Court Rejects Fraudulent Inducement Claim Arising From Alleged Undisclosed Leaks in Real Property

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Posted on: Nov 1 2023

On October 31, 2023, the Appellate Division, First Department, unanimously affirmed the dismissal of a fraudulent inducement claim alleged in connection with the purchase of real property. 829 Greenwich St., LLC v. Slorer, 2023 N.Y. Slip Op. 05458 (Oct. 31, 2023) (here). The decision addresses a number of principles this Blog frequently examines, including: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the oral representations supporting the fraudulent inducement claim.

29 Greenwich St., LLC v. Slorer

Plaintiff is the assignee of a buyer who contracted with the defendant-sellers to purchase a house located on Greenwich Street. Before signing the contract, the buyer hired a home inspection company to inspect the premises and issue an inspection report. The report pointed to various instances of water damage and possible signs of mold and moisture.

The contract of sale included a disclaimer clause that specifically disclaimed plaintiff’s reliance on seller’s representations about the condition of the house. In pertinent part, the disclaimer clause provided: “Purchaser is entering into this contract based solely upon such inspection and investigation and not upon any information, data, statements or representations, written or oral, as to the physical conditions, state of repair, use, cost of operation or any other matter related to the Premises or the other property included in the sale, given or made by Seller or its representatives, and shall accept the same ‘as is’ in their present condition and state of repair.” Plaintiff and defendants closed the deal and plaintiff took title to the house. After moving into the house, plaintiff allegedly discovered extensive water infiltration and damage.

Plaintiff brought the suit against defendants, claiming defendants fraudulently induced plaintiff to enter and close the contract by misrepresenting the condition of the house. Defendants filed a motion to dismiss the complaint pursuant to CPLR § 3211(a)(1) & (a)(7), claiming the disclaimer clause within the contract barred plaintiff from bringing the suit.

The motion court granted the motion.

First, said the motion court, the disclaimer clause “directly disclaim[ed] plaintiff’s reliance on seller’s representations of the house condition.” Under New York law, “[a] party claiming fraudulent inducement cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract executed by the allegedly defrauded party.”¹

The motion court explained that the language of the disclaimer unambiguously “preclude[d] seller’s representations, fraudulent or not, from becoming the inducement to buyer’s decision to contract.” Since the parties negotiated the contract “at arm’s length” and “specifically disclaim[ed] reliance on any representation by the other party,” the motion court saw “no reason to interfere with the parties’ freedom of contract.” Thus, concluded the motion court, plaintiff’s claims for fraudulent inducement failed.

The motion court also rejected plaintiff’s argument that there was an inconsistency between the contract of sale, which contained the disclaimer clause, and the attached rider which did not. The motion court noted that the “rider control[led] only if there [were] inconsistencies between the two.” The motion court found that “there [was] no inconsistency between the disclaimer and the seller’s representations in the rider.” Indeed, said the motion court, “[n]othing in the rider says that buyer was relying on seller’s representations to make the decision.” “Therefore,” said the motion court, “the disclaimer [was] not superseded by the rider, thus effectively binding the two parties.”

Second, the motion court found that the inspection report submitted by plaintiff actually supported defendants’ position that the water damage and mold complained of were not peculiarly within their knowledge. The motion court noted that “the infra-red inspection of the family room ceiling indicate[d] possible signs of moisture and mold, and continuous monitoring of the area [was] warranted.” As such, the motion court concluded that plaintiff was on notice of the water conditions: “The warning should have put plaintiff on alert and may justify a heightened inspection for mold and water damages.”

Plaintiff appealed. The Appellate Division, First Department unanimously affirmed.

The Court held that the motion court “correctly granted defendants’ motion to dismiss,” finding that plaintiff did not justifiably rely “on any representations regarding no water leaks or mold in the purchaser’s rider.”² The Court pointed to the “parties’ contract of sale [which] disclaimed such reliance by stating that plaintiff accepted the house ‘as is,’ based on its own inspection and investigation and not based on any representations by the seller defendants.”³

Like the motion court, the First Department rejected plaintiff’s argument that there was an inconsistency between the contract and the rider sufficient to escape the effect of the disclaimer: “Although the purchaser’s rider stated that the rider controlled in the event of any inconsistency, there was no such inconsistency, since it was silent as to plaintiff’s right to rely on the representations contained in the rider.”⁴ Additionally, noted the Court, “[t]he contract also stated that acceptance of a deed was deemed full performance of the contract and that the representations did not survive closing.”⁵

Moreover, the Court held that the presence of leaks and mold in the house were not facts peculiarly with defendants’ knowledge: “any alleged misrepresentation regarding the lack of leaks and mold in the house ‘did not concern facts peculiarly within the seller[s’] knowledge.’”⁶ “The inspection report cited by plaintiff noted extensive water damage,” said the Court.⁷

Finally, the Court rejected plaintiff’s concealment argument, i.e., the water damage was external, so that plaintiff was not on notice to look for “undetected interior leaks”.⁸ The Court found that, “among other things, “the [inspection] report noted that the fifth-floor ceiling had ‘significant damage from a roof leak above.’”⁹ Since “plaintiff was on notice of water damage, and had access to conduct additional inspections prior to closing,” concluded the Court, such access and ability to conduct additional inspections “vitiate[d] its claim that defendants actively concealed issues.”¹⁰

Takeaway

A party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party.¹¹ “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.”¹² As discussed, in 829 Greenwich St., the disclaimer was specific to the matters allegedly misrepresented.

An exception to the enforceability of a disclaimer clause is where the defendant has unique or peculiar knowledge of an allegedly misrepresented fact. Under such circumstances, even a specific contractual disclaimer will not defeat a plaintiff’s contention that it reasonably relied on the misrepresentation. In 829 Greenwich St., the issue of water leaks, water infiltration, and mold were matters identified in the inspection report. In fact, as noted by the Court, the report spoke of “extensive water damage.”In the context of real estate, to satisfy the justifiable reliance element of a fraudulent inducement claim, the purchaser of real property has a duty to inspect the property and satisfy himself/herself as to the bona fides of the transaction. The courts in New York will not hesitate to dismiss a fraud claim by a purchaser of real property where a defective condition exists and was reasonably discovered through an inspection or another form of due diligence. Since the seller has no duty to disclose the pre-existing condition, the seller will be liable only when he/she thwarts or prevents the purchaser from discovering the condition through the exercise of due diligence. As shown in 829 Greenwich St., plaintiff could not demonstrate justifiable reliance on any alleged misrepresentation.

Footnotes

Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 495, 495 (1st Dept. 2011).
Slip Op. at *1.
Id. (citing 116 Waverly Place LLC v. Spruce 116 Waverly LLC, 179 A.D.3d 511, 512 (1st Dept. 2020)).
Id.
Id.
Id. (quoting Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc., 115 A.D.3d 128, 137 (1st Dept. 2014); and citing 85-87 Pitt St., LLC v. 85-87 Pitt St. Realty Corp., 83 A.D.3d 446 (1st Dept. 2011)).
Id. (citation omitted).
Id.
Id.
Id.
Basis Yield, 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011).
Basis Yield, 115 A.D.3d at 137.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.