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Seller Can’t Hide Behind An “As-Is” Clause

by / Friday, 14 October 2011 / Published in Articles
Business Litigation

Seller Can’t Hide Behind An “As-Is” Clause

 By Bryan Mashian, Esq.  

 

A common misunderstanding is that an “as-is” provision in a real estate purchase and sale contract relieves the seller of the duty to disclose to the buyer any of the property’s defects. Generally, even with an as-is provision, the seller must disclose facts known to seller that materially and adversely affect the value of the property, which facts are not known to or not readily ascertainable by the buyer.

 

Duty to Disclose 
  •  An “as-is” provision in general will not override the seller’s duty to disclose material latent defects known to the seller.
  • For example, one court ruled that the buyer could sue for fraud despite “as-is” provisions when the seller knew hazardous materials contamination existed on the property, yet represented there was none. The seller had built a concrete building over an area the seller knew hazardous substances existed yet did not disclose this condition to the buyer.
  • In another case, the seller’s failure to disclose that a murder had taken place in a house 10 years earlier allowed the buyer to sue for rescission and damages. This court held that murder is not such a common occurrence as to impose on the buyer a duty to inquire about and discover it.
Buyer’s Background Bears 
  • Some courts have considered the buyer’s sophistication and experience and held that the buyer could not overcome the as-is provision to win a claim for the seller’s failure to disclose physical defects.
  • For example, a court held in favor of the seller where the buyer was a businessman and a real estate agent.
  • In this case, the court stated that this buyer therefore could be expected to be aware of the meaning of an “as-is” sale and to examine the property thoroughly. This buyer purchased a building without checking the basement which had a bulge in the wall and required extensive repairs.
When in Doubt, Disclose 
  • There is no bright-line test for determining whether the seller must disclose a known defect. The courts make this determination on a case by case basis. The courts consider and weigh various factors, such as the nature of the defect, the type of property and the parties’ experience.
  • A good rule of thumb is that if the seller wonders whether or not to disclose, the seller should disclose because the defect is likely worthy of the buyer’s consideration.
  •  The seller should make the disclosure in writing to avoid any dispute by the buyer of the seller having made the disclosure.
  • The seller preferably should make the disclosure as early as possible in the transaction to avoid wasting the parties time with the buyer who would not buy the property with such a defect.
As-Is Acknowledgments  

A comprehensive “as-is” provision should at minimum state:

  • The buyer has thoroughly and independently investigated the property and is fully satisfied with the property’s condition;
  •  Since not all buyers perform such due diligence, the clause should add that if the buyer does not perform these inspections, then the buyer assumes all associated risks;
  • The seller has not made any oral or written representations or warranties;
  • The buyer is purchasing the property “as-is,” with all known or unknown faults and defects.
Please Release Me  
  • The seller can further expand the protection of an as-is clause by having the buyer release the seller from all claims arising from the property’s condition. However, such an aggressive provision may make the buyer suspicious that the seller is hiding something and thus may not be acceptable in a traditional sale.
  •  But, when a lender sells a property it acquired via foreclosure, such a release is commonplace since the price is reduced in exchange for the buyer assuming more risk.
  • A generic release in California only discharges known claims. The seller can have the buyer release unknown claims as well by including an express waiver of the applicable laws. In sum, regardless of how well-drafted and comprehensive an as-is provision may be, the seller should be mindful that the seller may still have to disclose to the buyer material defects known to the seller.

 

 

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