Real Property Purchaser Sues Seller for Fraudulent Misrepresentation

This was originally posted on the SGR Blog.

Buyer’s Claim of Justifiable Reliance Meets Defense of Caveat Emptor

On June 21, 2006, Yama Rahimzada entered into a contract to sell to R. Vig. Props., LLC three improved commercial properties for the sum of $20.4 million. The sale closed on December 20, 2006. On December 18, 2012, RVP sued Rahimzada to recover damages for fraud and deceit, misrepresentation and breach of contract.

RVP alleged that Rahimazada represented that one of the properties, located in Valatie, NY, was primarily occupied by a master tenant pursuant to a self-sustaining triple-net master lease. RVP contended that Rahimzada withheld certain facts relating to the Valatie property, including the fact that the master tenant at that property had informed him that it was experiencing financial difficulties and, absent rent concessions, would breach the master lease and vacate the property. A prior determination of the United States Bankruptcy Court for the District of New Jersey relieved all prior assignees of the master lease for that property from liability notwithstanding that the terms of the master lease, annexed as an exhibit to the contract of sale, provided that such assignees were liable; and the master tenant at that property was a single asset entity with no assets other than the lease.

Rahimzada moved for summary judgment dismissing the complaint. Supreme Court granted the motion. RVP appealed.

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. In addition to those elements, an allegation that defendant had a duty to disclose material information and that it failed to do so.

A plaintiff’s reliance must be reasonable. If the facts represented are not matters peculiarly within the defendant’s knowledge, and the plaintiff had the means available of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, the plaintiff must make use of those means, or it will not be heard to complain that it was induced to enter into the transaction by misrepresentations.

In the context of real estate transactions, a claim of fraudulent misrepresentation must be analyzed within the doctrine of caveat emptor. 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. If however, some conduct (i.e., more than mere silence) 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. 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.

Here, Supreme Court correctly determined that the causes of action sounding in fraud were barred by the specific terms of the parties’ contract of sale. Moreover, contrary to RVP’s contention, the facts alleged to have been misrepresented and/or improperly concealed were not matters peculiarly within Rahimzada’s knowledge and which could not have been discovered by RVP by the exercise of ordinary intelligence and/or which thwarted RVP in efforts to fulfill the responsibilities imposed by the doctrine of caveat emptor.

In light of the language of the contract and RVP’s lack of justifiable reliance, Rahimzada established prima facie entitlement to judgment as a matter of law dismissing the causes of action sounding in fraud. In opposition, RVP failed to raise a triable issue of fact.

Rahimzada also established entitlement to judgment as a matter of law dismissing the cause of action to recover damages for breach of contract. The essential elements of a cause of action to recover damages for breach of contract are the existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach of its contractual obligations and damages resulting from the breach. The merger doctrine in a real estate transaction provides that once the deed is delivered, its terms are all that survive and the purchaser is barred from prosecuting any claims arising out of the contract. The only exception to that rule is where the parties clearly intended that the particular provision of the contract supporting the claim would survive the delivery of the deed.

Here, the sale of the Valatie property closed, the deed was delivered, and the contract demonstrated that the parties did not intend that any provision of the contract would survive delivery of the deed. So the doctrine of merger extinguished any claim that RVP may have had regarding the contract of sale. And, to the extent that the cause of action alleging breach of contract was premised on Rahimzada’s alleged breach of the implied covenant of good faith and fair dealing, Supreme Court properly determined, in effect, that such cause of action failed since it was based upon the same omissions that were alleged in connection with the causes of action sounding in fraud.

RVP failed to meet the burden of demonstrating that Rahimzada’s summary judgment motion should have been denied as premature. RVP did not identify facts essential to justify opposition to the motion that were exclusively within Rahimzada’s knowledge and control.

Accordingly, Supreme Court properly granted Rahimzada’s motion for summary judgment dismissing RVP’s complaint.

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