New Home Construction Issues: 26 Years After ‘Fumarelli’
This article covers developments regarding important questions New York courts have been asked to address, respecting three significant legal issues, affecting the rights and obligations of builder-vendors vis à vis purchaser-vendees of “new home” condominium and co-op residential construction.
In this article, the authors, whose first jointly written article on new home construction was published 22 years ago, will cover developments, which have occurred over that span of time, regarding important questions New York courts have been asked to address, respecting three significant legal issues, affecting the rights and obligations of builder-vendors vis à vis purchaser-vendees of “new home” condominium and co-op residential construction.
The ‘New Home’ Warranty
In Caceci v. Di Canio Construction, 72 NY2d 52 (1988), the rule of “Caveat Emptor” (buyer beware) was declared dead in New York consumer real estate transactions involving “new home” construction. In doing so, the Court of Appeals “recognize[d] the ‘Housing Merchant’ warranty, imposing by legal implication a contractual liability on a homebuilder for skillful performance and quality of a newly constructed home the defendant builder contracted for and sold to plaintiffs” (emphasis added).
The court, noting that “[o]ver 25 states [then] recognized some form of an implied warranty of habitability or skillful construction in connection with the sale of homes,” explained that the “post-World War II boom in housing [had] produced a building industry revolution and a growing awareness of the relative helplessness of would-be homeowners in the face of poor or deficient quality.”
The new “home” at issue in Caceci was a single-family house which the plaintiff alleged had been constructed with a defective foundation, for which the plaintiff was suing to recover the cost of repairing.
In this context, the court observed:
With respect to homes contracted for sale prior to construction, the two parties involved generally do not bargain as equals in relation to potential latent defects from faulty performance. The purchaser has no meaningful choice but to rely on the builder-vendor to deliver what was bargained for – a house reasonably fit for the purpose for which it was intended. The builder-vendor, on the other hand, maintains a superior position and is the only one who can prevent the occurrence of major defects. Responsibility and liability in cases such as the instant one should, as a matter of sound contract principles, policy, and fairness, be placed on the party best able to prevent and bear the loss.
Thus, it concluded:
Here, the implication that the builder must construct a house free from material defects and in a skillful manner is wholly consistent with the express terms of the contract and with the reasonable expectation of the purchasers. Common sense dictates that the purchasers were entitled to expect, without necessarily expressly stating the obvious in this contract, that the house being purchased was to be a habitable place. The law ought to fulfill that commonsense expectation (emphasis added).
In response to Caceci, the New York State Legislature enacted the Housing Merchant Implied Warranty Law, Article 36-B of the General Business Law, consisting of GBL §§777, 777-a and 777-b. GBL Article 36-B provides that “a housing merchant implied warranty is implied in the contract or agreement for the sale of a new home,” and it specifies one, two and six-year warranty periods, respectively for: (1) construction in a skillful manner, (2) installation of plumbing, electrical, heating, cooling, and ventilation systems in a skillful manner and (3) construction free from material defects to the home’s load bearing portions causing it to become “unsafe, unsanitary or otherwise unlivable.”
However, the statute narrowly defines the term “New home” to mean only “any single family house or for sale unit in a multi-unit residential structure of five stories or less in which title to the individual units is transferred to owners under a condominium or cooperative regime” (emphasis added).
As the authors of this article noted in 2002, “[t]his statutory scheme creates a clear dichotomy—between condominium/co-op structures of five stories or less and those of six or more stories—raising important questions concerning what, if any, warranty protections the law now provides for condominium/co-op structures in excess of five stories.” See Bailey and Desiderio, “Are Buyers of New Condos and Co-ops Subject to Caveat Emptor?” (New York Law Journal, Sept. 6, 2002).
The question posed in our prior article arose because, ten years after its Caceci decision and the subsequent enactment of GBL Article 36-B, in 1988, the Court of Appeals issued its decision in Fumarelli v. Marsam, 92 NY2d 298 (1998), in which the court held that “the statute eclipses [Caceci].” (Emphasis added).
In addition to noting an earlier ruling, Matter of Roberts Real Estate v. New York State Department of State, Division of Licensing Services, 80 NY2d 116 (1992), in which, in dicta, the court had “classified the statutory remedy [of GBL Article 36-B] as a ‘codification’ of Caceci,” the court held that GBL Article 36-B was “a full substitute for the antecedent common-law housing merchant warranty recognized in [Caceci]” (emphasis added). However, in doing so, the court failed to note the narrow Article 36-B statutory definition of the term “new home.”
Nevertheless, despite the boom in construction of new condominium and cooperative units built in New York in all the years following the 1988 enactment of Article 36-B, we noted in a subsequent article that, as of 2004 (with nearly 4,000 new condo/co-op units built in Manhattan alone from 1999 to 2003), there had not yet been any court decisions determining “whether or not the common law housing merchant implied warranty survives for cooperatives and condominium buildings of six stories or more.” See Bailey and Desiderio, “New Home Warranty – An Open Question Seeking an Answer” (New York Law Journal, Nov. 10, 2004).
This was so, even though there had been no lack of questions concerning other provisions of Article 36-B, which had been raised in the interim and decided by New York courts; such as, for example, (1) whether the remedy Article 36-B provided to buyers, i.e., “the reasonable cost of repair or replacement and property damages,” created a penalty or minimum measure of damage barring such claims from class action certification, (2) whether failure to meet Article 36-B notice requirements were grounds for dismissal of buyer’s suit, and (3) whether a buyer’s suit would not be dismissed for failure to give the required notice where a seller has effectively waived the notice requirement.
Moreover, despite Fumarelli, the question, whether or not Caceci’s common law housing merchant warranty survived for purchasers of condo/co-op unit purchasers in buildings of six stories or more, was still not definitively addressed by an appellate court until 2013.
Indeed, in 110 Central Park South Corporation v. 112 Central Park South, 41 Misc.3d 380, 90 NYS2d 681 (Sup. Ct., NY Co., 7/25/2013), Justice Barbara Jaffe had noted that “trial courts considering this question do not agree.” Compare, e.g., Bridge Street Homeowners Association v. Brick Condominium Developers, 2007 WL 7684712 (Sup. Ct., Kings Co., 2007) (the common law warranty applied; and Brine v. 65th Townhouse LLC, 20 Misc.3d 1138 (A), 867 NYS2d 372 (Sup. Ct. NY Co., 2007) (holding that a building with “six stories plus a basement [was] clearly not within GBL Article 36-B’s perimeters”), with Bradley v. 50 Orchard Street Associates, 2012 WL 1309381 (Sup. Ct., NY Co., 2012) (holding that the common law warranty did not apply).
In 110 Central Park South, the court recognized that, “as in Caceci, plaintiffs had no meaningful choice but to rely on the builder to construct a home that was fit to live in.”
Nevertheless, it also noted (a) that “the Legislature implicitly recognized that buyers of units in such large buildings are better able to protect themselves vis a vis the seller than buyers of units in smaller premises,” and (b) as Fumarelli had held that the “statute abrogated, not derogated, common law…[t]here is no authority, under Caceci or other cases cited therein, for the notion that there is or ever was an implied housing warranty for large commercial real estate ventures.”
The First Department, in 20 Pine Street Homeowners Association v. 20 Pine Street, 109 AD3d 733, 971 NYS2d 289 (1st Dept., 9/24/13), issued the most definitive answer, to date, as to whether the Caceci common law housing merchant implied warranty covers buildings of six or more stories.
The court held as follows:
The statutory housing merchant warranty scheme codified under Article 36-B applies only to buildings less than five stories, and not to the condominium at issue here, and we find that the ruling in Fumarelli abrogates whatever common-law implied housing merchant warranty, if any, that may have existed with respect to buildings taller than five stories prior to the statutory codification (emphasis added).
The ruling in 20 Pine Street Homeowners appears to have finally put the Fumarelli “open question” to rest. See Board of Managers of Beacon Tower Condominium v. 85 Adams Street, 136 AD3d 680, 683, 25 NYS3d 233, 238 (2d Dept. 2016), Board of Managers of 647 & 649 Place Condominium ex rel. Unit Owners of 647 & 649 Washington Avenue Condominium v. 647 & 649 Washington Avenue, 49 Misc.3d 1216(A), 26 NYS3d 723 (Sup. Ct., NY Co. 2016), and Tribeca Space Managers v. Tribeca Mews, 64 Misc.3d 1230(A)(Sup. Ct., NY Co., 2019) (Lebovits, J.).
Accordingly, as held in 20 Pine Street Homeowners, buyers of condo/co-op units in buildings of six stories or more must rely upon such limited warranties as the sponsor/builder provides for them in accordance with GBL Article 36-B, §777-b.
The Martin Act and Common Law Fraud
For more than a quarter century, New York courts see-sawed over the proper interpretation of the holding in CPC International v. McKesson Corporation, 70 NY2d 268 (1987), in which the Court of Appeals barred private plaintiffs from asserting private causes of action based on violations of the Martin Act, New York state’s “blue sky” law, which regulates the sale of securities and real estate investment offerings.
In CPC, the court held that “a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute” (emphasis added).
In Vermeer Owners v. Guterman, 78 NY2d 1114 (1991), the court restated its conclusion that there is no private right of action under the Martin Act but held that the complaint in that case was properly dismissed only because the plaintiffs had not proven common-law fraud.
As the First Department noted in Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 AD3d 457, 844 NYS2d 18 (1st Dept. 2007), prior First Department panels over the years had issued several erroneous decisions misinterpreting CPC and Vermeer to deny standing to any plaintiff whose common-law fraud complaint could be characterized as prosecution through “artful pleading” of a backdoor “private” Martin Act action.
Kramer explained that examples of “artful pleading” were found in “every claim of common-law fraud arising out of conduct that could have been the basis for an action by the Attorney General,” but where “none of the decisions suggest[ed] a principled basis for identifying those claims of common-law fraud that would not be regarded as such impermissible ploys.”
The Kramer court said that it is no “end run” around the Martin Act for the plaintiff to have an opportunity to prove the truth of the allegations when all the elements of fraud have been properly pleaded.” Kramer correctly noted that prior First Department decisions had erroneously linked issues of sponsor affirmative fraudulent offering plan misrepresentations with sponsor failure to make required Martin Act disclosures.
Nevertheless, the Court of Appeals overruled Kramer, in Kerusa Company v. W10Z/515 Real Estate Ltd. Partnership, 12 NY3d 268 (2009), explaining that the plaintiff’s complaint was based on defendants’ failure to disclose various construction and design defects in the offering plan amendments, while representing that there were no “material changes of facts or circumstances affecting the property or the offering,” when, in fact, problems arising during construction had alerted sponsor to the existence of major defects, which were otherwise ignored or inadequately remedied.
Kerusa expressly noted that the court was not deciding whether “the alleged misrepresentation of an item of information that the Martin Act or the Attorney General’s implementing regulations require to be disclosed would support a cause of action for fraud, so long as the elements of common-law fraud are pleaded” (emphasis added).
Finally, in Assured Guaranty (UK) LTD v. J. P. Morgan Investment Management Inc., 18 NY3d 141 (2011), the Court of Appeals reconfirmed its holding in CPC, but also clearly held that “an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability,” and that “[m]ere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.” This principle is now well established. See, e.g. Board of Managers of the Walton Condominium v. 264 H2) Borrower, LLC, 180 AD3d 622, 120 NYS3d 31 (1st Dept. 2020).
For a fuller discussion of the twenty-four-year decisional roundabout from CPC to Assured Guaranty, see Bailey and Desiderio, “The Martin Act ‘Shield’ and Private Fraud Actions” (NYLJ 2/8/2012), and for a discussion of the trial court’s view of the Kramer plaintiff’s non-disclosure allegations, which the First Department did not address (see Bailey and Desiderio, “’Standing’ to Sue Sham Condo, Coop Sponsors Changed”, New York Law Journal (May 1, 2008)).
Active Concealment
Although the Fumarelli “open question” has been answered, yet another question, regarding the reach of Article 36-B, remains open: whether and when the statute of limitations expires on faulty construction that the developer-sponsor intentionally concealed from buyers who, had no reasonable way of discovering the defects before their closings?
It had long been the rule, even during the era of “Caveat Emptor,” that “[i]f, 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.” Bethka v. Jensen, 250 NYS2d 887, 888, 672 AD2d 494 (3d Dept. 1998) (citations omitted) (cited in Kramer, supra).
Examples of actions that courts could deem to be “active concealment,” as suggested in Kerusa, supra, are “drywall…painted over or taped over to cover up or prevent discovery of water damage,” “put[ting] up walls or bricks…to hide or prevent it from finding leaking pipes or holes in the foundation.”
Other actions found to constitute “active concealment” have been the installation of “ventilation systems in the kitchen and bathroom areas [which], upon inspection…proved to consist of dummy sheet-metal ducts which simply terminated in the wall or ceiling space, without any connection to a central exhaust duct or fan.” 17 E. 80th Realty Corporation v. 68th Associates, 173 AD2d 245, 247, 173 NYS2d 245 (1st Dept. 1991), and “gas fired furnace in the [HOA] guardhouse lack[ing] a combustion air intake system; improper duct work in the club house roof; improper HVAC system in the ballroom taking into account the size and occupancy limits of the room; and lack of fire dampers in the ducts installed through the fire-rated wall in the convenience store and administration building.” Hamlet on Olde Oyster Bay Home Owners Association v. The Holiday Organization, 12 Misc.3d 1182(A), 824 NYS2d 783 (Sup. Ct., Nassau Co. 2006).
For any such “actively concealed” (and therefore fraudulent) construction defects, CPLR 213(8) (an action based on fraud) provides that:
The time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it (emphasis added).
As actions alleging fraud in connection with material construction defects are generally brought within either (a) the warranty periods specified in Article 36-B or (b) within the six-year period prescribed by CPLR 213(8), there is a paucity of cases involving developers relying upon a statute of limitations defense against a plaintiff’s complaint.
An intentionally concealed material construction defect (such as those noted above) is likely to be discovered well before the running of any limitations period. However, for such cases as may exist, the two-year discovery period should apply, but, to date, no such reported case has been found.
Nevertheless, a plaintiff who commences such a suit within the two-year discovery period, years after the expiration of the six-year limitations period, will most likely face extensive litigation regarding its own due diligence and whether any defects were truly concealed.
One odd case decided during the period after the Caceci decision, but before Article 36-B became effective, ruled:
that the statute of limitations [which was not discussed in Caceci] for the [Caceci] implied housing merchant warranty [was] more than four years…for a period equal to what a reasonable expectation would be that a house constructed in a workmanlike manner would be free of material defects, [and, therefore,] that the statute of limitations for a defective roof is over six years as one could reasonably expect that a well-made roof should last over six years (emphasis added)
Vento v. Honeybee Homes, 141 Misc2d 997, 535 NYS2d 344 (NYC Civil Ct., Richmond Co., 1988)
Sponsor and Engineer/Architect Offering Plan Certifications
Sponsor-Principal Liability
Claims against a sponsor’s principals, premised solely upon alleged violations of the offering plan and sponsor certifications contained therein, are properly dismissed where plaintiffs “[do] not posit any liability outside of [the Martin Act], nor assert that the Non-Sponsors are liable under an alter-ego or other veil piercing theory.” Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner, 106 AD3d 542, 544, 965 NYS2d 114 (1st Dept. 2013).
In addition, “conclusory statements that Sponsor’s Principals dominated and controlled Sponsor and each other,” without alleging “particularized facts to warrant piercing the corporate veil” do not suffice to sustain claims against the principals. 20 Pine Street Homeowners, supra, 109 AD3d at 735.
Consequently, many sponsor offering plans issued after the decisions in 184 Thompson and 20 Pine Street Homeowners now include the following sponsor disclaimer:
Consistent with a recent First Department decision, the principals of Sponsor expressly disclaim the existence of any private right of action for contract claims by individual unit owners (or a board on their behalf) in connection with or arising solely from their execution of the Certification of Sponsor and Principals, absent liability under another statute or under an alter-ego or other veil-piercing theory. See Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner et. al., 106 A.D. 3rd 542 (1st Dept. May 16, 2013).
Accordingly, plaintiffs who seek “to pierce the corporate veil bear a ‘heavy burden’ of showing that the [sponsor corporation] was dominated as to the transaction and such domination resulted in the harm alleged.” Board of Managers of the Modern 23 Condominium v. 350-52 West 23, LLC, 171 AD3d 433, 434, 98 NYS3d 9 (1st Dept. 2019).
However, where fraud allegations are based on affirmative misrepresentations, and, therefore, under Assured Guaranty, supra, are not barred by the Martin Act, sponsor principals who sign the offering plan certification may nevertheless be held liable. See Board of Managers of the Walton Condominium, supra.
In such cases, although the sponsor-principal cannot be held liable for breach of contract, “a corporate officer who participates in the commission of a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil is pierced.” Peguero v. 601 Realty, 58 AD3d 556, 873 N.Y.S.2d 17 (1st Dept. 2009) (emphasis in original). See also OCEANHOUSENYC v. 140 West Street (NY), 2021 WL 1943207 (NY Sup) (No. 656345/2020) (Hagler, J.), where the sponsor-principal, Ben Shaoul, “was involved in material misrepresentations to induce [plaintiffs] to purchase the apartment.”
Engineer/Architect Liability
In Sykes v. RFD Third Avenue 1 Associates, 15 NY3d 370 (2010), the Court of Appeals affirmed the dismissal of plaintiffs’ cause of action for negligent misrepresentation against the mechanical engineering firm which sponsor had hired to design the heating, ventilation, and air conditioning (HVAC) system for their apartment.
Although plaintiffs claimed that the negligently designed system caused their condominium apartment to be too hot in the summer and too cold in the winter, the court stated: “It has long been the law in New York that a plaintiff in an action for negligent misrepresentation must show either privity of contract between the plaintiff and the defendant or a relationship ‘so close as to approach that of privity’” (citations omitted).
Under the contract between the engineer and the sponsor, the engineer was contractually obliged to prepare, “for use in the offering plan,” written specifications of the HVAC system that was installed in the plaintiffs’ apartment. Plaintiffs claimed that they had relied on said written specifications, which sponsor had included in the offering plan, but which the engineer had not certified in the plan.
The Court of Appeals held that “plaintiffs have not sufficiently alleged that they were a ‘known party or parties,’” and “[w]hile [the engineer] obviously knew in general that prospective purchasers of apartments would rely on the offering plan, there is no indication that it knew these plaintiffs would be among them, or indeed that [the engineer] knew or had the means of knowing of plaintiff’s existence when it made the statements for which it is being sued” (emphasis added).
The First Department, in Bhandari v. Ismael Leyva Architects, 84 AD3d 607, 923 NYS2d 484 (1st Dept. 2011), followed Sykes and affirmed the dismissal of plaintiffs’ complaint against an architectural firm which had “affirmatively misrepresented, as part of the offering plan, a material fact about the condominium, i.e., the floor dimensions of certain units, including the one [the plaintiffs] purchased” (emphasis added).
Accordingly, although the court held, because of the architect’s affirmative misrepresentation, that the plaintiffs’ cause of action was not preempted by the Martin Act, the complaint was nevertheless dismissed due to plaintiffs’ failure to allege “that defendant knew they were prospective buyers who would likely rely on its misrepresentations, or indeed that defendant knew of their existence.”
However, unlike the circumstances in Sykes, where the defendant engineer did not certify the construction information contained in the plan, the certification language contained in an offering plan expressly provides a “contractually expressed intent to benefit third parties.” Bridge Street Homeowners Association v. Brick Developers, 18 Misc.3d 1128(A), 856 NYS2d 496 (Sup. Ct, Kings, 2008).
Arguably, as in the case of sponsors, see Board of Managers of the Walton Condominium, supra, purchasers should also be entitled to rely upon the architect’s or engineer’s competent performance of his or her professional obligations and be able to hold them accountable where the certification by the engineer/architect, was either falsely or negligently made and damage has been suffered. No appellate court has yet addressed this precise issue. For a fuller discussion see Bailey and Desiderio, “Certifying Professionals May Be Subject to Lawsuits”, New York Law Journal, (June 13, 2012)).
Conclusion
The above discussion shows that important issues in new home construction law have evolved, but that such change remains a continuing process over what is often a lengthy period. It is therefore necessary for attorneys to always consider whether their client’s case may be the appropriate vehicle by which a court may be persuaded to participate in the evolution of these issues.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey and John M. Desiderio is a partner and chair of the firm’s Real Estate Litigation Group. Zoe Tsicalos, a former extern of the firm and now graduate of the Maurice A. Deane School of Law at Hofstra University, assisted in the preparation of this article.