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Failing to disclose negative conditions presents pitfalls.

Developers and brokers selling homes in New Jersey can now be sued for failing to disclose negative off-site conditions, such as a closed toxic landfill nearby, under a State Supreme Court ruling this Spring which translates into "let the seller beware."

While New York State has generally adhered to the principle of "caveat emptor" - unless the nature of the condition of the property is such that a reasonable buyer will not realistically learn of its existence, or the seller has demonstrably superior knowledge - care must still be taken to protect sellers from the fallout if New York courts start leaning in the direction set by New Jersey.

In Strawn v. Canuso, 200 New Jersey homebuyers were allowed to sue the developers of their single-family community in Camden County for fraud and misrepresentation because the homebuyers were not specifically advised by the developer - and were thus unaware - that a closed landfill which contained toxic wastes was located a half-mile away from the homes. They contended the market value of their homes was greatly diminished. The developer's advertising promoted a bucolic environment with "healthy, fresh, country air" and proximity to country clubs and shopping malls.

Under Strawn, developers and brokers have a duty to disclose off-site conditions when three factors are met: 1) the conditions are unknown to the buyers; 2) are known or should have been known to the seller; and 3) "might materially affect the value or desirability of the property." The ruling was restricted to physical off-site conditions, and does not apply to individuals re-selling their homes - at least, not yet.

The court completely dismissed the notion that the doctrine of caveat emptor imposed any duty of investigation whatsoever on the homebuyers, finding instead that application of this principle would be an injustice. In addition, the homebuyers' contention of ignorance about the existence of the nearby landfill was assumed to be true. No findings were made as to whether or not any investigations were conducted by the buyers before closing. This is despite the fact that a telephone call to the New Jersey Department of Environmental Protection would have confirmed not only that a landfill had existed, but the presence of hazardous waste at the site and a history of environmental violations.

In contrast, New York State courts have held that the seller of property is under no duty to speak when the parties deal at arm's length. The mere silence of the seller, without some act or conduct which intentionally or unintentionally deceives the buyer, does not amount to a concealment that is actionable as fraud. For example the buyer's failure to ascertain zoning restrictions which applied to his property precluded his claim of fraud in DiFilippo v. Hidden Ponds Associates, where an adverse zoning condition existed.

However, active concealment and/or deception by a seller will prevail over cave-at emptor in New York. In a case where cracks in the foundation of the home were covered over with plasterboards in the basement, the ruling in Haberman v. Greenspan found that non-disclosure may constitute misrepresentation where one party has a duty to disclose due to superior knowledge which is not available to both parties. (In this case, it appears there was an actual deception.)

In New York, failing to disclose conditions about which there are no readily accessible or available public records, such as those concerning the "reputation" of a property or surrounding area, which may substantially affect its value may also lead to liability. This theory was applied to a "haunted" house in Nyack, where the buyer sued the seller and broker to rescind the contract and seek damages arising from the failure to disclose the existence of poltergeists - noise-making ghosts. The court found the house in Stambovsky v. Ackley was "haunted as a matter of law" due to the owner's efforts to publicize the presence of ghosts in various publications, and that this greatly impaired the potential of the property for re-sale. Additionally, the buyer was not a local, but a resident of New York City, and thus in no position to know the ghoulish reputation of the property in the community. In other words, she was unable to walk into a county clerk's office and ask to see a "Registry of Haunted Homes," and - since she was not a local - could not benefit from local coffee-klatch gossip or "common knowledge. "

In rather tongue-in-cheek fashion, the court stated: "The notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcised from the body of legal precedent and laid quietly to rest. "

Governor Pataki recently signed specific "haunted house" legislation which loosens the requirements on sellers and brokers, passed in response to the ruling in this case.)

In Danann Realty Corp. v. Harris, the buyer alleged fraud due to false representations made about the operating expenses of a building and profits to be derived from the investment. The court dismissed the case due to a detailed disclaimer in the contract of sale. The court found that the buyer "in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded." The disclaimer destroyed the allegations that the agreement was executed in reliance upon contrary oral representations or even misrepresentations. After all, if a buyer clearly and explicitly represents that there were was no reliance on any representations by their seller, then a later suit based upon such reliance might very well constitute an actionable misrepresentation by the buyer.

To be on the safe side, my law firm recommends the inclusion of a detailed specific disclaimer and merger clause in every contract of sale as a measure of protection to developers who want to avoid claims based on any fact, circumstance or condition outside the four corners of the contract. This includes those similar to the allegations in Strawn v. Canuso. The specific disclaimer language should spell out that the buyer has examined the property, and has been given ample opportunity to conduct tests, consult with independent professionals about the property and surrounding area, and make necessary inquiries about environmental conditions, zoning issues and any other matters which may affect the value or reputation of the property. It should state that the buyer is fully familiar with the subject of his or her purchase, and that any and all representations about its physical condition, surrounding area or any other matter which affects the premises have been included in the contract, which represents the full and complete agreement between the parties.

The disclaimer/merger clause should be stated in the form of representations by the buyer, with an acknowledgement that the seller has relied on such representations. The nature of the transaction will dictate the specificity and detail required to achieve the purpose intended, but the trend towards "caveat vendor" should never be far from the developer's mind, and so the use of a detailed specific disclaimer/merger clause should be a high priority.
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Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Insider Outlook
Author:Lee, R. Randy
Publication:Real Estate Weekly
Article Type:Column
Date:Oct 18, 1995
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