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The Property Condition Disclosure Act: New Proposed Legislation, by Vincent J. Gallo, Esq.

posted Sep 4, 2013, 10:52 AM by Pete Weinman   [ updated Sep 4, 2013, 11:18 AM ]
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September 4, 2013 by Vincent J. Gallo, Esq., Chair, RCBA Real Property Committee.

A Bill was introduced in the Assembly on January 17, 2013 designated as A2768-2013 which would extend the Property Condition Disclosure Act, otherwise referred to as New York Real Property - Article 14 - (Sections 460 through 467) as Property Condition Disclosure in the Sale of Residential Real Property (hereinafter the “PCDA”), as being further applicable to the sale of both condominiums and cooperative apartment units.  It would amend the definition of “Residential Real Property” at Section 461(5) to read: “’Residential Real Property’ means real property improved by a one to  four  family  dwelling  used  or occupied, or intended to be used or occupied, wholly or partly, as the home or  residence  of  one  or  more persons,  but shall not refer to (a) unimproved real property upon which such dwellings are to be constructed, or (b) [condominium units or cooperative apartments, or (c)] property in a homeowners'  association  that is not owned in fee simple by the seller.” Since the introduction of this Bill, it has been stalled and lingering in the Judiciary Committee of the Assembly for the past eight months, seemingly going nowhere.

An interesting article was writing some time ago around the time the PCDA was first enacted into law in the St. John’s Law Review, Volume 77, Issue 2, Spring, 2003 entitled “New York's Property Condition Disclosure Act: Extensive Loopholes Leave Buyers and Sellers of Residential Real Property Governed by the Common Law, by Philip Lucrezia. In examining the legislative history of the PCDA, the article addressed the fact that, interestingly, among the thirty-six states that have legislated in this area of the law at that time, New York was the only state to exclude condominiums and cooperative apartment units from falling within the purview of the Statute, thereby leaving Purchasers of condominiums and cooperative apartment units statutorily excluded from the protections afforded by the PCDA.  It was said that the rationale provided at the time of the adoption of the PCDA legislation was that the exteriors and many working systems of such units are the responsibility of the condominium association or cooperative corporation, and outside the control of the unit homeowner. What this rationale ignores, however, is that while it may be the managing agent’s responsibility to rectify such issues, it would be, pre-closing, the Seller’s obligation to facilitate causing the Managing Agent, which is, at that time, the Seller’s Managing Agent, to address these issues. The Purchaser, pre-closing, would lack the privity necessary to advocate anything with the Managing Agent.  Furthermore, if a condominium or cooperative apartment unit fell under the umbrella of the PCDA, it may very well impact the offering price that a Purchaser may present, or for that matter, whether a prospective Purchaser chooses to buy at all.

The Article aptly recognizes that under the PCDA, as it exists, as long as the Seller does not make any misrepresentations, active concealments, or comes under a duty to speak, he has no duty to disclose despite his actual knowledge of the damage. The Purchasers will have a unit with water damage, for example, that may lead to problems later on and were not discoverable by a reasonable inspection. Or, in lieu, if the Seller “opts out” of the obligation to tender a Property Condition Disclosure Statement, thereby obligating the Seller to pay the Purchaser the mandatory $500.00 charge, then at least the Purchaser knows that the issue of disclosure was statutorily addressed, thereby intimating to the Purchaser to inquire further. In excluding condominiums and cooperative apartment units from falling within the purview of the Statute, this creates an inequitable result that could have at least been addressed by the PCDA.

With a Seller of a condominium or a cooperative apartment unit falling within the purview of the Statute, who thereby discloses the existence of a structural condition, at least a prospective Purchaser knows what he or she is getting himself or herself into, and the potential costs attendant thereto. This allows for full transparency in the ordinary process of a real estate closing without unnecessarily distinguishing as to the nature of the property being purchased.

Interestingly, Judge Philip Straniere, as far back as 2005, fully recognized the foolishness of the Legislature in excluding condominiums and cooperative apartment units from falling within the purview of the PCDA. See Goldman v. Fay, 8 Misc.3d 959 (2005). In this Small Claims action, the Purchaser of a condominium unit on Staten Island sued the Seller for failing to disclose a water leak to the premises. The Seller denied having any knowledge of such condition. The parties both recognized that the PCDA did not apply to condominium units.  The Judge, in his infinite wisdom, stated that if the Statute was designed to protect consumers, why then would the law exclude condominiums and cooperative apartment units from falling within the purview of the Statute?  Good question, I must say.

The Court went on to state: “What is really puzzling is that when the "legislative findings" used to form a justification for the passage of the statute are read, it is clear that there is no rational basis for the exclusion of condominiums and cooperatives. The findings are as follows:  "The legislature hereby finds and declares that residential real estate consumers, both buyers and sellers would benefit from a mechanism intended to increase their ability to obtain information concerning a home purchase and sale. The legislature recognizes that home ownership sales are often complicated by misunderstandings arising from an ad hoc transfer process and conflicting information. A uniform document that regularizes disclosure can supplement information provided by professional inspections and tests to provide sellers and buyers with a better basis for negotiating a purchase and sales agreement. A uniform disclosure statement will alert both buyers and sellers to aspects of properties which may require attention: environmental, structural, mechanical or other potential problem areas, particularly those not readily observable by a visual inspection of the property." (L 2001, ch 456, § 1.)” Id. at 8.

The Court discounted the argument that the information requested in the Property Condition Disclosure Statement, most pointedly as to a condominium, is not under the control of the Seller and may have to be maintained by the condominium, for example, is a “red herring” since the purposes of the disclosure is to provide “information” to a prospective purchaser, and it should make no difference who is responsible for addressing or repairing the defective condition. The Court went on to say: “What is important is informing the purchaser of the condition and negotiating to have it corrected or deciding to purchase with that knowledge. In fact, it could be argued that such disclosures are more relevant in condominium and cooperative sales since the purchaser may be buying a unit with a problem and have no redress against the seller since the condition is not the responsibility of the seller but of a third party. There is no justification to remove sellers and purchasers of condominiums and cooperatives from the definition of a "residential real estate consumer."

In drawing the distinction, the Court held that: “An analysis of the legislative purposes for the PCDA leads to the question of whether the statute as written creates a serious equal protection problem in that the intent of the statute is to protect "residential real estate consumers" and the law as written eliminates a large portion of that statutorily identified group without setting forth a rational basis for doing so.  It is unnecessary to say that the 'equal protection of the laws' required by the Fourteenth Amendment does not prevent the states from resorting to classification for the purposes of legislation . . . But the classification must be reasonable, not arbitrary, and must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike. Equal protection does not require that all persons be dealt with identically, but it does require that a distinction made have some relevance to the purpose for which the classification is made."

As such, the Court held that it is clear that the current statutory scheme violates equal protection. The Legislature can differentiate between different classes of real estate ownership for certain purposes; however, there is no explanation in the statute as to why condominiums and cooperatives are excluded from coverage. In fact, condominiums that include an interest in a homeowners' association may be covered under the language of the statute. To exclude these types of real estate from the protection of the statute or conversely to include other types of ownership only requires a rational basis; no such rational basis is included in the statute or easily discernible upon a reasonable reading of the statute.

Accordingly, the Court held that it is clear that the current statute is unconstitutional as written and its application should be stayed pending the Legislature amending the current language so as to include all residential real estate transactions. Unfortunately, this Court does not have the jurisdiction to stay enforcement. It is hoped that the Legislature will act to correct the infirmities of the law or abolish it entirely and require the licensing of structural engineers with the recommendation that all purchasers have such an inspection done prior to the purchase of residential real property.

The fact that Article 14 of the Real Property Law excludes units in condominiums and cooperatives violates equal protection of the law and renders the current statute unconstitutional. The Court calls on the Legislature to either repeal the current law or stay its execution until the defects can be remedied. So did the Legislature act? As they say, one needs to crawl before they walk.  It took 8 years to introduce legislation to address the issues raised in Goldman. And while it is stalled in Committee, it is, at least, a first step.