NEW YORK ® LAW JOURNAL NEWSLETTERS REAL ESTATE LAW REPORTER Volume 20, Number 5 • March 2006 Caveat Emptor in the Purchase of New York Real Estate By Michael Gordon and Diane da Cunha nder New York law, the doc- diligence, the true nature of the trans- AD2d 542), the legality of multiple trine of caveat emptor, or action into which he is about to enter, kitchens in a home (Platzman v. buyer beware, applies to the he must make use of those means, Morris, 283 AD2d 561), and the loca- U absent which he will be precluded tion of the property’s boundaries purchase and sale of real property. Stambovsky v. Ackley, 169 AD2d 254, from arguing that he was fraudulently (Eisenthal v. Wittlock, 198 AD2d 395) 257. Under this doctrine, which has induced to enter into the transaction. where the courts found that the pur- undergone some recent modifications, Ittleson v. Lombardi, 193 AD2 374, 376. chasers could readily have verified the the seller of real property is under no Indeed, New York courts have dis- truth of the representations, particular- duty to speak (ie, make certain disclo- missed fraud claims asserted by pur- ly by inspection of the premises or sures to the purchaser) concerning the chasers where preexisting conditions review of available documents such condition of the property when the par- were reasonably discoverable by as the certificate of occupancy, ties deal at arms’ length. Id. Mere inspection. These circumstances survey and public records concerning silence on the part of the seller included underground contamination the property. concerning a defective or otherwise (Venezia v. Coldwell Banker Sammis In one notable case, Glazer v. undesirable condition of the property, Realty, 270 AD2d 480; Vandevort v. LoPreste, 278 AD2d 198, the court dis- without some act or conduct that Higginbotham, 222 AD2d 831), prior missed the purchasers’ claims that the deceived the purchaser, does not use of a vacant lot as a landfill (London sellers fraudulently represented that amount to conduct that is actionable v. Courduff, supra), and a vintage the residential home at issue was a as a fraud. London v. Courduff, 141 cooperative apartment in a “dreadful good place to raise children by con- AD2d 803, 804. state of disrepair.” (Ittleson v. cealing the fact that a convicted sex According to doctrine of caveat Lombardi, supra). The common thread offender lived in the neighborhood. emptor, as applied by New York in these cases is the court’s finding that The court found that the neighbor and courts, the purchaser of real property the seller had no duty to disclose the his offense had been covered by local has a duty to inspect the property and pre-existing condition and, in fact, newspapers for several years and that satisfy himself as to his bargain. Glazer had not taken any action to prevent the purchasers had not made any v. LoPreste, 278 AD2d 198, 198-99. the purchaser from discovering reasonable attempt to discover the Where a purchaser has the means the condition through the exercise of character of the neighborhood. available to him for discovering, by the due diligence. exercise of ordinary intelligence and Even where purchasers have WHEN EFFECTS ARE EASED claimed that sellers made false state- The effects of the doctrine of caveat ments upon which they relied, the emptor are eased, however, where a Michael S. Gordon is a partner with courts have dismissed fraud claims purchaser can show that the seller Katten Muchin Rosenman LLP in New engaged in acts that amounted to an York. He concentrates his practice on where they found that the true infor- commercial and corporate litigation, mation was easily available to the pur- active concealment, designed to thwart including contract, partnership and chasers. Thus, the courts have the purchaser’s efforts to fulfill his corporate-shareholder disputes, as well dismissed claims based upon alleged responsibility to inspect the property as securities and common law fraud. misrepresentations concerning the and prevent the discovery of the Diane da Cunha is special counsel adequacy of the water supply upon defective condition, or where the with the firm. the property (Cohen v. Colistra, 233 defect in the property is peculiarly LJN’s The New York Real Estate Law Reporter March 2006 within the knowledge of the seller and chaser would not be expected to con- seller to refuse to make any disclo- not likely to be discovered by a rea- template, much less investigate. While sures or representations concerning sonably prudent purchaser. Under at first glance, there may not appear to the property, inherently eliminates any these circumstances, a seller may have be any reason why the purchasers in possible fraud claim, which must be a duty to disclose the defect to the pur- Glazer, discussed above, should have based upon a false disclosure or mis- chaser and, in appropriate circum- been expected to investigate and dis- representation. Bishop v. Graziano, 10 stances, the real estate contract may be cover the local knowledge of a sex Misc3d 342, 346. Another court has rescinded or the seller may be held offender in the neighborhood, while in noted that a seller filling out the dis- liable for damages. Stambovsky, the purchaser was not closure sheet has the option of For example, where a seller has expected to investigate, much less dis- answering each question “unknown” taken proactive steps to conceal cover, the local knowledge of the haunt- and that an answer “unknown” “trig- defects in the property — including ing of his proposed residence, the dif- gers a duty to inquire on the part of where the sellers covered the founda- ference may lie not with the purchasers, the purchaser and relieves the seller of tion walls with plasterboard to conceal but rather with the sellers. The any potential liability for defects that cracks evidencing structural defects Stambovsky court emphasized the fact arise in regard to the part of the prem- (Haberman v. Greenspan, 82 Misc2d that the seller had in the past enthusias- ises covered by the question.” Malach 263), constructed false walls to conceal tically promoted the publication of her v. Chuang, 194 Misc2d 651, 663. water problems (Stephens v. Sponholz, encounters with the spirits that haunted Consistent with the apparent safe har- 251 AD2d 1061), buried industrial the house, creating and perpetuating bor that has been afforded sellers waste on property described as a horse its local reputation. The court found under the PCDA, the Legislature con- farm (Tahini Investments, Ltd. v. that having informed the public at large firmed that the PCDA “is not intended Bobrowsky, 99 AD2d 489), and used concerning the supernatural occur- to and does not diminish the responsi- floodlights and mothballs immediately rences, the seller owed a duty to the bility of buyers to carefully examine before the purchasers’ inspections to purchaser to inform him also. By con- the property they intend to purchase drive an infestation of bats away from trast, the seller in Glazer had no part in and public records pertaining to the the attic (Jablonski v. Rapalje, 14 AD3d establishing the presence of the property and, in fact, highlights the 484) — courts have deemed the seller sex offender. importance of professional inspections liable for fraud. In addition to the foregoing case and environmental tests.” (L. 2001, c. law, the New York State Legislature 465, sec. 1, Legislative findings). The has implemented legislation that inures required disclosure form itself states WHEN COURTS FIND to the apparent benefit of sellers seek- that “it is not a substitute for any SELLERS LIABLE ing to insulate themselves from fraud inspections or tests and the buyer is In the same vein, New York courts claims arising out of the alleged non- encouraged to obtain his or her own have found sellers liable for fraudulent disclosure of conditions relating to res- independent professional inspections conduct in instances where a seller idential property. In early 2002, the and environmental tests and also is had knowledge of an undisclosed New York State Legislature enacted a encouraged to check public records defect, which defect could not other- Property Condition Disclosure Act (the pertaining to the property.” RPL section wise have been discovered through a PCDA) (RPL sec. 460 et seq.) that was 462(2). Thus, New York statutory and reasonable inspection by the purchas- intended to regularize disclosures in case law confirms that the doctrine of er. These instances have involved the sale of residential properties. caveat emptor in the sale of real prop- defective sewer systems (Cetnar v. Pursuant to the PCDA, in general, the erty remains alive and well in the State Kinowski, 263 AD2d 842; Young v. seller of residential real property under of New York. Keith, 112 AD2d 625) and the pending a real estate purchase contract (ie, not revocation of a multiple-family certifi- a foreclosure or sheriff’s sale) is cate of occupancy (Scharf v. required to make a minimum of 48 Tiegerman, 166 AD2d 697). In one affirmative representations concerning —❖— unusual example, Stambovsky v. the condition of the house and Ackley, supra, the court found fraud property being sold. However, the This article is reprinted with permission from sufficient to rescind the contract for PCDA contains an “opt-out” provision the March 2006 edition of the LAW JOURNAL the sale of a home that the court found allowing a seller to give the NEWSLETTERS - THE NEW YORK REAL to be “haunted.” The court empha- purchaser a $500 credit against the ESTATE LAW REPORTER. © 2006 ALM sized that, prior to the sale, the seller agreed-upon purchase price in lieu of Properties, Inc. All rights reserved. Further had deliberately cultivated a local the required disclosure statement.