“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.

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.

An “as is” clause (including the one in paragraph 7 of the TREC contract) is fully effective in a residential transaction so long as there is no material and intentional fraud on the part of the seller. “A statement is not fraudulent unless the maker knew it was false when made or made it recklessly without knowledge of the truth. . . . [However, a] seller cannot have it both ways: he cannot assure the buyer of the condition of a thing to obtain the buyer’s agreement to purchase “as is” and then disavow the assurance which procured the “as is” agreement.” Thus an “as is” clause does not relieve a devious seller of liability for fraudulently inducing a buyer to enter into a contract. Larsen v. Carlene Langford & Assocs., 41 S.W.3d 245 (Tex.App.-Waco 2001, pet. denied).

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).

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 can go well beyond the one-liner in the TREC form. To protect the seller, 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.

Extensive “as is” clauses are common in commercial contracts, as are custom addenda with special provisions of all kinds. This raises the question: why should comprehensive “as is” provisions (in the contract and in the warranty deed) be limited to commercial properties? This makes no sense in a world where sales seven-figure residences are common.

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

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 both documents in order to assure a truly “as is” conveyance. These are different “as is” clauses that protect the seller in different phases of the transaction. They are even worded differently.

Checking the box at paragraph 7D(1) of the contract 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 term that requires a special provision in the contract that is approved by both parties. Without such a provision, 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.

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.

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, conditions, and circumstances including defects and needed repairs. If a prospective residential homebuyer is involved then that person is a consumer entitled to the protections 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.).

The disclosure duty does not require perfect knowledge on the part of the seller. “[A residential] 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 residential 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.

A custom “as is” addendum drafted by an attorney will likely be necessary. Why? Because the special provisions section of the printed contract (paragraph 11) is far too small (just two and a half lines) to thoroughly do the job.

Effect of Merger

May a seller safely rely on the contract “as is” clause in paragraph 7D1? No, because of the doctrine of merger. At closing, the contract usually disappears and is replaced by the deed and other closing documents that are executed by the seller.

“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 happens unless there is a survival clause in the contract; and since the TREC contract does not provide for survival of paragraph 7D(1), a seller must include another “as is” clause in the warranty deed in order to remove any doubt or ambiguity as to whether the “as is” contract condition survives closing.

Thus two “as is” clauses are required for comprehensive seller protection: one in the contract and (separately) in the deed. There is simply no better legal drafting protection for a seller than including a thorough “as is” clause in the warranty deed. Yet “standard” deed forms 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 special provision in the contract—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. Buyer acceptance is implied or presumed. However, obtaining the buyer’s signature goes farther and conclusively establishes the buyer’s acceptance of all the terms of the deed—including the “as is” clause.

Express signed acceptance of the deed by the buyer (rather than relying on a mere presumption) makes the seller’s legal position far more defensible going forward from closing. Ask any trial attorney.

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.

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 many 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.