Happy Halloween: On Haunted Houses and Due Diligence in Real Estate Deals

Oct 31, 2011 | Filed Under Property Law, Real Estate | Leave a Comment 

In the spirit of Halloween we’d like to share a story about buying a haunted house. You’ll likely dismiss this ghostly yarn as a fable. But be warned and keep your wits about you as this ghoulish tale spooked no less than five learned Judges of a court of law.

The year is 1989. A New York City resident, like so many other hustled and haggard urban dwellers, sought a nice place in the north country to rest and sooth his bones. Our city slicker found a riverfront Victorian in the village of Nyack, sitting on the western shore of the Hudson River’s widest point. And as it turns out, three miles to the east, as the crow flies, lies the village of Sleepy Hollow. That’s right, the house at the heart of this story is just a few miles from where the galloping headless horseman stalked Ichabod Crane. Now, it could be that the dense woods of Weschester and Rockland Counties so stirred the imagination of the early Dutch inhabitants that they dreamt up all these phantoms turned folk tales. Or maybe the vast expanse of the Hudson at this very point in the river’s course was what scared the towns to the east and west. Who knows what spirits lurk in the trees hugging the Hudson or drift across the deep waters beneath the creaking Tappan Zee Bridge? One thing was for sure, our hopeful purchaser was in the dark.

The folklore of the village of Nyack tells of a haunted house on the riverfront where spectral apparitions and encounters with spirits were commonplace. The local and national media even reported on the haunted Victorian’s paranormal bona fides in 1977 and 1982. No other than the owner of the house for sale had promoted the idea that her house was possessed and had it included in a tour of the haunted houses of Nyack. Our purchaser knew none of this and signed a Contract of Purchase and Sale.

Now, when you look to purchase a house or an apartment, you should have your lawyer review the contract presented by the seller — before you sign. You will also need to conduct due diligence on the property you are purchasing. And your due diligence should include a review of the quality of the title of the property in question and thorough inspection of the property, all to be sure that you know what you are getting.

So did our city slicker’s lawyer find the skeletons in the closet of the Victorian on the Hudson? And having signed a contract while putting down $32,500 in escrow, did he go through with the deal after discovering, to his horror, that the house was widely reputed to be possessed by poltergeists?

We find the answers to these questions in a case called Stambovsky v. Ackley, decided on July 18, 1991, by five Appellate Judges of the State of New York. The Judges decided that the house in our story was haunted as a matter of law, based upon the owner’s statements and the house’s reputation in the community. After all, ex facto jus oritur (common law arises out of facts). The Judges also held that the purchaser would lose his down payment. However, the Judges concluded that the purchaser would not be forced to purchase the haunted Victorian. The contract was not “fair and open”, the Judges reasoned, as the presence of ghosts so impaired the value of the property and its potential for resale that principles of equity prevented enforcement of the contract.

No doubt you are confused and perhaps just felt a chill in the air. Let us unravel what was decided in this most unusual case.

The Judges noted that with respect to transactions in real estate, New York adheres to the doctrine of caveat emptor. Caveat emptor means “buyer beware” and imposes no duty upon the seller to disclose any information concerning the premises. Instead, caveat emptor requires that a buyer act prudently and promptly to assess the fitness and value of his purchase. However, as a very narrow exception to the rule, caveat emptor will not prevent a buyer from backing out of a deal where there was concealment, by the seller, of a material (i.e. very important) fact. And so the Judges tried to figure out if purchaser did his diligence to the standards of the doctrine of “buyer beware.”

Indeed, purchaser and his lawyer did their diligence. They inspected the premises, without the help of Ghostbusters, and searched available public records with respect to title. But the Judges resolved that even the most meticulous inspection and search would not reveal the presence of poltergeists. They then decided, as a matter of law, that the purchaser would lose his down payment on the haunted house; yet as a matter of equity, the buyer would not be required to go through with the deal.

And so our ghost story ends with three chilling lessons. For the first lesson, let it be known that, as a matter of law, there are indeed haunted houses in the State of New York! For the second lesson, let a buyer and her lawyer beware that the gory details of a property being purchased must be discovered through their own due diligence. And for a third and final lesson, know that if you discover a skeleton in the closet of the house or apartment you wish to purchase, unless you have negotiated a no-hauntings clause in the contract, you can always get out of the deal, so long as you are willing to part with your down payment. Now that is scary.

Happy Halloween!

[Disclaimer: The above might be described as historical law fiction. The case of Stambovsky v. Ackley is real and the discussion of real estate law is sound, but no bit of this ghost story should be relied upon as legal advice. Ergo, caveat lector, or reader beware! Consult with a real estate attorney to address your specific situation].


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