There are special considerations that apply to fraud claims in connection with real property sale transactions, especially where the buyer is alleging the seller concealed material information about the property. The doctrine of caveat emptor (let the buyer beware) embodies these particular requirements. See the Topic “Caveat Emptor” in this blog. In effect, in real property transactions, courts apply a heightened element of reasonable reliance.
Caveat Emptor
The principles were summarized in Simone v Homecheck Real Estate Servs., Inc., 42 AD3d 518 (2d Dep’t 2007), as follows:
New York adheres to the doctrine of caveat emptor and imposes no liability on a seller for failing to disclose information regarding the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller which constitutes active concealment (see Matos v Crimmins, 40 AD3d 1053 [2007]; Jablonski v Rapalje, 14 AD3d 484, 485 [2005]; Platzman v Morris, 283 AD2d 561, 562 [2001]; London v Courduff, 141 AD2d 803, 804 [1988]). The mere silence of the seller, without some act or conduct which deceived the buyer, does not amount to a concealment that is actionable as a fraud (see Matos v Crimmins, supra; Slavin v Hamm, 210 AD2d 831, 832 [1994]). To maintain a cause of action to recover damages for active concealment in the context of a fraudulent nondisclosure, the buyer must show, in effect, that the seller thwarted the buyer’s efforts to fulfill the buyer’s responsibilities fixed by the doctrine of caveat emptor (see Jablonski v Rapalje, supra; Platzman v Morris, supra).
So, the buyer must establish two elements: (1) the seller actively concealed some condition or aspect concerning the property; and (2) the matter concealed “thwarted”—somehow stood in the way, prevented or inhibited—the buyer from discovering what was concealed.
Courts have found that if the buyer has the means to discover the allegedly concealed matter, including through investigation of publicly-available information, the duty of self-protection, or caveat emptor, bars the fraud claim against the seller because the buyer has not thereby been “thwarted” from using that publicly-available information. Just a few months ago, for example, the Appellate Division, Second Department, in R. Vig Props., LLC v Rahimzada, 213 AD3d 871 (2d Dep’t 2023) sustained summary judgment dismissing such a claim because relevant information was available to the buyer. See my post, Courts Reinforce Duty of Inquiry and Self-Protection, Rejecting Fraud Claims in Real Estate Transactions.
Second Department Sustains Fraud Claim Notwithstanding Caveat Emptor
In the new decision in Striplin v AC&E Home Inspection Corp., 2023 NY Slip Op 03720 (2d Dep’t Decided July 5, 2023), the Second Department showed the flip side of the doctrine of caveat emptor in reversing the dismissal of the fraud claim by the buyer of real property.
While the written contractual disclaimers in the contracts of sale were very similar in Rahimzada and Striplin, the difference for the appellate court was that in Rahimzada, the plaintiff-buyer had the means of discovering the allegedly concealed information through publicly-available means (even if it would have taken a fair amount of investigation), while in Striplin, the water damage arguably could not have been so discovered.
As I explained in my post, the contractual disclaimer in Rahimzada provided:
Purchaser hereby acknowledges that Purchaser has inspected the Premises. …. Purchaser agrees to take the premises and all such property “as is” and in their present condition, subject to reasonable use, wear, tear and deterioration between now and Closing Date. Seller shall not be liable for any latent or patent defects in the Premises. Seller shall have the right to inspect the Premises prior to closing upon reasonable prior notice.
Purchaser acknowledges that neither Seller nor any representative or agent of Seller has made any representation or warranty (expressed or implied) as to the physical condition, state of repair, income, leases, expenses or operation of the Premises or any matter or thing affecting or relating to the Premises or this Agreement, except as specifically set forth herein. Purchaser has not been induced by or relied upon any statement, representation or agreement, whether express or implied, not specifically set forth in this Agreement. Seller shall not be liable or bound in any manner by any oral or written statement, broker’s “set-up”, representation, agreement or information pertaining to the Premises or this Agreement furnished by any broker, agent, employee or other person, unless specifically set forth herein.
Both the lower court and Second Department in Rahimzada found that in the face of these disclaimers, specifically related to the subject of the fraud alleged, the plaintiff-buyer was obligated to investigate publicly-available information, which negated the fraud claim.
As described by the lower court in Striplin in dismissing the buyer’s fraud claim, the contract of sale there also had particular disclaimers:
Specifically, defendants allege that: (1) paragraph 12 of the Contract provides that plaintiffs entered into the Contract based solely upon their own inspection and investigation of the premises, and that plaintiffs accepted the premises “as is”; (2) paragraph 11 (c) of the Contract provides that none of the defendants’ covenants, representations, warranties or other obligations shall survive closing; (3) paragraph 31 of the Rider to the Contract provides that acceptance of the deed by the plaintiffs shall be deemed full performance and discharge of every agreement and obligation on the part of the defendants; and (4) paragraph 54 of the Rider indicates that the plaintiffs have obtained a home inspection and that they are satisfied with the results thereof, and that if the defendants did not provide plaintiffs with a Property Condition Disclosure Statement then plaintiffs were entitled to a credit of $500.00 at closing. Notably, plaintiffs received such a $500.00 credit in lieu of the statement.
Nevertheless, the Second Department reversed the lower court’s dismissal, ruling that issues of fact existed as to whether the seller did in fact actively conceal underlying water damage in the house in question. The Second Department relied upon and cited a similar case alleging concealed water damage, as I reported on in Active Concealment For Fraud in Real Property Sale Transaction. In that case, Razdolskaya v Lyubarsky, 160 AD3d 994 (2d Dep’t 2018), the Second Department found the “complaint allege[d] that [defendants] took several steps to hide the existence of leaks and mold damage including, inter alia, claiming that they had lost the key to the storage area in the cellar which was assigned to the subject condominium, and removing and replacing damaged sheetrock from the cellar and the parking area. These allegations, if true, might have thwarted the plaintiff’s efforts to fulfill her responsibilities imposed by the doctrine of caveat emptor with respect to the common areas of the building … .”
Relying on this same reasoning, the Second Department in Striplin found:
Here, accepting the facts alleged in the amended complaint as true, and according the plaintiffs the benefit of every possible favorable inference (see CPLR 3211[a][7]; Leon v Martinez, 84 NY2d 83, 87-88), the amended complaint sufficiently states a cause of action to recover damages for fraud on the theory that the Balaban defendants actively concealed extensive water damage to the property. The amended complaint, as amplified by an affidavit of one of the plaintiffs (see Janusonis v Carauskas, 137 AD3d 1218, 1219), alleges, among other things, that the Balaban defendants took measures to actively conceal the existence of leaks and water damage to the property, including placing new wood on top of rotten wood to hide the extent of the damage. The plaintiffs’ allegations, if true, might have thwarted the plaintiffs’ efforts to fulfill their responsibilities imposed by the doctrine of caveat emptor with respect to the property (see Razdolskaya v Lyubarsky, 160 AD3d at 997; Radushinsky v Itskovich, 127 AD3d at 839; Camisa v Papaleo, 93 AD3d 623, 625; Margolin v I M Kapco, Inc., 89 AD3d 690, 692). The Balaban defendants did not demonstrate that a material fact alleged in the amended complaint is not a fact at all and that no significant dispute exists regarding it (see Guggenheimer v Ginzburg, 43 NY2d 268, 274-275).
The Second Department specifically went on to note that the contractual disclaimers cited above did not conclusively refute the plaintiff’s claims, applying the standard for dismissal based upon documentary evidence (CPLR 3211(a)(1)).
Commentary
The doctrine of caveat emptor does heighten the legal burden when a buyer seeks to recover for fraud in connection with real estate purchases. The special duty imposed upon the buyer to protect itself mandates that the seller must have actively concealed a condition that the buyer claims was fraudulently hidden, and that concealment must have prevented the buyer from exercising the means of discovering the fraud. Particularly with respect to underlying water damage, sellers who have taken some form of action to cover up the source or damage are more likely to be held accountable in fraud.