After years of court decisions, it is clear to real estate attorneys that "as is" real estate contracts are not "as is" when it comes to environmental conditions. This was underscored again in the recent decision of Revell v. Guido, in New York state appellate court.
The appellate court reviewed the sale of property in which the seller filled out a property information statement submitted to him by his real estate agent. In the area where information on the septic system was requested, the seller wrote "septic system totally, new leach field totally replaced – new 5,000 gallon holding tank." It turns out the statement was a little short on facts.
Several years prior to the sale, the seller had received notice of code violations about his old septic system. He retained a consultant to install a new system, which was essentially an upgrade with the addition of two 2,000 gallon septic tanks. Later, when the seller filled out the disclosure form, he was aware that the upgraded system was not functioning properly either.
In the real estate transaction, the parties stipulated that the sale was "as is." When the buyer discovered the septic problem, a suit followed. The seller pointed out a provision called a "merger provision" that stated the purchase agreement incorporated all of the information obtained during investigation and there were no other agreements. He also pointed out the disclosure form contained a general qualification that "all information deemed reliable but not guaranteed."
The New York appeals court reviewing these facts first noted that New York follows the standard of "caveat emptor" – buyer beware – in commercial real estate transactions. However, the court then stated that sellers may be liable if the failure is "active concealment." Because the seller admitted the falsity of the statement made in the questionnaire, and the buyer asserted that it had relied on that statement, the appellate court said that the trial court needed to review and determine whether the buyer had relied on the false statements.
The New Jersey appellate court reasoned that the "totally new" statement in the property description was misleadingly false. The seller had said the system had been replaced twice at great expense to him, and thus, in his opinion, the system was totally new and the statement was not false. The appellate court sent the case back to determine whether the reliance on these statements was reasonable and if the buyer could have ascertained the facts on his own.
Most states have property disclosure laws requiring sellers to prepare these types of statements. In New York, property disclosure laws require disclosure, but the only penalty for non-compliance is a reduction of $500 in the purchase price. Some real estate lawyers advise clients to pay the $500 penalty rather than running the risk of making a material misstatement.
This logic can be extended to the questionnaires filled out in the Phase 1 environmental review process. Many consultants ask the sellers to fill out questionnaires as part of the due diligence process. Under the EPA's "All Appropriate Inquiry" rule, which provides a defense to some environmental liabilities, questionnaires are part of the information that should be obtained by prospective purchasers and could impact the ability to succeed in environmental defenses. Expect that these statements can be examined in connection with defenses.
View the entire May 2013 issue of In the Zone
Originally published by In the Zone
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