Real Property Law

AppDiv, Second Dept.

(memorandum opinion)

In tenant's action against landlord and real estate broker, tenant appealed from Supreme Court's grant of summary judgment to broker on tenant's claims for negligence and breach of fiduciary duty. The Appellate Division affirmed, holding that the doctrine of caveat emptor barred tenant's claim that the broker had failed to disclose the absence of a valid rental permit for the leased premises.

Landlord retained broker as his agent to negotiate a residential lease for the summer rental season in Southampton. Landlord then leased the premises to tenant. Before entering the lease, landlord and tenant executed a New York State Disclosure Form for Landlord and Tenant, in which tenant acknowledged that broker was acting as landlord's agent. Shortly after the lease commenced, tenant learned that the premises lacked a valid rental permit under the Southampton Town Code. Tenant then brought this action against both the landlord and the broker.

With respect to the broker, tenant claimed that the broker had acted negligently in listing the premises for rental when the premises lacked a valid rental permit. Tenant also contended that the broker had violated Real Property Law section 443(4)(b) by failing to deal with tenant in good faith and by failing to disclose all facts known to broker that materially affected the value and desirability of the premises. Finally, tenant contended that broker was acting as tenant's agent, and breached its fiduciary duty by advising tenant that the premises were available for rent, despite the absence of a valid rental permit. Supreme Court granted broker's motion to dismiss, and tenant appealed.

In affirming, the Appellate Division held that RPL 443(4)(b) did not impose on the broker a duty to investigate whether the premises had a valid rental permit. The court held that the statute does not alter the application of the common law of agency with respect to residential real estate transactions, and emphasized that New York law imposes no liability on the seller or the seller's agent to disclose any information concerning the premises unless there is some active concealment. As a result, broker was not liable. The court also held that the breach of fiduciary duty claim could not stand because tenant had acknowledged that the broker was acting as the agent of the tenant, not the landlord.

COMMENT

Although Real Property Law sections 443(4)(a)-(b) explicitly require a seller's real estate agent to disclose to the buyer all material facts known to the agent, courts have been unwilling to interpret that language to give buyers a cause of action against seller's agents. Sections 443(4)(a) and (b) state that in buyer-seller or tenant-landlord transactions, respectively, a seller or landlord's real estate agent should, in dealing with the buyer or tenant, “exercise reasonable skill and care ' deal honestly, fairly and in good faith ' and disclose all facts known to the agent materially affecting the value or desirability of property, except as otherwise provided by law.” RPL sections 443(4)(a)'(b). In Rosenblum v. Corcoran Group Eastside Inc., 2013 WL 394828, the court held that no special relationship nor fiduciary duty existed between defendant seller's real estate agent and plaintiff purchaser that would require the seller's agent to impart material information about the property to the purchaser. Purchasers brought suit after discovering that the apartment that they had contracted to purchase did not contain “thru-wall” air-conditioning in the living room and dining rooms as seller's agents had represented to them. Purchasers had argued that the seller's agents had a duty to disclose to them the absence of the air-conditioning because under section 443, agent disclosure duties are broader than those under the common law. Id. at 5. The court responded in a footnote by stating that the purchasers offered no case law in support of this notion, and that the provision they cited is limited by the phrase “except otherwise provided by law.” Id. at 6. The court's position in Ader v. Guzman is consistent with the Rosenblum approach .

Section 443(4) was enacted to streamline the written disclosure process for dual agency in residential real property sale and lease transactions. N.Y. Bill Jacket, 2006 A.B. 4135, Ch. 569. Effective Jan. 1, 2007, section443(4) clarified the definitions of the agency relationship between real estate agent and consumer, and disposed of the sole disclosure form requirement, replacing it with two separate disclosure forms: one for leases and one for residential real property transfers. Id. Although ' 443(4)'s purpose was to provide disclosure to consumers, courts have not interpreted this provision to enable buyers or lessees to recover when an agent for a seller or lessor fails to disclose.

The court in 2004 Bowery Partners, LLC v. E.G. W. 37th LLC, 32 Misc.3d 1210(A), 6-7 (2011), dismissed plaintiff purchaser's cause of action against defendant seller's real estate agents for “engag[ing] in misrepresentation and nondisclosure of material facts,” on the grounds that a seller's agent has no duty to act in the best interests of a potential buyer. The court explained that purchaser's claim appeared to be that seller's agents had a fiduciary duty to advise purchaser that the seller was preparing to sell the property in question to another buyer. Id. at 6. The court stated that it is well established under the common law that a seller's agent owes a fiduciary duty to its principal, but that no duty of loyalty or care extends to a potential buyer. The court went on to explain that section 443(4)(a) codifies that a seller's agent has a fiduciary duty of “undivided loyalty” to the seller, but held that a “seller's agent does not represent the interests of the buyer.” 32 Misc.3d 1210(A) at 7.

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Existence of Outstanding Lease on Closing Date Did Not Excuse Purchaser

1581 Franklin Steel, LLC v. Mineola Garden City Co., Ltd.

NYLJ 1/15/16, p. 32, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action by purchaser for return of a down payment, purchaser appealed from Supreme Court's award of summary judgment to seller. The Appellate Division affirmed, holding that the existence of an outstanding lease on the closing date did not excuse purchaser from its contract obligation.

Purchaser contracted to buy a commercial building and made a $125,000 deposit. A day before the scheduled closing, purchaser's lawyer informed seller's lawyer that purchaser was cancelling the contract due to the existence of a lease, which by its terms expired 30 days after the closing date, affecting a portion of the subject building. The lease had a renewal option, but the tenant had not exercised the option, and had already vacated the building by the time the sale contract was signed. When purchaser demanded return of its down payment, seller refused and purchaser brought this action. Supreme Court awarded summary judgment to seller dismissing the complaint and granting judgment on seller's counterclaim to retain the deposit. Purchaser appealed.

In affirming, the Appellate Division focused first on the language of the sale contract, which gave the purchaser an option to extend the closing date if the tenant had not vacated the premises by the time of closing. The court held that this language was nothing more than an option to extend the closing date, not an option to cancel the contract. The court then held that in any event, the alleged title defect caused by the lease was curable, and purchaser therefore had an obligation to give seller a reasonable time to cure. Purchaser's failure to do so resulted in forfeiture of its down payment.

COMMENT

Unless a contract for sale of property is explicitly made subject to an outstanding lease, the lease constitutes an encumbrance on the title and excuses the purchaser from its contract obligations. For instance, in Fruhauf v. Bendheim, 127 N.Y. 587, the court excused purchaser from closing when a portion of the property remained subject to a renewal lease not disclosed in the sale contract. The contract for a multi-unit building provided that the sale was subject to “existing tenancies” and to a particular lease “expiring May 1, 1889.” In fact, however, that lease contained a covenant of renewal that extended the term two-years past May 1, 1889 The Court of Appeals held that the exception for “existing tenancies” referred to leases on other units in the building, and not to the specifically described lease. As a result, purchaser was entitled to return of the down payment.

When a title defect is curable, the purchaser is not excused from the sale contract unless the seller gives the purchaser notice of the defect and a reasonable opportunity to cure. Thus, in Cohen v. Kranz, 12 N.Y.2d 242 the Court of Appeals held that the purchaser's attempt to cancel the sales contract was unjustified when purchaser did not initially specify the objections and only did so after the closing date. The Court of Appeals noted that evidence showed the defects were curable (a swimming pool that lacked a certificate of occupancy and a fence that projected beyond the front line of the dwelling) and that the purchaser's failure in specifying the objections before canceling the contract denied the seller a reasonable opportunity to cure the defects.

By contrast, where the purchaser does provide adequate notice of the defect, purchaser is excused if seller does not cure within a reasonable time. For instance, in Junius Const. Co. v. Cohen , the court excused purchaser from performance and awarded purchaser return of the down payment, finding that a two-year delay in clearing title was unreasonable when the purpose of the transaction was to build a factory ' those plans now frustrated ' and the current financial condition of the purchaser rendered performance either impossible or burdensome. 257 N.Y. 393. See also Klaiber, LLC v. Coon , 48 A.D.3d 856 (seller's delay unreasonable when it was given notice of title defect caused by ongoing divorce proceeding, but failed to do anything to clear defect for at least six-months) .

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Mortgagee Entitled to Supplement Affidiavit to Establish Compliance with RPAPL 1304

'Citimortgage, Inc. v. Espinal

NYLJ 12/18/15, p. 29, col. 4

App.Div, Second Dept.

(memorandum opinion)

In an action to foreclosure a mortgage, mortgagor appealed from Supreme Court's grant of summary judgment to mortgagee bank. The Appellate Division affirmed, holding that mortgagee's reply papers had adequately established compliance with RPAPL 1304.

Mortgagee bank had sent mortgagor notices of default dated Oct. 9, 2009 and Feb. 9, 2010, and then commenced this foreclosure action in July 2010. In support of its summary judgment motion, mortgagee submitted an affidavit of one of its vice presidents asserting that a 90-day foreclosure notice required by RPAPL 1304 had been sent to the address of the property and to mortgagor's last known address. In response, mortgagor contended that the affidavit failed to prove that the RPAPL 1304 notice had been mailed to mortgagor. In response, mortgagee submitted another affidavit including a United States Postal Service tracking number and a copy of mortgagee's correspondence log. Supreme Court then awarded summary judgment to mortgagee. Mortgagor appealed.

In affirming, the Appellate Division noted that because this mortgage was a home loan, it was subject to the 90-day notice requirement imposed by RPAPL 1304. But, because there was no allegation that the loan was a high-cost home loan or subprime home loan, RPAPL 1302's requirement that compliance with RPAPL 1304 be included in the pleading was inapplicable. Although Supreme Court properly concluded that mortgagee's initial affidavit was too conclusory to establish compliance with RPAPL 1304, Supreme Court properly allowed mortgagee to supplement that affidavit in reply to mortgagor's contention that the initial affidavit was inadequate, especially since Supreme Court also gave mortgagor an opportunity to submit a surreply.

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