Buyer Beware: Court Decision Highlights Importance of Performing Careful Diligence

by Sheppard Mullin Richter & Hampton LLP
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[authors: Rena Andoh and Kathryn Hines]

In Princes Point LLC v. AKRF Engineering, P.C., No. 601849/2008 (N.Y. Sup. Ct. Jul. 13, 2012), Judge Charles Edward Ramos granted a motion for summary judgment dismissing plaintiff’s claims of fraud, negligent misrepresentation, rescission and specific performance, relating to a real estate agreement and amendments thereto.

Plaintiff Princes Point, L.L.C. (“Plaintiff”) entered into this agreement with Defendants Allied Princes Bay Co. and Allied Princes Bay Co. #2, L.P. (collectively, “Allied”) on or around June 18, 2004 to purchase waterfront property on Raritan Bay (the “Property”). Allied had owned the Property since the early 1970’s, but the Property had been designated as a hazardous waste site in the 1980’s. Therefore, Allied engaged in remediation work on the Property based on plans approved by the Department of Environmental Conservation (“DEC”). Part of the remediation work involved the construction of a 1,900 foot seawall around the shoreline of the Property by Allied. Allied employed AKRF Engineering, P.C. (“AKRF”) to supervise this project.

The purchase agreement signed by Plaintiff and Allied in June of 2004 stated that the property was being purchased “as is … and with all faults.” The agreement provided that during the due diligence period, Plaintiff and its agents could enter the Property at any time to test and inspect. Defendants further agreed to provide Plaintiff with copies of any environmental studies and reports in Defendants’ possession. The agreement also had an outside closing date by which the closing had to occur – if the approvals were not obtained by that date, either party could terminate the agreement on 20 days’ notice. Finally, the agreement provided that if Allied exercised its option to cancel and terminate the agreement, Plaintiff could waive any development approval and proceed to closing without any abatement in the purchase price.

The Plaintiff did not inspect or test the Property during the due diligence period, but instead relied on the documentation and reports provided by Allied. Once the due diligence period ended, Plaintiff began actively marketing the Property. By early 2006, Plaintiff had entered into more than 80 contracts and had collected over $2 million for those contracts.

However, Allied was not able to obtain the necessary development approvals by the outside closing date required by the agreement. Instead, because of Allied’s request for certain variances, the DEC revisited the site and expressed concern that the seawall on the property did not match the DEC-approved plans. Consequently, the DEC denied the request for the variance and further notified Allied that it planned to re-inspect the seawall – upon re-inspection, the DEC requested that the seawall be reopened in two locations.

Starting around March 2, 2006, Allied apprised Plaintiff of the situation with the DEC. (Although Plaintiff alleged that this apprisal was deficient and that Allied misrepresented that the seawall might require only minor repairs.) Allied told Plaintiff that it intended to exercise its right to terminate the agreement unless Plaintiff amended it to increase the purchase price by $2 million, increase the amount of the down-payment and reimburse Allied for half the cost to obtain the remaining development approvals and do the necessary work on the seawall. In exchange, Allied would extend the outside closing date. Plaintiff consented and the agreement was amended on March 22, 2006.

Allied ultimately entered into a consent order with the DEC to govern the DEC-required work. The consent order was finalized on September 7, 2007. The work was completed in March of 2009 at a cost of over $6 million. Meanwhile, the new outside closing date passed without final approvals or completed seawall work. As a result, the parties began extending the new outside closing date on a month-to-month basis, until Plaintiff commenced a legal action seeking rescission and/or reformation of the March 22, 2006 Amendment. In the action, Plaintiff alleged various disclosure failures on the part of Defendants through causes of action for fraudulent inducement, negligent misrepresentation, rescission, and specific performance (with abatement of the purchase price). Judge Ramos granted the motion for summary judgment dismissing each of these claims.

In dismissing the fraudulent inducement claim, Judge Ramos held that to the extent the alleged misrepresentations and omissions related to the original June 2004 Agreement, such claims were precluded by an April 19, 2012 order of the First Department that determined that Plaintiff’s claims for fraud failed because the property was being purchased “as is . . . and with all faults” and plaintiff was thus relying solely on its own inspections of the property. To the extent that the claim related to the March 2006 Amendment, Judge Ramos found that plaintiff’s reliance on any alleged oral misrepresentation that the repairs or modifications to the seawall would be minimal, was unreasonable as a matter of law, based on: i) the fact that Plaintiff had acknowledged that prior to executing the March 2006 Amendment, Allied had informed it of the DEC’s inspection and request that the investigation be re-opened; ii) the fact that Plaintiff never sought to contact the DEC to verify Allied’s alleged misrepresentation, despite the fact that the agreement between the parties entitled Plaintiff to speak directly with the DEC; and iii) the fact that Plaintiff never sought to exercise its contractual right to make site inspections or physically investigate the seawall.

In dismissing the negligent misrepresentation claim, Judge Ramos reasoned that such a claim was not viable absent a fiduciary or other special relationship, rejecting Plaintiff’s argument that a special relationship was present due to Allied’s allegedly superior knowledge with respect to the construction and condition of the seawall. Applying the “superior facts” doctrine, Judge Ramos concluded that the material facts at issue were not peculiarly within the knowledge of Allied and that the information could have been discovered by Plaintiff through the exercise of ordinary intelligence.

Because Plaintiff’s fraud and negligent misrepresentation claims were deemed insufficient, Judge Ramos concluded that there was no basis on which to sustain Plaintiff’s claim for rescission. Finally, Plaintiff’s claim for specific performance of the June 2004 Agreement with an abatement was dismissed as the imposition of the Restrictive Covenant by the DEC was held to fall squarely within the agreement’s Permitted Exception to Plaintiff’s contractual right to specific performance.

 

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