Duty to Disclose Condemnation Information in a Transaction?

, New York Law Journal

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Saul Fenchel

When a purchaser, for example, purchases real property and then learns that not only does the government plan to take the property through eminent domain but the seller knew of but did not disclose this information before the sale, does the purchaser have any legal recourse? Conversely, does the seller have a duty to disclose information of a condemnation?

General New York Law

In general, New York law adheres to the doctrine of caveat emptor.1 The seller has no duty in an arm's-length transaction to disclose any information concerning the property unless there is some conduct by the seller that constitutes active concealment. The seller's silence, without some affirmative act of deception, is not actionable as fraud.

In order to recover damages for active concealment, "the plaintiff must show, in effect, that the seller [] thwarted the plaintiff's efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor." If the alleged concealed information is not a matter "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 cannot allege inducement into a transaction by misrepresentations.2

Public Notice Provisions

Condemnations are a matter of public knowledge.3 The Eminent Domain Procedure Law (EDPL) provides for public notice and involvement. One of the EDPL's purposes is to "establish opportunity for public participation in the planning of public projects necessitating the exercise of eminent domain[.]"4 This goal is implemented under EDPL Article 2, which covers the condemnation planning stage.5 EDPL Articles 4 and 5 provide further public notification and service of notification.6

If properly followed, a condemnation is not a matter "peculiarly known" to just a specific party.

Condemnation Case Law

The general New York law is applicable to condemnation proceedings.7 In Khindri v. Getty Petroleum Marketing, plaintiff Khindri leased a gas station from defendant Getty Petroleum.8 After plaintiff signed the purchase agreement but before the closing on the purchase, New York State scheduled a public hearing regarding the widening of a road that would acquire a portion of the gas station property, which would prevent the gas station's continued use. The State published this notice in several newspapers one month before the closing date. Plaintiff brought an action for fraudulent inducement, alleging that Getty knew of the condemnation and withheld that information.

To succeed on an action for fraud, a plaintiff must prove a misrepresentation or material omission of a fact, which was false and known to be false by defendant, made for the purpose of inducing the plaintiff to rely upon it, and plaintiff justifiably relied on the misrepresentation or material omission, and injury.

The weak link regarding an omission of a condemnation is the justifiable reliance element. The Suffolk County Supreme Court stated that plaintiff must prove that it was justified to rely on the material omission of fact and added that conduct that amounts to active concealment can give rise to an action for fraud. However, "[r]eliance is not 'justified' as required when the plaintiff reasonably could have discovered the true facts with due diligence."

The court continued that the "prevailing rule today is that justifiable reliance does not exist when plaintiff has failed to inspect public records, meaning that such party had the means to discover the true nature of the transaction entered into by the exercise of ordinary intelligence and failed to make use of such means." Because the notice was a matter of public record, the court held that there was no fraudulent (or negligent) misrepresentation.

Similarly, in Beach 104 St. Realty v. Kisslev-Mazel Realty, plaintiff buyer purchased two adjacent parcels for development purposes from defendant seller in July 2005.9 The closing occurred on Oct. 14, 2005. Subsequently, plaintiff received a New York City petition dated Jan. 4, 2007, to acquire the properties through condemnation. The city's petition revealed that application was made for condemnation and filed on Dec. 10, 2002. Plaintiff also learned of public declarations, public certified applications, public hearings, and public approvals, all of which occurred between Sept. 11, 2002, and April 13, 2005, and all of which concerned the condemnation. Plaintiff brought an action for fraud, arguing that defendant seller had a duty to disclose the condemnation.

The Appellate Division, Second Department, noted the general New York law of caveat emptor, found that the defendant had no duty to disclose, and did not actively conceal, the information. The court added that condemnations are public knowledge with public hearings and plaintiff's title search did not suffice as due diligence.10

Compare 'Smirlock Realty'

An interesting offshoot of this issue is "whether a policy of title insurance will be rendered void pursuant to a standard misrepresentation clause found therein as a result of the insured's failure to disclose a material fact which was a matter of public record at the time the policy was issued."11 On a case of first impression, the Court of Appeals held that a title policy was not rendered void when the insured did not disclose to the title company information about a condemnation.

In Smirlock Realty, the Town of Hempstead condemned certain land on and adjacent to the subject property. At that time, the property was improved with a warehouse and three public streets provided access: one to the north and two to the east. The main loading docks for the warehouse were located at the east end of the building with direct access to the eastern streets. Truck access to the northern access was severely impaired via a narrow alley and therefore was of little value as an access route for the warehouse.

A foreclosure proceeding was instituted on the property and mortgagee plaintiff purchased the property. Before closing, the town informed plaintiff that the town had condemned a portion of the property adjacent to the northern access. During the closing and in front of defendant title company's title closer, plaintiff discussed the condemnation with the mortgagor seller. Defendant issued plaintiff a title policy after title closed and insured ordinary rights of access and egress belonging to abutting owners. The policy did not except for any condemnations affecting the northern and eastern access. A commercial tenant subsequently leased the property.

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