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The Effect of "As-Is" Clauses on Brokers and Sellers
Question Presented:
Does an "as-is" clause in a contract for the sale of real estate relieve the seller and his broker from liability for defects in the property?
Summary:
Two sources should provide the answer to the above question: case law and the relatively new state property condition disclosure statutes which have been passed in twenty-six states. There is substantial case law which covers disputes prior to the enactment of the disclosure statutes, and although there is some variance from state to state, there are some general rules to be gleaned from this case law, which remains good law for states without disclosure statutes. There is, however, virtually no case law which interprets the new disclosure statutes, some of which provide for "as-is" clauses and none of which expressly explain under what conditions such a clause is effective when a cause of action is brought under the disclosure statute. Many states (e.g., Illinois and Ohio) do, however, state that common law obligations and rights are not usurped by their disclosure statutes. Thus, even for the states which have enacted disclosure laws, we should be able to rely on the past decisions and policies of courts which have generally been hesitant to give "as-is" clauses effect.
Discussion:
I. Common Law -- General Trends
A. Latent Defects -- No Bar for Misrepresentation, Concealment or Non-Disclosure of Known Defects
Courts have generally held that an "as-is" clause, by itself, does not relieve a residential property seller or broker from liability for latent defects which they knew of or latent defects which the seller or broker had a duty to inspect for and discover. Stormont v. Astoria Limited, 889 P.2d 1059 (Al. 1995); Gibb v. Citicorp Mortgage, Inc., 518 N.W.2d 910 (Neb. 1994); Silva v. Stevens, 589 A.2d 852 (Vt. 1991); Stemple v. Dobson, 400 S.E.2d 561 (W.Va. 1990). This is because an "as-is" clause, by itself, never bars claims of fraudulent misrepresentation and in most states does not even bar claims of negligent misrepresentation, concealment or nondisclosure. E.g., Stormont, 889 P.2d at 1063; Gibb, 518 N.W.2d at 918; Silva, 589 A.2d at 863; Stemple, 400 S.E.2d at 567; Rayner v. Wise Realty Co., 504 So. 2d 1361 (Fla. App. 1987); Sheehy v. Lipton Industries, Inc. 507 N.E.2d 781 (Mass. App. 1987); Ferguson v. Cussins, 713 S.W.2d 5 (Ky. App. 1986); V.S.H. Realty, Inc. v. Texaco, Inc., 757 F.2d 411 (Mass. App. 1985).
For instance, in Silva, the Vermont court held that an "as-is" clause did not overcome the misrepresentations of the seller's broker. 589 A.2d at 856. In this case, there were multiple problems with an earth-sheltered home, which were not easily discoverable by the buyer and about which the seller had knowledge. Id. at 855. There was an "as-is" clause in the sales contract. Id. However, the broker had made positive statements in his advertising, stating that the home was built to the "strictest standards" and that the garage was "well constructed." Id. at 856. The court determined that these statements were negligent misrepresentations, and barred the seller from using the "as-is" clause as an affirmative defense. Id.
In Stemple, the West Virginia court held that the seller was liable for concealment and nondisclsoure despite the existence of an "as-is" clause in the sales contract. 400 S.E.2d at 567. Here, the buyer determined that the seller had fraudulently concealed evidence of termite-damaged timbers and had misrepresented to the buyer that there was not serious termite damage. Id. at 561. The court stated that "the existence of an 'as is' clause in a contract of sale for real estate will not relieve the vendor of his obligation to disclose a condition which substantially affects the value or habitability of the property, and which condition is known to the vendor, but not to the purchaser, and would not be disclosed by a reasonable and diligent inspection. Such failure to disclose constitutes fraud." Id.
In Gibb, Citicorp had acquired the subject property through foreclosure of the mortgage. 518 N.W.2d at 915. Its agent knew, however, that the property was infested with termites and had extensive damage. Id. Citicorp hired a service to treat the termites and conceal most of the visible damage. Id. The agent then showed Gibb what was left of the visible damage and assured him that all necessary treatments and repairs had been made. Id. The agent did not disclose the full extent of the damage. Id. The subsequent purchase agreement stated that Gibb had personally inspected the property, that there were no warranties and that the property was "sold strictly in 'AS IS' condition." Id. When Gibbs later brought suit, the court held that neither the disclaimer nor the "as is" clause defeated a cause of action for misrepresentation or concealment. Id. at 918. The court reasoned that the extent of the termite damage was not discoverable by the buyer and that the "as is" clause, thus, did not relieve the seller and his agent of their duty to make honest representations and full disclosures. Id.
Similarly, in V.S.H. Realty, the purchase agreement contained an "as-is" clause, gave the buyer the right to inspect and made no representations as to the condition of the property. 757 F.2d at 413. The seller made a partial disclosure regarding some fuel oil seepage, but did not disclose the full extent of the problem or the fact that the Coast Guard had initiated an investigation of the seepage. Id. Neither problem was discoverable via buyer's inspection. Id. The court noted that "a party who discloses partial information that may be misleading has a duty to reveal all the material facts he knows to avoid deceiving the other party." Id. at 414. Thus, the plaintiff's claim of common law misrepresentation was not barred by the "as-is" clause. Id. The court did note, however, that an "as-is" clause would protect a defendant against his failure to disclose a material defect if he did not have knowledge of the defect or a duty to inspect and discover it. Id. at 418. See also, The Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995); Callahan v. Miller, 599 N.Y.S.2d 145 (1993).
Ohio decisions bear mentioning because Ohio courts have uniquely and consistently held in the past that an "as-is" clause, while not barring claims of misrepresentation and concealment, does insulate a seller and broker from claims of non-disclosure of even latent defects. Jacobs v. Racevskis, 1995 WL 396510 (Ohio App. 2 Dist. 1995); Barker v. Stoner, 650 N.E.2d 1372 (Ohio Mun. 1994); Vecchio v. Kehn, 1994 WL 449703 (Ohio App. 8 Dist. 1994); Brewer v. Brothers, 611 N.E.2d 492 (Ohio App. 12 Dist. 1992); Kossutich v. Krann, 1990 WL 118705 (Ohio App. 1990). What remains to be seen, however, is whether Ohio courts in the future will hold similarly in light of the fact that their new disclosure statute does not provide for "as-is" clauses at all. (See discussion of disclosure statutes in II. below.)
B. Patent Defects -- "As-Is" Clauses Are Effective
Patent defects present a different situation. Where a defect is obvious or easily discoverable by the buyer, the burden is shifted from the seller to the buyer. Mulkey v. Waggoner, 338 S.E.2d 755 (Ga. App. 1985); Lingsch v. Savage, 29 Cal. Rptr. 201 (1963); Bryant v. Troutman, 287 S.W.2d 918 (Ky. 1956). The "as-is" clause is then effective. Put another way, where the defects are patent, the buyer does not rely on the seller or broker's representations.
For example, in Mulkey, the court noted that if evidence of beetle damage could have been observed by the buyer, the "as-is" clause would have been effective. 338 S.E. 2d at 755. Similarly, the court in Lingsch, while holding that the presence of an "as-is" clause did not discharge the seller of liability for the latent defects which he had failed to disclose, noted that the holding would have been different had the defects been patent. 29 Cal. Rptr. at 201. The court stated that such a clause would have been effective as to a dilapidated stairway, but not as to a missing structural member, a subterranean creek, or an unexploded bomb buried in the basement -- if such defects were known by the seller. Id.
C. Where the Buyer Cannot Claim Reliance on Seller or Broker -- "As-Is" Clauses Are Effective
An "as-is" clause may also be effective in other situations where the broker or seller can establish that the buyer did not rely on his representations or nondisclosure. Haygood v. Burl Pounders Realty, Inc., 571 So. 2d 1086 (Ala. 1990). This may occur where a sales contract provides for buyer inspection, where the subject defect would have been discoverable through such an inspection and where the buyer fails to make the inspection. Callahan, 599 N.Y.S. 2d at 145; Young v. Keith, 492 N.Y.S.2d 489 (1985). It may also occur where the "as-is" clause specifically references a particular defect in the property or where the buyer has been put on notice regarding a specific problem. Copland v. Diamond, 624 N.Y.S.2d 514 (1995); Prudential Ins. Co., 896 S.W.2d at 156; Leatherwood, Inc. v. Baker, 619 So. 2d 1273 (Ala. 1992). In all these cases, the requisite reliance of the buyer on the seller is missing (It is missing with patent defects, as well) and the "as-is" clause then shifts the burden to the buyer.
For instance, in Callahan, the "as-is" contract expressly provided that the buyers were to rely on their own inspection of a particular aspect of the property -- that is, the contract was contingent upon the buyers obtaining a water flow test to determine the adequacy of the water supply. 599 N.Y.S. 2d at 146. The buyers, however, elected not to obtain such a test. Id. at 146-47. When the buyers sued, claiming that that seller had fraudulently represented the water supply as adequate, the court held that the buyers, by failing to investigate themselves, declined to rely on any representations of the seller. Id. at 147. The court thus determined that the lack of reliance, together with the "as-is" clause, was sufficient to bar a claim of misrepresentation. Id.
In Copland and Leatherwood, notice of the potential for a specific defect, in conjunction with an "as-is" clause, barred claims for fraud. 624 N.Y.S.2d at 517; 619 So. 2d at 1273. In both cases, the courts held that the buyers did not rely on the sellers' representations. In Copland, there was a specific disclaimer regarding possible termite infestation. 624 N.Y.S.2d at 517. In Leatherwood, the buyers assumed the risk of foundation problems when they signed an "as-is" clause after being put on notice that there were foundation problems throughout the neighborhood. 619 So. 2d at 1274. In short, because there was no justifiable reliance on the part of the buyer, the "as-is" clauses were effective.
D. Environmental Hazards -- "As-Is" Clauses Generally Not Effective
An "as-is" clause is rarely effective where serious environmental hazards covered by CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act), are involved. Federal courts, under whose jurisdiction such cases fall, generally find that these hazards are difficult for the buyer to discover and so dangerous that they strictly construe "as-is" clauses against the seller and broker. E.g., Car Wash Enterprises, Inc. v. Kampanos, 874 P.2d (Wash. App. 1994); Niecko v. Emro Marketing Co., 769 F. Supp. 973 (E.D. Mich. 1991); Wiegmann & Rose Int'l Corp. v. L.L. Industries, 735 F. Supp. 957 (N.D. Cal. 1990); International Clinical Laboratories, Inc. v. Stevens 710 F. Supp. 466 (E.D. N.Y. 1989); Southland Corp. v. Ashland Oil, Inc., 696 F. Supp. 994 (D.C. N.J. 1988); Channel Master Satellite Systems, Inc. v. J.F.D. Electronics Corp., 702 F. Supp. 1229 (E.D. N.C. 1988).
For instance, in Wiegmann, the court held that the seller was liable for hazardous waste cleanup under CERCLA despite the existence of an "as-is" clause in the deed. Wiegmann, 735 F. Supp. at 957. The waste was discovered after the sale of the property. Id. The buyer spent over $500,000 investigating and planning for the cleanup. Id. The court noted that Congress intended for former owners of contaminated property to be responsible to current owners for contamination which developed while they owned the property. Id. The court also noted that the enumerated defenses of the Act did not include selling the property subject to an "as-is" clause and that giving such a clause effect would frustrate the intent of the statute. Id. The court thus held the seller liable and the "as-is" clause ineffective. Id.
II. Effects of Property Condition Disclosure Statutes
A. Uncertain Results
Six of the twenty-six states which have property condition disclosure statutes provide for the use of "as-is" clauses. They are: Illinois, Maryland, Oklahoma, Oregon, Tennessee and Virginia. Three other states have provisions that are tantamount to "as-is" clauses. The Alaska statute provides for a waiver of disclosures "by agreement." The Kentucky statute allows a seller to refuse to provide disclosures so long as he communicates such refusal to the buyer. Washington state permits a buyer to expressly waive the right to receive a disclosure statement.
In none of these states, however, does the statute explain exactly how an "as-is" clause works when a cause of action is brought based on the disclosure statute. And the statutes are so new in most states that case law hasn't caught up with them. A number of states such as Illinois and Ohio provide that the statute is not intended to limit or modify obligations or rights created by common law. Thus, it is fair to project that courts will continue to give "as-is" clauses vis-a-vis the disclosure statutes the same effect or non-effect that they did under common law.
B. California Cases
California was the first state to enact a property condition disclosure statute, which went into effect in 1987. Thus, it is the first state where we do have case law interpreting "as-is" clauses in conjunction with a property condition disclosure statute -- even though California's statute does not expressly provide for "as-is" clauses. Interestingly, California case law gives "as-is" clauses effect anyway, albeit narrow effect. Wilson v. Century 21 Great Western Realty, et al., 18 Cal. Rptr.2d 779 (1st Dist. 1993); Loughrin v. The Superior Court of San Diego County, 19 Cal. Rptr.2d 161 (4th Dist. 1993).
In April of 1993, the First District Court of Appeals held that a broker had not failed in his duty to discover hidden foundation defects, despite the warnings given him by a neighbor. Wilson, 18 Cal. Rptr.2d at 785. The broker had a statutory duty only to make a "reasonably competent and diligent 'visual' inspection and disclosure." Id. at 784. Discovering the foundation defects would have required more. Id. The court noted, nevertheless, that an "as-is" clause in the sales contract would have shielded the broker against claims of negligence or negligent misrepresentation, but not against affirmative or negative fraud. Id. at 782.
Less than two weeks later, the Fourth District Court in Loughrin specifically examined whether disclosure requirements under the California statute are waivable and whether "as-is" clauses constitute waiver. 19 Cal. Rptr.2d at 164. The court first looked to the legislative intent behind the statute. Id. It noted that failure to disclose defects as required under the statute results not in invalidation of the contract, but in liability for damages. Id. It thus reasoned that the legislature intended for disclosure requirements to be waivable. Id. It also noted that waivability was alluded to in the legislative history. Id. However, the court also asserted that since an "as-is" clause does not protect the seller from common law claims of misrepresentation, Shapiro v. Hu, 233 Cal. Rptr. 470 (1st Dist. 1987), it cannot protect the seller from claims based on representations made via the statutory disclosure requirements. Loughrin, 19 Cal. Rptr.2d at 164. Specifically, the court held that an "as-is" clause, together with a clause requiring the buyer to rely on his own inspection, will insulate a seller against claims for negligent misrepresentation of defects which the seller should have known about but did not know about because he did not have to inspect for them. Id. at 165. However, the court concluded, an "as-is" clause will not insulate a seller from claims based on intentional or negligent misrepresentation if the defects were not discoverable by the buyer through a required inspection. Id. Put another way, the court held that an "as-is" clause is only effective when the buyer justifiably is not relying on the seller's representations.
Conclusion:
It is generally not advisable for a broker or seller, at common law or relative to the new disclosure statutes, to depend on "as-is" clauses for protection. Buyers frequently can claim that sellers have made representations, especially when they have filled out the new statutorily-required disclosure forms, that have turned out to be misrepresentations. Since claims of misrepresentation are rarely barred by an "as-is" clause, the seller will be liable for actual damages unless he can prove that he did not know of the defect and had no duty to discover it. Only when a seller or broker is certain that a buyer is not relying on the seller or broker's representations -- such as when the defect is clearly patent or when inspection of a specific aspect of the property is required by contract -- is it safe to depend on an "as-is" clause.
"As-is" Clause Does Not Protect Sellers from Fraud Allegations
Wyoming's highest court has considered whether sellers' statements (one of whom also acted as listing broker for the property) to buyer about property's condition constituted fraud.
In 1996, James and Rita Alexander ("Sellers") listed their property, which was forty acres and included house as well as a mobile home office, for sale, with Rita Alexander serving as listing broker. Donald and Linda Meduna, through the Meduna Red Angus Ranch Trust ("Buyers"), submitted a purchase offer that was accepted by the Sellers. The sale closed in April 1997, and the Buyers took possession of the property in June 1997. The purchase contract contained language that the property was being sold "as is."
Shortly after moving onto the property, the home's basement flooded and the mobile home's ceiling leaked. The Buyers were also unable to grow any produce in the garden and the costs for connecting to the local water district was approximately $4500 more than the Sellers had told the Buyers it would cost. The Buyers also learned that the property's foundation needed extensive repairs in order to avoid collapse. The Buyers filed a lawsuit against the Sellers alleging fraud and infliction of emotional distress. Following a trial, the trial court found that the Sellers were liable for fraud and awarded the Buyers approximately $100,000 in compensatory damages plus attorney's fees, costs, and $25,000 in punitive damages. The Sellers appealed.
After slightly modifying the amount of damages awarded to the Buyers, the court otherwise affirmed the rulings of the trial court. In order to properly allege fraud, the Buyers needed to show: (1) the Sellers made a false representation intended to induce action by the Buyers; (2) the Buyers reasonably believed the statement was true; and (3) the Buyers relied upon the false representation and suffered damages.
The court found that the evidence supported the trial court's finding of fraud. In particular, the court looked at three statements made by the Sellers. First, the property condition disclosure form only listed two prior instances of flooding in the basement, both of which the Sellers claimed had been repaired. Second, the testimony at trial also showed that after learning that the Buyers planned to grow crops in the garden to generate additional income, the Sellers told the Buyers that the garden had recently been fertilized and could produce the crops sought by the Buyers. Third, the Sellers also told the Buyers that it would only cost them a total of $3500 to connect to the local water district.
The evidence showed that all three statements were false and the court determined that the Sellers knew such statements were false at the time they were made. Expert testimony established that the basement flooding problem had existed in the basement for a number of years, as the basement had extensive water damage and heavy salt deposits existed in the basement. In addition, the Sellers' former housekeeper testified that she had cleaned salt deposits from the basement six years prior to the sale of the property. Although the Sellers denied the existence of a flooding problem, the court found their testimony to not be credible as the evidence contradicted those statements, showing that the Sellers had recarpeted the basement numerous times and it appeared that they had recently installed wood paneling on the basement walls. All of this lead the court to conclude that the Sellers should have disclosed the basement flooding problems to the Buyers and their disclosures on the property condition disclosure form to the contrary constituted fraud.
The court also found that the statements concerning the garden and the water hookup constituted intentional misrepresentations. While the Sellers were under no obligation in either case to address the Buyers' concerns, once the Sellers began making representations, they had an obligation to make a full and truthful disclosure to the Buyers. The court found that they mislead the Buyers about the garden because the Sellers had not grown anything in the garden for ten years. Similarly, the Sellers' improperly informed the Buyers that it would cost $3500 to connect with the local water district when the actual cost was $8000. In both cases, the court found that the Sellers had intentionally mislead the Buyers with their comments and the Buyers had acted in good faith in relying upon these statements. Thus, the court ruled that these constituted intentional misrepresentations that constituted fraud.
The Sellers argued that because the contract contained an "as is" clause, they could not be liable to the Buyers for the property's condition. The court rejected this argument, finding that an "as is" clause does not protect a party from liability for intentional misrepresentations made by the party.
The court next considered the damages awarded to the Buyers. First, the court found that the evidence supported the approximately $100,000 in compensatory damages awarded to the Buyers, except for a slight modification to the amount awarded for the water connection hookup. The Buyers were entitled to receive these damages in order to restore the property to the condition that the Sellers had represented to them, which included rebuilding the property's foundation.
Next, the court considered the $25,000 in punitive damages assessed against the Sellers. Punitive damages are awarded to punish outrageous misconduct and the award must be in proportion to the compensatory damages awarded to a party. The court found that the Sellers' conduct justified the punitive damage award and the award was in proportion to the amount of compensatory damages awarded to the Buyers. The court also affirmed the award of attorney's fees and costs to the Buyers. Thus, the court affirmed the trial court's rulings and awards in favor of the Buyers for the Sellers' fraud.
Alexander v. Meduna, 47 P.3d 206 (Wyo. 2002).
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