Buyers Beware of the "As Is" Clause When Purchasing Commercial or Residential Property
By: Tara Sohlman
Texas permits buyers and sellers to enter into real estate contracts containing “as is” clauses, and such clauses will be enforced barring evidence showing the clause is invalid. Commercial and residential property purchase agreements can contain a clause stating the buyer is purchasing the property “as is” or “in its present condition,” which has been interpreted by Texas courts to operate the same as an “as is” clause. See Lutfak v. Gainsborough, No. 01-15-01068-CV, 2017 WL 2180716, at *3 (Tex. App.—Houston [1st Dist.] May 18, 2017, no pet.) (mem. op). If the clause is valid, the “as is” clause will provide protection for the seller on many claims a buyer could assert relating to the property as the clause will negate the key elements of reliance and causation.
- What Is a Buyer Doing When Agreeing to Purchase a Property “As Is”?
By agreeing to an “as is” clause, a buyer assumes the responsibility of the assessing a property’s value and condition. Further, the buyer assumes the risk that the property will be less than the purchase price. The Texas Supreme Court explained that “[b]y agreeing to purchase something “as is,” a buyer agrees to make his own appraisal of the bargain and to accept the risk that he may be wrong. The seller gives no assurances, express or implied, concerning the value or condition of the thing sold.” Prudential Insurance Company of America v. Jefferson Associates, Ltd., 896 S.W.2d 156, 161 (Tex. 1995) (citations omitted).
A valid “as is” clause prevents a buyer from holding a seller liable if the property is worth less than the price paid. When a buyer agrees to an “as is” clause, the buyer assumes the risk on his own. He agrees to take on the risk in determining the value of the property. A buyer need not undertake this risk; the option is to require that the seller assume part or all of that risk by providing warranties. As a result, the buyer becomes the sole cause of his injury as he removed the possibility that the seller’s acts or omissions would cause him to suffer damage. Id. The buyer’s assumption of the responsibility and risk constitutes a new and independent basis for the purchase, and the result is that the buyer disavows reliance on the seller’s representations. Id.; Lutfak, 2017 WL 2180716, at *3.
An “as is” clause protects the seller from many claims that a buyer could raise in relation to the purchase of the property. The “as is” clause negates the essential elements of reliance and causation for many of these claims, such as breach of contract, negligence, fraud, violations of Texas’ Deceptive Trade Practices Act (“DTPA”), and breach of express or implied warranties. Prudential Insurance Company of America, 896 S.W.2d at 160 (proof that conduct caused damages was a necessary element under fraud, negligence, DTPA, and breach of duty of good faith and fair dealing theories); Barnett v. Coppell North Texas Court, Ltd., 123 S.W.3d 804, 815 (Tex. App.-Dallas 2003, pet. denied) (in breach of contract action, plaintiff must prove that breach caused damages).
- Is the “As Is” Clause an Important “Basis of the Bargain”?
To assess whether an “as is” clause is enforceable, Texas courts will examine “the nature of the transaction and the totality of the circumstances.” The clause must be an important “basis of the bargain,” not an incidental or boilerplate provision in the contract. Further, the parties should be of relatively equal bargaining power. See Kupchynsky v. Nardiello, 230 S.W.3d 685, 691 (Tex. App.—Dallas 2007, pet. denied) (“as is” clause was not an important “basis of the bargain” as there was no evidence that it was a bargained for contract term in the parties’ agreement); Fletcher v. Edwards, S.W.3d 66, 70 (Tex. App.—Waco 2000, pet. denied); see also Johnson v. Perry Homes, No. 14-96-01391-CV, 1998 WL 751945, at *9-*10 (Tex. App.—Houston [14th Dist.] Oct. 29, 1998, pet. denied) (concluding that because numerous disclaimers in contract were part of the "boiler-plate" provisions in the contracts, there was no evidence the disclaimers were the “basis of the bargain” between appellants and Perry, nor were they part of a release executed in settlement of a dispute).
The “in its present condition” clause in Van Duren v. Chife, ___ S.W.3d ____, No. 01-17-00607-CV, 2018 WL 2246213 (Tex. App.—Houston [1st Dist.] May 17, 2018, no pet. h.) was unsuccessfully challenged as ambiguous and constituting a boilerplate clause. The Van Durens also argued that they were tricked into signing the contract version with the “in its present condition” clause. The Van Durens purchased a house from the Chifes. They signed a Texas Real Estate Commission form contract which provides two options for acceptance of the property: “in its present condition” or subject to the seller’s completion of specific repairs. The Van Durens’ contract selected the “in present condition” clause. Two years after moving in, the Van Durens discovered water intrusion and wet, rotting wood throughout the structure of the house. Id., 2018 WL 2246213, at *2.
The “in present condition” clause failed to constitute boilerplate language or be ambiguous. As addressed, the contract gave the parties two choices to accept the property “in its present condition” or subject to the seller’s completion of repairs. When a contract clause gives the parties the option to choose from two or more options, the clause is negotiable and will not be construed as boilerplate. Further, the “in present condition” clause is not ambiguous and operates as an “as is” clause. 2018 WL 2246213, at *6.
The Van Durens also asserted that they were tricked into agreeing to the “in present condition” clause. The original version of the contract did not contain the language “in its present condition,” however, the evidence established that the clause was added after negotiations between the Van Durens and Chifes. 2018 WL 2246213, at *7. The Van Durens did not present evidence that they were tricked into signing the final version with the “as is” clause. They tried to argue that they did not read it word for word, but failing to read the contract will not be a ground for avoiding its terms. Id. In fact, in Texas, parties who sign a contract are deemed to know and understand its contents and will be bound by the terms set forth therein. See Royston, Razor, Vickery & Williams, LLP v. Lopez, 467 S.W.3d 494, 500 (Tex. 2015).
- The Buyer’s Inspection: Creating an Independent Basis for the Purchase and Negating the Elements of Causation and Reliance
The buyer’s inspection creates a new and independent basis for the purchase and results in negating the elements of reliance and causation on the buyer’s claims against the seller. The buyer’s inspection constituted pivotal point in the case in Lutfak v. Gainsborough, No. 01-15-01068-CV, 2017 WL 2180716 (Tex. App.—Houston [1st Dist.] May 18, 2017, no pet.) (mem. op.). In this case, the “in present condition” clause from a standard Texas Real Estate Commission One to Four Residential Resale Contract protected the seller of the property from the buyer’s claims. Jeff Gainsborough purchased a townhome owned by Giliad Luftak in 2010. Luftak was the townhome’s original purchaser and owned the townhouse since 2009. Prior to the sale, Luftak completed a Seller’s Disclosure Notice pursuant to Texas Property Code section 5.008. The Disclosure Notice gave Gainsborough the right to inspect the property and, for consideration of $100.00, the right to terminate the contract during a ten-day period. Id., 2017 WL 2180716, at *1.
One day after signing the contract, Gainsborough inspected the house, and numerous problems were identified. Two days after the original contract was signed, the parties amended the contract to add the home inspection report and identify items that were to be repaired by Luftak. The parties later supplemented the amended terms; Gainsborough placed $2,500 of the purchase price in escrow. If Gilad made the repairs within thirty (30) days of escrow, he could demand release of the $2,500 from escrow. Otherwise, Gainsborough could demand release of the money and make the repairs himself. The amendment and supplement of the amendment did not alter or supersede the “in present condition” purchase of the house as agreed under the original contract. Id., 2017 WL 2180716, at *2 & *4. After closing on the townhouse, receiving the $2,500 because Luftak did not make the repairs, and moving in, Gainsborough discovered additional problems with the house, including it leaked when it rained and that the air conditioning was insufficient to cool the home. He hired two contractors to make repairs. Id.
Gainsborough argued he was fraudulently induced to accept the house “in its present condition.” He asserted that the Seller’s Disclosure Notice identified only an unwrapped pipe in the attic broke in winter 2009 and that repairs were made, including replacing sheetrock and insulation. Gainsborough asserted that Luftak knew the townhouse had suffered water penetration and wood rot but did not disclose these facts. A letter showed that the 2009 burst pipe actually flooded the home and cost Luftak $150,000 in repairs; there were also photos of the damage taken by his insurer. However, Gainsborough conducted his own independent inspection which revealed several areas of concern that he argued Luftak concealed from him. His inspector concluded that there were areas of water penetration and damage, but the causes could not be determined. Gainsborough did not renegotiate the contract after the inspection to remove the “as is” provision. “[T]exas courts consistently have concluded that a buyer’s independent inspection precludes a showing of causation and reliance if the buyer continued to complete the purchase after the inspection revealed the same information that the seller allegedly failed to disclose.” Id., 2017 WL 2180716, at *5 (citations omitted). This principal becomes particularly true when the buyer does not renegotiate the purchase agreement after the inspection reveals the information and the buyer chooses to rely on the inspection. Id. As a result, the “as is” clause prevents Gainsborough from establishing the elements of causation and reliance that are necessary for his claims for fraud, DTPA violations, and negligent misrepresentation. Id.
- Fraudulent Concealment: Can It Destroy a Buyer’s Reliance?
Exceptions exist to the enforceability of an “as is” clause. A seller will not be protected by an “as is” clause that the seller induced the buyer to enter into through fraudulent representations or by concealing information. A seller cannot assure the buyer of a specific condition to induce the buyer to enter into the “as is” agreement and then later disavow that assurance. Likewise, a seller can also not be protected if a buyer is entitled to inspect the property and that inspection is impaired or obstructed by the seller. In these types of situations, an “as is” clause will not bar the buyer’s recovery against the seller. Prudential Insurance Company of America, 896 S.W.2d at 162. To defeat an “as is” clause with a fraudulent concealment type argument, the buyer must establish that the seller possessed the information that the seller allegedly conceals or misrepresents.
The type of information required for fraudulent concealment to defeat an “as is” clause can be found in Nelson v. Najm, 127 S.W.3d 170 (Tex. App.—Houston [1st Dist.] 2003, pet. denied). In this case, Najm purchased a gas station from the Nelsons “as is” without conducting an inspection. The Nelsons did not disclose the existence of an underground waste oil tank and specifically told Najm that no inspections were necessary. Id. at 172-173. After purchasing the gas station, Najm discovered the underground tank and that the property did not comply with environmental standards. Id. at 173. In this situation, the “as is” case will not protect the sellers from a fraud claim. The Nelsons concealed a known fact and said an inspection was not necessary. There was no independent inspection that would eliminate the buyer’s reliance on their representations. An “as is” clause entered into as a result of fraudulent misrepresentations will not negate the causation element of fraud. Id. at 175-176.
Establishing what the seller should know or may know was insufficient to defeat the “as is” clause in Prudential Insurance Company of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995). In this case, the purchaser sued the seller for misrepresentation and concealment with respect to the existence of asbestos in the building. Asbestos was discovered in the building three years after the purchase. The contract for the purchase of the building contained the following provision:
As a material part of the consideration for this Agreement, Seller and Purchaser agree that Purchaser is taking the Property “AS IS” with any and all latent and patent defects and that there is no warranty by Seller that the Property is fit for a particular purpose. Purchaser acknowledges that it is not relying upon any representation, statement or other assertion with respect to the Property condition, but is relying upon its examination of the Property. Purchaser takes the Property under the express understanding there are no express or implied warranties . . . .
Id. at 160. The bargaining power and knowledge of the purchaser and seller were not issues in this case. The buyer challenged the “as is” clause on the basis that the seller concealed information.
The purchaser argued that the “as is” clause could not be enforced because the seller fraudulently concealed information. The evidence showed that the buyer requested the building plans and specifications, and the seller produced only the “as built” plans. The seller had the plans and specifications but asserted it could not locate them at the time the buyer requested them. In viewing the evidence in the light most favorable to the buyer, the Supreme Court assumed that the seller concealed the plans and specifications. Even that concealment was not sufficient to overcome the “as is” clause.
The plans and specifications did not establish that the building contained asbestos. Instead, they only showed that the building may contain asbestos. The specifications called for the use of a fireproofing material called Monokote, which contained asbestos (based on earlier published information), or an approved substitute. Thus, the seller could not be certain if Monokote was used in the building. The seller also knew that buildings built about the same time as this one, in the early 1970s, contained asbestos. Overall, the evidence showed that the seller knew there was a good chance that the building could contain asbestos. Id. at 159-160. However, there was no evidence showing the seller actually knew the building contained asbestos. “A seller has no duty for failing to disclose facts he does not know. Nor is a seller liable for failing to disclose what he only should have known.” Id. at 162. The seller was not liable for failing to disclose the possibility of asbestos as the seller did not possess specific knowledge that the building contained asbestos. Id.
Later discovered defects may also not support a fraudulent concealment or inducement challenge to an “as is” clause. In Van Duren v. Chife, ___ S.W.3d ____, No. 01-17-00607-CV, 2018 WL 2246213 (Tex. App.—Houston [1st Dist.] May 17, 2018, no pet. h.), as addressed previously, the Van Durens discovered water intrusion and resulting wood rot and structural damage two years after purchasing the house from the sellers. They claimed that the sellers’ broker, Stacy Mathews, fraudulently induced them to enter into the contract by failing to inform them about misrepresentations in the Seller’s Disclosure. A Seller’s Disclosure is required by Texas Property Code section 5.008. The seller, not the broker, completes the Seller’s Disclosure. Under the statute, the Disclosure must only be completed “to the best of the seller’s belief and knowledge as of the date the notice is completed and signed.” Tex. Prop. Code § 5.008(d). A seller does not possess an ongoing duty to update the Disclosure. A broker cannot be held liable for misrepresentations or omissions in the Disclosure as they are not his; only the seller makes the representations in the Disclosure. Id. A broker possesses a duty to come forward if he has reason to believe the Disclosure is false or inaccurate, and he can be liable if a plaintiff shows that he knew the Disclosure to be untrue. Id.; Tex. Occ. Code § 1101.805(e). Similarly, repaired defects will not rise to the level of fraudulent concealment. A repaired defect differs from having awareness of an existing defect. “[K]nowledge of a leak that was repaired, without more, does not support a reasonable inference of knowledge of an existing defect.” 2018 WL 2246213, *8.
The Van Durens asserted they relied on the Chifes’ Seller Disclosure, which indicated that the Chifes were not aware of any defects or malfunctions in the house, roof repairs, other structural repairs, water penetration, wood rot, or conditions that would materially affect one’s health or safety. The Van Durens argued that the Sellers’ Disclosure was false and that the Chifes and Mathews knew of water penetration before they sold the house. The evidence available showed prior emails from November 2012 between the Chifes and builder about “construction anomalies” and “code violations” and asking that repairs be made. The Chifes were not happy that the builder sent a carpenter to make the repairs. Mr. Chife testified that the builder fixed everything, and they experienced no further problems with the house. November 2013 e-mails were also introduced to show that Mathews informed the Chifes of several issues with the house, including an exterior leak at the front door from the balcony above wherein he advised that this could be a structural issue. Mrs. Chife told him to have the area checked and fixed. The Chifes and Mathews testified the e-mails were written after the Van Durens brought the balcony leak to Mathews’ attention. Mathews testified he photographed the area and other issues that the Van Durens pointed out during one of their visits to the house. 2018 WL 2246213, *2-*3. Overall, evidence showed Mathews knew of the November 2013 e-mails. However, the evidence failed to support that he knew of undisclosed defects. 2018 WL 2246213, *8. There was no evidence that Mathews fraudulent induced the Van Durens to enter into the contract.
As these cases demonstrate, a buyer must be very cautious when entering into a bargained for “as is” clause and should build in protections such as a termination period during which an inspection can be conducted. After an inspection, if defects are found, the buyer must determine if they are acceptable, and if the buyer wants to renegotiate the contract or terminate the contract. Otherwise, the buyer may face very difficult challenges in overcoming an “as is” clause. Texas law supports enforcement of these clauses, and they will have the effect of negating key elements in most of the claims a buyer would bring against a seller.