Today’s BLOG article relates to fraudulent concealment, caveat emptor and justifiable reliance when purchasing real property.[1] As readers of this BLOG know, 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. V. Rahimzada, 213 A.D.3d 871, 872 (2nd Dep’t 2023) (citations and internal quotation marks omitted). To sustain a cause of action for fraudulent concealment, in addition to the elements of fraudulent misrepresentation, a plaintiff must allege “that the defendant had a duty to disclose material information and that it failed to do so.” P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V., 301 A.D.2d 373, 376 (1st Dep’t 2003) (citation omitted). When addressing the element of justifiable reliance, the “general rule” is that “if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” Danann Realty v. Harris, 5 N.Y.2d 317, 322 (1959) (citations and internal quotation marks omitted). Where, however, matters are within the “peculiar knowledge” of the seller, “as is” and “no reliance” clauses in real estate contracts will not save a seller from claims of fraudulent misrepresentations. TIAA Global Investments, LLC v. One Astoria Square LLC, 127 A.D.3d 75, 87 (1st Dep’t 2015) (citing Danann 5 N.Y.2d at 322).
For example, the Third Department, in Schooley v. Mannion, 241 A.D.2d 677 (1997), noted that “general merger or ‘as is’ clauses in contracts do not serve to exclude parol evidence of fraud in the inducement.” Schooley, 241 A.D.2d at 678. In Schooley, the plaintiff purchased an apartment building in Saratoga County. The contract of sale contained an “as is” clause. After the plaintiff took possession, the building’s tenants complained of freezing pipes and high energy bills. “In the course of performing routine maintenance and adding gas heating to certain units in an attempt to lower bills, plaintiffs discovered that the property was not insulated according to alleged representations made by defendant.” Id. Plaintiff, buyer, sued the defendant, seller, for fraud. The Appellate Division reversed the motion court’s order granting the defendant’s motion to dismiss. The Court found “a clear question of fact exists regarding whether defendants misrepresented the existence of insulation throughout the premises and, if so, whether plaintiffs reasonably relied on such statements.” Id. at 678. In so doing, the Court stated:
Moreover, general merger or “as is” clauses in contracts do not serve to exclude parol evidence of fraud in the inducement. Notably, specific disclaimers contained within an agreement can provide an effective defense against allegations in a complaint which assert that the agreement was executed in reliance upon oral misrepresentations. Here, although the contract in question indicated that plaintiffs were taking the property “as is”, it did not indicate that plaintiffs had inspected the property; nor did it specify that they were not relying upon any representations as to the physical condition of the property, let alone any representations made regarding the installation of insulation. Furthermore, even if the contract had contained specific disclaimers, the fact that the alleged defect regarding insulation was peculiarly within [seller]’s knowledge would be sufficient to salvage plaintiffs’ cause of action. It is significant that [seller] is alleged to have recently gutted and renovated the entire property and that insulation is a nonvisible component, not easily verified without destructive testing.
Id. (citations omitted and internal quotation marks omitted).
When dealing with real estate transactions, fraudulent misrepresentation claims “must be analyzed within the doctrine of caveat emptor.” 98 Gates Avenue Corp. v. Bryan, 225 A.D.3d 647, 649 (2nd Dep’t 2024) (citation omitted). “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.” Id. (citations and internal quotation marks omitted). However, where affirmative conduct “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,” but the conduct must be “more than mere silence.” Id. at 649-50 (citations and internal quotation marks omitted). “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.” Razdolskaya v. Lyubarsky, 160 A.D.3d 994, 996 (2nd Dep’t 2018).
On October 2, 2024, the Appellate Division, Second Department, decided Gordon v. Connie Profaci Realty, LLC, an action in which the plaintiff commenced an action against a real estate brokerage firm for fraud in conjunction with its purchase of residential real property and, in the complaint, alleged that the defendant “misrepresented the number of bedrooms in a home in Staten Island … in order to induce the plaintiff to purchase it.” The plaintiff appealed the motion court’s grant of the defendant’s motion to dismiss.
The Court noted that “proof of active concealment will not suffice when the plaintiff should have known of the information which the defendant allegedly concealed.” In affirming the motion court’s dismissal of the complaint, the Court stated:
Here, the plaintiff alleged that, after inspecting only four bedrooms, he executed the contract of sale in reliance upon the defendants’ purported misrepresentations that the home contained six bedrooms. According to the plaintiff, during his visits to the home, the defendant Andrew S. Porazzo made certain statements indicating that two of the bedrooms were not available for inspection. Contrary to the plaintiff’s contention, however, these allegations were insufficient under the circumstances to establish that the defendants thwarted his efforts to satisfy his obligations under the doctrine of caveat emptor. The plaintiff failed to allege facts demonstrating that the purported misrepresentations concerned matters peculiarly within the defendants’ knowledge which he could not have discovered by the exercise of ordinary intelligence. Since the plaintiff failed to adequately allege justifiable reliance, the Supreme Court properly granted the defendants’ motion pursuant to CPLR 3211(a) to dismiss the complaint. [Citations, internal quotation marks, brackets and ellipses omitted.]
[1] Eds. Note: to find our BLOG articles related to any of these topics, visit the “Blog” tile on our website and enter your relevant search terms in the “search” box. Specifically as to “caveat emptor,” see, e.g., [here], [here], [here], [here] and [here].
