The Impact Of Princes Point v. Muss Development Decision

Sellers of U.S. commercial real estate typically agree to make a number of representations, warranties and covenants in the associated purchase and sale contract. The substance and breadth of those undertakings are usually heavily negotiated by sellers and buyers. This issue was recently highlighted in a decision earlier this year by the New York Appellate Division, First Department, in the case of Princes Point LLC v. Muss Development LLC.

Commercial real estate acquisitions in the U.S. are generally completed on an "as-is" basis premised on the deep-rooted real estate doctrine of caveat emptor (or buyer beware). Sellers as a result tend to resist and stridently argue against making any representation, warranty or covenant about the subject property or properties unless it is considered a material inducement to a buyer's entering into the contract or cannot otherwise be determined by a buyer through inspection and customary due diligence methods. The consequence of this is a limited set of seller representations, warranties and covenants in the contract, which are often weightily relied upon by the buyer in its ultimate decision to enter into the contract and proceed with the transaction.

If a representation and warranty made by the seller when the purchase and sale contract is signed is discovered to be materially false prior to the closing of the transaction, subject to the terms of the purchase and sale contract, the buyer might bring a legal action under common law against the seller seeking to rescind or void the contract on the grounds that the buyer would not have entered into the contract if the falsehood or misrepresentation was known by it at the time of contract execution. However, buyers of New York commercial real estate and their advisors should take caution before bringing an action for rescission prior to the closing date as it might have the unintended and devastating effect of constituting an anticipatory breach by the buyer. The New York Appellate Division, First Department, came to that conclusion earlier this year in Princes Point LLC v. Muss Development LLC. The case, however, is pending review by the Court of Appeals after the non-prevailing buyer's motion to New York's highest court to appeal the decision was recently granted.

Anticipatory breach, also known as repudiation or anticipatory repudiation, is a fundamental and long-standing principle of contract law. It is essentially a statement or an act by a party to a contract that indicates either that party's intent to breach or inability to perform a promise. Anticipatory breach occurs before performance under the contract is due, but is nonetheless deemed a breach as a matter of law.

Some jurisdictions implement different standards for determining when anticipatory breach has occurred. The "relaxed standard" under the Restatement (Second) of Contracts and the Uniform Commercial Code (UCC) requires that the statement or act be sufficiently positive to...