“As Is” in Texas Residential Transactions

Topics Covered

Part One: Achieving “As Is” for the Seller
Part Two: Buyer Concerns with “As Is”

Is “As Is” the new standard?

Traditionally, conveyance of property “as is” was a specific subset among various possibilities. It was a material contract term that was intended, negotiated, and clearly stated—not simply assumed or checked as a customary box on a promulgated form. Now, agents and brokers check paragraph 7.D.(1) of the TREC 1-4 Family Residential Contract as (more or less) a standard default. This practice is less than ideal, but it reflects prevailing practice.

Some “As Is” Clauses Are Better than Others

The “as is” language in paragraph 7.D.(1) of the TREC contract reads: “As Is means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract.” Many real estate lawyers consider this wording to be only minimally adequate at best. For a seller, it is better than nothing—although not by much. When writing a good “as is” clause, brevity is not a virtue.

Quality and Strength of the “As Is” Clause

The drafting principle that applies here is that it is not just the existence of an “as is” clause that matters but its quality and strength. An effective “as is” clause is thorough in its scope and coverage. It should go beyond property condition and exclude representations and warranties on the part of the seller or the seller’s agent. Oral statements should also be disclaimed. It is also a good idea to state that any statements by the seller are made to the best of the seller’s current actual knowledge. The “as is” clause can further state that the buyer will be relying solely on the buyer’s inspections and other due diligence. Just adding these few additional points can improve the quality and strength of an “as is” clause, yet the TREC contract does not give a residential seller this flexibility.

“As Is” Clauses in Commercial Transactions

One often sees extensive “as is” provisions in commercial contracts. It is, however, worth asking: Why should comprehensive “as is” provisions be limited to commercial properties? Given the value of residential transactions today and the clear legal vulnerability of sellers, is there a valid reason for giving residential sellers second-class treatment when it comes to an effective “as is” clause? Why is it more important to give the seller of a $500,000 commercial warehouse better “as is” protection than the seller of a $2M residence?

Scope of an “As Is” Clause

A thorough “as is” clause in a residential contract should cover:

the realty (surface and sub-surface);
the home, garage, and any other improvements;
included fixtures, appliances, accessories, and furniture;
the availability and condition of utilities;
any survey or plat provided to the buyer;
any reports, receipts, or other documents provided;
state that no repairs or remediation are offered;
state that any repairs made are conveyed “as is;” and
provide for an “as is” clause in the warranty deed

Enforceability of an “As Is” Clause

An “as is” clause in Texas should be clear, conspicuous, and unequivocal, preferably set in bold and all caps. It should be declared that “as is” is a material term of the contract that is specifically-negotiated and not mere boilerplate.

In evaluating the enforceability of an “as is” conveyance, “the nature of the transaction and the totality of the circumstances surrounding the agreement must be considered. Where the ‘as is’ clause is an important part of the basis of the bargain, not an incidental or ‘boilerplate’ provision, and is entered into by parties of relatively equal bargaining position, a buyer’s affirmative agreement that he is not relying on the representations of the seller should be given effect.” Kupchynsky v. Nardiello, 230 S.W.3d 685, 690 (Tex. App.—Dallas 2007, pet. denied).

PART ONE:
ACHIEVING “AS IS” FOR THE SELLER

Sellers Prefer “As Is”

No comebacks after closing should be a seller’s goal, and the time to begin working toward that goal is during the contract phase of the process—before the contract is signed.

A seller interested in avoiding post-closing liability and lawsuits is on firmer legal ground if the “as is” nature of the transaction is fully and expressly set forth in both the contract and the warranty deed. This means that there should be two full-length “as is” clauses, one in the contract and one in the warranty deed.

Note that checking the box at 7D(1) does not automatically entitle the seller to include a custom “as is” clause in the warranty deed. This is a separate special provision. Sellers need both clauses in order to maximize “as is.”

“As Is” Special Provisions Addendum

A special provisions addendum to the contract should be used to (1) expand the “as is” language of paragraph 7D.(1), and (2) require that a thorough “as is” provision be included in the warranty deed at closing.

This must be done before the contract is signed. Attempts to add an “as is” provision after the contract is signed almost always fail. This requires a formal contract amendment, and buyers may be reluctant to add a new clause that might not be in their best interest.

Disclosure of Material Facts is Still Required

Inclusion of an “as is” clauses in the contract and deed does not relieve the seller of the obligation to disclose material facts, defects, needed repairs, and adverse conditions relating to the property. There is no clause, provision, or waiver that can be added to a residential real estate contract that eliminates this duty on the part of the seller or that would allow the seller to commit fraud. An “as is” clause (no matter how comprehensive) is insufficient protect a seller of residential property if there is willful concealment or if the seller engages in fraudulent inducement. Ritchy v. Pinnell, 357 S.W.3d 410 (Tex.App.—Texarkana 2012, no pet.)

The next several paragraphs outline steps that a seller can take to assure a true “as is” conveyance.

Seller’s Should Check Box 7.D.(1)

A seller of residential real estate who seeks to convey property in “as is” condition should undertake several steps to protect the seller’s interest, starting with checking the box at 7.D.(1) of the TREC Contract. This provision states:

D. ACCEPTANCE OF PROPERTY CONDITION: “As Is” means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract. Buyer’s agreement to accept the Property As Is under Paragraph 7D(1) or (2) does not preclude Buyer from inspecting the Property under Paragraph 7A, from negotiating repairs or treatments in a subsequent amendment, or from terminating this contract during the Option Period, if any.
(Check one box only)
_X_ (1) Buyer accepts the Property As Is.
___ (2) Buyer accepts the Property As Is provided Seller, at Seller’s expense, shall complete the following specific repairs and treatments: ______ None ______.

As noted, many agents and brokers are now checking paragraph 7.D.(1) as a standard default.

Sellers Should Want a Better “As Is” Clause

If a seller wants to maximize “as is” then a comprehensive special provision must be included before the contract is signed. A special provisions addendum prepared by an attorney will be necessary since drafting a custom “as is” provision constitutes the practice of law. The addendum should mention two separate “as is” clauses:

(1) the first, in the contract, expands 7D.(1) to assure that the property is offered for sale entirely “as is;” and

(2) a second “as is” clause in the warranty deed should state that the property is conveyed and accepted in “as is” condition.

From a legal perspective, these are different “as is” clauses that are designed to bookend the transaction. Both are essential to protect the seller.

Planning for an “As Is” Clause in the Warranty Deed

The “as is” language for the warranty deed should be prescribed (word-for-word) in the special provisions addendum. Doing this has the effect of requiring the drafter of the warranty deed to include this exact language. Specifying exact “as is” language in advance also avoids last minute fights about legal wording that can cause a transaction to fail.

Without a signed special provision, the title company attorney (often the preparer of the seller’s deed) will be under no obligation to include an “as is” clause (or any other custom clauses) in the deed. Checking paragraph 7.D.(1) in the contract is not sufficient for this purpose.

Why get a second “as is” clause in the deed?

The legal concept at work here is the doctrine of merger. “When a deed is delivered and accepted as performance of a contract to convey [and so long as the contract does not specify that contract terms will survive closing, then] the contract is merged [into] the deed. Though the terms of the deed may vary from those contained in the contract, still the deed must be looked to alone to determine the rights of the parties.” Alvarado v. Bolton, 749 S.W.2d 47 (1988).\

Merger means that after closing the earnest money contract is essentially gone for most legal purposes. Only the closing documents (especially the principal legal documents such as the deed) matter after closing. Thus a seller should want the warranty deed to include a second “as is” in order to preserve this protection.

Sellers Should Want the Buyer to Sign the Deed

Sellers should want the buyer to sign and acknowledge the deed. Although this may be considered unusual in Texas (typically only the seller signs the deed), obtaining the buyer’s express consent to the deed’s “as is” clause squashes any ambiguity about the terms on which the property is being conveyed and accepted.

Acceptance of the terms of the deed is no longer implied as is traditionally the case in Texas deed practice; when the buyer signs, acceptance and agreement are express, thus making the seller’s position far more defensible going forward.

Sellers Should Disclose Known Material Facts

This is less a separate step for the seller and more a consistent theme that should be woven throughout the transaction. An “as is” clause will not protect a non-disclosing seller. Sellers are best advised to go beyond the Seller’s Disclosure in order to provide clarity and detail when it is appropriate to do so. Include repair estimates and photos if these are available. A seller should supply supplemental disclosures to the buyer if it seems like a good idea—and never rely on giving a buyer an oral disclosure.

If a custom addendum is used (strongly recommended) then this is a good place for the seller to make express disclosures as to any known material facts including defects, needed repairs, and other adverse conditions and circumstances.

Making full disclosure of material facts is at least as important to a seller’s potential post-closing liability as the wording of the “as is” clause that should appear in the deed.

For legal authority supporting the duty of full and ongoing seller disclosure, see the Deceptive Trade Practices-Consumer Protection Act (Bus. & Com. Code Sec. 17.46 et seq.); the Statutory Fraud Act (Bus. & Com. Code Sec. 27.01); the Texas Property Code (Sec. 5.008 et seq.); and applicable case law and common law pertaining to fraud, fraudulent misrepresentation, and fraudulent inducement.

Sellers Should Advocate for their “As Is” Interests

Real estate brokers and agents often have a heavy bias against any deviation from what is considered standard on the TREC and TXR forms. They also have a bias against involving attorneys in residential transactions. For agents and brokers, the reason is clear: adding a custom “as is” addendum to a residential contract not only pushes them out of their comfort zone but (in their view) jeopardizes their commission—so when a seller requests such an addendum immediate pushback can be expected.

There is no remedy for resistance from agents and brokers other than for a seller to simply insist on protecting the seller’s own best interests.

PART TWO:
BUYER CONCERNS WITH “AS IS”

Buyers Want Full and Ongoing Disclosure

A buyer’s strategy should not only be to negotiate a good sales price but also to assure full and ongoing disclosure from the seller as to all known material facts, defects, needed repairs, and adverse conditions and circumstances—whether directly present on the property or not. Consider the example of a seller who is aware that a cell tower is scheduled to be constructed on an empty lot next door. The buyer wants to know about this as well as any other material facts—before expiration of the option period.

The buyer need not impose additional responsibilities or duties upon the seller (a duty to investigate, for instance). A buyer’s goals are simple: (1) to remind the seller and the seller’s broker of the legal obligation to make full and ongoing disclosure, and (2) to secure the seller’s express agreement to do so. The earlier this is accomplished, the better. The best place to start is a special provisions addendum to the contract.

Affirmation of Seller’s Disclosure Duty

When it comes to “as is,” the buyer wants to make sure that the seller understands that the 7D.(1) “as is” clause is not a means of avoiding full and ongoing disclosure.

It is legitimate and prudent for a buyer to preemptively address any incorrect mindset on the part of the seller as to the duty of full and ongoing disclosure. There are two parts to this: (1) reminding a seller of a legal duty; and (2) separately securing from the seller an enforceable agreement to disclose.

All participants (parties and agents) should be on the same page when it comes to the disclosure requirement. Conveying property “as is” does not relieve the seller of the duty to disclose known material facts.

“In the context of a [residential] real estate transaction, a seller is under a duty to disclose material facts that would not be discoverable by the exercise of ordinary care and diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover. But a seller has no duty to disclose facts he does not know. Similarly, a seller is not liable for failing to disclose what he only should have known.” Myre v. Meletio, 307 S.W.3d 839, 843-44 (Tex. App.—Dallas 2010, pet. denied).

Conclusion

Sellers should avoid relying solely on the flimsy “as is” contract provision in paragraph 7D.(1) and instead seek to maximize the “as is” nature of the transaction from start to finish. However, any substantial deviation from the TREC contract will require a special provisions addendum.

Buyers should consider agreeing to such an addendum so long as the seller commits to providing full and ongoing disclosure of material facts.