Sabo v. Delman, 3 N.Y.2d 623 (1958)

A party can claim fraudulent inducement to enter a lease if the landlord makes false representations about the zoning restrictions applicable to the property, even if the tenant covenants to avoid nuisances, and even if the tenant’s lawyer does not independently verify the zoning status based on the landlord’s assurances.

Summary

A tenant sued landlords for fraud and breach of warranty after discovering that the leased premises were not in an unrestricted zone as represented in the lease. The tenant intended to convert restaurant garbage into fertilizer. The New York Court of Appeals held that the landlords’ false representation about the zoning constituted fraud in the inducement, entitling the tenant to damages, even though the tenant covenanted to prevent objectionable odors. The Court reasoned that the tenant relied on the landlords’ specific assurance about the zoning status, leading them to believe the premises were unrestricted, and that the added expense of complying with more restrictive zoning regulations was a direct result of the fraud.

Facts

Tenant Sabo sought to lease property from Landlord Delman to convert restaurant garbage into fertilizer. The lease, executed on March 4, 1964, represented that the premises were in an unrestricted zone and that the proposed use would not violate zoning ordinances. The lease also contained a covenant by the tenant to prevent objectionable odors or gases. The premises were previously in an unrestricted zone but were rezoned in 1961 to an M-1 district, which allowed light manufacturing uses with conditions, including odor control. The landlords’ lawyer said that it would not be necessary for the tenant’s lawyer to check whether the premises were located in an unrestricted zone because the landlords “own the property, and we know the area,” that it is in an unrestricted zone, and “We [landlords] guarantee it.” After alterations and equipment installation, the city filed violations due to the failure to meet M-1 zoning standards. The tenant subsequently terminated the enterprise and sued for fraud.

Procedural History

The tenant sued the landlords for fraud and breach of warranty. The landlords counterclaimed for rent and use and occupation. The trial court ruled in favor of the tenant. The Appellate Division affirmed the trial court’s decision, with two justices dissenting. The landlords then appealed to the New York Court of Appeals.

Issue(s)

Whether a landlord’s false representation in a lease that the premises are in an unrestricted zone constitutes fraud in the inducement when the tenant relies on this representation, despite a covenant to prevent nuisances and the availability of public zoning information.

Holding

Yes, because the landlord’s specific representation about the zoning status induced the tenant to enter the lease, and the tenant relied on this representation to their detriment. The tenant’s covenant to prevent nuisances does not negate the fraudulent misrepresentation, as this is a general obligation even in unrestricted zones.

Court’s Reasoning

The Court of Appeals reasoned that the landlords’ representation of the property being in an unrestricted zone was a false statement of fact, not merely an opinion of law. The Court emphasized that the landlords explicitly assured the tenant that they knew the zoning status and guaranteed it, thus dissuading the tenant from independently verifying the information. The Court stated, “The statements in this case, both before the execution of the lease, and in the body of the lease, exemplify ideally an instance in which the statements are not intended or understood merely as an expression of opinion. Landlords said they knew the premises were in an unrestricted district. This meant that they knew as a fact, that the zoning resolution did not restrict the use of the particular premises, and tenant so understood it.”

The Court rejected the argument that the tenant should have known the actual zoning restrictions, stating that the tenant relied on the landlords’ guarantee. The Court also held that the tenant’s covenant to prevent objectionable odors did not negate the fraudulent representation, as this obligation exists even in unrestricted zones to prevent nuisances. Moreover, the damages awarded for removal and installation costs were deemed reasonable based on the evidence presented. The Court affirmed the lower court’s decision, holding the landlords liable for fraud in the inducement and upholding the damage award.