A failed wet sprinkler system in a South Boston luxury apartment building spawned a case showing courts are unlikely to entertain buyers’ suits against sellers for defects discovered after closing.
Most commercial real estate sales are structured to allow buyers to inspect properties for defects and environmental problems before they commit to closing. In exchange for this free look, buyers are expected to accept properties in “as is” condition with all faults, including latent defects.
Buyers usually cannot sue sellers because of problems discovered after the sale, unless there is fraud or intentional misrepresentation. The federal district court for Massachusetts recently validated this arrangement, in Aspen American Insurance Co. v. Covenant Fire Protection Inc.
City Point Capital developed a luxury apartment building in South Boston known as Westside Crossing. The building was equipped with a wet sprinkler fire protection system. After completing the project, City Point agreed to sell it to Akelius US LLC for $16.45 million. The purchase and sale agreement between City Point and Akelius allowed the latter to inspect the building before closing. If Akelius closed on the sale, it would acquire the building “as is,” without representations or warranties by City Point. Akelius completed the purchase in October 2015.
During the winter of 2016, the sprinkler system’s pipes burst twice, causing $340,000 in damage. Akelius recovered a hefty insurance settlement from its insurer, Aspen American Insurance Co., whereupon Aspen was subrogated to Akelius’s claims involving the sprinkler system. Aspen sued City Point, the sprinkler system installation contractor, and City Point’s engineering firm in federal district court. Aspen claimed that City Point and the other defendants were “negligent, reckless and/or otherwise failed to use due care” when installing the sprinkler system.
Real estate investor Akelius US LLC bought 339 D St. in South Boston for $16.45 million in 2015, but during the winter of 2016 its sprinkler pipes burst twice, causing $340,000 in damage. Image courtesy of Google Maps
Court Disagrees with Claims
City Point moved for summary judgment to dismiss Aspen’s claims against it, citing the “as is” clause in the purchase and sale agreement. Aspen opposed City Point’s motion for summary judgment, and moved to amend its complaint to add claims against City Point for breach of contract and breach of the implied warranty of habitability. The federal court ruled on these motions last February.
As to City Point’s motion for summary judgment, the court examined clauses in the purchase and sale agreement between City Point and Akelius, where Akelius represented that it was a knowledgeable real estate investor, it had opportunities to inspect the building before closing and it acquired the property “as is” and without representations or warranties. The court also noted that Aspen’s complaint did not accuse City Point of fraud or intentional misrepresentation. The court ruled that Aspen could not maintain its subrogated negligence and recklessness claim against City Point under these circumstances and dismissed that claim.
The court next considered Aspen’s motion to amend its complaint with claims against City Point for breach of contract and breach of the implied warranty of habitability. In the later stages of lawsuits, courts can allow amendments to complaints for “good cause,” but can deny them if the amended complaint would fail to state a viable claim against the defendant.
Regarding Aspen’s proposed breach of contract claim, the court noted that City Point made no warranties on the condition of the property, and that even if City Point had done so, the warranties would have been extinguished by merger when Arkelius accepted the deed to the property at closing. The court denied Aspen’s motion to add the breach of contract claim to its complaint against City Point.
The court then addressed Aspen’s bid to add a claim against City Point for breach of the implied warranty of habitability. Massachusetts courts recognize an implied warranty of habitability for residential leases and sales of new homes by builders. However, the courts have not yet extended the implied warranty to sales of apartment buildings to experienced real estate investors like Akelius. The court was reluctant to let Aspen pursue the implied warranty claim against City Point but gave Aspen until March 28 of this year to file a renewed motion to amend its complaint, if Aspen alleged specific facts supporting the claim. Aspen declined to file the renewed motion, effectively ending its suit against City Point.
Christopher R. Vaccaro
This case confirms that, in the absence of fraud or intentional misrepresentation, courts are unlikely to entertain buyers’ suits against sellers for defects discovered after closing, if the buyer is a knowledgeable investor with an opportunity to inspect the property before closing, and the purchase and sale agreement disclaims representations and warranties as to the property’s condition. Prudent sellers and their lawyers should draft their purchase and sale agreements with this in mind.
Christopher R. Vaccaro, Esq. is a partner at Dalton & Finegold, L.L.P. in Andover. His email address is cvaccaro@dfllp.com.
