Fourth Department’s Decision in Real Estate Deal Calls for Express, not Implied, Reading of a Real Estate Contract

By James L. Maswick

The Fourth Department recently reinforced that when dealing with real estate contracts, the contract must be enforced strictly by its express terms, especially when dealing with whether an agreement is in existence between the parties. In Todd T. Pohlman and TMAC Holdings, LLC v. Michael R. Madia, Joseph J. Madia, et al, plaintiffs and defendants had a contract in place to purchase a commercial piece of real estate. Upon the plaintiffs’ attorney indicating that he was ready to move forward with the contract based on the environmental and structural reports having been completed, the Court ruled that defendants’ refusal to move forward with the contract was valid because there had never been a valid contract in place between the parties.

In real estate, frequently there are contingencies in place between the parties to indicate whether the deal will move forward. A contingency frequently allows one of the parties to back out of the deal with no adverse consequences to that party in the event the contingency is not met. Frequent contingencies include a structural inspection contingency; if it is discovered that the property is in poor structural condition upon an inspection by a licensed home inspector or engineer, the purchaser can choose to cancel the contract and purchase of the property. Another frequent contingency that is used is a contingency for obtaining a mortgage. The contract language for this contingency will most often provide that if the purchaser is unsuccessful in obtaining financing for a mortgage, the purchaser is released from any requirement of purchasing the property without further financial penalty.

In commercial real property transactions, which are often more complicated than residential deals, there can be additional contingencies as well. In Pohlman, which involved a commercial real property deal, the purchasers sought to include a contingency in the contract for attorney approval based on receipt of a satisfactory Phase I Environmental Assessment Report and a warranty representing that sellers had no knowledge of any environmental problems with the property. The sellers’ attorney conditionally approved the majority of the contract, though proposed 12 relatively minor modifications to the contract and rejected purchasers’ request for a Phase I Report and environmental warranty. Purchasers’ attorney responded that he had “ordered” a Phase I report and the structural analysis of the property and that “assuming these reports come back reasonably OK, which we anticipate, we are good to go.”

Six days later purchasers’ attorney advised that he had “no problem” with sellers’ proposed modifications to the contract and additionally noted that if a Phase II Environmental Report became necessary, the purchasers would expect the sellers to pay for it. The sellers’ attorney advised that they would not agree to pay for the Phase II Report. The purchasers’ other attorney then sent a letter indicating that the “Environmental and structural report and inspections have been completed” and that the purchasers had agreed to proceed with the purchase of the property. He also asked for the search and survey to be forwarded so that they could begin to prepare for the real estate closing. The search and survey terms, it should be noted, refer to title work which must be done in any real property transaction. At this time, the sellers’ attorney informed the purchasers that there was no contract in place because the contract had not been unconditionally approved by purchasers’ attorneys. The purchasers then commenced a breach of contract action.

The Fourth Department, quoting the Court of Appeals, stated that “clarity and predictability are particularly important” in the area of law dealing with the attorney approval of real estate contracts, citing Moran v. Erk, 11 N.Y.3d 452, 457 (4th Dept. 2008). While the Fourth Department indicated that while the plaintiff could have unilaterally waived the environmental conditions that had been place don approval of the contract, neither of the purchasers’ attorneys ever clearly and unequivocally did so. Thus, the Fourth Department held that the contract was never approved by purchasers’ attorneys. This meant that the Court did not Order that the sellers sell the real property to the purchasers under this contract. Purchasers’ attorneys were faulted for relying on an inference with respect to the purchase of the real property that a final agreement was in place, when one did not exist.

This is a strong reminder for all attorneys who deal in real property transactions. The Statute of Frauds, a New York State legal concept which has been in place for a long time, indicates that contracts for real property must be in writing. This is further buffered by decisions, such as Pohlman, which require clarity and predictability in real property deals and not just inferences and working on implied assumptions. To have a contract, there must be a “meeting of the minds”; that is, both parties must have clarity with respect to their agreement.

Flink Smith Law handles real property transactions from the Canadian border down to south of Albany, servicing Franklin, Clinton, Essex, Warren, Washington, Schenectady, Albany, Rensselaer, Greene, Columbia, Fulton, Montgomery, St. Lawrence, Hamilton, Saratoga and Schoharie Counties. Their dedicated Real Estate Closing Department handles over 100 closings a year. If you or someone you know would like representation in a real estate purchase, sale, refinance or representation for a lender or title insurance, please do not hesitate to contact our firm. A complete copy of the decision can be found here.

The Court Appeals’ Nesmith Decision: Reduced Coverage Implications for Insurance Companies and the Public

By: Christopher Guetti

This article focuses on a policy provision, known as the non-cumulation clause, which is present in most policies, but may not be well known to the insureds that buy those polices, and the impact of the recent Nesmith decision by the Court of Appeals in reviewing Allstate’s provision.

A non-cumulation clause, also sometimes known as an anti-stacking clause, acts as a potential limit on the amount of available coverage.  Claimants and insureds seek to trigger, in some fashion and to the extent available, coverage in consecutive insurance policies issued by the same insurer.  Insurers want to limit attempts to trigger consecutive policies, or stack coverage, and confine the insurers’ liability to the limits of a single insurance policy.

The non-cumulation condition is most likely to apply in a claim where (1) The claimant’s alleged injury existed in more than one policy period and (2) The claim’s value is more than the limits of liability of any one of the liability policies the policyholder bought.

The Nesmith decision represents the second major decision in this area in recent years, and both it and its predecessor involved toxic tort claims that arose out of exposure to lead based paint.  In the predecessor decision of Hiraldo v. Allstate Insurance, 5 NY3d 508 (2005), the Court of Appeals interpreted a non-cumulation clause found in a series of successively issued liability insurance policies, holding that a person suing for exposure to lead paint during the terms of all of the policies could not recover more than one policy limit.

Hiraldo, involved a single child who lived in a building for three years under three successive Allstate policies with $300,000 limits. In an action to recover for injuries based upon exposure to lead based paint, the plaintiff claimed that the child had been exposed to lead paint continuously during the terms of all three policies, and therefore $900,000 in coverage should have been available. The Court rejected the argument by relying on the plain language of the non-cumulation clause in the Allstate policy, and limited its liability to the amount shown on the declaration page, $500,000, “regardless of the number of… policies involved.”

The non-cumulation clause at issue in Nesmith v. Allstate, 2014 N.Y. Slip Op. 08217 (2014) was very similar to the Hiraldo clause, and stated as follows:

Regardless of the number of the insured persons, injured persons, claims, claimants or policies involved, our total liability under the family liability protection coverage for the damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.

The fact pattern in Nesmith, however, was a bit different, although it did involve claims based upon exposure to lead based paint.  Allstate Insurance Company issued a liability policy to the landlord of a two family house, which was renewed annually for the years beginning September 1992 in September 1993 in the amount of $500,000.

This case, however, did not involve a single family’s tenancy.  Felicia Young and her children lived in one of the two apartments at the premise from November 1992 until September 1993.  In July 1993, the Department of Health notified the landlord that one of the children had an elevated blood lead level and that several areas in the apartment were in violation of State regulations governing lead paint. The Department listed the violations and directed the landlord to correct them, which he did and in August 1993, the Department indicated that the violations have been corrected.

The Young family moved out in September 1993, and Lorenzo Patterson, Sr., and Qyashite Davis moved in with their two children. One of those children then tested positive for elevated blood lead level, and the Department of Health sent another letter to the landlord concerning violations and requiring him to correct them.

In 2004, both Young and Nesmith (grandmother of the Patterson/Davis children) brought lead paint actions.  In 2006, the Young action was settled for $350,000. In 2008, Nesmith settled that claim, but reserved the issue of the applicable policy limit for future litigation. Allstate also paid the Nesmith children $150,000, which it claimed was the remaining coverage. Nesmith then brought an action against Allstate for a declaratory judgment, asserting that a separate $500,000 limit applied to the Nesmith children.

Nesmith argued that the injuries to Young’s children and Nesmith’s grandchildren were separate losses, as the loss did not arise from continuous or repeated exposure to the same general conditions. The Court of Appeals rejected the argument, stating that even though they may not have been exposed to the exact same conditions, they were exposed to the same “general conditions” as identified in the cumulation clause.  That general condition was the presence of lead paint that endangered the children’s health. This, said the Court, was a single accidental loss, and only one policy limit was available to the two families.  A copy of the complete decision can be found here.

This decision presents a very real practical danger to an insured, which was raised in the dissenting opinion, pointing out that the majority improperly expanded the Hiraldo decision to a situation that would have been unknown to the insured at the time he procured his insurance, and the coverage for liability of any kind diminished considerably.

The Nesmith decision implies that the failure of the property owner to do anything short of completely removing lead paint from the building during the Young tenancy and before the Nesmith tenancy amounted to nothing at all, even though the owner received confirmation from the Department of Health during the Young tenancy that he had in fact fixed the dangerous conditions at the property, and it was in a safe condition.

Nesmith essentially holds that if there was a nexus between the cause of the injuries during policy year one and the cause of injuries in any later policy year, even when suffered by different children from different families and from different times, coverage is only available under the first policy year.

As a result, even though a property owner continued to renew his policy and pay the premium, he was actually getting less coverage for any later lead paint claims. The property owner would not have known this, and the only way to avoid the reduction in coverage, would have been to seek insurance from a different insurer.

As the dissent points out, this is a real dilemma that has practical implications even for property owners today, as well as their insurers.  It is not known whether Nesmith will be applicable in claims that arise from conditions other than lead paint, but there is nothing in the decision specifically limiting the decision to such claims.  Balance that against the business of insuring real property, and rental properties in particular.  Property owners want to keep their insurance coverage with an insurer that they like, and will generally not seek out new insurers every policy year.  Likewise, insurers want to keep good paying customers that pay premiums not only to start new policies, but to renew them year after year.  The only way for a property owner to avoid a potential Nesmith decision when there are successive claims that arise on successive policies, would be for the property owner to purchase insurance from a different insurer each time their insurance is up for renewal.  Both the insurance industry as well as the property owner will have to look at this issue very carefully, and determine what is best for their respective businesses.

Only time will tell what effect, if any, the Nesmith decision will have on property owners procurement and maintenance of successive or renewal insurance policies.  Although not limited to lead paint claims, the holding may be limited to Allstate insurance policies, as the case does not address, nor should have considered, the non-cumulation clauses from other insurance companies.  It may be that the clauses in those policies differ substantially from the clause in the Allstate policy.