Introduction:
When one sells residential real property in California, both the buyer and the seller must execute nearly fifty pages of documents that, among other matters, disclose required information about the property in question, ranging from location in flood and earthquake zones to whether a person has recently died on the premises. These disclosures are required by law.
A vital area of disclosures is condition of the property. While inspections by buyer’s experts is common, indeed universally recommended, the question arises as to undiscovered defects or problems arising and whether the seller is under a duty to disclose such conditions to the buyers.
Many sellers do not want to take the time or trouble to locate every possible defect and simply want to sell the property in its current condition and let the buyer take the risk of repairing and replacing any defects on the property. Often the seller is unfamiliar with the property, may have inherited it or been gifted it, and simply wants to cash out as quickly and easily as possible.
The solution many sellers utilize is to sell the property AS IS which is a written understanding that the seller purchases the property without warranty or recourse as to its condition. But such a simple solution is not necessarily enforceable in California which puts strict limits on what AS IS sales can accomplish. This article shall discuss those limits and possible solutions for sellers who still want to minimize their exposures.
“AS IS” in California-Restrictions:
An "as is" clause in a purchase and sale agreement does not necessarily insulate the seller from the
common law duty to disclose defects or the requirements of Civ. Code §§1102 et seq. "As is" language
serves to give notice of patent defects and means that the buyer accepts the property in the condition in
which it is reasonably observable by him or her.
If augmented by language indicating that the buyer is relying on his or her own inspection of the
property, it may also relieve the seller of the duty to inspect for defects or to disclose matters that the
seller should know but does not.
However, the benefits of Civ. Code §§1102 et seq. are not waived merely by the buyer’s acceptance
of "as is" language in the purchase agreement, and the seller remains liable for any failure, whether
negligent or intentional, to reveal known concealed defects not apparent from an inspection of the
property.
Similarly, "as is" language in a real property sale agreement does not shield a seller from liability for
intentional fraud. Civ. Code §1668 (providing that contracts that directly or indirectly exempt anyone from
responsibility for fraud are against policy of law).
The law thus limits AS IS to protecting the seller from claims as to defects “reasonably” apparent to the
buyer and does not allow a seller to intentionally mislead the buyer under any circumstances. The paucity
of this protection is readily apparent. It is relatively easy for a seller to simply list obvious
defects in the sales documents and have the buyer sign off as to notice. What buyers really want is for
those defects unknown or suspected but not confirmed by seller to not later result in claims against the
buyer when the defect becomes more apparent. As an example, the seller may have noticed rodent
droppings in his backyard a year before but not recently. He does not believe he has a rodent problem.
Does he have to disclose his “discovery” from a year ago or would the AS IS language protect him?
Recall that negligently failure to disclose negates AS IS as well, so if the seller can claim the buyer was
negligent in not revealing the defect, the action will not be dismissed by the court.
And the problem is not simply whether the buyer will actually win the claim of defect not disclosed. The
need to defend the claim in court will necessarily result in thousands of dollars in costs and fees and tens
of hours of time allocated to the defense. All a buyer needs to claim is that the seller knew or should
have known of the infestation (or leak or electrical problem) and the matter must go to a judge or jury.
Knowing this, the seller may be forced to settle since the cost of trial may exceed the benefit of a win in
court.
AS IS simply gives the seller another defense to raise in the matter but the question of facts as to
extent of knowledge or negligence still arise thus trial may still be required.
Steps to Practically Maximize the Benefits of AS IS in the Agreement:
- Clearly the wise seller will take steps to draft a carefully constructed contract, with legal advice,
and not rely on merely using the words “AS IS” to provide full protection. Effectively, California
law requires disclosure of any defects known and to give the buyer access to the property to
inspect before one can assume AS IS gives any real protection. It makes sense to reveal what
inspections the seller has not made and what areas the buyer may wish to investigate. It is vital
to specify precisely the areas that the seller is warrantying, if any, and to advise the buyer to
make full and complete inspections of any other areas.
- The cost of litigation can also be minimized by providing for arbitration of all disputes, including
any disputes as to AS IS, and providing that the prevailing party in any such dispute will receive
all costs and attorney’s fees from the losing party. Arbitration lasts months instead of the years
that litigation can take and usually costs far less since discovery is limited. Having attorney’s fees
paid to the prevailing party allows that cost to be taken out of the mix in the dispute and makes
sure no one brings a claim unless convinced they can win. It also makes it possible to come out
whole if one encounters a claim that is weak but from a buyer who feels either to emotional to
settle or who assumes that you will settle to avoid the attorney’s fees you are incurring.
- If in doubt, disclose. If suspicious as to whether there can be a problem, disclose, making sure
that one emphasizes that one is not sure but is making full disclosure just in case. Keep in mind
that disclosing does not necessary mean you will adjust the price because of the disclosure. Or
pay for the repair or inspection.
- Make sure all past written inspections are provided to the buyer. Nothing destroys your position
more than having to admit that an inspection was not revealed. Take the time to provide any and
all information that could be relevant. The AS IS means you are not taking responsibility for it: it
does not mean that you will not reveal that it exists. Indeed, the more you reveal, the harder it will
be for the seller to avoid the ramifications of the AS IS clause.
CONCLUSION:
While nothing is guaranteed in law, it is not difficult to maximize the effectiveness of an AS IS clause if
one carefully and thoughtfully creates the right package of documents and disclosures. The key is to
assume that the trier of fact is going to be determined to protect the buyer if something known by you is
not disclosed or if there is some type of “unfairness” in the transaction.
A wise old broker once told the writer that he did not understand why people are so cautious about putting
it “all on the table.” Disclosures seldom kill a deal, he commented, though it might lead to more
negotiations. “And if they don’t disclose, they end up spending a lot more money with you lawyers than
they made by not disclosing.” True.