A recent decision of the New York Appellate Division, Second Department, addressed claims of fraud in the context of the sale of real property, and specifically the interrelationship between the buyer’s duty of due diligence and the seller’s duty to refrain from “concealing” material information concerning the real property—Lin Chen v Zum Dev., Inc., 2026 NY Slip Op 01937 (2d Dep’t Decided April 1, 2026)(“Zum”).
Caveat Emptor
The doctrine of “caveat emptor” plays a critical role in any fraud-related claim relating to the sale of real property. I have commented often on this doctrine and how it can significantly limit the ability of the buyer to establish a viable claim of fraud or misrepresentation relating to real property sales. See, e.g., Caveat Emptor Bars Fraud Claim in Real Property Sale. While any claim of fraud requires as a necessary element that the party alleging it has been misled to establish that it acted reasonably in relying on any alleged false information, in the context of the sale of real property, the concept of “let the buyer beware” (which is the literal translation of caveat emptor) has heightened importance.
In any fraud claim, even if not in the context of a real property transaction, the fraud claimant has a duty to use available means, including through publicly available information, to vet anything upon which it will rely to take any form of action. See Third Department Finds Reliance Justified Even When Information Allegedly Concealed Was Publicly Available.
These concepts surfaced as the dispositive factors in the recent Zum case.
Zum
In Zum, the defendant (Seller) entered into a contract in which it agreed to sell a residential property to plaintiffs (Buyers) for $1,750,000. The main thrust of Sellers’ fraud-based claims was their allegation that Seller and related individuals represented to the Buyers that the house was brand new when the house had actually been built on top of an existing foundation. Buyers alleged breach of the contract of sale against the selling entity, which was an LLC, and also tried to extend the legal exposure to the individual defendants by alleging fraud-based claims. In addition to the breach of contract claim, the Buyers alleged claims for fraudulent misrepresentation (second cause of action), negligent misrepresentation (third cause of action), fraudulent concealment (fourth cause of action), fraudulent inducement (fifth cause of action), promissory estoppel (sixth cause of action), and unjust enrichment (seventh cause of action).
The Defendants did not seek to dismiss the breach of contract claim against the Seller LLC. They did move, however, to dismiss all of the other claims, arguing that the Buyers were improperly seeking to pressure the individuals through tort-based claims that were not viable. The court below granted Defendants’ motion to dismiss those claims and the Second Department affirmed.
The Second Department in Zum relied heavily upon one of its earlier decisions that was very much on point—R. Vig Props., LLC v Rahimzada, 2023 NY Slip Op 00887 [213A.D.3d 813] (2d Dep’t 2023), which I commented upon in Courts Reinforce Duty of Inquiry and Self-Protection, Rejecting Fraud Claims in Real Estate Transactions.
In Zum, the Second Department relied upon the general requirements for alleging fraud and then bolstered those principles with the caveat emptor doctrine that applies to real property transactions.
Reviewing general fraud elements, the Second Department observed:
“A cause of action to recover damages for fraudulent misrepresentation requires a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury” (R. Vig Props., LLC v Rahimzada, 213 AD3d 871, 872 [internal quotation marks omitted]; see Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 179). “A cause of action to recover damages for fraudulent concealment requires, in addition to the elements of a cause of action to recover damages for fraudulent misrepresentation, an allegation that the defendant had a duty to disclose material information and that it failed to do so” (R. Vig Props., LLC v Rahimzada, 213 AD3d at 872; see Mandarin Trading Ltd. v Wildenstein, 16 NY3d at 179).
In the real property context, the Second Department continued:
“In the context of real estate transactions, a claim of fraudulent misrepresentation must be analyzed within the doctrine of caveat emptor” (R. Vig Props., LLC v Rahimzada, 213 AD3d at 872; see Hecker v Paschke, 133 AD3d 713, 716). “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” (R. Vig Props., LLC v Rahimzada, 213 AD3d at 872 [internal quotation marks omitted]; see Razdolskaya v Lyubarsky, 160 AD3d 994, 996). “If however, some conduct (i.e., more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property” (R. Vig Props., LLC v Rahimzada, 213 AD3d at 873 [internal quotation marks omitted]; see Razdolskaya v Lyubarsky, 160 AD3d at 996). “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor” (R. Vig Props., LLC v Rahimzada, 213 AD3d at 873 [internal quotation marks omitted]; see Razdolskaya v Lyubarsky, 160 AD3d at 996).
As indicated in the Record and Respondents’ Brief on appeal, the subject contract of sale provided:
12. Condition of Property. Purchaser acknowledges and represents that Purchaser is fully aware of the physical condition and state of repair of the [Property], based on Purchaser’s own inspection and investigation thereof, and that Purchaser is entering into this contract based solely upon such inspection and investigation and not upon any information, data, statements or representations, written or oral, as to the physical condition, state of repair, use, cost of operation or any other matter related to the [Property], given or made by Seller or its representatives, and shall accept the same “as is” in their present condition and state of repair….
These Defendants also pointed out that publicly-available plans for the subject real property openly revealed that the foundation had in fact been existing—effectively negating the claim that this information was affirmatively concealed and that the property was represented to be “new.”
The Second Department ruled:
Here, the Supreme Court correctly determined that the second, fourth, and fifth causes of action, sounding in fraud, were barred by the specific terms of the contract of sale (see Comora v Franklin, 171 AD3d 851, 853; JPMorgan Chase Bank, N.A. v Rosa, 169 AD3d 887, 891). Moreover, contrary to the plaintiffs’ contentions, the facts alleged to have been misrepresented and/or improperly concealed were not matters peculiarly within the Zum defendants’ knowledge, which could not have been discovered by the plaintiffs by the exercise of ordinary intelligence, and did not thwart the plaintiffs in their efforts to fulfill their responsibilities fixed by the doctrine of caveat emptor (see R. Vig Props., LLC v Rahimzada, 213 AD3d at 872). Accordingly, the court properly granted those branches of the Zum defendants’ motion which were pursuant to CPLR 3211(a) to dismiss the second, fourth, and fifth causes of action insofar as asserted against them.
The Second Department went on to reject the negligent misrepresentation claim as well:
The Supreme Court properly granted that branch of the Zum defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the third cause of action, alleging negligent misrepresentation, insofar as asserted against them. “To recover on a theory of negligent misrepresentation, a plaintiff must establish that the defendant had a duty to use reasonable care to impart correct information because of some special relationship between the parties, that the information was incorrect or false, and that the plaintiff reasonably relied upon the information provided” (Atlasman v Korol, 238 AD3d 826, 830; see Grammar v Turits, 271 AD2d 644, 645). “Generally, [a] special relationship does not arise out of an ordinary arm’s length business transaction between two parties” (Atlasman v Korol, 238 AD3d at 830 [internal quotation marks omitted]; see Neurological Surgery, P.C. v MLMIC Ins. Co., 208 AD3d 1238, 1240). “[A] plaintiff in an action for negligent misrepresentation must show either privity of contract between the plaintiff and the defendant or a relationship so close as to approach that of privity” (Atlasman v Korol, 238 AD3d at 830 [internal quotation marks omitted]; see Sykes v RFD Third Ave. 1 Assoc., LLC, 15 NY3d 370, 372). Here, the facts alleged in the complaint do not suggest that the parties were in a relationship of privity or near-privity when the Zum defendants made their alleged negligent misrepresentations as the alleged negligent misrepresentations were made prior to the execution of the contract of sale. Moreover, the facts alleged are duplicative of the breach of contract cause of action (see Crawford v Integrated Asset Mgt. Servs., LLC, 236 AD3d 750, 752).
Finally, the Second Department upheld the dismissal of the promissory estoppel and unjust enrichment claims, ruling that Buyers had failed to allege that the individual defendants were directly “enriched” by the representations or that any direct representations were allegedly made by them.
Commentary
It is particularly challenging to allege and establish any type of claim for fraud in the context of a real property transaction, and the Zum decision continues that line of judicial thinking. As I have reported, there are in fact cases in which the courts do sustain such fraud claims, but active concealment by the seller must be adequately alleged. See Claims of Active Concealment and Misrepresentations in Real Estate Sale Survive Dismissal Motion; Active Concealment of Hidden Water Damage Preserves Fraud Claim In Face of Caveat Emptor Defense