The Supreme Court of Westchester County recently granted defendant’s motion to dismiss in the case of Batra v. Electronic Land Services. This case involved a major real estate deal, and highlighted many of the practical considerations involved in such transactions. It also arguably illustrated a situation where plaintiff simply had a great deal of bad luck – but in contractual terms, bad luck is often known as assumption of risk – who assumes the risk of bad luck? Under what circumstances might the contract exclude recovery? Such questions were answered by this case.
Background of the Case
Plaintiffs sought to purchase a large (> 10,000 acre) parcel of real estate in New Rochelle, New York – an affluent area near White Plains. As is quite common, the purchase was part of a larger redevelopment plan. Essentially, sometimes the value of real estate lies in its location and potential use, rather than the existing buildings. It is quite common for a developer, like the plaintiffs, to pay a high price for real estate and demolish the existing buildings in order to, for example, construct a shopping mall, office building, high rise condominium, or other use. The net value of this large-scale redevelopment greatly outweighs the initial costs of acquiring the land, even when demolition of existing buildings is factored in.
However, local municipalities are quite aware of this situation, and many are not proponents of redevelopment. For instance, a sleepy, affluent residential community like New Rochelle may feel that a giant office building or shopping mall replacing a park or housing area would dramatically and negatively affect the character of the community, to say nothing of housing prices. Homeowners typically do not want to find themselves living next to shopping malls or hotels, with attendant issues of noise, traffic, etc.
Thus the solution is zoning. Zoning is very much a creature of local government – it is essentially regulation of what may be built, and where. Zoning is an incredibly powerful tool, and subject to very little review (great deference) by the courts. Zoning may also be incredibly complex, requiring a team of attorneys simply to figure out.
In this case, the plaintiff and the defendant entered into a land purchase agreement in April 2005 for the parcel of land. Unbeknown to plaintiff, in May 2005 the City re-zoned the area in question to prohibit the form of development plaintiff sought to do unless the parcel of land was 15,000 acres or larger in size. Plaintiff closed the deal in June 2005 – and then found out that zoning ordinances prohibited their development plan, rendering the purchase an expensive mistake. Plaintiff’s lot was 14,000 acres in size.
Plaintiff then sued defendant for breach of contract – the contract also included a form of title insurance. Plaintiff’s theory was that they paid the defendant to conduct an independent title investigation, which they failed to do. If they had, they would have found that the conveyable property was actually greater than 15,000 acres in size, but because of a past defective metes and bounds description that was not discovered, the property had shrunk to 14,000 acres. Plaintiff’s also claimed they were owed damages under the title insurance policy.
Unfortunately, the title insurance policy covered situations where the defendant conveyed an interest in property they did not possess. For example if they had conveyed 2 acres to plaintiff where they only had the right to convey 1 acre, the policy would have applied. However, the way the policy was written, it did not cover the situation where defendant conveyed less than they could have… and it just so happened that the defect then caused the plaintiff to run afoul of the zoning regulations.
As far as defendant’s breach of contractual obligations regarding the zoning, the contract had a specific exclusion for damages caused by changes to governmental rules, regulations, and ordinances – such as re-zoning. Although defendant acted arguably less than admirably, the letter of the law and the contract acted to protect defendant and cause plaintiff to lose.
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