SELLER AND LISTING BROKER CHARGED
WITH KNOWLEDGE OF HOME’S ILLEGAL STATUS
The claimant, a prospective home buyer commenced this action against the defendant sellers and real estate broker alleging they negligently misrepresented the legal occupancy status of the premises in Staten Island. The defendant-sellers listed the property for sale with Neuhaus Realty, Inc., a real estate broker doing business on Staten Island. The premises was listed as a “two-family semi-attached” home and was promoted through the Multiple Listing Service maintained by the Staten Island Board of Realtors with that designation. The claimant was seeking to purchase a two-family home and contacted the defendant Douglas Franks Realty, Inc. to assist in that regard. Franks obtained the listing after the agreement with Neuhaus Real Estate expired. The claimant/prospective purchasers were shown the premises by Franks and prior to a contract, ordered a structural inspection.
The claimant testified that when the contract was prepared it stated that the premises was a legal two-family home; however, when the certificate of occupancy was produced by the seller as part of the contract process, it revealed the premises was a legal “one-family residence” and had been since it was first built in the late 1970s. Upon learning this information, the claimant elected not to sign the contract of sale.
Claimant sought to have the sellers and the broker reimburse her for the $400 cost of the home inspection. She further asserted that had she known the premises was a legal one-family dwelling, she would never have considered it for purchase. The defendant-sellers and real estate broker claimed ignorance of the proper legal status of the premises. The owners claimed it was a mother/daughter home which they had purchased in 1985 as a two-family dwelling and had used it in that fashion since its purchase. The broker claimed that he merely continued the listing as Neuhaus originally listed it and that the tax office had designated it as a two-family dwelling. The Court, in its decision, indicated that the Department of Finance is not dispositive of a property’s legal status with the Building Department of the City of New York.
Judge Straniere, who is well-known to the real estate industry as having written the decisions concerning Property Condition Disclosure, stated the following: “I know this is going to be hard to believe but certain owners of real property actually convert premises that are built as parent/child homes or with summer kitchens into illegal apartments. Apparently the individuals who created the permissibility of these structures in the Building Code also believe in the Easter bunny, the tooth fairy and the Boston Red Sox ability to win the World Series. Unfortunately, the real culprits in this fiasco are rarely, if ever, brought before the Court, leaving it instead for judges to mete out justice and resolve problems that this system created for innocent or unenlightened parties.”
The Court determined that the sellers had direct liability to the claimant. As the sellers, they knew or should have known whether the premises is a legal one or two-family home. When they purchased the premises, they should have received the title report which would have included in it a certificate of occupancy search. One of the exhibits provided by the defendant shows four mortgage transactions between 1996 and 2000. The Court did not believe it credible that four lenders miscatagorized the occupancy status of the premises and all the title companies “missed” this fact. “Perhaps the occupants of the “child” space kept the connecting door unlocked when the appraiser visited the premises and indicated that he or she was “Uncle Fudd or Aunty Em, a relative of the then current owner. However, since the occupancy status was a public record, the sellers were charged with actual or constructive notice that the premises is a legal one-family dwelling.”
A more interesting question was whether or not the knowledge of the proper occupancy should be imputed to the listing or selling broker. The defendant broker attached copies of all the searches he made that indicated the property was a two-family dwelling. Unfortunately for the broker, none of them was from the one agency that would have that information, namely, the Department of Buildings. A note at the bottom of one of the exhibits which was prepared by First American Real Estate Solutions, advised persons to “verify the accuracy of the data with the county or municipality.” Judge Straniere opined “one would think that with a listing price in August 2003 of $359,000, a figure that would generate in excess of $20,000 in commissions (assuming a 6% rate), a real estate broker would have an interest, if not an obligation, to check the Building Department files. Brokers are constantly seeking to be classified as professionals and on a regular basis, lobby for legislation permitting them to be able to draft contracts along with or instead of lawyers; yet they are seemingly unwilling to take even a minimum step to ensure that the information that is being provided to them by the seller is correct. Since the brokers claim to be the trained real estate specialist, it is not too much to expect them to check public records to verify the accuracy of information that is part of the public record especially when the broker intentionally includes this data in advertisements in which they seek to promote the premises and earn a commission.”
The Court further believed that the relationship between a broker and his client is governed by principal-agent law and as such, it is a fiduciary relationship. As a result, there exists certain duties between the parties. Interestingly, Judge Straniere in a prior decision indicated that caveat emptor is no longer the law in New York; however, in this decision he stated: “Although it has been eroded from its common law roots by consumer protection legislation and Court decision interpreting those statutes, caveat emptor still governs real estate transactions.” Admittedly, Judge Straniere believes that one of those areas that has seen an erosion of that doctrine is the broker-client relationship. By requiring that brokers and salespersons be licensed, the State has taken a stand that as part of the protection of the public from fraud and misrepresentation, brokers and salespersons must meet certain standards, have certain skills and must treat parties fairly. It has been held that the rule of caveat emptor is not permitted to be applied in a case where it is plain that the vendor had a duty to notify the vendee of a material fact known to the former but unknown to the latter and that a seller has an affirmative duty to disclose any material facts which might affect the recipient’s conduct in the transaction. See Scarf v. Tiegerman, 166 A.D.2d 697. Judge Straniere has extended that holding to the seller’s agent in the transaction, the broker, in those situations where the material fact is a matter of public record. This is a monumental change in recent case law and is now placing a direct requirement on all real estate licensees to ensure the accuracy of the information which they deliver to the prospective purchasers so long as this information is a matter of public record.
In 1993 the legislature adopted RPL 443 which, by statute, differentiated between brokers who act as the seller’s agent and those who act as buyer’s agent in a residential real estate transaction. One of the requirements of the disclosure is that the seller’s agent in dealing with the buyer must “see and must disclose all facts known to the agent materially affecting the value or desirability of the property, except as provided by law”. Judge Straniere, in his unique style, went on to discuss the issue concerning prior knowledge of the licensee. “Since the statute requires that the broker only disclose facts the agent knows, it can be argued that “ignorance is bliss” and if the broker does not know the true occupancy status, there is no duty to inquire. “I know nothing” may have worked for Sgt Schultz in “Hogan’s Heroes,” however, it will not work in this case…. The broker and salesperson are charged with knowledge of what is legal or illegal in transactions concerning the sale of property. Whether a premises can be legally occupied is an essential element of any transaction and the real estate professional is charged with that knowledge.” Interestingly, Judge Straniere believes that “as licensees, they may have an obligation to notify the municipality when they learn of violations of the Building Code since occupancy of the premises in violation of the certificate of occupancy is illegal.
In this case, the information concerning the legal occupancy of the premises was essential to the transaction. The claimant as a buyer wanted to see a two-family house and the broker agreed to show only two-family homes to the claimant. As a result, the Court found liability on the part of both the seller and the real estate broker. “It does not matter that the (real estate broker) had incorrect information, he was the professional in the transaction and as such he had a duty to not only inquire as to the legal occupancy status but to independently confirm it. Judgment for the claimant in the amount of $400 with interest from January 10, 2004 including costs and disbursements.
Olukotun v. Reiff , Civil Court, Richmond County, Judge Straniere
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