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Schapiro v. Su

A-0757-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

RENT CONTROL; REPRESENTATIONS — Where a seller provides a copy of its rent control registration form, clearly marked with the caveat that the rents stated thereon might not be lawful, and the buyer does no further investigation, the buyer cannot back out of the transaction, but if there was a mutual mistake as to the property’s value based on the represented rents, a court can give a buyer the opportunity to either rescind the contract or honor it at the contract price less whatever the seller may be willing to offer as a purchase price reduction, but not to grant the buyer the right to specific performance together with reformation of the sales price.

A husband and wife purchased a three-family building. Prior to their purchase, they received rent registration forms from the seller showing the rents for certain years prior to the closing date. The buyers never checked as to the legality of these rents. The form indicated in upper case letters that the filing of the rent registration form did not constitute a determination by the municipality as to the legality of the rents set forth in the statement. When the buyers divorced a year later, they offered the building for sale. In their marital settlement agreement, the husband agreed to pay a certain sum to his wife from the sale of the property, regardless of the sales price. A buyer was found. The contract of sale provided that the husband and wife would obtain a certification from the municipality that the rents were legal. The municipality’s rent control office determined that the legal rent was much lower than the registered rents on file. The sellers’ attorney then contacted the buyer’s attorney to discuss the problem, but the parties could not resolve the matter despite the sellers’ offer to reduce the purchase price. The buyer then sued the sellers, seeking specific performance, reformation of the sales price, compensatory damages, and punitive damages for fraudulent conduct.

The Chancery Division reformed the contract. It held that the representation of the rental amount for the apartments was a significant factor in the third-party buyer’s decision to purchase the building. The Court made a finding of a mutual mistake as to the property’s value based on the represented rents, but that the sellers had not commit a fraud because they may have been told by their prior counsel that the rents were legal. It noted that the sellers acted inequitably when they attempted to force a closing when the buyer was not willing to close without an adjusted purchase price. The Court felt that reformation was the appropriate remedy and gave the purchaser the option to buy the property at a reduced price or reject the offer. The sellers’ appealed the lower court’s ruling.

On appeal, by the buyers, the Appellate Division modified the judgment. It found that the contract made no representation regarding legal rent. The Court also noted that the record did not indicate the buyer’s desire to lease the apartments for profit or that the lawful rental price was material to the purchase price. It did note, however, that the contract required the sellers to supply a certification from the municipality as to the legal rent. The Court held that reformation is an “extraordinary remedy,” only available when there is either a mutual mistake or where there is unilateral mistake by one party connected with fraud or unconscionable conduct by the other. Here, the Court found that the lower court never specifically found, by clear and convincing evidence, that there was either mutual mistake as to the “legal rent” or a unilateral mistake by the buyer combined inequitable conduct by the sellers. The Court also believed there was no reliance by the buyers on sellers’ representations relating to rent. Accordingly, it held that reformation was not an approved remedy. Instead, the Court concluded that the buyer could either rescind the contract or honor the contract as it presently existed (less the sum offered by the sellers to compensate the buyer for the fact that sellers were not able to produce a certification that the rents were legal).

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