Thursday, April 26, 2012
Agreement to Resell Condo for Less than FMV Upheld
Kentucky Court of Appeals Upholds Obligation to
Resell Condominium at Less than Fair Market Value
In a recent decision, the Kentucky Court of Appeals upheld a deed covenant for a condominium requiring that it be resold to the development at less than its fair market value. Puckett v. St. Andrews Place Retirement Community, Inc., 2012 WL 1072418 (Ky. App. Mar. 30, 2012) (not to be published).
The condominium complex in question is operated by St. Andrews Place Retirement Community, Inc., a nonprofit corporation. Mary Puckett purchased a condominium for $52,065 in 1993, living in it until she passed away in 2008. The Master Deed for the property provided that the developer would have a right to re-acquire the property upon its transfer with the price determined on a sliding scale against the original unit cost based upon the number of years of residence. For someone holding property in excess of ten years, the repurchase would be at 75% of the original cost. After Ms. Puckett’s death, St. Andrews notified her heirs that it would be buying the property back for $38,588, that being 75% of the original acquisition price of $52,065. In turn, the heirs refused to sell at less than fair market value and brought a declaratory judgment action seeking the determination that the buyback provision was an unforceable restraint on alienation. When summary judgment was granted to St. Andrews, the heirs appealed.
The heirs’ position was based in part on Man O War Restaurant, Inc. v. Martin, 932 S.W.2d 366 (Ky. 1996), wherein the Kentucky Supreme Court invalidated a buyback provision for corporate shares pursuant to which they would be reacquired for the initial acquisition cost, holding that such constituted either an unenforceable penalty or unreasonable liquidated damages. Curiously absent from the Court’s discussion is any recognition that the Man O War Restaurant has been legislatively overruled by the Kentucky General Assembly. See, e.g., Rutledge, The 2002 Amendments to the Kentucky Business Corporation Act, 67 Bench & Bar 13 (May, 2003). The heirs relied as well upon Sebastian v. Floyd, 585 S.W.2d 381 (Ky. 1979), the Court there invalidating a forfeiture clause in an installment land sales contract, it requiring a credit, at the judicial sale, for payments already made by the purchaser.
Ultimately, the Court held that the buyback would be enforced, it being reasonable in light of the complete disclosure to Ms. Puckett and as well her ultimate heir and the objectives of St. Andrews, namely to provide affordable housing facilities.
It remains to be seen whether a similar provision in a non-charitably focused venture would be upheld.