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Contracts of Sales and Options
By M. Robert Goldstein and Michael J. Goldstein
Under the common law a contract vendee of real property was
considered the equitable owner of that property and entitled
to the award made for that property in a condemnation proceeding,
subject to the obligation to pay to the vendor the contract
price (Reife v. Osmers, 252 NY 320 (1929); Clarke v. Long
Island Realty Co., 126 App. Div. 282, 110 NYS 697 (1908).
It was not a matter of choice or option. It followed the English
rule of Paine v. Meller, 6 Ver. Jr. 349, which placed the
risk of loss upon the contract vendee in the event of the
loss or destruction of the property between contract and closing,
if the loss were not the fault of the vendor. The majority
of jurisdictions in the United States have followed this rule.
In 1936, following the recommendation of the Law Revision
Commission, Real Property Law, §240-A, was enacted, which
is the so-called Uniform Vendor and Purchaser Risk Act. We
say "so-called" because as of this writing it has
only been enacted by 10 other states, and the New York enactment
added a provision as to eminent domain, not provided for in
the Uniform Act.
This section was re-enacted in 1963 as General Obligations
Law, §5-1311. It provides in pertinent part:
1. any contract for the purchase and sale or exchange of
realty shall be interpreted, unless the contract expressly
provides otherwise, as including an agreement that the parties
shall have the following rights and duties: a. When neither
the legal title nor the possession of the subject matter of
the contract has been transferred to the purchaser: (i) if
all of a material part is destroyed without fault of the purchaser
or is taken by eminent domain, the vendor cannot enforce the
contract, and the purchaser is entitled to recover any portion
of the price that he has paid; but nothing herein contained
shall be deemed to deprive the vendor of any right to recover
damages against the purchaser for any breach of contract by
the purchaser prior to the destruction of taking;
Further provisions relate to destruction or taking of an
immaterial part of the property and where either title or
possession has been transferred to the purchaser, neither
of which is pertinent to this discussion.
Contract Vendee as Equitable Owner
The Court of Appeals in In Re Jefferson Houses, 306 NY2d 278
(1953), subsequent to the passage of this statute, but making
no reference to it, found that the contract vendee was the
equitable owner of the condemnation award involved, subject
only to the payment of the contract price. While the contract
also provided for an assignment of the award to the contract
vendee in the event of a condemnation proceeding, the Court
deliberately and specifically did not ground its decision
on hat basis. Based upon this case the courts continued to
apply the common law rule insofar as treating the contract
vendee as the equitable owner where he chose to enforce the
contract by appearing in the proceeding and claiming the award.
See Geist v. State of N.Y., 3 Misc. 2d 714, 156 NYS2d 183
(1956) where a similar rule was applied. It was so accepted
that there are no appellate challenges to the proposition
and no further reported court decisions that we have found.
Then came In the Matter of County of Westchester v. P. &
M. Materials Corp., 20 AD2d 431, 248 NYS2d 539 (2d Dept.,
1964). There the Court, after stating the contract vendee
"was an owner of an interest in the property" and
citing the common law cases and with a "c.f." for
In Re Jefferson Houses, stated "we hold that the statute
(Real Property Law §240-a) . . . confined (the vendee)
to recovery of its deposit." The rationale for doing
so was stated as:
However, in the case of a total or material taking in eminent
domain, because the vendor cannot be assumed to have taken
on the full risk of loss and to have granted the purchaser
the prospect of all gain, and because, unlike the case of
physical destruction, the vendor cannot insure himself against
a contract loss occasioned by the taking, we may impute to
the contracting parties the intention that in such a case,
the vendor is relegated to the condemnation award which will
give him the fair market value of his property.
Not only was this case not reviewed in the Court of Appeals,
but there have been no other appellate cases in New York since
then directly relating to this subject that have come to our
attention. It is clear that it was a reaction to the statutory
change to the common law rule of giving the vendee the choice
of either recovering the award or leaving it to the vendor
and getting his deposit back.
Law of the State
In 1979 in Lucenti v. Cayuga Apartments Inc., 48 NY2d 530,
the Court of Appeals dealt with this statue in a different
context. It made reference to P & M Materials Corp., but
only insofar as it referred to a review of the law relating
to destruction of the property in a non-condemnation situation.
In that case the Court held that there was no automatic termination
of the contract and that the option was with the vendee to
decide whether he could live with the contract or not in the
event of a fire destroying a material part of the property
and could rely on his common law right to specific performance
with an abatement in the price for the loss.
Where does that leave us with respect to General Obligations
Law, §5-1311. To begin with, any knowledgeable attorney
will specifically address this problem in the contract and
make specific provision with respect to it. But, if it is
not addressed, there is a question, at least in our minds,
of whether P & M Materials, represents the law in this
state, outside of the Second Department. It is clear the statute
itself did not overturn the prior common law although it modified
it. But since the prior rule was court-made law and was followed
not because it was equitable or good law but because it was
ingrained in our law for so long a time, the courts could
just as easily reverse course. The fact is that the Court
of Appeals, before the statute, had refused to do so explicitly
because it was long-settled law while noting the criticism
addressed to the rule. But this is apparently just what the
Appellate Division, Second Department did. It did not interpret
the statute to come to its conclusion but re-interpreted the
common law because of the statute. But we still must hear
from the other departments on this subject, not to speak of
the Court of Appeals. Since the Court of Appeals interpreted
the statute as not providing for an automatic termination
of the contract in the event of a fire where there was material
damage and there is nothing in the statute to distinguish
between condemnation and other events, there is nothing to
indicate the Court of Appeals would agree with this change
in direction in the common law that is followed in most of
the states in this country.
Which brings us to options. An option has been stated to
be:
an exclusive privilege to buy and a contract for an option
is the agreement by which the privilege is created. Sometimes
it is defined as a continuing offer, binding for the time
specified on the one who makes it, but not the one to whom
it is made, unless he accepts when it becomes binding or both.
It neither transfers, nor agrees to transfer title to property,
but confers the bare right to accept an offer within the time
permitted and upon the terms provided. Benedict v. Pincus,
191 N.Y. 377, 381 (1908).
What happens when there is an option outstanding as to a
piece of property condemned? Does the option holder have any
right to compensation? Are his rights any different from a
contract vendee? What started this whole article was a recent
case in New Jersey, State of New Jersey v. Jan-Mar Inc. decided
by the Appellate Division on Aug. 23. New Jersey law previously
was as enunciated in State of New Jersey v. New Jersey Zinc
Co., 40 N.J. 560 (1963). This latter case held that an option
was not an interest in real property and as such not compensable
in a condemnation proceeding. Among the authorities cited
for this position was the New York rule, which is the same,
and is set forth in In re Waterfront, 246 N.Y. 1 (1927). This
has continued to be the law in New York, albeit there have
been very few reported cases on the subject since then. But
in the Jan-Mar case the court, following the growing trend
in other jurisdictions in the United States, found that an
option to buy, coupled with a lease, was an interest in real
property and although not exercised by the time of the condemnation
proceeding was exercisable against the award by the option
holder. It is to be noted that New Jersey still follows the
common law rule as to the contract vendees and has not adopted
the Uniform Vendor and Purchaser Risk Act. It is also to be
noted in the Jan-Mar case that there was no condemnation clause
in the lease cutting off the tenant's right to share
in the award.
Jan-Mar is interesting for another reason. It goes into the
trend in the various states today where the issue of options
have been addressed and notes the growing trend is to treat
options generally as compensable interests in real property
in condemnation proceedings. While that case was limited to
an option contained in a lease, we would not be surprised
to see options generally, for which a consideration has been
paid, to be treated as compensable interests in real property
in a condemnation proceeding in New Jersey. This appears to
be the trend in the case law in the various states (see, Nichols
on Eminent Domain, §5.03(1). We have no recent indication
of how options would be treated in New York although if the
P & M Materials case is treated as generally accepted
law in this state, bucking the generally accepted law in the
other states, we doubt that New York would join the trend
in the other states to treat options as a compensable interest
in real property.
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