of any real property, or an interest therein, is void unless the contract or some note or memorandum thereof, expressing the consideration, is in writing, subscribed by the party to be charged, or by his lawful agent thereunto authorized by writing.” The provision above seems to be simple and straightforward, however, therein lies the problem. While it is clear that a real estate contract or a lease for more than one year be in writing, and that there be consideration reflected in the agreement, the courts have had to interpret this provision and provide additional requirements under the common law relating to contracts to establish whether a valid agreement exists between the parties.
Required Contract Terms: Cohen v. Holder
In Cohen v. Holder [see https://bit.ly/3ytQxcj], the purchaser and the seller executed a document which was “purported” to be an “agreement for the sale of a four-family brownstone located in Brooklyn…for the purchase price of $300,000.” The court points out that this document did not provide for “the date or place of the closing.” Approximately 17 months after executing this document, the purchaser’s attorney sent a letter to the seller’s attorney declaring “time of the essence.” The closing never occurred, and the purchaser sued the seller for specific performance.
The court explained that “under the statute of frauds, a contract for the sale of real property must be evidenced by a writing (see N.Y. GOL § 5-703).” The court further provided that the “writing must ‘identify the parties, describe the subject matter, be signed by the party to be charged, and state all of the essential terms of an agreement’. In a real estate transaction, the essential terms of a contract typically include the purchase price, the time and terms of payment, the required financing, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, and adjustments for taxes and utilities.” It is clear from this court’s decision that simply having a document that is executed by both parties is not enough to establish that there is a valid and binding contract of sale between the parties.
The court in Cohen further provided that “the writing must set forth the entire contract with reasonable certainty so that the substance thereof appears from the writing alone…. If the contract is incomplete and it is necessary to resort to parol evidence to ascertain what was agreed to, the remedy of specific performance is not available.” Courts are reluctant to add terms to any contract unless they are clearly negotiated and included in the document. Therefore, the purchaser would not be entitled to the remedy of specific performance whereby the seller would be forced to consummate the sale and transfer.
The court in Cohen also pointed out that “In addition to the document not specifying the closing date, the evidence established that the parties never agreed with respect to the mortgage terms.” The purported agreement did not include any financing provisions and although the purchaser “testified that he was purchasing the property ‘subject’ to the existing mortgage and that he had the ‘option’ of obtaining a purchase money mortgage,” none of these terms were actually included in the document. Therefore, the court held that “The failure to include such terms makes the purported real estate contract unenforceable.” Therefore, it is important to ensure that all relevant provisions are included in any real estate contract or there may be a possibility that the agreement will be deemed null and void.
Residential Leases and N.Y. GOL § 5-702
Under N.Y. GOL § 5-702 [a] [see https://bit.ly/3P9UgBF] “every written agreement…for the lease of space to be occupied for residential purposes, for the lease of personal property to be used primarily for personal, family or household purposes…must be: 1. Written in a clear and coherent manner using words with common and everyday meanings; and 2. Appropriately divided and captioned by its various sections.” Landlords, attorneys, and brokers must be aware of this requirement and be sure to utilize leases that adhere to both requirements.
If a seller, creditor, or lessor fails to adhere to the requirements of N.Y. GOL § 5-702, the said party “shall be liable to a consumer…in an amount equal to any actual damages sustained plus a penalty of fifty dollars. The total class action penalty against any such creditor, seller or lessor shall not exceed ten thousand dollars in any class action or series of class actions arising out of the use by a creditor, seller or lessor of an agreement which fails to comply with this subdivision.” It is important to note that a violation of this provision does not “render any such agreement void or voidable.” In addition, no action may be brought by a consumer or lessee “after both parties to the agreement have fully performed their obligation under such agreement, nor shall any creditor, seller or lessor who attempts in good faith to comply with this subdivision be liable for such penalties.”
Agreements in Writing: Best Practice
Whether the law requires an agreement to be in writing or not, it is always a good idea to have a formal agreement prepared for any transaction that is being contemplated. Often times, courts may void an agreement if all of the “essential” terms are not included. Therefore, it is important to have an attorney, knowledgeable in this area, to prepare any agreement, particularly residential (as well as commercial) lease agreements, due to the everchanging legal landscape and legal requirements. Many landlords elect to not use an attorney and this could lead to violations of law and the loss of important rights and remedies. Parties may believe that their rights will be protected since they have entered into and executed an “agreement,” but little do they know that the “purported” agreement may not be worth the paper it is written on.