Touro Law Review BLOG

By Alessandra Albano 

I.      Introduction

The doctrine of caveat emptor, or the real-life “get out of jail free” card, is a common law doctrine that traces back to our English roots and has greatly influenced many state laws over time.[1] The premise of “let the buyer beware”[2] was replaced by some state legislation requiring disclosure statements in the purchase and sale of residential real property. While the use of the doctrine varies from state to state, it has been regarded favorably in New York for centuries.

In New York, the remnants of the doctrine of caveat emptor can be seen today, as the state has taken a different approach from its old roots.[3] Prior to March 1, 2002, New York was considered a caveat emptor state, in which it abided by the common law doctrine on all matters pertaining to the sale of residential real estate.[4] The doctrine imposed “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.”[5] To be successful in an action for active concealment, fraud, or nondisclosure, the purchasing party must prove that the selling party thwarted the purchasing party’s efforts in fulfilling its responsibilities, including its due diligence, which is outlined by the doctrine of caveat emptor.[6]

The New York Legislature on March 1, 2002 altered the way New York views residential real property transactions by enacting the Property Condition Disclosure Act (the “PCDA”).[7] This legislation provided that each seller of residential real property must furnish the purchaser with a truthful and complete property condition disclosure statement.[8] The PCDA gave more power to the purchasing party in obtaining accurate information about the property.[9] Additionally, the PCDA directed sellers to complete a forty-eight-question form, the Property Condition Disclosure Statement (the “PCDS”), which details property conditions.[10] If the premises differed from the description on the form, the seller would be liable for any defects.[11]

Seemingly, the institution of the PCDA diminished the viability of caveat emptor. However, Section 465 of the PCDA recalls the common law doctrine of caveat emptor.[12] This section allows sellers to opt-out of providing purchasers with a PCDS.[13] Instead of truthfully drafting and completing a PCDS, sellers can provide purchasers with a five-hundred-dollar credit at closing.[14] Such credit can be considered a form of liquidated damages which prevents the purchaser from suing the seller for any other defects or deficiencies regarding the property.[15] This method of conveying residential real estate mimics the doctrine of caveat emptor, thus creating a seller-centric selling environment.

This blog will be divided into four sections. Section II will provide a historical overview of the operation of the residential real property laws before the enactment of the PCDA. Section III will discuss New York’s approach to the doctrine of caveat emptor, including the addition of the PCDA to New York law. Section IV will examine the “opt-out” option included in the PCDA. Section V will include recommendations to change the PCDA for the future.

II.      Historical Overview and Background of Caveat Emptor

The doctrine of caveat emptor has been a longstanding rule within traditional English law. This doctrine acts as a warning to purchasers to beware of potential problems lurking in the shadows of their future purchases. In New York, the doctrine of caveat emptor heavily influenced the state’s residential real property laws. Under the doctrine, it shows that a seller has no duty to disclose any information concerning the property when dealing at arm’s length, unless there is a confidential, fiduciary relationship or the conduct of the seller rises to the level of active concealment or material misrepresentation.[16] To demonstrate active concealment, the purchaser must prove that the seller’s conduct “thwarted the plaintiff’s effort to fulfill their responsibilities fixed by the doctrine of caveat emptor.”[17] Proving intentional misrepresentation and concealment is a difficult task for purchasers. Furthermore, most residential real estate transactions involve arm’s length rather than fiduciary relationships. Thus, the doctrine of caveat emptor dominates residential real estate transactions.

An example of a typical caveat emptor case is Platzman v. Morris.[18] In Platzman, the plaintiff purchasers entered into a contract for the sale of a home in Nanuet, New York.[19] Upon inspecting the home and before entering the agreement with the defendant sellers, the purchasers observed that the home included three kitchens, one on each level of the home.[20] The sellers stated that the basement kitchen was illegal, while the kitchens on the first and second floors were legal.[21] In the sales contract, the sellers represented that the home was a legal one-family home.[22] Furthermore, the contract included an as-is clause which provided that the purchasers were aware of the current condition of the property and agreed to take possession in its final, as-is condition from the sellers.[23] Moreover, the as-is clause stated that the purchasers were not to rely on any other representations or information given by the sellers, as the purchasers were responsible for taking the property subject to their inspection.[24] After discovering the illegality of the second-floor kitchen, the purchasers claimed fraud.[25]

The court held that the doctrine of caveat emptor applied in this situation.[26] Here, the purchasers had the duty to inspect the property at their leisure.[27] A proper inspection would have included an inquiry as to the legality of each of the three kitchens.[28] Since the purchasers did not make any attempt to investigate, the liability fell on them.[29] Additionally, the purchasers signed the contract which contained an “as-is” clause,[30] which provided that the purchasers were fully aware of the condition of the property prior to purchase.[31] The presence of the as-is clause further emphasized the purchasers’ need to fully inspect the premises.

Prior to the enactment of the PCDA, New York Real Property Law focused heavily on limiting liability for the seller. Sellers clearly favored this approach while purchasers bore the brunt of the responsibility. Essentially, sellers were shielded from liability for property defects unless there was some indication of misrepresentation or fiduciary relationship. Purchasers, on the other hand, were responsible for knowing and understanding all patent and easily discoverable property conditions. However, it can be assumed that, as part of a purchaser’s due diligence, it is his or her responsibility to investigate the property prior to entering into a contract.

By continuing the use of caveat emptor, New York adheres to the notion that purchasers should not rely on sellers’ words when negotiating. It is a well-known rule of contract law that the duty of good faith and fair dealing only applies once the contract has been formed.[32] During the negotiation process, there is no direct duty of good faith and fair dealing.[33] The doctrine of caveat emptor essentially reiterates that principle to remind purchasers that they need to investigate for themselves, regardless of what was said or promised.[34]

III.      The Property Condition Disclosure Act

The doctrine of caveat emptor imposed a strict burden on the purchasers.[35] In response, on March 1, 2002, the New York Legislature enacted the Property Condition Disclosure Act.[36] This statute was designed to help buyers recover damages for undisclosed, defective conditions regarding residential real property. The PCDA states that “every seller of residential real property pursuant to a real estate purchase contract shall complete and sign a property condition disclosure statement . . . .”[37] The statement shall be delivered to the purchaser prior to signing the sales contract and affixed to the completed purchase contract.[38] However, the PCDA does not prohibit parties from entering into sales agreements which stipulate that the property shall be sold “as-is.”[39]

New York Real Property Law Section 462(2) specifies the format of the PCDS.[40] The PCDS is not a warranty by the seller, nor is it a substitute for property inspections.[41] The completed PCDS is a representation based on the seller’s actual knowledge at the time of completion.[42] However, a seller will be held liable for actual damages suffered by a purchaser, and other existing equitable or statutory remedies, if the seller’s conduct amounts to a willful failure to perform the requirements under the PCDA. New York legislators anticipated that such legislation would create turmoil within the residential real property industry, so they included an “opt-out option” section to help sellers.[43]

 

IV.      The “Opt-Out Option”

To avoid potential disputes, the New York Legislature built an interesting caveat into the PCDA: the “opt-out option.”[44] Similar to other state laws,[45] Section 465(1) of the New York Real Property Law provides that if a seller chooses not to furnish the purchaser with a PCDS prior to contracting, the seller shall give the purchaser a five-hundred-dollar credit at closing.[46]

The leniency of the “opt-out option” allows for the responsibility to shift back to the purchaser. Essentially, by a seller providing the five-hundred-dollar credit at closing, the traditional doctrine of caveat emptor is reinstated. In turn, practitioners in the real estate law industry typically recommend that sellers provide this credit to avoid responsibility for defective conditions affecting the property. Furthermore, the credit acts as “‘cheap insurance’ to protect sellers against an inadvertent ‘incomplete statement.’”[47]

Providing the purchaser with the five-hundred-dollar credit is a way of releasing the seller from liability. In Bishop v. Graziano,[48] purchasers brought an action against sellers for breach of contract and fraud.[49] Upon taking occupancy of the home, purchasers noticed damage to the floors and walls.[50] However, based on the contract and addendum to the contract, sellers elected not to furnish purchasers with a PCDS[51] but to exercise their opt-out rights.[52] This credit, therefore, precluded purchasers’ claims because it was their responsibility to inspect the home for defects prior to closing.[53] Furthermore, any purported reliance on the sellers’ statements would not be actionable under New York law due to the credit.[54]

The “opt-out option” opens purchasers up to significant risk, much like the doctrine of caveat emptor. The significance of the “opt-out option” is that it takes the risk, which was assigned to the sellers under the PCDA, and reassigns it back to the purchasers, thus invoking the doctrine of caveat emptor once more. The “red flag” starts to wave as soon as the seller fails to produce the PCDS and opts to provide the purchaser with the five-hundred-dollar credit. This further emphasizes the purchaser’s need to beware of all conditions regarding the property. If the purchaser receives the credit and notices defects after closing, courts are extremely reluctant to favor the purchaser because it is the purchaser’s responsibility to conduct a proper and thorough inspection of the property.

 

V.      Recommendations and Conclusion

The New York Legislature passed the PCDA to help shield purchasers from liability for undisclosed defects. New York desired to move away from the traditional doctrine of caveat emptor and implement a new purchaser-favored body of law.[55] The initial portion of the PCDA, the physical disclosure form, did just that.[56] It shifted the responsibility from the purchaser to the seller and nearly eliminated the concept of buyer beware.[57] This form forced sellers to remain liable for undisclosed or misrepresented property defects.[58] However, this provision of the PCDA opens up too many avenues for litigation. The courts must determine whether the defect was within the seller’s actual knowledge and if the seller misrepresented the property.[59] By completing the PCDS, the seller is asking to be sued.

The “opt-out” option of the PCDA is much more favorable to sellers because it shifts the burden back to the purchaser to be cognizant of all property conditions prior to purchasing the premises.[60] Essentially, the PCDA, with the utilization of the “opt-out” option, takes New York back to the very essence of the doctrine of caveat emptor.

Similarly, the “opt-out” option of the PCDA provides overwhelming advantages for sellers. Simply stated, the seller can pay his way out of disclosure. The “penalty” for failing to provide, or purposefully opting not to provide, the purchaser with a completed PCDS is only five hundred dollars.[61] This “penalty” acts as a “slap on the wrist.” This remedy is simply not effective. It is estimated that approximately eight out of ten sellers provide their purchasers with the five-hundred-dollar credit.[62] While New York home prices vary around the state due to New York’s extreme property diversity, the “opt-out” option credit is too low.

Based on statistical studies regarding median home values in New York,[63] the five-hundred-dollar credit is considered a sham. It is an inexpensive way for sellers to escape liability worth hundreds of thousands of dollars. To remedy this problem, New York should consider whether to adopt legislation which uses the doctrine of caveat emptor with a modified credit option or impose liability on sellers for defective property conditions with no “opt-out” provisions. It is this author’s recommendation to utilize the former because it still recognizes a purchaser’s duty to exercise due diligence, while not acting as a “get out of jail free card” for sellers.

If New York chooses to impose the doctrine of caveat emptor with the credit, it would be in New York’s best interest to increase the “opt-out” option credit to something of substantial worth. Some individual purchasers rely on the credit to pay for property inspections, and thus, it should be increased. Increasing the “opt-out” option credit to one-half percent of the property value would reflect the great variation of home values across the state. With this, there would be no definitive credit price for all properties.

The reasoning behind the percentage option is that each home across New York is valued at a different price. Some homes can be valued at upwards of two million dollars. The current five-hundred-dollar credit for property valued at this price is simply ineffective. The approximate percentage value of the five-hundred-dollar credit for a home priced at two million dollars is 0.025%. When put into this perspective, on its face, the credit resembles a nuisance.

On the other hand, for property valued at seventy-five thousand dollars, the five-hundred-dollar credit may be more than necessary. Under this author’s recommendation of applying the credit at one-half percent, the total credit for a residential property valued at seventy-five thousand dollars would equate to three hundred seventy-five dollars, less than the credit the purchaser would currently receive.

Applying a percentage option increases fairness for both the purchaser and the seller. If the credit is too little compared to the value of the home, it can be viewed as a sham. If the credit is too much compared to the value of the home, it could unnecessarily tip the balance in favor of the purchaser.

New York’s PCDA was a brief attempt to minimize the effects of the traditional common law doctrine of caveat emptor. While the thought was there, the PCDA’s main provision, the PCDS, has proven to be increasingly ineffective. This legislation gives sellers two options to choose from: one which significantly increases their liability or one that significantly decreases their liability. Most sellers wisely choose to limit their liability. With this, the statement provision is substantively inadequate and thus calls for its revision in favor of a modified reversion back to the doctrine of caveat emptor with an increased credit provision.

* J.D. Candidate 2021, Touro College Jacob D. Fuchsberg Law Center, B.S. Business Administration, St. Joseph’s College – Long Island.

[1] Cendant Mobility Financial Corp. v. Asuamah, 285 Ga. 818, 819 (2009).

[2] Id.

[3] See N.Y. Real Prop. Law § 462 (McKinney 2019).

[4] See Platzman v. Morris, 283 A.D.2d 561, 562 (2d Dep’t 2001).

[5] Id.

[6] Id.

[7] See N.Y. Real Prop. Law §§ 462-465 (McKinney 2019).

[8] See id. § 462.

[9] Id.

[10] Id.

[11] Id.

[12] See id. § 465.

[13] Id.

[14] Id. § 465(1).

[15] See generally id. § 465.

[16] Platzman v. Morris, 283 A.D.2d 561, 562 (2d Dep’t 2001); Glazer v. LoPreste, 278 A.D.2d 198, 198 (2d Dep’t 2000).

[17] Platzman, 283 A.D.2d at 562.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] U.C.C. § 1-304 (Am. Law Inst. & Unif. Law Comm’n 1977).

[33] In re 50 Pine Co., LLC, 317 B.R. 276, 283 (Bankr. S.D.N.Y. 2004) (See Restatement (Second) of Contracts § 205 (Am. Law Inst. 1981)).

[34] While this rule is clearly advantageous for sellers, it is blatantly unfair to unsuspecting purchasers. This opens up a realm of opportunity for justifiable reliance by the purchasers, which is seemingly pushed to the side when the doctrine of caveat emptor is involved.

[35] See Platzman, 283 A.D.2d 562; Perin v. Mardine Realty Co., 5 A.D.2d 685 (2d Dep’t 1957).

[36] N.Y. Real Prop. Law § 462(1) (McKinney 2019).

[37] Id.

[38] Id.

[39] Id.

[40] Id. § 462(2).

[41] Id.

[42] Id. Additionally, a seller is obligated to update the PCDS if the seller becomes aware of defects prior to closing.

[43] Id.

[44] Id. § 465(1).

[45] See 2019 Conn. Legis. Serv. P.A. No. 19-192 (H.B. 7179) (West); N.J. Admin. Code § 13:45A-29.1 (2019).

[46] Id.

[47] Blumenthal, Practice Commentary, McKinney’s Cons. Laws of N.Y., 2018 Electronic Update, Real Prop. Law § 465.

[48] 10 Misc. 3d 342 (Dist. Ct. Suffolk Cty. 2005).

[49] Id. at 343.

[50] Id.

[51] Id.

[52] Id.

[53] Id. at 345. Had the contract provided for an inspection contingency clause, the outcome would have been different.

[54] Id. at 346.

[55] See N.Y. Real Prop. Law § 462 (McKinney 2019).

[56] Id.

[57] Id.

[58] Id.

[59] Id.

[60] See id. § 465(1).

[61] Id.

[62] Emily Pickrell, Should You Sign a Property Condition Disclosure?, Newsday (Sept. 5, 2007), https://www.newsday.com/business/should-you-sign-a-property-condition-disclosure-1.876762.

[63] See Residential Median Sale Price Information by County, N.Y. State Dep’t Tax’n & Fin. (last updated Apr. 12, 2019), https://www.tax.ny.gov/research/property/assess/sales/resmedian.htm; See Oshrat Carmiel, NYC Homebuyers Find Biggest Price Reductions in Manhattan, Bloomberg (Jan. 23, 2020), https://www.bloomberg.com/graphics/property-prices/nyc/.