LEGAL CORNER: Critical Changes to the New York Property Condition Disclosure Statement Act Effective on March 20, 2024

On Sept. 22, 2023, New York Gov. Kathy Hochul signed critical legislation amending Sections 262, 265 and 267 of New York’s Real Property Law (“RPL”) known as the Property Condition Disclosure Statement Act (PCDSA) [see https://bit.ly/3FeUEem]. The newly enacted amendments to the act will take effect on March 20, 2024. The original PCDSA (“2002 PCDSA”) went into effect on March 1, 2002.

The Newly Enacted Amendments of the PCDSA

The Removal of the $500 “Opt-Out” Credit

One significant change to the act is the elimination of the provision, which provided that if a seller of a one-to-four family residential real property did not deliver a completed Property Condition Disclosure Statement (PCDS) to a purchaser prior to entering into contract, the seller would be required to provide the purchaser with a $500 credit at closing. This is a significant change in real estate transactions, particularly in downstate New York where almost no seller ever provides the PCDS.

Section 465 of the RPL was also amended. The title of Section 465 was changed from “Remedy” to “Liability,” and the identical language referred to above relating to the $500-credit was deleted entirely and replaced with the following: “Nothing contained in this article shall be construed as limiting any existing legal cause of action or remedy at law, in statute or in equity.” It is important to note that the preceding language was the same language contained in Section 467 (which is being deleted and moved to Section 465 with this newly enacted amendment). Again, this change is notable because there is no longer a reference to a “remedy” (i.e., the $500 credit) that was available to a purchaser for a seller’s failure to provide the PCDS.

The shifting of the definition of “liability” in itself does not seem to have a significant effect on the state of a seller’s potential liability under the new amended PCDSA. The PCDS, with the deletion of the $500-credit language, now simply provides that if a seller “…makes a knowingly false or incomplete statement on [the] form [it] may subject the seller to claims by the buyer prior to or after the transfer of title.” Existing case law and prior judicial interpretations relating to the PCDSA would still be applicable and will be discussed in more detail below.

Additional PCDS Questions Added Relating to Flood Issues

Other notable changes to the PCDS include the revision of question 10 to include specific reference to whether the real property is in a “Federal Emergency Management (FEMA)” designated floodplain and the addition of questions 11 through 18, and question 39. All of the other questions have remained basically the same. These added questions relate specifically to whether the residential real property is located on “100-year floodplains” or “500-year floodplains.” The questions also ask whether the property is subject to any federal flood insurance requirements or subject to federal flood requirements, whether the seller has received any flood assistance from FEMA or other governmental agencies, whether the property is covered by flood insurance and whether there are FEMA elevation certificates available for the property.

Questions 14, 17 and 39 are significant additions to the new PCDA. Question 14 requires the seller to disclose if the seller “ever” received assistance from FEMA, the SBA or other governmental agencies. Question 17 requests the seller to disclose whether the seller “ever filed a claim for flood damage to the property….” Additionally, the seller is now required to disclose under question 39 whether the structure has “…experienced any water penetration or damage due to seepage or a natural flood event.” It is important to note that the only question related to the existence of water damage was question 27, which asked the question as follows: “Is there any rot or water damage to the structure or structures?” Basically, allowing a seller to answer “no” to the question if there was damage or rot as long as the seller remedied the issue which is what occurred in the Kazmark case discussed below. The addition of the above questions now requires the seller to provide any historical information relating to the property.

An Agent’s Duty Under Section 466

While Section 466 of the RPL was not modified, it is important to review the duties of a real estate licensee in connection with the PCDS. Section 466 provides as follows:

An agent representing a seller of residential real property as a listing broker shall have the duty to timely inform each seller represented by that agent of the seller’s obligations under this article. An agent representing a buyer of residential real property, or, if the buyer is not represented by an agent, the agent representing a seller of residential real property and dealing with a prospective buyer, shall have the duty to timely (in any event, before the buyer signs a binding contract of sale) inform such buyer of the buyer’s rights and obligations under this article.

As long as the agents fulfill their obligations with respect to Section 466 “the agent shall have no further duties under this article and shall not be liable to any party for a violation of this article. When the 2002 PCDSA went into effect NYSAR created general broker/agent disclosure confirmation forms for optional use by real estate licensees so that they could document that they delivered the PCDS to the seller and that they informed buyers of their rights and obligations under the PCDSA.

Malach v. Chuang:

The First Decision in 2002 on the Original PCDSA

The first court decision interpreting the 2002 PCDSA was issued by Judge Philip S. Stranieri in 2002 in Malach v. Chuang [see https://bit.ly/3PSgvNr]. This decision is still cited and relied on by courts in New York. Judge Straniere’s decision was openly critical of the legislature for creating an act which, in his opinion, was vague, unenforceable in part, difficult to interpret and which did not achieve the principal objectives sought, namely protection of the purchaser. He noted that the “legislation must be re-examined and re-drafted so that it can achieve its stated purpose of consumer protection.” The judge provided an analysis of the then newly0enacted law (which is helpful to revisit) based upon four specific issues: (1) whether the PCDSA provided a buyer with a specific cause of action separate from what is already available to a buyer under common law; (2) what are the specific remedies, if any, provided under the law; (3) whether disclosures made in the PCDS survive the contract or a closing and (4) the effect of an answer of “unknown” provided by the seller in the PCDS.

Regarding the causes of action available under the PCDSA, Judge Straniere concluded that the PCDSA did not establish a separate cause of action available to a purchaser and that only the existing common law causes such as active concealment or fraudulent misrepresentation were available.

Similarly, with regard to remedies, Judge Straniere concluded that other than the specific remedy relating to the $500 credit, there were no other clear remedies provided in the PCDSA, except for the vague reference to any remedies available at law or in equity, and in his opinion, there were “serious” issues with it.

The court also held that the disclosures made in the PCDS would not survive the contract or closing, provided that the customary “as is” language and “merger clause” are included in the contract. Judge Straniere also pointed out that since the PCDS was annexed to the contract, as required by the act, the purchaser had no cause of action based upon the disclosures made in the PCDS because they “merge into the contract of sale and into the deed at closing.”

Lastly, regarding the effect of an answer of “unknown” provided by the seller in responses to questions contained in the PCDS, Judge Straniere noted that the manner in which the law was written places an undue burden upon purchasers because any answer, which reflects “unknown” shifts the burden to the purchaser to make inquiry about that particular item. Judge Straniere explained that “a prudent purchaser having been informed of seller’s lack of knowledge should either hire a structural engineer to inspect all of the ‘unknowns’, or take some other steps to acquire the knowledge necessary to make an intelligent decision regarding the condition of the premises.”

The Early Opinion in Malach as to the Benefits of Not Providing the PCDS

The court in Malach also noted that it may make sense for a seller not to complete the PCDS at all and simply provide the purchaser with a $500-credit. Judge Straniere explained that “completion of the Disclosure provides a document that can be used against the seller in a suit under a common law theory such as one alleging fraud or negligent misrepresentation. The Disclosure is certified by the seller giving it certain evidentiary value. By completing the Disclosure, the seller may be giving the purchaser an advantage in subsequent litigation.” It soon became the custom, mainly in downstate New York, for seller’s attorneys to recommend to their seller-clients not to complete or deliver the PCDS and simply opt to provide the purchaser with the $500-credit. However, in upstate New York many sellers do provide the PCDS and as a result there exists more case law on the PCDSA in those areas.

Kazmark v. Waslyn: A False Statement in the PCDS May Constitute Active Concealment

In Kazmark v. Waslyn [see https://bit.ly/3FaKLOD] (a 2018 Third Department Appellate Division decision), the plaintiffs sued the sellers “for breach of contract, fraud/intentional misrepresentation, negligent misrepresentation and violation of Real Property Law § 465(2) stemming from allegations that defendant knew or should have known about the material defects that he denied existed or that he listed as unknown in the PCDS.” The court in Kazmark citing various decisions, explained that if a seller makes a false statement in the PCDS it could constitute active concealment.

However, the court went on to state that since the PCDS requires only that a seller make a disclosure based on the seller’s actual knowledge, the buyer is required to prove “that the seller had actual knowledge of a condition that was misrepresented by the disclosure contained in the PCDS.” Additionally, the buyer must prove “…that [the] defendant knowingly misrepresented a material fact upon which [the] plaintiff justifiably relied, causing [the plaintiff’s] damages,” in order for the buyer to be successful in a cause of action for fraud or intentional misrepresentation.

In Kazmark, the seller testified “that, although he was aware of standing water in the basement before 2006, he answered no to the question on that topic because he had corrected the problem and, to his knowledge, there were no such issues when he completed the form in 2008.” Since question 20 on the current PCDS (27 on the new form) asks whether there “is water damage or rot” at the time the seller completed the PCDS, it was not misleading or dishonest for the seller to answer “no” to that question. The revised PCDS, particularly question 39, now requires the seller to disclose if there was “any water penetration or damage” relating to the property and would have likely required the seller to provide a different response.

Where Do We Stand Now?

The newly amended Act will certainly require sellers to complete and deliver the new PCDS to purchasers starting March 20, 2024. It will require real estate licensees to be sure to review and comply with the requirements of Section 466. It is critical for licensees to strongly recommend to their buyer and seller clients early on to discuss the ramifications and requirements of the PCDSA with their attorneys. Sellers should be referred to their attorney and instructed not to complete the PCDS until they have conferred with counsel.

Most importantly, it will require attorneys, particularly those practicing in downstate New York, to review existing case law, the entire act and the PCDS very carefully. They must be sure to advise their clients and stress the importance of answering all of the questions honestly and explain to their seller-clients what the term “actual” knowledge means in the context of completing the PCDS. Attorneys representing sellers must also be sure to include the necessary “as is” merger, and non-survival provisions in their contracts and riders.

Section 462(1) specifically provides that “nothing contained in this article or this disclosure statement is intended to prevent the parties to a contract of sale from entering into agreements of any kind or nature with respect to the physical condition of the property to be sold, including, but not limited to, agreements for the sale of real property ‘as is.’” Therefore, attorneys will need to sharpen and refine existing contract language to protect sellers to the furthest extent possible.

Additionally, the purchaser’s attorney will need to explain now, more than ever, that simply because the seller is providing a PCDS and disclosing certain information relating to the condition of the property, the purchaser must conduct all of the necessary and required inspections. In fact, the PCDS expressly provides that it “IS NOT A WARRANTY OF ANY KIND BY THE SELLER” and “IT IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR TESTS.” The newly amended PCDSA will certainly change the landscape of real estate transactions in the coming years but how exactly is yet to be seen. All that can be done now is to be prepared.