Article: Real Property Purchase and Sale Agreements and the "As Is" Provision

REAL PROPERTY PURCHASE AND SALE AGREEMENTS AND THE "AS IS" PROVISION

Common and reoccurring misunderstandings in both commercial and residential real estate transactions arise from the significance of the "as is" provision.

Sellers often (wrongfully) believe that the inclusion of an "as is" provision eliminates Seller's duty to provide (i) any, (ii) complete or (iii) accurate disclosures in the sale of real property.

Buyers often (erroneously) believe that they have no claim against Sellers who failed to disclose a "material fact" known by Seller, adversely affecting the value or desirability of a piece of real property.

This article is intended to provide basic explanations as to the legal significance of the "as is" provision contained in any residential or commercial real property purchase and sale agreement. This article is not intended to substitute for the advice of any attorney as to a specific problem or transaction. If you have a specific legal question or need legal advice, the reader should contact an attorney.

WHAT IS AN "AS-IS" PROVISION?

An "as-is" provision is a (commonly misunderstood) provision in a real estate sales contract providing that the buyer of the property takes the property in the condition visually observable to the buyer. However, contrary to popular misconception, an "as-is" provision does not relieve a seller of the seller's duty to disclose "all known material facts" concerning the property and DOES NOT eliminate Seller's responsibility to provide any and all other required disclosures.

SELLER'S GENERAL DISCLOSURE DUTIES

In California, a seller of real property, be it commercial or residential, has a common law duty to disclose all known "material facts" that are not known or visually observable by the buyer. A fact is generally considered material if it would impact the value or desirability of the property. A seller's failure to disclose any known material fact may result in the seller being liable to the buyer for mis-representation or fraud.

Additionally, a seller of residential property in California consisting of one-to-four dwelling units, has a non-waivable duty to provide the buyer with numerous written statutory disclosures.

To attempt to relieve, or at least limit, their potential liability for failing to disclose all conditions or defects relating to their property, sellers often insert an "as-is" provision into the contract. However, while an "as-is" provision may be effective to disclaim any express or implied warranty regarding the condition of the property, it does not does not limit or relieve the seller of any of seller's disclosure obligations

IMPACT OF AN "AS-IS" PROVISION

A seller cannot eliminate his or her common law duty to disclose all known material facts concerning their property that are not known or visually observable by the buyer. Nor can a seller of residential property eliminate his or her statutory disclosure obligations. Thus, despite the common belief among many sellers, an "as-is" provision does not alter a seller's disclosure duty, nor does it protect or absolve a seller from liability for non-disclosure.

So what does an "as-is" provision do?

Depending on its language, an "as-is" provision typically puts the buyer on notice that the seller is making no representation or warranties concerning the quality or condition of the seller's property.

Therefore, California courts have held that the effect of an "as-is" provision is to cause the buyer to "take the property in the condition visible or observable to him." As explained by one court, "an 'as is' provision may be effective as to a dilapidated stairway but not as to a missing structural member, a subterranean creek in the backyard or an unexploded bomb buried in the basement, all being known to the seller."

In short, a properly drafted "as-is" provision should alleviate a seller's concern that buyer will down the road claim that seller guaranteed or made certain representations concerning the condition of property, but an "as-is" provision does not limit, alleviate, or impact the seller's duty to make required disclosures concerning the property.

CONCLUSION

As is our recommendation for our existing clients and potential clients, legal consultation ought to be employed proactively, ideally before the transaction is consummated, to avoid future problems.

It is critical for individuals to understand their potential duties and obligations BEFORE entering into purchase and sale agreements. While the foregoing article is intended to highlight some of the significance of an "as is" provision, it does not begin to address all the issues one must consider before signing a contract.

Mr. Faoro is a partner at Last & Faoro specializing in Real Estate and Construction Law for over 20 years, assisting owners, developers, contractors and realtors in real estate and construction matters. He can be reached at (650) 696-8350, or by email at dlfaoro@lf-lawyers.com. The foregoing article is intended only to provide an overview of some of the "as is" provision in a real property purchase and sale agreement.

The article is not intended to contain legal advice, is not intended to discuss or address any specific situation or problem and should not be relied on in making any legal decisions. If you have a specific legal question or need legal advice, you should contact a qualified attorney.