"As Is" or Is It?
What is required to allow the seller to convey property “as is”? More particularly, do the provisions in Section 7D of the TREC contracts meet the requirements allowing a seller to convey property “as is”?
The short answer to whether you can rely on the printed provisions in the TREC contracts to convey property “as is” with all warranties, other than warranty of title, negated is “No you cannot”.
Before we get into the details of why you cannot rely on the printed provisions in the TREC contracts, let’s examine what Texas courts require for an effective “as is” provision in a contract.
The gold standard for requirements for “as is” contracts is the 1995 Texas Supreme Court case which lawyers often refer to simply as “The Prudential Case”. This case involved the sale of the Jefferson Building in Austin from Prudential to F.B. Goldman. 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. Goldman sued Prudential and lost because of the “as is” provisions Prudential had in its contract. The court said that, to be effective as an “as is” sale, the contract must:
- State that the buyer is purchasing “as is” with any latent and patent defects and there is no warranty by Seller that the Property is fit for a particular purpose.
- Contain an acknowledgment by the buyer that the buyer is not relying upon any representation, statement or other assertion regarding the Property condition but is relying on buyer’s examination of the Property.
- Contain a statement that the buyer is taking title to the property with a specific understanding there are no express or implied warranties (except for limited warranties of title in the closing documents).
- Contain a provision that the “as is” provisions survive closing.
Besides these specific requirements, courts also consider the experience of the parties in real estate matters and the relative bargaining power of each party. It is helpful to address these issues in the contract by stating the experience of the buyer, assuming the buyer is an experienced investor, and by stating that they each have relatively equal bargaining power. It is also helpful if the buyer is represented by legal counsel.
Section 7D of the TREC contracts states that “As Is” means the present condition of the Property with any defects and without warranty except for the warranties of title and the warranties in this contract. This provision falls far short of the requirements required by the supreme court in the Prudential Case.
The takeaway from the language of the court in Prudential is that not all “as is” provisions are effective. Very precise language is required and even if you use all the right words, the court may look at the experience of the parties, their bargaining positions, whether the “as is” provision was freely negotiated, and whether they were represented by counsel to determine whether to enforce “as is” provisions. At least one Texas appellate court has held that the “as Is” provision in the TREC contracts is boilerplate and not freely negotiated.