Effect and Enforceability of AS-IS Clauses in Real Estate Contracts
WHAT IS AN “AS IS” CLAUSE?
AS-IS clauses are best described as a species of “disclaimer of reliance” clauses. Under such clauses, a buyer generally agrees that she is entering a contract to purchase real estate relying solely on her own judgment and not on any statement or representation by the seller. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 178-81 (Tex. 1997).
Most real estate contracts contain a provision or paragraph providing that the buyer is purchasing the property on an “AS IS” basis. These clauses, often referred to as an “AS-IS ” or “AS IS WHERE IS” clause, are contained in most residential and commercial contract forms promulgated by the Texas Real Estate Commission and the Texas Association of Realtors.
The most common promulgated form – the TREC One to Four Family Residential Contract (Resale) – states the following at paragraph 7(D):
ACCEPTANCE OF PROPERTY CONDITION: “As Is” means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract. Buyer’s agreement to accept the Property As Is under Paragraph 7D(1) or (2) does not preclude Buyer from inspecting the Property under Paragraph 7A, from negotiating repairs or treatments in a subsequent amendment, or from terminating this contract during the Option Period, if any.
(Check one box only)
(1) Buyer accepts the Property As Is.
(2)Buyer accepts the Property As Is provided Seller, at Seller’s expense, shall complete the following specific repairs and treatments: _________________________
The forgoing is an example of a typical AS IS clause. Customized contracts drafted by attorneys typically include much more detailed AS IS clauses than what is contained in the sample above.
PURPOSE /INTENDED EFFECT OF AN AS-IS CLAUSE?
The purpose of an AS IS clause is to insulate the Seller from liability based upon an incomplete disclosure or other inadvertent misrepresentation /Failure of disclosure related to the condition or value of property being sold.
In general, a buyer who purchases property “as is” agrees to make her own appraisal of the property and accept the risk that she may be wrong. Williams v. Dardenne, 345 S.W.3d 118, 123-24 (Tex. App.-Houston [1st Dist.] 2011, pet. denied) (citing Prudential, 896 S.W.2d at 161). A buyer who purchases property “as is” chooses “to rely entirely upon his own determination” of the property’s value and condition without any assurances from the seller. Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex.1995); see also TEX. BUS. & COM. CODE ANN. § 2.316(c)(1) (West 2009) (“as is” agreement excludes implied warranties).
By agreeing to an AS IS purchase, the buyer assumes the responsibility for assessing the property’s value and condition as well as the resulting risk that the property is worth less than the price paid. Prudential, 896 S.W.2d at 161.
EFFECT OF VALID AS-IS CLAUSE IN A REAL ESTATE PURCHASE CONTRACT
Texas courts, including the Supreme Court of Texas, have upheld AS-IS clauses in real estate purchase and sale contracts. Case law generally establishes that a buyer who agrees to purchase property “as is,” acknowledges, by her own admission, that she is the sole cause of any damage that may result from unknown defects in the property.
Thus, the buyer’s undertaking of an independent evaluation constitutes a new and independent basis for the purchase, one that disavows any reliance on representations made by the seller. See Mid Continent Aircraft Corp. v. Curry Cnty. Spraying Serv. Inc., 572 S.W.2d 308, 313 (Tex.1978) (in “as is” contract, buyer “has taken the entire risk as to the quality of the [property] and the resulting loss.”). It is in this way that an “as-is” clause acts to sever the causal link between the alleged misrepresentation and damages that is necessary for recovery. Prudential, 896 S.W.2d at 161.
Thus, a valid “as is” clause negates the elements of causation and reliance . Both of these elements are essential to a buyer proving DTPA, fraud, or negligence claims relating to the value or condition of the property. See Prudential, 896 S.W.2d at 161; Welwood v. Cypress Creek Estates, Inc.,205 S.W.3d 722, 726 (Tex. App.-Dallas 2006, no pet.) (“In general, a valid `as is’ agreement negates the element of causation necessary to recover on claims regarding the physical condition of the property.”); Larsen, 41 S.W.3d at 253(holding that “as is” clause in earnest money contract conclusively negated causation and reliance elements of plaintiff’s fraud, negligence and DTPA claims); Boehl, 2011 WL 238348, at *2 (affirming summary judgment on ground that “as is” clause in TREC residential resale contract negated causation as to buyer’s DTPA, fraud and negligence claims).
IS AN AS-IS CLAUSE ENFORCEABLE?
Proof of an enforceable disclaimer-of-reliance clause can, as a matter of law, preclude a fraudulent-inducement claim. Lufkin, 573 S.W.3d at 229; Schlumberger, 959 S.W.2d at 181. Other causes of action arising from a Seller’s alleged disclosure deficiencies can also be precluded by valid AS IS clauses.
Not all AS IS clauses are enforceable, however. For example, a buyer is not bound by an “as-is” clause if she demonstrates that she was induced to enter the agreement by fraudulent representation or concealment of information by the seller. Prudential, 896 S.W.2d at 162.
FACTORS FOR DETERMINING ENFORCABILITY
The enforceability of a disclaimer-of-reliance provision is a question of law. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011) (citing Schlumberger, 959 S.W.2d at 181). Questions of law are decided by judges, while questions of fact are determined by jurors. Thus, a judge’s ruling on whether or not as AS IS clause is enforceable is often dispositive of cases alleging sellers’ non-disclosure or misrepresentation of property conditions.
In determining whether a disclaimer-of-reliance clause is enforceable, courts consider the totality of the circumstances and whether :
(1) the disclaimer language is clear;
(2) the terms of the agreement were negotiated, rather than boilerplate;
(3) the contract was the product of an arm’s-length transaction;
(4) the complaining party was represented by counsel; and
(5) the parties were knowledgeable in business.
To succeed on a theory that fraudulent inducement obviates the AS IS clause, the buyer must show that:
- the seller made a material misrepresentation;
- the seller was either aware that the representation was false or that he lacked knowledge of its truth;
- the seller intended for the buyer to rely on the misrepresentation;
- the buyer relied on the misrepresentation; and
- the buyer’s reliance caused injury.
This can be a difficult showing, and the proof required varies in each case.
A buyer or seller faced with litigating the effect and enforceability of an AS IS clause should contact man experienced real estate attorney.