“As Is” Conveyances in Texas Residential Transactions

Topics Covered

Quality and Strength of an “As Is” Clause
Two “As Is” Clauses: Contract and Deed
“As Is” and Disclosure of Material Facts
Enforceability of Residential “As Is” Clauses
Achieving an “As Is” Conveyance

“As Is” as the New Standard

Traditionally, conveyance of real property “as is” was a choice among various possibilities. It was a material contract term that was intended, specifically negotiated, and clearly stated—not simply assumed and checked as a customary box on a promulgated form. Now, agents and brokers check paragraph 7D(1) of the TREC 1-4 Family Residential Contract as (more or less) a standard default. This is less than ideal, but it reflects prevailing practice. The issue for sellers is that paragraph 7D(1) does not go nearly far enough in achieving a truly “as is” conveyance. Given the large volume of lawsuits against residential sellers at the courthouse, more needs to be done.

The Minimalist TREC “As Is” Clause

The “as is” language in paragraph 7D(1) 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 barely adequate at best. For a seller, it is better than nothing—although not by much. A more thorough “as is” clause would offer significantly better seller protection. The truth is that some “as is” clauses are most definitely better than others.

Quality and Strength of an “As Is” Clause

The quality and strength of an “as is” clause matters immensely if the transaction is ever litigated, thus an effective clause should go well beyond the one-liner in the TREC form. It should be a fulsome paragraph that (among other things) rejects oral, electronic, and implied agreements. Just adding a few additional points can improve the power of an “as is” clause, yet the TREC contract does not give a seller this flexibility, nor is there the option of requiring an “as is” clause in the warranty deed at closing. These deficiencies in the TREC contract literally force a cautious seller into adding special provisions.

“As Is” Clauses in Commercial Transactions

Extensive “as is” clauses are common in commercial contracts, as are custom addenda with special provisions. This raises the question: 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, 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 request by a seller to include “as is” language in the deed is both reasonable and commonly done in Texas real estate. A thorough “as is” clause in a residential contract should address:

the realty (surface and sub-surface);
the home, garage, and any other improvements;
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;”
disclaim oral, electronic, and implied agreements; 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, 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).

Two “As Is” Clauses are Required

A seller interested in avoiding post-closing liability and lawsuits should want two full-length “as is” clauses, one in the contract and one in the warranty deed to the buyer. Why? Because the doctrine of merger applies, meaning that the contract is usually merged into and superseded by the terms of the deed—and if the deed fails to include its own “as is” clause then that increases the seller’s vulnerability to litigation. Accordingly, sellers need both clauses in order to assure a truly “as is” conveyance. From a legal drafting perspective, these are different “as is” clauses altogether, addressing different phases of the transaction. Both are essential to protect the seller.

Note that checking the box at paragraph 7D(1) does not automatically entitle the seller to include an “as is” clause in the warranty deed. Inclusion of an “as is” clause in the deed is a separate and material contract term that requires a special provision approved by both parties.

The time to begin addressing the “as is” issue is before the contract is signed. Expanding a seller’s “as is” protection after the contract is signed requires a formal contract amendment, and a buyer may be reluctant to add a custom provision if it is perceived to be favorable the seller.

Value of a Custom “As Is” Addendum

A custom “as is” addendum should (1) expand and enhance the weak language of paragraph 7D(1); and (2) mandate that a thorough “as is” provision also be included in the warranty deed at closing. Ideally, the “as is” language for the deed should be prescribed (word-for-word) in the addendum. Specifying the exact “as is” deed language in advance avoids last minute fights about legal wording that can cause a transaction to fail.

Without a signed special provision or “as is” addendum, the title company attorney (usually 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 7D(1) in the contract is not sufficient for this purpose.

Disclosure of Known Material Facts

Inclusion of “as is” clauses in both the contract and deed are essential steps in protecting the seller. However, doing so does not relieve the seller of the obligation to disclose known material facts including defects, needed repairs, and adverse conditions relating to the property. If a prospective residential homebuyer is involved then that person is a protected consumer for purposes of the Deceptive Trade Practices Act (Bus. & Com. Code Sec. 17.46 et seq.; Chastain v. Koonce, 700 S.W.2d 579 (Tex. 1985).

There is no clause, provision, or waiver that can be added to a contract that eliminates the seller’s disclosure duty to a consumer or that would allow the seller to defraud the consumer by willfully failing to disclose known material facts. An “as is” clause (no matter how comprehensive) is insufficient to 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.).

“In the context of a [residential] real estate transaction, a seller is under a duty to disclose [known] 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).

Beyond the Seller’s Disclosure Form

Sellers are best advised to go beyond the Seller’s Disclosure in order to provide clarity and detail whenever 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 the buyer an oral disclosure. A seller cannot over-disclose.

Making full disclosure of known material facts is a matter of seller self-interest that is at least as important to potential post-closing liability as the wording of the “as is” clause in the deed.

For statutory and common law authority supporting the seller’s duty of full and ongoing 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.

“As Is” Clause in the Contract

A seller of residential real estate should take several steps in order to achieve a truly “as is” conveyance, starting with checking the box at paragraph 7D(1) of the TREC Contract:

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.

In addition, a custom “as is” addendum should be included as part of the signed contract. Why? Because the special provisions section of the printed contract (paragraph 11) is far too small (just two and a half lines) to do the job. The addendum should clearly set out in detail the two separate “as is” clauses discussed above. An attorney should be involved since drafting custom contract addenda constitutes the practice of law.

“As Is” Clause in the Deed

There is an “as is” clause (such as it is) in the TREC contract. Isn’t this sufficient to protect the seller? No, because of 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).

After closing the earnest money contract (including its “as is” clause) is essentially gone, replaced and superseded by the deed for most legal purposes. Merger happens unless there is a survival clause in the contract; and since the TREC contract does not provide for survival of paragraph7D(1), a seller must include another “as is” clause in the deed in order to remove any doubt or ambiguity as to whether the “as is” contract condition survives closing.

There is simply no better legal drafting protection for a seller than including a comprehensive “as is” clause in the warranty deed. Yet “standard” deeds pumped out by title companies do not include one.

Requiring the Buyer to Sign the Deed

Sellers who are concerned about conveying property “as is” have the option—by means of a custom special provision—of requiring the buyer to sign and acknowledge the deed at closing. This is somewhat unusual in Texas since typically only the seller signs the deed. However, obtaining the buyer’s signature conclusively indicates the buyer’s acceptance of the deed’s “as is” clause—as well as any other custom provisions that the deed may contain.

The notary box for the buyer can be adjusted to add the wording “John Doe, who also affirmed that he/she/they unconditionally accepted and agreed to the ‘as is’ clause in the foregoing deed.” Doing this squashes all doubt or ambiguity about the terms on which the property is being conveyed, making it unnecessary to rely on the Texas doctrine of implied acceptance of a deed.

Express signed acceptance of the deed’s terms by the buyer makes the seller’s legal position far more defensible going forward. Ask any trial attorney.

None of the foregoing will happen simply as a result of a casual last-minute request by the seller. Requiring the buyer to sign and acknowledge the deed is a material term that must be set forth in a signed special provision to the contract. Planning ahead is required.

Advocating for One’s Best Interests

Residential brokers and agents have a heavy bias against any deviation from what is considered standard (by them) on the TREC and TXR forms, even when nonstandard features arise that render the forms inadequate. They are also reluctant to involve attorneys in residential transactions. For agents and brokers, adding a custom “as is” addendum to a residential contract not only pushes them out of their comfort zone (and likely beyond their experience level) but jeopardizes their commission—so a seller can expect immediate pushback if such an addendum is requested.

Resistance to special provisions from agents and brokers can be a real problem. There is no remedy for this other than for a seller to simply insist on proper “as is” protection by adding contract special provisions to that effect.