When Is Part Performance ‘Part Performance in Real Estate Cases’?
Adam Leitman Bailey and John Desiderio discuss the issue of “part performance,” the doctrine of which can overcome the Statute of Frauds in circumstances when parties enter into unwritten deals and don’t contemplate all the possible circumstances that might arise in the course of their dealings.
In my 27 years as a real estate litigator, until recently, I have never used the sword of part performance as much as I have been relying on it now. One of the reasons is the extreme desire of the real estate investor to get rich quickly at the expense of everyone else using deliberate cunning, deceitful actions. Another common trait in these actions has been a problem with the language barrier of the other real estate party from another country. I also believe that some of the new real estate entrants are not as street smart or educated on the rules of the game as their predecessor real estate investors, allowing them to be taken advantage of. In addition, real estate players may not be working as hard as their parents to do their due diligence and paper deals. As far as their advisors, the number of qualified real estate attorneys and advisors may be lacking as very few real estate attorneys came into existence during the years between 2008 and 2012. Ergo, the rules of part performance must be understood and asserted in more cases.
However, it is a difficult doctrine to prove as we learned in a recent case last year, Toobian v. Golzad, 193 AD3d 778, 780, 147 NYS 3d 61 (2d Dept. 2021), that proper planning can turn a losing case into a winner:
The doctrine of part performance is not easily applied in practice. A party who relies on the part performance exception must demonstrate that his or her actions are “unequivocally referable” to the oral agreement which he or she seeks to establish. “Unequivocally referable” conduct is conduct which is inconsistent with any other explanation. It is insufficient that the oral agreement gives significance to plaintiff’s actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement. Significantly, the doctrine of part performance is based on principles of equity, in particular, recognition of the fact that the purpose of the Statute of Frauds is to prevent frauds, not to enable a party to perpetrate a fraud by using the statute as a sword rather than a shield. Toobian v. Golzad, 193 AD3d 778, 780, 147 NYS 3d 61 (2d Dept. 2021). (Internal quotes and citations omitted) (Emphasis added).
Non-written agreements, made between individual persons, and oral promises that are ancillary to written agreements, including ancillary promises to written agreements made between commercial enterprises, no matter how large or small the enterprise, are enforceable, whenever facts are present that satisfy the doctrine of part performance. The doctrine of part performance is an exception to the proscriptions of the Statute of Frauds (General Obligations Law §§ 5-701, 5-703(4)), as recognized and applied under the equity powers of the courts.
As explained in Messner Vetere Berger McNamee Schmetterer Euro RSCG Inc, v. AEGIS Group PLC, 93 NY2d 229, 235 (1999),
the doctrine of part performance is based on principles of equity, and specifically, recognition of the fact that it would be a fraud to allow one party to a real estate transaction to escape performance after permitting the other party to perform in reliance on the agreement.
The equitable ground of the doctrine is codified in General Obligations Law §5-703(4):
Nothing contained in this section abridges the powers of courts of equity to compel the specific performance of agreements in cases of part performance.
The Court of Appeals, in Woolley v. Stewart, 222 NY 347. 350 (1918), cited in Messner, stated the essential basis of the doctrine as follows:
A party to [an oral agreement to convey an estate or interest in real property], other than a lease for a term not exceeding one year, is nugatory and unenforceable, [and] a party to the agreement may legally and rightfully refuse to recognize or perform it. The breach of a void agreement is not a fraud or a wrong in law. He may, however, withdraw himself from the policy and defense of the statute, or waive its protection, by inducing or permitting without remonstrance another party to the agreement to do acts, pursuant to and in reliance upon the agreement, to such an extent and so substantial in quality as to irremediably alter [the] situation and make the interposition of the statute against performance a fraud.
Examples of Part Performance
In ‘Walter v. Hoffman,’ 267 NY 365 (1935), a seller brought an action for specific performance against the buyer of the seller’s property based upon an oral agreement the parties had entered into for purchase and sale of the property. The seller sought to require the buyer to pay the unpaid balance of the purchase price and to accept the deed for the property. The court affirmed the judgment of specific performance upon facts showing that the defendant buyer had taken exclusive and sole possession of the property, had used the property as her home, and had made alterations and improvements to it. The court found that in this case there was part performance “by both parties” that was unequivocally referrable to the alleged oral contract.
In applying the equities, the court noted that “courts may properly take into consideration the acts or part performance by both parties.” 267 NY at 370. (Emphasis added). The court explained:
[T]he problem is whether part performance of the oral agreement creates irremediable injury to the suitor if complete performance is withheld. Unless there has been part performance by the suitor, there has ordinarily been no change of position by him, and therefore no injustice to him if the contract is not performed. To the extent therefore, the acts of part performance relied on must be acts of the suitor. None the less, resultant injustice or injury may be increased, or indeed, arise from subsequent acts performed by the other party. That is true, notably, where, as in this case, a seller has given possession or real property to the buyer and the buyer has then used the property. (Emphasis added) (Citations omitted).
The court held, on evidence that defendant’s “possession has been long continued in the intervening time the buyer has enjoyed the benefit of complete ownership, and the seller has been unable to dispose of the property[,] [r]eturn of possession under such circumstances might be an incomplete measure of justice…[since] as we have said, there has been an alteration of the property. True, the alteration may be an improvement. None the less, if the property is returned to the seller, she will receive something different from what she owned before and something that she may not want.” (Empasis added) Id., at 370-371.
In Pinkava v. Yuriw, 64 AD3d 696, 882 NYS2d 687 (2d Dept. 2009), the plaintiffs (husband and wife) alleged an oral agreement with the defendants (the wife’s sister and husband), to pay $150,000.00 over time to the defendants, in order to purchase the defendants’ interest in an apartment building that the plaintiffs and defendants owned together pursuant to a joint venture whereby the parties had purchased and managed the property for profit. The plaintiffs paid the defendants an initial amount of $51,000.00 towards the purchase price and agreed to pay the balance over time (and the evidence showed that plaintiffs were meeting their obligation and had assumed sole responsibility for management of the building).
Upon the death of the sister’s husband, the plaintiffs offered to pay the balance of the purchase price, tendered a check to do so, and ordered a title search on the property. The sister refused to accept the plaintiffs’ check, and the plaintiffs then learned that the defendant sister had conveyed her interest in the property to her son.
The plaintiffs sued to set aside the conveyance to the sister’s son, to impose a constructive trust upon the defendants’ interest in the property, and for specific performance. The court affirmed the denial of the defendants’ motion which sought to dismiss plaintiffs’ claims as barred by the Statute of Frauds, and the court also affirmed dismissal of defendants’ motion for summary judgment on defendant’s counterclaims.
The court found that “in response to the defendants’ prima facie showing that enforcement of the alleged oral agreement was barred by the statute of frauds, the plaintiffs raised triable issues of fact as to whether they had partially performed in a manner unequivocally referable to the its terms,” concluding that “there is evidence from which a trier of fact might conclude that the plaintiffs’ conduct was extraordinary and explainable only by a reference to the oral contract.” 64 AD3d, at 692-693.
The court also determined that, “accepting plaintiffs’ factual allegations as true, and according them the benefit of every favorable inference, as we must,” the plaintiffs’ allegations of payments to the [defendants] and their contribution of time managing the property was sufficient to establish the transfer in reliance and unjust enrichment elements of a cause of action for a constructive trust.” Id., at 693.
“Agreement To Agree”
As held, in Frankel v. Ford Leasing Development Company, 7 AD3d 757, 776 NYS2d 905 (2d Dept. 2004), a “[l]etter [that] expressly contemplated a more complete and formal contract and omitted many essential terms of a contract,” was only an agreement to agree “which is unenforceable under the statute of frauds.” And, the letter was unenforceable even though “the parties engaged in extensive negotiations and exchanged proposed purchase agreements.” The court noted that the extensive negotiations and exchange of proposed agreements “further demonstrated the absence of a complete agreement.”
Joint Ventures and Corporate Shares
Parties often enter into oral agreements with the intention of establishing a commercial enterprise in which the individual parties to the agreement will jointly share in the purchase and management of a real estate project through some corporate form of ownership.
The history of the case of Anostario v. Vicinanzo, 59 NY2d 662 (1983) presents another vivid example of the differing judicial judgments that may result when one or another of the parties to such an oral joint venture seeks to avoid the Statute of Frauds by invoking the doctrine of part performance.
As set forth in Anostario v. Vicinanzo, 56 AD2d 406, 302 NYS2d 933 (3d Dept. 1977), with subsequent Appellate Division rulings at 60 AD2d 674, 400 NYS2d 512; 79 AD2d 825, 435 NYS2d 367; and 87 AD2d 940, 451 NYS2d 238, plaintiff Anostario brought an action for specific performance alleging that he and defendant Vicinanzo had agreed to purchase certain realty through the vehicle of a corporation in which each was to become an equal shareholder, but that defendant breached the agreement and completed the transaction for his own benefit.
The parties had signed an agreement with the property owner whereby, in consideration of a payment of $560,000, title would be conveyed to a corporation to be created by them. The parties also jointly signed a promissory note for a bank loan used to cover payment (by their jointly drawn check) of the deposit on the purchase price of the contract to purchase the property. The defendant arranged for the formation of the corporation to which title would be conveyed, and the parties assigned their interest in the contract to the corporation.
The defendant obtained a mortgage commitment of $580,000 from a second lender, the closing took place, title was transferred to the corporation, the promissory note was paid off, and the new corporation took control of the property.
Defendant (an attorney) attended to all matters related to the closing and remained the sole shareholder of the corporation. Plaintiff claimed that defendant had solicited his assistance to manage the building and service the tenants after the takeover, agreeing that they would share equally in the enterprise. Defendant claimed that he had consistently asked plaintiff to contribute capital in exchange for a minority interest in the project.
A majority of the Third Department panel (in the first of its four separate rulings in the case) noted that the contract “was not exempt from [the Statute of Frauds] by operation of the so-called joint venture exception,” because the parties had agreed to carry out their plan in corporate form, citing Weisman v. Awnair Corporation America, 3 NY2d 444 (1957), but holding, although (a)“none of the writings proffered by plaintiff, either separately or collectively, adequately spelled out the terms of the supposed association between the parties,” and (b) “although not argued by the parties,” that the court was nevertheless “persuaded that the [dismissal by Supreme Court] should be reversed and a new trial granted because [plaintiff’s] evidence did establish yet another exception to the Statute of Frauds, namely, that of part performance.” 56 AD2d, at 409 (Emphasis added). The court explained that:
one does not generally place his name on a promissory note with another as an eleemosynary gesture. Plaintiff’s later execution of the assignment while that note was still outstanding would be extraordinary indeed if it was done in the expectation of mere employment by the new corporation. The fact that additional personal investment was unnecessary, owing to the size of the mortgage procured by the defendant in this remarkable transaction, does not lessen the force of plaintiff’s deeds. It simply presents a factual matter for Trial Term to entertain in its resolution of the opposing contentions of these parties. Without reference to words of promise, plaintiff gained some degree of interest in the transaction when he signed the purchase agreement and he became fiscally obligated thereto when he signed the note. The assignment to of that interest to the new corporation was needed to allow the matter to proceed and it can be logically explained only as an incident of assured ownership in that entity. 56 AD2d, at 410 (Emphasis added).
However, after three additional rulings of the Third Department adhering to its original decision, the Court of Appeals weighed in (at 59 NY2d, at 663) holding that:
Plaintiff’s actions, viewed alone, are not “unequivocally referable” to an agreement to convey one-half interest in defendant’s corporation. While the agreement alleged provides a possible motivation for plaintiff’s actions, the performance is equivocal, for it is as reasonably explained by the possibility of other expectations, such as the receipt of compensation other than in the form of an equity interest in the corporation. Moreover, the performance undertaken by plaintiff is also explainable as preparatory steps taken with a view toward consummation of an agreement in the future. (Emphasis added).
Nevertheless, as the Court of Appeals also noted, in Walter v. Hoffman, supra, 267 NY, at 369, decisions issued by the courts on whether part performance is sufficient or insufficient “are sometimes valuable as guides in the application of these general principles in other cases, where the conditions are different,…. but the correct application depends always upon the facts in the particular case.” (Emphasis added)
As the above discussion shows, the doctrine of part performance can overcome the strictures of the Statute of Frauds when parties enter into unwritten business deals, or into written business deals with unwritten ancillary terms, and they do not contemplate all of the possible circumstances that might arise in the course of their dealings. Nevertheless, the party relying upon the doctrine of part performance must (a) allege facts showing that the parties did orally agree to the contract that the party seeks to enforce, (b) that the acts of “part performance,” by the party seeking to enforce the oral agreement, must be “so clear, certain, and definite in their object and design” as to be deemed “unequivocally referable” to the agreement, and (c) that the party’s acts alone would be otherwise unintelligible or, at least, extraordinary, unless they were done in reliance upon the existence of the alleged agreement.
Such agreements can arise in any number of circumstances, and particularly in those situations where individuals agree to engage in joint venture partnerships, which are themselves exempt from the Statute of Frauds, but where acts of part performance of the unwritten terms of the venture may nevertheless need to be proven, either to enforce the agreement and/or to show that the agreement is not barred by the Weisman rule, which, if interpreted strictly, would prevent the joint venture partners from using separate corporate entities to carry out the purposes of a business plan that involves more than one project.
Attorneys who enter the fray at the time when the deals are coming apart must carefully review all of the facts in order to be able to make the best case possible for their clients—whether that be to show that a party’s actions are either “unequivocally referable” to an alleged oral agreement, or that they are not. The difference between one or the other conclusion may be difficult to determine; but the ultimate determination will depend upon the ability of the individual attorney to persuade the court to accept his or her interpretation of the facts.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. John M. Desiderio is the chair of the firm’s real estate litigation group. Shayne Messing, a Spring 2022 litigation extern at the firm and a student at New York Law School, and Richard Silverberg, a 2021 Fall extern at the firm and a student at Hofstra Law School, contributed to the preparation of this article.
The original article can be found Here.