“As Is” in Texas Residential Transactions

Topics Covered

Part One: Achieving an “As Is” Conveyance 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 the prevailing methodology for completing TREC contracts.

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.

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.

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 $300,000 commercial warehouse better “as is” protection than the seller of a $3M residence?

Scope of the “As Is” Clause

A thorough “as is” clause in a residential contract can cover the following:

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

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 AN “AS IS”
CONVEYANCE FOR THE SELLER

Sellers Prefer “As Is”

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 closing documents. This means that there should be two full-length “as is” clauses, one in the contract and one in the warranty deed.

However, inclusion of “as is” clauses in the contract and warranty 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.

Check Box 7.D.(1) of the Contract

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. This would appear to be driven more by the structure of the form and available blanks rather than a conscious intention to choose “as is” as a specific strategy.

“As Is” Addendum to the Contract

If a seller wants to maximize the “as is” nature of the conveyance then a comprehensive “as is” provision must be included before the contract is signed. Why? Because it is difficult or impossible to add this later. An “as is” addendum prepared by an attorney will be necessary, since a custom “as is” provision is considered a non-standard clause. Drafting non-standard contract provisions constitutes the practice of law.

The addendum should mention two “as is” clauses: the first (in the contract) stipulating that the property is offered for sale “as is;” and a second clause (in the warranty deed) stating that the property is being conveyed and accepted in “as is” condition. From a legal perspective, these are conceptually different clauses designed to bookend the transaction.

“As Is” Clause in the Warranty Deed

The “as is” language that will be contained in the warranty deed should be prescribed (word-for-word) in an special provisions addendum to the contract. Doing this has the effect of requiring that the drafter of the warranty deed include this exact language. The TREC form does not offer this option. Without such a requirement, 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. Specifying exact “as is” language in advance also avoids last minute fights about legal wording that can cause a transaction to fail.

The buyer should be required to sign and acknowledge the deed. Although this is considered unusual in Texas (typically only the seller signs the deed), obtaining the buyer’s express consent to the “as is” clause squashes any ambiguity about the terms on which the property is being conveyed and accepted. In effect, the instrument becomes a contract as well as a conveyance. Acceptance of the terms of the deed is no longer implied as is traditionally the case in Texas deed practice; acceptance and agreement are express, thus making the seller’s position far more defensible going forward.

Avoid Survival of Contract Terms

Paragraph 19 of the TREC Contract states that “All covenants, representations and warranties in the contract survive closing.” This is a buyer-favorable clause that is never in the best interest of the seller. A seller’s goal should be to close off any possibility of a post-closing lawsuit by the buyer. Sellers therefore want the doctrine of merger to fully apply, meaning that contract terms will not survive but instead be entirely merged into the closing documents.

“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 warranty deed containing the “as is” clause) matter after closing. Merger is the seller’s preferred outcome as part of an overall strategy to defeat post-closing lawsuits.

Disclose Known Facts and Circumstances

This is less a separate step for the seller and more a consistent theme that should be woven throughout. 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.

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.

Advocate for One’s Own 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 this situation other than for the seller to simply insist on protecting the seller’s own interests.

If the agent or broker says a custom “as is” addendum is excessive and unnecessary, one might respond by asking: “Then why is the courthouse clogged with seller non-disclosure cases?” Real estate lawyers will tell you they receive several inquiries per week from residential buyers who want to sue a seller for failing to disclose a material item. (Our favorite is the case where the seller failed to disclose that a rooster would not be included with the chickens.)

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 anything is signed. Attempts to add an “as is” provision after the contract is signed almost always fail. Adding such a provision requires a formal contract amendment, and buyers are reluctant to add a new clause that might not be in their best interest.

As for the seller, the same agent who previously declared that a custom addendum was unnecessary will now say “Oh, you should have gotten that ‘as is’ clause in the contract if you really wanted it.”

PART TWO: BUYER CONCERNS WITH “AS IS”

Buyers Want Full disclosure

A buyer’s strategy should not only be to negotiate a good sales price but also to assure full 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 should want to know whatever the seller knows when it comes to 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 buyer’s special provisions addendum to the contract.

Affirming the Seller’s Disclosure Duty

Why is it important to remind sellers of an existing legal responsibility? Because there is a widely-held misconception among sellers (and even among some agents and brokers) that conveying a property “as is” relieves the seller of any duty to disclose known material facts. Lawyers sometimes call this hiding the ball. While this strategy occasionally works in commercial transactions, it is contrary to Texas law when it comes to the sale of residential property.

“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).

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. All participants (parties and agents) should be on the same page when it comes to this requirement.

Alternate Buyer Strategy

The buyer has the option of agreeing to the inclusion of an “as is” deed clause but only so long as the seller agrees to sign a statement affirming full disclosure. Example: “As consideration for accepting the Property ‘as is,’ Seller affirms that Seller has made or will make full disclosure to Buyer of all known material facts, defects, needed repairs, and any adverse conditions and circumstances that could reasonably affect the Buyer’s decision to buy or not buy.” Since this is substantially the same standard found in the Deceptive Trade Practices Act, a good-faith seller should have no objection.

CONCLUSION

The Deed “As Is” Clause

Relying solely on the flimsy “as is” provision in the TREC 1-4 Contract is risky for the seller. A custom clause is preferable. The problem is that non-standard clauses (including an “as is” clause) must be agreed to by both parties, either at the contract stage or by subsequent contract amendment. Custom clauses in closing documents cannot be unilaterally imposed by one party on the other. And to be clear, checking the box at 7D(1) does not entitle the seller to include a custom “as is” clause in the warranty deed.

The better choice for a seller is always to execute a custom contract addendum that not only spells out the exact “as is” wording but requires that the buyer sign and acknowledge the warranty deed in order to confirm acceptance of the property “as is.” When it comes to protecting the seller’s best interests, there is simply no substitute for a thorough “as is” clause in the warranty deed.

You Can Always Sue

Be exceedingly cautious concerning advice along the lines of “Oh, you can always sue for this or that,” or “You can always raise a defense of such and such.” This kind of advice is invariably dispensed by non-lawyers. By the time one is at the lawsuit stage one has in many respects already lost. In today’s ultra-expensive litigation environment, the process is part of the punishment. Better to avoid it altogether with clear “as is” documentation.