Varsity Blues? Misrepresentation in New York Real Estate

cheatingMany of our readers are aware of the recent college admissions cheating scandal.  Credentials of proposed candidates were misrepresented in an effort to obtain admission to prestigious colleges.  Parties to real estate transactions in New York may also misrepresent financial qualifications and property conditions in an effort to close the sale of a property.  This post will address the types of misrepresentations that may occur in real estate transactions and the remedies if such misrepresentation is discovered.

From the prospective of a purchaser, misrepresentation can take the following forms.  It is not unusual for a contract to purchase a house to contain a provision that the purchaser represents that she has adequate funds to close, has not filed bankruptcy during the past seven years, and is not aware of any judgments filed against her.  The purpose of this clause is to deter a seller from entering a contract, taking the property off the market and later discovering that the purchaser cannot obtain cooperative board approval  or obtain a loan commitment due to facts that the purchaser knew at the outset of the transaction.

Purchasers also are often required to represent that a loan application will be pursued with diligence.  A purchaser may falsely elevate financial details on his mortgage application in an effort to qualify for a mortgage for which he is not otherwise qualified.  Lenders protect themselves as to this potential form of misrepresentation by requiring proposed borrowers (and applicants for short sale approval) to deliver a signed IRS form 4506-T.  This document allows the lender to obtain tax returns directly from the IRS, in case the borrower falsified tax returns delivered to the lender in an effort to look more favorable as a borrower.  In addition, lenders typically contact the borrower’s employer immediately before the closing to confirm continued employment and salary awarded.  Cooperative applications commonly contain personal and business letters of reference.  Due diligence may dictate that the authors of such letters be contacted to confirm that they did indeed write and submit such letters as part of the board application.

Seller representations in real estate contracts tend to be much more limited and therefore misrepresentation is not as common.  Standard contract language states that the seller represents that she has not been known by another name in the past ten years.  The rationale for this language is as follows.  Judgments remain effective for ten years from the date of filing.  If a seller omits names by which she has been known, a title report or lien search will not show a potential judgment, resulting in a buyer unintentionally purchasing a property subject to a lien.  Likewise, sellers represent whether they are United States citizens.  If the seller is not a United States citizen, the purchaser must withhold a particular percentage of the purchase price for delivery to the IRS.  The purchaser is liable if she fails to withhold when the seller is a non-citizen.  Sellers in limited cases may make representations pertaining to property or cooperative building conditions such as to the best of seller’s knowledge there is no underground oil tank at the premises, there has been no complaint as to noise, bedbugs, or other property conditions in a cooperative building or that the seller has completed all cooperative apartment renovations according to cooperative and municipal requirements.  Otherwise and for the most part, sellers refrain from representations and rely upon purchasers to conduct their own engineer inspections pertaining to property conditions that they should discover on their own prior to closing.  For those potentially undiscovered property conditions, the purchaser has no remedy once the deed is accepted at the closing.   Further, under New York law, sellers have the option to either complete a questionnaire regarding property conditions or issue a $500 credit at closing.  Sellers who choose to issue the credit are therefore insulating themselves from potential claims of misrepresentation.

There are multiple remedies for misrepresentation in real estate transactions.  The purchaser could potentially lose her downpayment if there was a material misrepresentation and the closing did not occur as a result.  If the seller could not close due to a misrepresentation, the buyer should receive the refund of her downpayment and could also sue for specific performance, since the particular house or apartment is unique.  Although New York law ordinarily does not permit the post-closing recovery of damages due to the seller’s misrepresentation of property conditions, such a remedy may be possible in certain circumstances.  Other remedies may include denial of a loan commitment or of board approval to purchase a cooperative apartment.  We suggest that our readers consult with experienced attorneys  to determine which representations should be made in real estate contracts and the appropriate remedies for misrepresentation.