What Is Left of <i>Caveat Emptor</i>?

By contrast, in Devine v. Meili, 932 NYS2d 581 (11/10/11), the Third Department affirmed a trial court's grant of seller's motion for summary judgment dismissing a commercial purchaser's fraud claim. After closing, purchaser learned from the village building department that village officials had previously inspected the premises and found them to be unsafe. Purchaser then commissioned an architect's inspection, which revealed rotted support beams, a cracked foundation, extensive water damage, and other conditions that compromised the building's structural integrity. Purchaser then sued seller, contending that seller had installed new drywall and had painted over other areas to conceal the defects later uncovered by the architects. Purchaser offered evidence that seller knew of the defects, because she had previously obtained estimates of the cost to repair them, but never followed through on the estimates. The Third Department held that purchaser's allegations were insufficient to establish a question of fact. The court noted that the contract provided that the property was sold “as is,” and gave the purchaser a right (which purchaser had exercised) to inspect the premises before purchase.

Points of Agreement ' and Disagreement

The courts in Margolin and Devine both accepted the basic premise of caveat emptor doctrine: A seller who stands silent, saying nothing about the condition of the building she sells, is not liable for defects the purchaser subsequently discovers ' even if the seller was fully aware of those defects. Both courts also agreed that a seller who actively conceals defects cannot invoke caveat emptor doctrine.

Where the courts disagree is on what allegations of concealment or affirmative misrepresentation are sufficient to overcome a motion to dismiss or a summary judgment motion. In Margolin, the Second Department held that allegations of concealment (supported by the buyer's own affidavit asserting that the buyer found evidence of concealment) were enough to preclude dismissal of the complaint. By contrast, in Devine, the court was unwilling to hold that evidence of new drywall and painting was sufficient to raise a question of fact about concealment. It is true, of course, that Devine was decided on a motion for summary judgment, not a motion to dismiss, but that procedural difference does not appear to explain the difference in result.

Although the approach taken by the court in Margolin appears more consistent with ordinary procedural doctrine, the court's approach would essentially permit every buyer to survive a motion to dismiss (obtaining greater leverage over the seller) merely by making allegations of concealment. That, in turn, would make caveat emptor doctrine less valuable to most sellers. Another difference worth noting is that Devine involved commercial premises, where one might expect the buyer to be more savvy and to do more investigation before purchasing.

RPL Sections 462 and 465

RPL Section 462, enacted in 2001, requires sellers of residential (but not commercial) real property to complete and sign a property condition disclosure statement. The statute significantly restricts a seller's ability to take advantage of the caveat emptor doctrine, even though courts continue to refer to the doctrine as the default rule in New York.

First, consider the seller who does not provide the required form. Section 465(1) expressly entitles a buyer, at closing, to a $500 credit against the purchase price when seller does not furnish the form. But does that credit relieve seller of all other liability for defects discovered after closing? In particular, does failure to provide the form itself constitute active concealment of a defective condition, bringing the seller within one of the recognized exceptions to the caveat emptor rule? One might read section 465(1) as providing a limitation on a purchaser's remedies, but section 467 provides that “[n]othing contained in this article shall be construed as limiting any existing legal cause of action or remedy at law, in statute or in equity.” As yet, there has been no definitive case law resolving the issue. In Daly v. Kochanowicz, 67 AD3d 78, the Second Department dismissed a fraudulent misrepresentation claim when seller had failed to provide the statutory form, but the court emphasized that notwithstanding seller's refusal to answer the questions in the disclosure statement, the purchaser had been put on fair notice ' by her own inspector and by seller's refusal to include a rider promising that the basement would be free of seepage ' that the house was subject to water intrusion. In other words, the court dismissed the claim because, regardless of any concealment, purchaser could not reasonably have relied on any explicit or implicit representation by seller.

Next, consider the seller who does provide the form. Misleading statements on the form serve as the foundation for a claim of fraudulent misrepresentation. Thus, in Simone v. Homecheck Real Estate Services, Inc., 42 AD3d 518, the Third Department upheld denial of a motion to dismiss based on false representations in the disclosure statement, despite the presence of an “as-is” provision in the contract and a specific merger clause in the sale contract, both of which required dismissal of a breach of contract claim. Of course, as with other misrepresentation or active concealment claims, a purchaser can only prevail when purchaser demonstrates reasonable reliance on the misrepresentation or concealment. See Daly v. Kochanowicz, supra.

Conclusion

In short, caveat emptor is not what it once was, especially in residential real estate transactions. Under current law, the seller had better “beware” of the potential legal consequences of failure to disclose defects.

New York courts continue to hold that caveat emptor ' let the buyer beware ' represents the general rule applicable to real property transactions. Two recent appellate cases, however, illustrate continuing uncertainty about the remaining scope of the caveat emptor doctrine, while Real Property Law sections 462 and 465 limit the doctrine's significance in many residential transactions.

Margolin and Devine

In Margolin v. I.M. Kapco, Inc., NYLJ 11/8/11, p. 28, the Second Department reversed a trial court's grant of defendant seller's motion to dismiss a residential purchaser's fraud claim. The purchaser alleged that seller had fraudulently represented that there were no leaks in the house and that seller had actively concealed the defects by placing large aluminum roasting pans above the drop ceiling to collect water from ongoing leaks. Supreme Court dismissed purchaser's complaint, but the Appellate Division reversed, emphasizing the need to accept all facts alleged in the complaint as true, and to give plaintiff the benefit of every possible inference on the motion to dismiss. The court held that the facts alleged, if proven, might be sufficient to establish “active concealment” by the seller ' a well-established exception to the caveat emptor rule.

By contrast, in Devine v. Meili , 932 NYS2d 581 (11/10/11), the Third Department affirmed a trial court's grant of seller's motion for summary judgment dismissing a commercial purchaser's fraud claim. After closing, purchaser learned from the village building department that village officials had previously inspected the premises and found them to be unsafe. Purchaser then commissioned an architect's inspection, which revealed rotted support beams, a cracked foundation, extensive water damage, and other conditions that compromised the building's structural integrity. Purchaser then sued seller, contending that seller had installed new drywall and had painted over other areas to conceal the defects later uncovered by the architects. Purchaser offered evidence that seller knew of the defects, because she had previously obtained estimates of the cost to repair them, but never followed through on the estimates. The Third Department held that purchaser's allegations were insufficient to establish a question of fact. The court noted that the contract provided that the property was sold “as is,” and gave the purchaser a right (which purchaser had exercised) to inspect the premises before purchase.

Points of Agreement ' and Disagreement

The courts in Margolin and Devine both accepted the basic premise of caveat emptor doctrine: A seller who stands silent, saying nothing about the condition of the building she sells, is not liable for defects the purchaser subsequently discovers ' even if the seller was fully aware of those defects. Both courts also agreed that a seller who actively conceals defects cannot invoke caveat emptor doctrine.

Where the courts disagree is on what allegations of concealment or affirmative misrepresentation are sufficient to overcome a motion to dismiss or a summary judgment motion. In Margolin, the Second Department held that allegations of concealment (supported by the buyer's own affidavit asserting that the buyer found evidence of concealment) were enough to preclude dismissal of the complaint. By contrast, in Devine, the court was unwilling to hold that evidence of new drywall and painting was sufficient to raise a question of fact about concealment. It is true, of course, that Devine was decided on a motion for summary judgment, not a motion to dismiss, but that procedural difference does not appear to explain the difference in result.

Although the approach taken by the court in Margolin appears more consistent with ordinary procedural doctrine, the court's approach would essentially permit every buyer to survive a motion to dismiss (obtaining greater leverage over the seller) merely by making allegations of concealment. That, in turn, would make caveat emptor doctrine less valuable to most sellers. Another difference worth noting is that Devine involved commercial premises, where one might expect the buyer to be more savvy and to do more investigation before purchasing.

RPL Sections 462 and 465

RPL Section 462, enacted in 2001, requires sellers of residential (but not commercial) real property to complete and sign a property condition disclosure statement. The statute significantly restricts a seller's ability to take advantage of the caveat emptor doctrine, even though courts continue to refer to the doctrine as the default rule in New York.

First, consider the seller who does not provide the required form. Section 465(1) expressly entitles a buyer, at closing, to a $500 credit against the purchase price when seller does not furnish the form. But does that credit relieve seller of all other liability for defects discovered after closing? In particular, does failure to provide the form itself constitute active concealment of a defective condition, bringing the seller within one of the recognized exceptions to the caveat emptor rule? One might read section 465(1) as providing a limitation on a purchaser's remedies, but section 467 provides that “[n]othing contained in this article shall be construed as limiting any existing legal cause of action or remedy at law, in statute or in equity.” As yet, there has been no definitive case law resolving the issue. In Daly v. Kochanowicz , 67 AD3d 78, the Second Department dismissed a fraudulent misrepresentation claim when seller had failed to provide the statutory form, but the court emphasized that notwithstanding seller's refusal to answer the questions in the disclosure statement, the purchaser had been put on fair notice ' by her own inspector and by seller's refusal to include a rider promising that the basement would be free of seepage ' that the house was subject to water intrusion. In other words, the court dismissed the claim because, regardless of any concealment, purchaser could not reasonably have relied on any explicit or implicit representation by seller.

Next, consider the seller who does provide the form. Misleading statements on the form serve as the foundation for a claim of fraudulent misrepresentation. Thus, in Simone v. Homecheck Real Estate Services, Inc. , 42 AD3d 518, the Third Department upheld denial of a motion to dismiss based on false representations in the disclosure statement, despite the presence of an “as-is” provision in the contract and a specific merger clause in the sale contract, both of which required dismissal of a breach of contract claim. Of course, as with other misrepresentation or active concealment claims, a purchaser can only prevail when purchaser demonstrates reasonable reliance on the misrepresentation or concealment. See Daly v. Kochanowicz, supra.

Conclusion

In short, caveat emptor is not what it once was, especially in residential real estate transactions. Under current law, the seller had better “beware” of the potential legal consequences of failure to disclose defects.