If It Smells, You Better Investigate

The North Carolina Court of Appeals added further strength to the doctrine of Caveat Emptor on April 7, 2009 when it handed down its opinion in Sunset Beach Development, LLC v. AMEC, Inc., et al., ____ N.C. App. ____, ____675 S.E.2d 46, 52 (2009)".The key point for real estate professionals to learn from this case is that if something seems amiss, you better investigate.

In Sunset Beach, the developer plaintiff entered into a contract to purchase a 453 acre coastal tract from an entity named GGSH Associates. The contract was contingent on GGSH providing the developer with a wetlands delineation approved by the Army Corp of Engineers which did not vary more than three acres over or under twenty-five acres. If the variation in the wetlands delineation varied by more than three acres, the parties were required to renegotiate the price.

After the contract was executed, GGSH hired a consultant to prepare the wetlands delineation. At the same time, the developer hired the same consultant to perform a wetlands delineation on three other adjoining tracts that the developer had also purchased or was going to purchase and to produce a composite map of all four tracts. It is important to point out that during this time GGSH provided the developer with a key to the tract of property that allowed the developer with “unfettered access” to the tract.

At some point before closing, GGSH entered into an undisclosed agreement with the consultant whereby it agreed to pay the consultant $90,000 as long as the sale occurred for the original purchase price. GGSH’s consultant forged the name of a prior employee of the Army Corp of Engineers on the maps he prepared.

Upon their review of the composite map, the developer’s engineers and members raised concerns regarding the wetlands delineation. Specifically, the engineer was concerned (i) that “the wetland[s] information received was not sufficient for design due to the lack of information concerning wetland size, type, and directional/distance ties to an established boundary,” (ii) that the only date on the map was January 9, 1989, (iii) that the Army Corps had not issued a separate letter of wetlands certification, (iv) that the composite map was signed by an individual who did not work for the Army Corps at the time the composite map was prepared, and (v) that the composite map had no legend for the delineations even though a legend was required by the Army Corps. At no time did the developer contact the Army Corps to inquire about the authenticity or accuracy of the Composite Map.

After closing, the Army Corps sent a letter stating it had never received verified wetlands delineation from the consultant and requiring that work on the tract had to stop.

The Court of Appeals in Sunset Beach Development held that the developer did not reasonably rely on any misrepresentations made by the GGSH because (i) the developer had an opportunity to inspect the tract and (ii) the GGSH had not resorted to any artifice which was reasonably calculated to induce the purchaser to forego investigation action. Specifically, the Court of Appeals noted the developer had been given unfettered access to the tract so they had ample opportunity to inspect the tract. Further, the Court of Appeals noted that the following actions did not constitute an “artifice to induce” the developer into foregoing further investigation into the wetlands delineations: (1) GGSH making statements to the developer that the tract contained approximately twenty-five acres of jurisdictional wetlands, (2) GGSH’s representations in the contract that there were no known violations of environmental laws on the tract, and (3) GGSH entering into an undisclosed agreement with the consultant for a conditional payment of $90,000.00.

In its decision, the Court of Appeals focused on the fact that the developer never took any real steps to investigate whether the composite map was accurate. In essence, the Court of Appeals recognized that the composite map was so flawed that the developer could not have reasonably relied on it. This fact coupled with the fact that the Court of Appeals noted that both parties were sophisticated parties who had experience dealing with coastal real estate emphasized that the fact that the Court of Appeals is of the opinion that sophisticated parties know that they better conduct their own due diligence rather than rely on assertions from the adverse party.