Buyers Beware: Be Diligent in Your Inspections; Be Careful in Your Agreements

A recent court decision in New York highlights a couple a lessons that we constantly need to be reminded of when entering into commercial real estate agreements: (1) when purchasing commercial real estate “as is” and “with all faults,” the buyer should beware and conduct its own inspection of the property, and (2) when it involves a commercial transaction, the court will more often than not hold you to the bargain you negotiated. If you negotiate a bad deal, you’re stuck with it.

In “Princes Point LLC v. AKRF Engineering, P.C.”, No. 601849/2008 (N.Y. Sup. Ct. Jul. 13, 2012), the plaintiff/buyer (Princes Point LLC) lost big, with its claims against the defendants/sellers (Allied Princes Bay Co. and Allied Princes By Co. #2, L.P.) under a purchase agreement dismissed by the court. The plaintiff/buyer had entered into a purchase agreement with the defendants/sellers to acquire commercial waterfront property. The property was being sold “as is … and with all faults.” The property was designated a hazardous waste site back in the 1980’s and as a result, the defendants/sellers had been actively remediating the property based on plans approved by the Dept. of Environmental Conservation (DEC). Part of their remediation work was the construction of a massive seawall along the property’s shoreline.

During the due diligence period, the plaintiff/buyer and its agents were permitted to enter the property at any time to inspect it and conduct tests. It also received copies of all studies and reports in defendants/sellers’ possession. The agreement also had an outside closing date, allowing for either party to terminate the agreement upon certain notice if the deal wasn’t closed by then. Finally, the agreement provided that if the defendants/sellers exercised their right to terminate, the plaintiff/buyer could waive any developmental approval and proceed to closing without any abatement of the purchase price.

Rather than conduct its own inspections and environmental reviews, the plaintiff/buyer simply relied on the studies and reports supplied to it by the defendants/sellers. It then proceeded, after the due diligence period expired, to actively market the property and entering into numerous contracts related to the property.

In the meantime, the defendants/sellers were not able to obtain the necessary approvals they needed from the DEC so rather than terminate the agreement and walk away, they agreed with the plaintiff/sellers to postpone the dates and let everything ride while they tried to complete the work and obtain the DEC approval. This continued for quite some time as the DEC determined to reinspect the seawall and proceeded to require additional work and approvals that prolonged the remediation and drove up its costs.

The defendants/sellers informed the plaintiff/buyer of their intention to exercise their termination rights unless the agreement was amended to increase price to cover some of the additional remediation and agreement was ultimately reached by the parties. Still the work dragged on without the DEC issuing its approvals or the seawall construction being completed.

Finally, the plaintiff/buyer had had enough and sued, alleging, among other things, fraudulent inducement and also asking the court to force the defendant/sellers to sell the property under the agreement but with a purchase price abatement.

Lesson No. 1― It’s next to impossible for a buyer to succeed on a claim that a seller committed fraud when buying property “as is” and “with all faults,” meaning the buyer is relying solely on its own inspection of the property. The plaintiff/buyer in this case had the opportunity to do its own legwork and didn’t. That complacency cost it a lot of money. Also, regarding the later amendment, the plaintiff/buyer was aware of the fact that the DEC wanted to reinspect the property and reopen the investigation. It could have called the DEC itself and found out more about what was going on, but didn’t. Again, it couldn’t claim it was misled by the defendants/sellers about the magnitude of the DEC actions, when it wasn’t even curious enough to call DEC and find out for itself what was going on. Its agreement with the defendants/sellers clearly gave it the right to do so. Curiosity may have killed the cat, but in this case, it could have saved the plaintiff/buyer a small fortune.

Lesson No. 2― Words mean things and what you negotiate in your commercial agreements will be held against you; so be careful. I have encountered many business clients over the years who get annoyed with the way attorneys ‘wordsmith’ the agreements. Attorneys like to ‘wordsmith' the agreement, because they understand what can go wrong later and truly want to protect their clients’ interests. In this case, the plaintiff/buyer negotiated a right to demand specific performance, i.e., require the defendants/sellers to close on the sale of the property, but expressly without any right to a reduction in the purchase price. It should be no surprise then that the court refused to order specific performance that included any such reduction in the purchase price.  Best practice is to ensure that your agreement clearly spells out your understanding of the deal with preciseness, and doesn’t box you in on matters where you really want or need flexibility.

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