In 1995 the Texas Supreme Court entered its opinion in Prudential Insurance Company of America v. Jefferson Associates, Ltd. and F.B. Goldman. This case involved the sale of the Jefferson Building in Austin from Prudential to F.B. Goldman. Four months later Mr. Goldman conveyed the building to Jefferson Associates, Ltd., an entity he formed. Mr. Goldman was a knowledgeable real estate investor who owned an interest in at least thirty buildings. Prudential’s property manager told Goldman’s agent that the property was “super fine” and one of “the finest little properties in…Austin”. The building contained asbestos. The contract betweenPrudential and Goldman provided in part “As a material part of the consideration for this Agreement, Seller and Purchaser agree thatPurchaser 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 on its examination of the Property. Purchaser takes the Property under the express understanding that there are no express or implied warranties (except for limited warranties of title set forth in the closing documents). Provisions of this Section 15 shall survive closing”.

Three years after closing, Goldman became aware of the asbestos when he attempted to refinance the building. He sued Prudential. The Texas Supreme Court ruled in favor of Prudential because the “as is” provision “precluded (Goldman) from proving thatPrudential’s contract caused him any harm”. The Court said that it should not be necessary for every “as is” provision to go into so much detail, but the language in Goldman’s contract “leaves no doubt”. However, the Court also recognized that certain aspects of a transaction may make an “as is” agreement unenforceable. For example, an “as is” agreement isn’t enforceable if it is induced by fraudulent representation or concealment of information by the Seller. A Seller can’t interfere with a Buyer’s ability to inspect the condition of property and insist the Buyer take it “as is”. Other aspects must also be considered. For example, is the “as is” provision an important part of the deal, or is it just “boiler plate”?

The 1995 case of Smith v. Levine decided by the San Antonio Court of Appeals is a good example of an “as is” clause that was not enforceable. In this case a TREC residential earnest money contract was used. Paragraph 7A was checked stating “Buyer accepts the Property in its present condition, subject only to any lender required repairs and “AS IS”. The contract also stated that the Sellers, Smiths, made “no warranties, either express or implied, as to any matter whatsoever, including,without limitation, the condition of the home” and that “no verbal contract or agreement contrary to any of the terms contained in the foregoing contract had been made”.

Smiths had attempted to sell the house to a tenant in 1988. However, the tenant’s inspector wrote a report stating that the house had a defective foundation. The tenant didn’t buy the house and the Smiths put the property on the market advertising it as being in excellent condition. In 1991, Levines bought the house after having an engineer do a walk through inspection. The engineer stated that cracks seen by Levines were minor and superficial. Smiths stated that the cracks were superficial and routine.

In 1993, Levines contracted to sell the house. Their buyer, Holmes, hired the same inspector who had inspected the house for the 1988 buyer. Holmes notified Levine of his inspector’s findings and terminated his contract. Levines then sued Smith and prevailed. This Court distinguished the Prudential case for several reasons. Levine was a first time homebuyer; Goldman owned many properties. The “as is” provision in Prudential stated it would survive closing,the language in the Smith/Levine contract did not. The language in the Smith/Levine contract said nothing about Levines relying on their own examination and not on the seller’s representations. In reading the Smith v. Levine opinion, it can be seen that the language of the “as is” provision and the circumstances of the parties were very important.

Both the Prudential and the Smith case cited Weitzel v. Baines, a 1985 Texas SupremeCourt case. Weitzel was a case involving a residential buyer (who happened to be an attorney). From language in the opinion it appears that a TREC earnest money contract and property condition addendum were used. The buyer, Weitzel, had the right to inspect the property and the seller agreed to pay up to $1,000.00 for repairs. The addendum stated “Failure to [inspect] shall be deemed a waiver of Buyer’s inspection and repair rights and Buyer agrees to accept the property in its present condition”. Weitzel did not have the property inspected although he discovered a “condemned” notice on the house. Apparently the house had a septic system problem. The seller stated that the house met city codes. However, the septic system didn’t work properly and Weitzel won his case both at trial and on appeal.

Real estate licensees are limited in the changes they are permitted to make to TREC promulgated contract forms. A licensee is required by TREC rules to advise parties to consult an attorney when there are unusual matters in a transaction which should be resolved by legal counsel. Although the words “as is” may seem very simple, they can be very complicated. Licensees should give serious thought to suggesting legal representation to parties who are dealing with a contract containing an “as is” provision. As Is Addendum for TREC Contracts.