Caveat Emptor: “All Houses Wherein Men Have Lived and Died Are Haunted Houses.”

The buyer of a Brooklyn building sued the seller for fraud and breach of contract after the closing of title. The buyer made several claims against the seller, including that the roof was leaking, it wasn’t new, and the construction and renovations performed on the building were shoddy and done only to quickly “flip” the property. The buyer also claimed that the tenant’s signed estoppel certificate was false. The buyer’s attorney claimed that no ordinary amount of due diligence would have revealed that the roof was leaking; only destructive testing done prior to closing would have shown water intrusion or mold. The seller’s position was that any alleged defects in connection with the sale of the building could have been raised before the closing of title. Once the closing took place, any alleged defects were waived; the representations in the contract of sale merged with the transfer of title.

Disclaimers in the Contract of Sale

In the contract of sale between the seller and buyer, there were numerous clauses that contained specific disclaimers.[1] Among these disclaimers was the following one (which is fairly typical in real estate contracts):

The Purchaser acknowledges that they have physically inspected the Premises prior to signing this Contract and are aware of the physical condition of the Premises and agree to take the Premises in “AS IS CONDITION” in its present physical condition. Purchaser acknowledges that the Seller has made no representation or warranties and concerning the physical condition of the Premises other than those that are specifically set forth herein.

Doctrine of Caveat Emptor – Buyer Beware!

The seller retained Richard A. Klass, Esq., Your Court Street Lawyer, to defend the lawsuit brought by the buyer. A motion to dismiss the case was filed based on several legal arguments, first and foremost being the defense of caveat emptor (meaning that the buyer was responsible for checking the quality of his purchase).

New York adheres to the caveat emptor doctrine and imposes no duty on the seller to disclose any information concerning 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. Platzman v. Morris, 283 AD2d 561 [2 Dept. 2001]. As held by the Second Department in London v. Courduff, 141 AD2d 803 [2d Dept. 1988], “The buyer has the duty to satisfy himself as to the quality of his bargain pursuant to the doctrine of caveat emptor, which in New York State still applies to real estate transactions.”

As held in Simone v Homecheck Real Estate Services, Inc., 42 AD3d 518, 521 [2d Dept 2007], “Where the contract specifically disclaims the existence of warranties or representations, a cause of action alleging breach of contract based on such a warranty or representation cannot be maintained (see Bedowitz v Farrell Dev. Co., 289 AD2d 432 [2001]). Here, the contract of sale specifically provided that the premises had been inspected by the buyer and was being sold ‘as is’ without warranty as to condition, express or implied. Furthermore, a specific merger clause is contained in the rider to the contract and precludes the buyer from claiming that he relied on any of the sellers’ alleged misrepresentations (see London v Courduff, supra). In addition, because title to the property had closed and the deed was delivered, the doctrine of merger extinguished any claim the buyer may have had regarding the contract of sale (see Ka Foon Lo v Curis, 29 AD3d 525 [2006]). Hence, the cause of action to recover for breach of contract cannot be maintained and should have been dismissed pursuant to CPLR 3211 (a) (7).”

Where the contract of sale, as in this case, contains a provision that the plaintiff is fully aware of the condition of the premises based upon his own inspection and is not relying upon any representations of the seller, any subsequent action for fraud is barred. Daly v. Kochanowicz, 67 AD3d 78 [2 Dept. 2009]; Platzman v. Morris, 283 AD2d 561, 563 [2 Dept. 2001] (“Since the contract contained a provision that the plaintiffs were fully aware of the condition of the premises based upon their own inspection and investigation, and not based upon any information or representations, written or oral, made by the sellers, the plaintiffs cannot claim fraud.”).

No ‘latent defect’ exception to the merger doctrine

The buyer argued in opposition to the motion that the merger doctrine did not apply to latent defects (which may only be discovered after occupancy of the premises). He incorrectly cited Fehling v Wicks, 179 Misc 2d 1041 [App Term 1999] as being a decision from the Second Department. It is actually a decision of the Appellate Term, Second Department. More importantly, the Fehling v Wicks decision has been rejected by the Appellate Divisions.

In Arnold v Wilkins, 61 AD3d 1236, 1237 [3d Dept 2009], the court held: “Plaintiffs alternatively contend that the merger doctrine does not apply here because the faulty sewage system was a ‘latent defect.’ In support, they rely on Fehling v. Wicks, 179 Misc.2d 1041, 687 N.Y.S.2d 868 [1999] for the proposition that ‘where the purchaser discovers latent defects which are discoverable only after the purchaser occupies the premises,’ the merger doctrine is inapplicable (id. at 1042, 687 N.Y.S.2d 868). Importantly, however, the purported ‘latent defect’ exception to the merger doctrine has not been adopted by the Appellate Divisions or the Court of Appeals in these circumstances.”

In TIAA Glob. Investments, LLC v One Astoria Sq. LLC, 127 AD3d 75, 85 [1st Dept 2015], the court held (emphasis added):

The merger doctrine in a real estate transaction provides that once the deed is delivered, its terms are all that survive and the purchaser is barred from prosecuting any claims arising out of the contract (Ka Foon Lo v. Curis, 29 A.D.3d 525, 526, 815 N.Y.S.2d 131 [2d Dept.2006] ). The only exception to this rule is where the parties clearly intended that the particular provision of the contract supporting the claim would survive the delivery of the deed (id.). Further, an “as is” clause in a contract to sell real property will ordinarily bar a claim for breach of contract (see Board of Mgrs. of the Chelsea 19 Condominium v. Chelsea 19 Assoc., 73 A.D.3d 581, 581, 905 N.Y.S.2d 8 [1st Dept.2010] ). Plaintiff argues that the merger doctrine does not apply here because of the latent nature of the defects at issue. It further contends that its allegations of deceptive behavior on Seller’s part to mask the true condition of the building render the “as is” clause inoperable.

Although plaintiff cites trial court opinions identifying a latency exception to the merger doctrine, the concept has not been adopted by any of the Appellate Divisions or by the Court of Appeals (see Arnold v. Wilkins, 61 A.D.3d 1236, 1237, 876 N.Y.S.2d 780 [3d Dept.2009]), and we are not adopting it here.

It was urged that the seller was bound to the decisions of the Appellate Divisions, as the Second Department has not opined on the issue yet. See, Summit Const. Services Group, Inc. v Act Abatement, LLC, 34 Misc 3d 823, 831 [Sup Ct 2011] (“The general rule is that trial courts must follow applicable decisions of the Appellate Division in their Department. If there is no decision from the Appellate Division in the Department in which the trial court is located, the trial court must follow the decision of another Department. This is because the Appellate Division is a single statewide court divided into departments for administrative convenience.”)