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the case of the curious “typo” / 41 Rushmore buyers get to rescind

Sandy MattinglyPosted on Posted in manhattan real estate business — No Comments ↓

Real Deal trumps NY Times [with April 16 update, below]
The fascinating story of 41 in-contract buyers at The Rushmore being granted the right to rescind their contracts is not a Manhattan loft story, but it is a Manhattan new developments story. Within the Real Estate Industrial Complex it is also a very big story. And it is a story that The Real Deal (proving that it is not just an industry rag) covered better than The Old Grey Lady.

quick and dirty
The brief synopsis is that

  • the 2006 Offering Plan for The Rushmore, 80 Riverside Boulevard, contained a standard clause setting a "First Closing" date that — if missed — would generate a right in buyers to walk away and get their money back
  • the original "First Closing" date in the Offering Plan was September 1, 2008, and was never changed
  • the first residential unit to close was on February 12, 2009
  • many people signed contracts way back in 2006
  • 41 buyers (at least some of whom signed 2006 contracts) retained attorneys and petitioned the NYS Attorney General last June to force Extell to let them rescind, after the developer refused to rescind
  • the AG’s office decided yesterday in favor of the buyers, rejecting Extell’s claim that the First Closing date in the Offering Plan should ITAL have been September 1, 2009 (i.e., "2008" was a typo that should be disregarded)

who are the real journalists?
The NY Times bought the typo story, but The Real Deal was more skeptical.

I can’t find the article in today’s Metro section or tomorrow’s Real Estate section, but the Anahad O’Connor by-lined New York State Backs Remorseful Buyers At Rushmore Tower is on-line. The lead there is "[c]all it the multimillion-dollar typo." O’Connor also refers to "a seemingly minor typo in a date in the densely worded 732-page offering plan", says "the [early buyer] group seized on the typo", and that "the typo got in the way".

In fact, the AG’s office decided that it did not matter whether the Offering Plan "September 1, 2008" was a typo or not, that any such "mistake" could not be blamed on the buyers, so the contract is the contract is the contract. "The Attorney General has concluded that the law of mistake does not support the Sponsor’s position." (Paragraph 12 on page 4 of the decision, linked to in The Real Deal article, below.)

The Real Deal article presents a much more nuanced analysis than The Times and contains the full text of the AG decision in the David Jones piece, AG orders Extell to refund Rushmore buyers, which was posted last night. Note the different punctuation used by Jones compared to O’Connor, and the fact that the developer did not support the claim of "mistake" (in my bold), a fact omitted in The Times article:

Extell has argued that the missed deadline was due to a "typo" and that closings at the Rushmore were supposed to commence closing a year later, but the AG states not only that Extell failed to back up the claim, but that the alleged error should not negate the buyer’s claims.

 

In providing context for Extell’s claim that The Rushmore date must have been a mistake because the developer’s standard practice was to set a rescission date at the end of the first operating year, instead of at the start of the year, Jones reported: 

Earlier this week, The Real Deal obtained documents showing that in 2006, Extell did what it has claimed it would never do in connection with its projects. In the offering plan for a condo project called Altair 20, at 15 West 20th Street in Chelsea, Extell said it expected closings would begin by May 1, 2006. The developer stated that it would offer rescission if closings did not take place by April 30, 2006, which was the first day of the project’s anticipated budget year.

 And:

[The AG’s office] also noted that Extell failed to present a single document that demonstrates that Sept. 1, 2009 was the intended date.

the ‘net is good at detail and depth
It looks as though both The Times and The Real Deal articles were written and posted last night, so one can’t alibi a weaker Times article as deadline-driven. And TRD was able to leverage the web by posting the full AG decision, which gave careful readers like Anon #9 and Anon #11 the opportunity to catch this nugget in the AG’s footnote 4 on page 13 (I will leave in the typos [irony!] in Anon #11’s comment, as neither of us can cut-and-paste from the AG decision, apparently; but bless that Anon for all the typing): 

"Notably, there is other evidence that the selection of the September 1, 2008 rescission date was not a typographical error. Sponsor’s initial proposed offering plan has the same language of the Provision but with a February 1, 2008 date for both the First Closing and the right of rescission. In addition, counsel for certain purchasers of units in the Condominium has submitted an offering plan for the Avery Condominium in which an affiliate of Sponsor is the sponsor. In that offering plan, the sponsor specified a rescission date six months after the projected first closing date, which underminds Sponsor’s contention that no sponsor would ever choose a rescission date earlier than the 12-month period permitted in the Regulation. In reponse, Sponsor state to this Office that the date in the Avery offering plan was also a mistake. Although each of these situations might be a mistake (a matter not free from doubt), a sponsor must abide by teh language that it chose in its offering plan."

risking over-kill
Just to drive a stake through that point: let’s just say that the AG’s office is skeptical about the "mistake" claim as a matter of proof, but does not need to decide that point to find for the buyers. That’s why Jones reported "Lawyers for the buyers argue that the decision backs up their allegations of bad faith and fraud."

so what?
As a practical matter, this decision means that up to 41 more units in this 289 unit building will be back on the market, and that the developer is likely to resell them in 2010 at less than the 2006 contract prices. Indeed, it will be interesting to see how many of these 41 are fighting because they want to live in The Rushmore but pay less (i.e., will now re-negotiate) and how many simply can’t (or prefer not to) close at all (because their financial situation or other life circumstances have changed in the last 3+ years).

Close readers will look for Back On The Market listings here to see how many (or, how few) of these 41 fall in each category.

And you can bet that the developer community (including the high-priced lawyers who prepare these documents) will strive mightily to avoid these arguments by tightening up their documents and amending as they need to. Of course, this argument would not have occurred unless The Market had not changed so dramatically between 2006 and 2009.

Props to David Jones and The Real Deal!
 

[update April 16: David Jones reported last night that the developer intends to file a court challenge to the AG’s decision, which would definitely be an uphill fight.]

© Sandy Mattingly 2010

 

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