Property Condition Disclosure Act: The First Published Court Test

The Property Condition Disclosure Act (PCDA), which became effective on March 1, 2002, requires a seller of residential real property to deliver to a buyer a Property Condition Disclosure Statement (PCDS) before the buyer signs a binding contract (Real Property Law, sec. 462). In Malach v. Chuang (see page 8), infra, a Richmond County Civil Court judge construed ' for the first time ' the remedy provisions of the statute (R.P.L. sec. 465).

Facts Proven At Trial

The sellers gave the purchasers a PCDS answering 'unknown' to question 20 regarding rot to structures. In fact, they answered 'unknown' to 30 of the 48 questions. The purchasers hired an inspector to check the structures, but that inspection did not include the in-ground swimming pool (placed mostly above ground). When the deck was removed after the closing, the purchasers noticed that the main supports and the body of the pool had rot, which if left untreated, would cause the pool to collapse. The existence of the rot was not easily discoverable upon reasonable observation. The judge found that the evidence supported the sellers' claim that they did not have actual knowledge of the condition of the pool because it was not visible prior to their giving the PCDS.

Right Result, But Faulty Analysis

Purchasers sued sellers for improper completion of the PCDS. After a trial, the judge, on his own motion, also considered a claim for common law fraud. The purchasers lost on both causes of action. The result is correct on these facts under both the PCDA and the common law, but the analysis of the PCDA and the fraud claim is faulty in many respects (citing no cases or authorities). The result is surely correct under R.P.L. ' 465(2), as the PCDA provides a remedy against a seller who provides a PCDS only if the seller had actual knowledge and willfully defaulted by lying when the seller said 'unknown' on the PCDS. The purchasers in this case did not prove that the sellers had actual knowledge of facts contradicting their statement in the PCDS, so the purchasers properly lost the case.

The result is also correct under a common law fraud theory. The purchasers did not prove that the sellers had actual knowledge. The sellers could not be liable for a negligent misrepresentation because they did not have constructive knowledge either. Consequently, the purchasers also properly lost on common law fraud.

Analysis of PCDA Remedies

R.P.L. Section 465 provides that a purchaser is entitled to a $500 credit at closing if the seller fails 'to perform the duty … to deliver a disclosure statement prior to the signing by the buyer of a binding contract.' The opinion correctly states that the purchasers were not entitled to the $500 credit under R.P.L. ' 465(1), because that remedy only applies if the seller fails to deliver the PCDS in a timely manner.

The only other remedy expressly provided in the PCDA is under R.P.L. ' 465(2), which states that a seller who provides a PCDS shall be liable for actual damages for a 'willful failure to perform the requirements of this article,' in addition to any other existing equitable or statutory remedies. In an attempt to interpret the PCDA, the judge looked at other consumer protection legislation, such as the statute on home improvement contracts, that provides a private action for fraud and an injunction action by the state Attorney General. G.B.L. sections 772 and 774. As a result of this comparison, the judge stated he did not find that the PCDA provides a specific right of action to the purchaser for 'a breach of the Disclosure form' (the PCDS). Consequently, he held that the purchasers had no cause of action under the PCDA, saying that R.P.L. ' 465(2) has a 'nebulous legal effect,' fails to create a right of action for improper completion, is unclear and is therefore unenforceable.

The judge stated that it was not clear to him what R.P.L. ' 465(2) means. He asked what 'requirements of this article' means. Does it mean 'truthful completion' of the PCDS? It clearly does mean that (as well as timely delivery). The essential requirements are: 1) that the seller reveal its actual knowledge in response to the questions; and 2) that the seller is responsible only for willful failure to comply. Accordingly, the seller is not responsible for 'constructive' knowledge (knowledge that a reasonable seller should have known in the circumstances). That test was proposed in the original legislation, but was deliberately deleted from the final statute. A constructive knowledge test was thought to be too much of a trap for the unwary seller. Under the same approach, the seller is liable only for a willful failure, not a negligent one.

The sellers in this case tried to protect themselves by answering 'unknown' to 30 of the 48 questions. The judge rightly observed that an 'unknown' answer should trigger a duty on the purchasers to inquire about the subject matter, especially where, as in this case, the sellers answered 'unknown' to most of the questions. But in this case, the sellers answered 'unknown' many times, still got sued, and had to pay to defend a litigation. The judge rightly asked why a sellers' attorney would ever advise the clients to give a PCDS and expose themselves to litigation when they could decline to do so and just give a $500 credit at the closing? Many attorneys who have attended my lectures on the PCDA have come to the same conclusion. This case should increase their numbers.

Analysis of Common Law Fraud Action

Having found no cause of action under the PCDA, the judge, on his own motion, analyzed whether the evidence provided at trial would support a cause of action for 'breach of contract' [sic] or common law fraud. The judge rightly noted that delivery of a PCDS provides purchasers with a document that can be used against sellers in a common law suit for fraud or negligent misrepresentation. Thus, the PCDS gives purchasers an advantage in subsequent litigation. Moreover, the PCDA expressly states that it does not 'limit any existing legal cause of action or remedy at law, in statute or in equity.' R.P.L. ' 467.

Merger Clauses Do Not Prevent Fraud Claim

The judge stated  that any rights of the purchasers under the PCDA were merged in the contract and would not survive execution of the contract, based on the standard NYSBA contract 'as is' clause disclaiming reliance on prior statements as to condition and the standard clause merger clause as to all prior understandings. While he was correct in observing that nothing in the PCDA indicates that a PCDS disclosure is intended to survive, he failed to take note of the many New York cases holding that such merger clauses do not prevent a fraud claim. See e.g., Bridger v. Goldsmith, 143 N.Y. 424, 38 N.E. 458 (1894) (party who perpetrates fraud may not contract for immunity). While this is an error in the holding, it should not change the result, because no fraud was proven.

The Property Condition Disclosure Act (PCDA), which became effective on March 1, 2002, requires a seller of residential real property to deliver to a buyer a Property Condition Disclosure Statement (PCDS) before the buyer signs a binding contract (Real Property Law, sec. 462). In Malach v. Chuang (see page 8), infra, a Richmond County Civil Court judge construed ' for the first time ' the remedy provisions of the statute (R.P.L. sec. 465).

Facts Proven At Trial

The sellers gave the purchasers a PCDS answering 'unknown' to question 20 regarding rot to structures. In fact, they answered 'unknown' to 30 of the 48 questions. The purchasers hired an inspector to check the structures, but that inspection did not include the in-ground swimming pool (placed mostly above ground). When the deck was removed after the closing, the purchasers noticed that the main supports and the body of the pool had rot, which if left untreated, would cause the pool to collapse. The existence of the rot was not easily discoverable upon reasonable observation. The judge found that the evidence supported the sellers' claim that they did not have actual knowledge of the condition of the pool because it was not visible prior to their giving the PCDS.

Right Result, But Faulty Analysis

Purchasers sued sellers for improper completion of the PCDS. After a trial, the judge, on his own motion, also considered a claim for common law fraud. The purchasers lost on both causes of action. The result is correct on these facts under both the PCDA and the common law, but the analysis of the PCDA and the fraud claim is faulty in many respects (citing no cases or authorities). The result is surely correct under R.P.L. ' 465(2), as the PCDA provides a remedy against a seller who provides a PCDS only if the seller had actual knowledge and willfully defaulted by lying when the seller said 'unknown' on the PCDS. The purchasers in this case did not prove that the sellers had actual knowledge of facts contradicting their statement in the PCDS, so the purchasers properly lost the case.

The result is also correct under a common law fraud theory. The purchasers did not prove that the sellers had actual knowledge. The sellers could not be liable for a negligent misrepresentation because they did not have constructive knowledge either. Consequently, the purchasers also properly lost on common law fraud.

Analysis of PCDA Remedies

R.P.L. Section 465 provides that a purchaser is entitled to a $500 credit at closing if the seller fails 'to perform the duty … to deliver a disclosure statement prior to the signing by the buyer of a binding contract.' The opinion correctly states that the purchasers were not entitled to the $500 credit under R.P.L. ' 465(1), because that remedy only applies if the seller fails to deliver the PCDS in a timely manner.

The only other remedy expressly provided in the PCDA is under R.P.L. ' 465(2), which states that a seller who provides a PCDS shall be liable for actual damages for a 'willful failure to perform the requirements of this article,' in addition to any other existing equitable or statutory remedies. In an attempt to interpret the PCDA, the judge looked at other consumer protection legislation, such as the statute on home improvement contracts, that provides a private action for fraud and an injunction action by the state Attorney General. G.B.L. sections 772 and 774. As a result of this comparison, the judge stated he did not find that the PCDA provides a specific right of action to the purchaser for 'a breach of the Disclosure form' (the PCDS). Consequently, he held that the purchasers had no cause of action under the PCDA, saying that R.P.L. ' 465(2) has a 'nebulous legal effect,' fails to create a right of action for improper completion, is unclear and is therefore unenforceable.

The judge stated that it was not clear to him what R.P.L. ' 465(2) means. He asked what 'requirements of this article' means. Does it mean 'truthful completion' of the PCDS? It clearly does mean that (as well as timely delivery). The essential requirements are: 1) that the seller reveal its actual knowledge in response to the questions; and 2) that the seller is responsible only for willful failure to comply. Accordingly, the seller is not responsible for 'constructive' knowledge (knowledge that a reasonable seller should have known in the circumstances). That test was proposed in the original legislation, but was deliberately deleted from the final statute. A constructive knowledge test was thought to be too much of a trap for the unwary seller. Under the same approach, the seller is liable only for a willful failure, not a negligent one.

The sellers in this case tried to protect themselves by answering 'unknown' to 30 of the 48 questions. The judge rightly observed that an 'unknown' answer should trigger a duty on the purchasers to inquire about the subject matter, especially where, as in this case, the sellers answered 'unknown' to most of the questions. But in this case, the sellers answered 'unknown' many times, still got sued, and had to pay to defend a litigation. The judge rightly asked why a sellers' attorney would ever advise the clients to give a PCDS and expose themselves to litigation when they could decline to do so and just give a $500 credit at the closing? Many attorneys who have attended my lectures on the PCDA have come to the same conclusion. This case should increase their numbers.

Analysis of Common Law Fraud Action

Having found no cause of action under the PCDA, the judge, on his own motion, analyzed whether the evidence provided at trial would support a cause of action for 'breach of contract' [sic] or common law fraud. The judge rightly noted that delivery of a PCDS provides purchasers with a document that can be used against sellers in a common law suit for fraud or negligent misrepresentation. Thus, the PCDS gives purchasers an advantage in subsequent litigation. Moreover, the PCDA expressly states that it does not 'limit any existing legal cause of action or remedy at law, in statute or in equity.' R.P.L. ' 467.

Merger Clauses Do Not Prevent Fraud Claim

The judge stated  that any rights of the purchasers under the PCDA were merged in the contract and would not survive execution of the contract, based on the standard NYSBA contract 'as is' clause disclaiming reliance on prior statements as to condition and the standard clause merger clause as to all prior understandings. While he was correct in observing that nothing in the PCDA indicates that a PCDS disclosure is intended to survive, he failed to take note of the many New York cases holding that such merger clauses do not prevent a fraud claim. See e.g., Bridger v. Goldsmith , 143 N.Y. 424, 38 N.E. 458 (1894) (party who perpetrates fraud may not contract for immunity). While this is an error in the holding, it should not change the result, because no fraud was proven.