BUYING A HOUSE AND LATER FINDING DEFECTS?

The cost of litigating this type of claim might be higher than the cost of repair. There is a recent case where the Buyer pursued the claim pro se in small claims court but was still not successful. 

DeMARCO v. Petrou, 2021 NY Slip Op 21101 - NY: Town of Webster Village Justice Court April 19, 2021:

"This matter came before the court as part of its small claims calendar. The plaintiff's claim was stated in the court filing as follows: "Defendant sold house to plaintiff and was dishonest on disclosure statement in regards to sale of house". The testimony of the plaintiff revealed that the parties had entered into a standard real estate contract dated April 20, 2020. As a part of that contract the seller signed a Property Condition Disclosure Statement. However, the buyer never signed the "Buyer's Acknowledgment" portion of the property disclosure statement. The deal closed on June 17, 2020. A review of the Purchase and Sale Contract reveals that both parties were represented by their own attorneys. One real estate broker was both the listing agent and the selling agent. That broker, Bonnie P. Pagano, testified at the hearing on behalf of the defendant. The contract was not contingent on a property inspection.^[1] It also contained a standard "AS IS" provision at paragraph 5(E) which states in pertinent part as follows: "Condition of Property. Buyer agrees to purchase the Property and any items included in the purchase AS IS except as provided in paragraph 1(B), subject to reasonable use, wear, tear, and natural deterioration between now and Closing."^[2]

The plaintiff testified that the basis of his claim was the defendant's answer to question number 32 on page five of the said disclosure form. The defendant put an "x" in the box for "No" relative to the "Plumbing system" in answer to the question "Are there any known material defects in any of the following?". The problem was first observed by the plaintiff approximately three weeks after having moved into the property. In fact the plaintiff took possession of the property two days prior to closing. In any event, the plaintiff indicated that the problem was found to have stemmed from the shower in the bathroom off of the master bedroom. That bathroom contained the free standing shower in question and a separate bathtub. The plaintiff testified that the shower was not used by him during those first three weeks of the plaintiff's occupancy, because another shower in another bathroom of the house was utilized. On that first occasion of the use of that stand-up shower the plaintiff observed water running down a wall in a room below the shower. During his testimony plaintiff showed a brief video on his phone of that event.He indicated that he had attempted to use silicone between the various parts of the shower, but that did not correct the problem. As a result, the plaintiff hired a contractor to correct the situation. He entered into evidence pictures of the excavation of the said bathroom and the remedial actions taken.He pointed out black mold which was depicted in the pictures of the excavation of the bathroom walls behind the stand-up shower. It was his contention that the black mold, which would have been caused by moisture, proved that the shower must have leaked prior to his purchase of the residence. However, no mold expert or plumber testified on behalf of the defendant. Finally, the plaintiff entered into evidence a copy of an invoice in the amount of $5,488.00 for construction work to make the required repairs to the bathroom. The plaintiff further testified that he did in fact pay that bill. As a result, the plaintiff was suing for $3,000.00, which is the maximum amount permitted by the Uniform Justice Court Act.^[3]

The defendant testified that he and his wife had lived in the property for approximately thirty three years prior to the sale of the property to the plaintiff. He further testified that he and his wife had utilized the said free standing shower on a daily basis, sometimes multiple times per day because of being in the restaurant business. The defendant testified that they never experienced any problems of any leakage of water from that shower to the room below. It is further noted from the Purchase and Sale Contract, which was entered into evidence by the defendant, that it provided for a "Pre-Closing Walkthrough" in paragraph 6 (A) thereof. The defendant also entered into evidence a document entitled "Final Walk-Through". Said document was signed by the plaintiff and the real estate broker. It indicated that the walk-through took place on June 12, 2020, which was five days before the closing. The walk-through document stated in pertinent part that "I have had an opportunity inspect the property . . . and state that the Property has been left in satisfactory condition and hereby accept the Property in the condition it was at this time and date with the following exceptions: NONE." Nevertheless, the real estate broker indicated during her testimony that the plaintiff had pointed out to her some off white paint on the ceiling under a different bathroom, which he thought might have been an attempt to cover water damage to that ceiling, but was assured by the broker that there was no problem. The plaintiff testified that she told them the sellers never used the shower which was off their master bedroom. The real estate broker testified that the plaintiff was

confusing what she told him about a different shower in the house, and that the sellers had used the stand-up shower off their bedroom on a daily basis without any problems.

Issues Presented.

Does the Property Condition Disclosure Act establish a cause of action for a false or incomplete statement on the property condition disclosure form?

What remedy does the Property Condition Disclosure Act provide a buyer for a failure to comply with the act?

Does the plaintiff have valid common law breach of contract or fraudulent misrepresentation cause of action against the defendant based on the damage caused by the leak from the shower?

Legal Analysis.

Liability Under the Property Condition Disclosure Act. Section 1804 of the Uniform Justice Court Act states in pertinent part that "The court shall conduct hearings upon small claims in such manner as to do substantial justice between the parties according to the rules of substantive law. . . ." Article 14 of the Real Property Law encompasses the Property Condition Disclosure Act [the Act].^[4] Property condition disclosure statements are required by Real Property Law § 462 (1). That section states as follows:

"Except as is provided in section four hundred sixty-three of this article, every seller of residential real property pursuant to a real estate purchase contract shall complete and sign a property condition disclosure statement as prescribed by subdivision two of this section and cause it, or a copy thereof, to be delivered to a buyer or buyer's agent prior to the signing by the buyer of a binding contract of sale. A copy of the property condition disclosure statement containing the signatures of both seller and buyer shall be attached to the real estate purchase contract. Nothing contained in this article or this disclosure statement is intended to prevent the parties to a contract of sale from entering into agreements of any kind or nature with respect to the physical condition of the property to be sold, including, but not limited to, agreements for the sale of real property `as is.'"

It must be noted that the law requires that a copy of the disclosure form be attached to the real estate contract. The required form of the property condition disclosure statement is set out in RPL § 462 (2). However, nowhere does the law state that the disclosure statement is made a part of or is incorporated into said purchase and sale contract. That is significant in that the standard Purchase and Sale Contract utilized in Monroe County, which is the one entered into by the parties herein, states in pertinent part in paragraph 8 (E) "This contract when signed by both Buyer and Seller will be the record of the complete agreement between the Buyer and Seller concerning the purchase and sale of the Property. . . . Seller's representations in this Contract shall not surviv after closing."

Further review of that form is instructive as to the intent of the legislature in requiring this form, with exceptions, to be a part of every residential real estate transaction. Note that the introductory portion of the disclosure form sets out its intended purpose, as follows:

"Purpose of statement: This is a statement of certain conditions and information concerning the property known to the seller. This disclosure statement is not a warranty of any kind by the seller or by any agent representing the seller in this transaction. It is not a substitute for any inspections or tests and the buyer is encouraged to obtain his or her own independent professional inspections and environmental tests and also is encouraged to check public records pertaining to the property" (See RPL § 462 [2])

The statutory form goes on to say that

"A knowingly false or incomplete statement by the seller on this form may subject the seller to claims by the buyer prior to or after the transfer of title. In the event a seller fails to perform the duty prescribed in this article to deliver a Disclosure Statement prior to the signing by the buyer of a binding contract of sale, the buyer shall receive upon the transfer of title a credit of five hundred dollars against the agree upon purchase price of the residential real property." (See RPL § 462 [2])

Establishment of a cause of action by the Property Condition Disclosure Act. This law went into effect on March 1, 2002.^[5] Since that time there has been a fair amount of case law generated at the trial court level relative to the issue as to whether or not the act created a new cause of action based on an alleged false or incomplete statement by the vender of a residential property. In fact, the claim submitted by the plaintiff herein is based on the presumption that an alleged false statement made by the defendant on the disclosure statement is in of itself the basis for a suit for damages incurred by the plaintiff in correcting the problem discovered subsequent to the closing. In other words, the plaintiff's claim assumes that the Property Condition Disclosure act establishes a cause of action for a false or incomplete statement on the disclosure form.

That theory has not been the case in this jurisdiction. It has been held that

"The Disclosure Statement does not create a duty to disclose that supersedes the common law nor does the Property Condition Disclosure Act create a cause of action beyond the common law. The common law principle of caveat emptor, and the necessity of a showing of justifiable reliance for a claim of fraudulent misrepresentation in real estate purchase actions, remain the applicable law." (Renkas v. Sweers, 10 Misc 3d 1076[A], 2005 N.Y.Slip Op. 52247[U], *5, [Supreme Court, Monroe County, Stander, J., 2005])

In addition, prior to that decision, a Civil Court, City of New York held that

". . . an analysis of the statute leads to the conclusion that there is no cause of action available to the plaintiffs under the terms of the Act. Since plaintiffs are seeking to enforce a right and remedy created by a statute which changed the common law, the terms of the Act must be strictly construed (Statutes 301). Unlike consumer protection legislation found in the General Business Law which gives a right of action either to the consumer or to the attorney general, this Act provides no such specific right of action to the purchaser for a breach of the Disclosure form. (Malach v. Chuang, 194 Misc 2d 651, 654, 754 N.Y.S. 835, 838 [2002])

That case was cited by this court when it held that a plaintiff could not ". . . rely on the on the representations relative to the electrical system as set out in the Property Condition Disclosure Statement for purposes of seeking relief. . . ." (Spinney v. Mirabella, 20 Misc 3d 1137(A), 2008 NY Slip Op. 51768[U], * 2 Webster Just Ct, DiSalvo, J.). See also Middleton v. Calhoun, 13, Misc 3d 949, 955, 821 N.Y.S.2d 444,449 [2006] wherein the court stated "There is nothing in the history or in the language of the statute that expounds on the elements for a new cause of action."^[6]

One of the reasons why the Property Condition Disclosure Statement is not the source of relief on which a buyer can rely is the common "AS IS" clause found in the standard Real Estate Purchase Contract. The court in Renkas held that

"In the Purchase and Sale Contract the Buyers specifically and unequivocally agreed to purchase the property in an "AS IS" condition, subject to inspections. The Buyers performed inspections of their choice and then decided to continue with their purchase of the property in its `AS IS' condition. The Seller's answers, whether oral or in the Property Condition Disclosure Statement, did not thwart the ability of the Buyer to assess and determine the condition of the property and did not alter the contract between the parties to purchase the property `AS IS.'"^[7]

To now hold that Property Condition Disclosure Statement overrides the said "AS IS" paragraph is to completely ignore one of the stated intentions of the parties to the contract. Also it must be noted that the first paragraph of the statutory form of the Property Condition Disclosure Statement states as follows: "The Property Condition Disclosure Act requires the seller of residential real property to cause this disclosure statement or a copy of thereof to be delivered to a buyer or buyer's agent prior to the signing by the buyer of a binding contract of sale." (See RPL § 462 [2]) Thus the buyer is to be advised of the residential property's condition prior to execution of the of the Purchase and Sale Contract by the buyer. This certainly gives the potential buyer the opportunity to investigate the representations made in the said disclosure statement prior to presenting a purchase offer or by making the contract contingent on the approval of a professional inspection report relative to each of the items set out in the disclosure statement. In addition, in the "Purpose of Statement" paragraph cited in full above the buyer is basically being told not to rely on disclosure statement, despite being made on the alleged actual knowledge of the seller. Note the phrases that the disclosure statement is "not a warranty of any kind by the seller" nor "a substitute for any inspections or tests", and that "the buyer is encouraged to obtain his or her own independent professional inspections and environmental tests". Clearly the Property Condition Disclosure Statement is meant to be a starting point of the discussion and not an end in and of itself. The document essentially advises potential buyers not to rely on its terms. "In addition, the Property Condition Disclosure Act specifically states that this disclosure statement is not intended to prevent the parties from entering into an agreement for the sale of real property "AS IS" (Real Property Law § 462[1])."^[8]

Remedy Provided For a Violation of the Property Condition Disclosure Act. The remedies provided for under the act are set out in RPL § 465. Subsection 1 provides for five hundred dollar credit at closing if the seller does not ". . . deliver a disclosure statement prior to the signing by the buyer of a binding contract of sale. . . . "The Purchase and Sale Contract signed by buyer and presented to the seller or is his or her agent is a purchase offer and is only a binding contract when it is signed by the seller. Thus under the law a seller must provide the Property Condition Disclosure Statement prior to being signed by the seller. In order for the parties to comply with the law, the disclosure statement would have to be provided to a potential buyer prior to the execution of a purchase offer. Otherwise acceptance of the offer by the seller followed by the providing of the disclosure statement would put the seller in violation of the act. It is noted that the Purchase and Sale Contract, herein executed by the parties, but signed first by the buyer as an offer, states in paragraph 5(A) that "Seller has provided buyer with the attached Seller's Property Condition Disclosure Statement." Assuming that to be true, there would have been no requirement for the seller to provide the buyer with the said five hundred dollar credit at closing.

RPL § 465 (2) states as follows:

"Any seller who provides a property condition disclosure statement or provides or fails to provide a revised property condition disclosure statement shall be liable only for a willful failure to perform the requirements of this article. For such a willful failure, the seller shall be liable for the actual damages suffered by the buyer in addition to any other existing equitable or statutory remedy."

Subsection two is more difficult to interpret as to when it applies and to specifically what damages can be awarded. As the court in Malach stated

"Having read this paragraph several times, it is not clear that a reasonable person can understand what it means. It states: `Any seller who provides a property condition disclosure statement shall be liable only for a wilful failure to perform the requirements of this article.' However nowhere in the statute is there a definition of `requirements of this article.' Are not the `requirements of this article' the completion of the form or completion of a revised form and delivery of it to the buyer (RPL § 462)? Or is it to be implied that the `requirements of this article' are the `truthful' completion of the form? The statute contains no definition of what is meant by a `wilful failure to perform the requirements of this article.' Since this is a legislative attempt to create a new legal right should not the language of the statute be clear and unequivocal? There is no guidance as to what is meant by this phrase."^[9]

Thus it would appear that the only real remedy is the five hundred dollar credit at closing if the seller does not provide the disclosure statement.

Liability Under the Common Law. The plaintiff's Request For Small Claims Action was worded in a manner that alleges a cause of action arising from the Property Condition Disclosure Form and not as a breach of contract. It has been held in the Malach case that "Although plaintiffs did not plead a breach of contract action, CPLR 3025(c) permits the court to conform the pleadings to the proof adduced at trial. This being the case the court will analyze the evidence that plaintiffs provided at trial to determine if a cause of action exists for breach of contract."^[10] This court will take the same approach as to a possible cause of action for fraudulent misrepresentation.

Breach of Contract. An argument that the Property Condition Disclosure Statement is for contractual purposes incorporated into the entire contract between the plaintiff and defendant is not helpful in assessing the importance of the truth or completeness of representations made in the statement. That is because

". . . the entire document is incorporated into the contract, not just the separate representations. The terms set forth by the Disclosure Statement include a statement that the disclosures are not warranties and that such disclosures are not a substitute for inspections and tests. The Disclosure Statement specifically informs the Buyers that such statement is `not a warranty of any kind by the seller.' The Buyers signed the Disclosure Statement with an acknowledgment that it was not a warranty and not a substitute for inspections or testing of the property."^[11]

As a result, in reviewing the terms of the contract, one must again return to the "AS IS" provision found in paragraph 5(E) of the Purchase and Sale Contract. In fact the actions of the plaintiff in failing to make the contract contingent on his approval of the results of a professional inspection, by not thoroughly inspecting the property during the walkthrough, by not inspecting the residence himself during his pre-closing possession or for the three weeks after the closing evidences the plaintiff's intention to take the property in whatever condition it was at the time he made the purchase offer.

The next question is whether or not the leaky stand-up shower represented a latent defect. "If this is a latent or hidden defect, then the defendants have to have had actual knowledge of the condition and the concomitant duty to speak."^[12] A latent defect has been variously defined as follows: "A hidden defect. . . . A defect in a article sold, which is known to the seller, but not to the purchaser, and is not discoverable by mere observation. . . . A defect which reasonably careful observation will not reveal." [Internal citations omitted]^[13] It is important to remember ". . . that `[u]nder the well-established doctrine of merger, provisions in a contract for the sale of real estate merge into the deed and are thereby extinguished absent the parties' demonstrated intent that a provision shall survive transfer of title' (Hunt v. Kojac, 245 AD2d 858, 858-859, 666 N.Y.S.2d 330 [1997]; see Schoonmaker v. Hoyt, 148 NY 425, 429-430, 42 N.E. 1059 [1896]; Alexy v. Salvador, 217 AD2d 877, 878, 630 N.Y.S.2d 133 [1995])." (Arnold v. Wilkins, 61 AD3d 1236, 876 N.Y.S.3d 780, 781 [3d Dept 2009]) The Appellate division refused to apply the latent defect exception to the merger doctrine in Arnold because the defect in the septic system ". . . was `discoverable' prior to the closing."^[14] There is no doubt that in the instant case, if in fact the stand-up shower had been leaking when the property was owned by the seller, that said condition would have been easily discoverable prior to closing. This is especially true when in this case the plaintiff obtained possession of the home prior to the closing. In addition any representations by the seller/defendant or his agent are by contract merged into the deed pursuant to paragraph 8 (F) of the Purchase and Sale Contract which states "No oral agreements or promise will be binding. Seller's representations in this Contract shall not survive after Closing." Thus the plaintiff does not have a meritorious cause of action for common law breach of contract.

Fraudulent Misrepresentation. In analyzing the facts relative to the existence of any alleged fraudulent misrepresentation it must be noted that "The common law principle of caveat emptor, and the necessity of a showing of justifiable reliance for a claim of fraudulent misrepresentation in real estate purchase actions, remain the applicable law."^[15] The plaintiff's argument is that the defendant must have had actual knowledge of the fact that water leaked from the stand up shower in the master bathroom, because the first time he used the shower, which was three weeks after closing, water ran down the wall of the room beneath the shower. Pictures of the wall behind the shower took during the renovation process show water stains and mold. Other pictures entered into evidence shows a stain on the ceiling and upper wall in the room below the shower. Those particular stains were never questioned by plaintiff before the closing. Another picture shows a sheet of drywall taken down from the ceiling below the shower with water damage on the side that faced the floor of the bathroom. That damage would not have been observed by any inspection. As previously stated a video on the plaintiff's phone showed the water running down the wall below the shower.

The plaintiff did not provide an expert witness or the contractor who did any of the renovation work. In fact all we have is the sworn testimony of the plaintiff who said he never used the shower for about three weeks after closing. As previously noted the plaintiff waived having a professional property inspection as a contingency of the contract. Nor was there any testimony that the plaintiff himself conducted an inspection of the workings of any of the bathroom fixtures. There is not even any evidence that the plaintiff examined the Property Condition Disclosure Statement at any time before entering the contract or closing on the property as the said form was not signed by him. So it is not even certain that the plaintiff ever relied on the said disclosure form before entering the contract.

Again the case of Renkas v. Sweers, 10 Misc 3d 1076[A], 2005 N.Y.Slip Op. 52247[U], *5, [Supreme Court, Monroe County, Stander, J., 2005] is instructive.The facts of that case are very similar. In that case "The Buyers assert[ed] a claim for fraudulent misrepresentation by the Seller in the third cause of action alleging that Seller had knowledge of the defective condition in the basement related to standing water and that Seller misled Buyers both orally and in the Property Condition Disclosure Statement."^[16] The first question faced by the court was what constitutes fraudulent misrepresentation? The court stated that

"To prove a cause of action for fraudulent misrepresentation the Buyers must establish the following elements:

(1) a misrepresentation or an omission of material fact which was false and known to be false by the defendant, (2) the misrepresentation was made for the purpose of inducing the plaintiff to rely upon it, (3) justifiable reliance of the plaintiff on the misrepresentation or material omission, and (4) injury (citations omitted)."^[17]

The court then addressed whether or not the seller made an attempt to hide the complained of condition from the seller.

"If a seller actively conceals a condition of the property, then an exception to the principle of caveat emptor may exist. . . . Active concealment is some conduct, more than mere silence, by the seller that may create a duty to disclose information concerning the property. . . . 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.'. . . [Internal citations omitted]"^[18]

Thus even in situations where there was active concealment by the seller of real property, the buyer is not automatically entitled to relief. The burden remains on the buyer to do his or her due diligence relative to the condition of the property that is being purchased. Although it is true that "New York adheres to the doctrine of caveat emptor and imposes no duty on the seller or the seller's agent to disclose any information concerning the premises when the parties deal at arms length, unless there is some conduct on the part of the seller or the seller's agent which constitutes active concealment. . . ." (Jablonski v. Rapalje, 14 AD3d 484,485, 788 N.Y.S.2d 158,160 [2nd Dept 2005]). But the buyer must show more than active concealment. "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 (see Platzman v. Morris, supra at 562, 724 N.Y.S.2d 502)."^[19]

In the instant case, there was not any attempt to actively conceal anything about the condition of the property. As previously indicated the plaintiff waived his right to have a professional property inspection. The property was made available to the plaintiff five days before the closing for a walkthrough. In addition, the plaintiff was allowed to move into the property two days before the closing. As a result, the plaintiff had an unfettered opportunity to check out every part of the house and its various utilities. Nevertheless, the plaintiff choose not to use the shower in the bathroom off the master bedroom. Certainly, one would not expect a seller to make his or her property so available to a purchaser if the seller was trying to hide a defect that would become obvious at the first use of the defective item in question days before the purchase was finalized. In fact a shower off the master bedroom would be an item one would expect a buyer in early possession to use. Since there was no evidence of any active concealment by the defendant or any effort on the part of the defendant to thwart the plaintiff from inspecting the property, the plaintiff could not prevail on a claim of fraudulent misrepresentation.

Conclusion

The plaintiff's claim based on an alleged false or incomplete statement made on the Property Condition Disclosure form is hereby dismissed. In addition for reasons stated previously herein the plaintiff failed to establish a proper claim for breach of contract or fraudulent misrepresentation under the common law. This constitutes the decision and order of this court.

[1] The plaintiff testified that he was in the real estate business. That he did not believe hiring a property inspector would be useful, because a property inspector would not run the water long enough to detect any problems.

[2] Paragraph 1(B) deals with personal property to be transferred with the real estate. Said paragraph warrants said items of personal property to be in "working order at the time of closing" except for any specific items of personal property that are specifically excluded from that guaranty. In this case that contract provision indicated there were "No exclusions".

[3] (UJCA § 1801.)

[4] (Real Property Law § 460.)

[5] (2001 McKinney's Session Law News of NY, Ch. 456 § 3)

[6] This court does take notice of the case of Calvente v. Levy, 12 Misc 3d 38,40, 876 N.Y.S.3d 828,830 [App Term, 9th & 10th Jud Dists 2006] wherein the court held that "Real Property Law § 465 (2) established a cause of action under the Real Property Disclosure Law. However, this court disagrees with that finding. Furthermore this court is not bound by that decision. See People v. Pestana, 195 Misc 2d 833, 836-837, 762 N.Y.S.2d 786,789 [2003], which explained that inferior courts must follow the decisions rendered by the Appellate Division of another department until that department or the Court of Appeals renders a different opinion. That is ". . . justified by the status of the Appellate Division as a `single statewide court divided into departments for administrative convenience.'" The appellate term is not accorded the same authority. In fact "The appellate term, by contrast is a court of local jurisdiction. (NY Const. Art. VI, § 8[a])." Thus courts outside of the Second Department are not bound by the decisions of the Appellate Term of the Second Department.

[7] (Renkas at *5)

[8] (Id.)

[9] (Malach at 656, 839-840)

[10] Malach at 663, 844-845)

[11] (Renkas at *6) However, as previously stated, the buyer herein did not sign the "Buyer's Acknowledgment."

[12] (Malach, at 665, 847)

[13] (Black's Law Dictionary 1027 [Revised 4th ed 1968])

[14] (Id. at 1237, 781.)

[15] (Renkas at *5)

[16] (Id. at *2.)

[17] (Id.)

[18] (Id. at *3.)

[19] (Id. at 485, 160-161.)"