Bed bugs threaten to undermine sale of apartment buildings

A common thread that plagues real estate discussion boards today is the return of bed bugs to Manhattan with a vengeance (in fact, New York City adopted legislation in August 2010 requiring residential landlords to advise prospective tenants of the presence of bedbugs in a building in the preceding year) and the difficulties encountered by hapless apartment dwellers in the eradication of this scourge. A more atypical topic, however, is the challenges that a buyer could encounter upon the purchase of an apartment, or an entire apartment building, with a bed bug infestation. The New York State Supreme Court and the New York Appellate Division, First Department, recently shed some light on this unpleasant and unsettling issue. In 85-87 Pitt St., LLC v 85-87 Pitt St. Realty Corp., et al., the plaintiff-buyer entered into a contract of sale with the defendant-seller to purchase an apartment building located at 85-87 Pitt St. in New York City. The contract of sale, entered into in December 2007, contained a clause establishing that the buyer accepted the building "as is" after having had an opportunity to inspect the premises. The contract also had a clause setting forth that all prior understandings and agreements between the parties were merged into the agreement and would be extinguished at the time of closing. In April 2008, after the closing had taken place, the buyer alleged to have discovered a bedbug infestation within the building. The buyer sued the seller, asserting various claims in tort and contract, and also sought rescission of the contract as well as full restitution, together with consequential damages and costs. The crux of the buyer's argument was that the seller knew of the presence of bedbugs in the building, but intentionally failed to notify the buyer of same. The buyer further claimed that the seller fraudulently concealed the extent of the infestation by falsely stating prior to closing that bedbugs had existed in the building, but had been confined to one apartment and cured. Finally, the buyer claimed that the infestation was a latent defect not reasonably discoverable with due diligence and, had it known of the bed bug infestation, it would not have proceeded with the closing. The seller moved to dismiss each of the claims asserted against it, and predicated its motion on the language contained within the contract of sale whereby the buyer purchased the property "as is" and that any and all prior agreements and understandings were merged into the contract. The seller also produced witness affidavits attesting that the seller did not make any representations regarding bed bugs in the building and, in fact, only addressed this issue several months after the closing. The court dismissed each of the claims asserted against the seller. In rendering its decision, the court relied upon the contract of sale between the parties, which established, in no uncertain terms, that the building would be sold "as is" and that all prior agreements and understandings merged into the contract and would be extinguished at the time of the closing. On appeal, the Appellate Division affirmed the dismissal of the case, again predicated upon the contract clause setting forth that the buyer had accepted the building "as is" after having had an opportunity for inspection, as well as the merger clause contained therein that extinguished any claims arising from the seller's alleged misrepresentations concerning bedbugs. Significantly, the appellate court noted that "a bug infestation is not a matter peculiarly within a seller's knowledge that requires disclosure by the seller. An infestation could be discovered with reasonable diligence and an inspection of the premises." The lesson to be learned from this case is simple - in the course of a buyer's due diligence in today's market, it should search building records for reports of a bed bug (or any insect/vermin) infestation, and may want to conduct its own physical inspection with an exterminator to uncover any such infestation, past or present. Moreover, should a buyer wish to have some safeguard against this issue, it should insist on a clause within the contract of sale whereby the seller proffers a representation about the presence or absence of bedbugs so as to be enforceable. Andrea Lawrence is senior counsel for Epstein Becker Green, New York, N.Y.