“As Is” in Texas Residential Transactions
The Case for Including a Special Provisions Addendum
by David J. Willis J.D., LL.M.
Property condition is a central concern for both sellers and buyers. Sellers want to convey a property without responsibility for repairs (a leaky roof), post-closing liability for difficult-to-detect conditions (mold), or external adverse circumstances (future widening of the street by the city). The solution for the seller is to control the drafting of both the sales contract and the warranty deed to insure that the property is conveyed “as is,” in its present condition and without representations or warranties, express or implied. (The deed delivered at closing will contain both express and implied warranties of title—at least so long as it is a general or special warranty deed—but these are separate and apart from representations or warranties as to property condition.)
The buyer’s strategy should not only be to negotiate such seller pre-closing repairs or allowances as may be practicable under market conditions but also to assure full disclosure from the seller as to all known defects or adverse conditions affecting the property, 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 not seek to impose additional responsibilities or duties upon the seller (a duty to investigate, for instance). That is not the point. The point is to make the seller aware of his existing legal responsibility to disclose any known condition or circumstance that could affect the buyer’s decision to buy or not buy. Selling a residential property “as is” is not a permissible dodge of this legal responsibility. The buyer’s goal should be to know whatever the seller knows when it comes to material facts relating to property condition—and know it before expiration of the option period.
Why is it important to remind sellers of their existing legal responsibilities? 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 issues relating to property condition. Lawyers sometimes call this hiding the ball; the seller is effectively saying to the buyer “I’m not telling you anything about the condition of the property. It’s up to you to do your due diligence and find what you can.” While this strategy may occasionally work in commercial transactions, it is contrary to Texas law when it comes to the sale of residential property—so it is prudent for the buyer to address this incorrect mindset from the very beginning of the transaction. All participants in the transaction (parties and agents) should be on the same page when it comes to the requirement of full and ongoing seller disclosure.
This article addresses both the law applicable to seller disclosure as well as practical steps that can be taken to achieve an “as is” residential transaction. In other words, this article seeks to demonstrate that it is possible to secure both full disclosure and a successful “as is” conveyance, thereby meeting key goals of buyer and seller. A necessary element of the process is the use of a custom special provisions addendum to the TREC 1-4 family contract.
The Texas Property Code: Required Seller’s Disclosure Notice
Property Code Section 5.008 requires that a seller of improved residential property provide the prospective buyer with a seller’s disclosure:
5.008(a) A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section.
Section 5.008(7)(d) states that the disclosure notice “shall be completed to the best of seller’s belief and knowledge as of the date the notice is completed and signed by the seller.” A seller’s disclosure notice is not required in the following instances (see Section 5.008(e)):
(1) pursuant to a court order or foreclosure sale;
(2) by a trustee in bankruptcy;
(3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest (which would include deeds in lieu of foreclosure).
(4) by a lienholder who has either purchased at a foreclosure sale or a
sale pursuant to a court order or accepted a deed in lieu of
(5) by a fiduciary in the course of an administration of a decedent’s estate, guardianship, conservatorship, or trust;
(6) from one co-owner to one or more other co-owners;
(7) made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;
(8) between spouses incident to divorce, legal separation or a property
(9) to or from a governmental entity;
(10) a new residence of not more than one dwelling unit that has not been occupied for residential purposes;
(11) of real property where the value of any dwelling does not exceed 5% of the value of the property.
The purpose of the seller’s disclosure is to make clear what appliances, equipment, and features exist on the property; whether or not these items are working; if the seller knows of any defects or malfunctions in critical systems; if certain red-flag events like termite treatment, previous fires, or flooding have occurred; the need for repairs; and the existence of unpermitted additions, unpaid HOA fees, violations of deed restrictions, lawsuits, or conditions that “materially affect the health or safety of an individual.”
The statutory exceptions do not include “I have never lived on the property,” a common tactic used by unscrupulous flippers in attempting to avoid providing the disclosure notice. Unless expressly exempted by the statute, a seller’s disclosure must still be provided by non-resident investor-sellers.
A practice note for buyers: just because a seller’s disclosure is not required in a particular case should not deter a buyer from attempting to get one or, alternatively, using a custom special provisions addendum to declare that full seller disclosure of known defects is required as a contract term. The scope and extent of seller disclosure is not just a matter of legality; for a buyer interested in knowing all material facts relating to property condition, achieving full and ongoing seller disclosure should be considered a vital goal of the negotiation.
The above discussion refers to residential homes. Property Code Section 5.013 states a separate seller disclosure requirement for sales of unimproved property intended to be used for residential purposes. However, a “seller is not required to give the notice if: (1) the seller is obligated under an earnest money contract to furnish a title insurance commitment to the buyer prior to closing; and (2) the buyer is entitled to terminate the contract if the buyer’s objections to title as permitted by the contract are not cured by the seller prior to closing.”
Looking Beyond the Property Code and Promulgated Forms
Unfortunately for Texas consumers, the Property Code fails to expressly state that a residential seller has a legal duty of full and ongoing disclosure as to all known defects and material adverse conditions. Worse, neither TREC nor Texas Realtors’ contracts state this legal duty in plain language. Even the statutory form of the seller’s disclosure notice stops short of expressly stating that a seller has a legal duty of full and ongoing disclosure. This is a colossal failure of draftsmanship given the abundance of litigation against non-disclosing residential sellers.
To understand the totality of the law applicable to seller disclosure we must look beyond the Property Code to other statutes as well as relevant case law. The important point for sellers and their agents to recognize is that even though the full and ongoing disclosure requirement may (for now) be missing from the Property Code and from promulgated contracts, it is still the law. “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).
Because of the level of misunderstanding and misconception on the part of residential sellers when it comes to “as is” sales, it is in a buyer’s best interest to expressly and emphatically remind everyone (parties and agents) in writing of the legal requirement of full disclosure which starts with the earnest money contract and continues through closing. There is no good reason why the disclosure requirement cannot (and should not) be also incorporated into the contract as a negotiated term.
The Deceptive Trade Practices-Consumer Protection Act (DTPA)
The Deceptive Trade Practices-Consumer Protection Act (Business & Commerce Code Section 17.46 et seq.) is exactly what it says it is: legal protection for consumers. Cases applying the DTPA consistently declare that residential real estate is a tangible “consumer good” as that term is defined in the statute, and prospective buyers of residential real property are “consumers.” Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985). Accordingly, misrepresentations or failure by a seller of residential real property to disclose known material defects and adverse conditions are violations of the DTPA.
The DTPA states that “false, misleading, or deceptive acts or practices in the conduct of any trade or business are hereby declared unlawful. . . .” Also expressly stated to be unlawful are misrepresenting the characteristics and uses of a particular item; representing that goods or services are of a particular quality and standard when they are not; advertising with intent not to sell as advertised; and failing to disclose information in an attempt to induce the consumer into buying. Additionally, a consumer may seek relief if the consumer relied to the consumer’s detriment upon a seller’s breach of an express or implied warranty (Sec. 17.50(a)(2)) or if the seller is culpable of “any unconscionable action or course of action. . . .” (Sec. 17.50(a)(3)).
The statutory wording bears repeating: any unconscionable action, which is a broad standard indeed. An “[u]nconscionable action or course of action is defined as an act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Martinez v. Martinez, No. 13-19-00518-CV, 2020 WL 5887587 (Tex.App.—Corpus Christi 2020, no pet.). Is this not an exact description of what a non-disclosing seller is doing?
Section 17.50 spells out relief available to consumers. Basically, a consumer who claims to have suffered economic damages or damages for mental anguish may seek relief if the other party’s action was a “producing cause” of the damages. That is a liberal standard, especially considering that most events in life and business have multiple causes—and the defendant’s alleged action is required to be only one of those causes. Any offense enumerated in the laundry list of Section 17.46 is a basis for a consumer claim so long as the defendant’s actions were “relied on by a consumer to the consumer’s detriment” (Sec.17.50(B)).
Low Threshold for Seller Liability under the DTPA
Note that a consumer under the DTPA need not have signed a contract with a non-disclosing seller. The Act applies even in the absence of contractual privity, meaning that seller liability for misrepresentation or non-disclosure in a proposed residential real estate transaction can arise even prior to execution of an earnest money contract. “To be actionable under the DTPA, the defendant’s deceptive conduct must occur [only] in connection with a consumer transaction.” In other words, a non-disclosing seller can get himself in trouble just be engaging in deception while showing the property. A signed contract is not required. Todd v. Perry Homes, 156 S.W.3d 919 (Tex.App.—Dallas 2005, no pet.). According to the Texas Supreme Court, it is not even required that the harm to a potential buyer be foreseeable by a non-disclosing seller. Helena Chem. Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001).
All that is required is that a seller’s dishonesty be a producing cause of harm, perhaps one of several such causes. Intent to harm is not required. Foreseeability of harm is not required. A reasonable prospect that harm might occur is not required.
The Act protects even the ignorant from the consequences of their own ignorance: “An act is false, misleading, or deceptive if it has the capacity to deceive an average or ordinary person, even though that person may [be] ignorant, unthinking, or credulous.” Daugherty v. Jacobs, 187 S.W.3d 607 (Tex.App.—Houston [14th Dist.] 2006, no pet.).
Clearly, the DTPA is very pro-consumer. Section 17.44(a) states that the Act “shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty and to provide efficient and economical procedures to secure such protection.” If a seller’s dishonest actions or inactions were a producing cause of loss or detriment to the plaintiff, even if the seller had no intent to harm, and even if the seller could not possibly have foreseen the possibility of harm, then the seller may have significant liability. This is true even if an earnest money contract has not yet been signed.
The key question to keep in mind in evaluating a DTPA claim is this: could the seller’s knowing misrepresentation or failure to disclose have reasonably influenced an ordinary buyer’s decision to buy or not buy? Breaking it down, these are the requirements for seller liability for non-disclosure: “(1) The defendant knew information regarding the goods or services; (2) the information was not disclosed; (3) there was an intent to induce the consumer to enter into the transaction through failure to disclose; and (4) the consumer would not have entered into the transaction on the same terms had the information been disclosed.” Gill v. Boyd Distrib. Ctr., 64 S.W.3d 601 (Tex.App.—Texarkana 2001, pet. denied).
Note that this standard does not carve out a specific time segment in the interaction between buyer and seller. It does not (for instance) apply solely in the beginning of a real estate transaction when the seller disclosure notice is first given. No such time limitation is stated in the statute or in relevant cases. Accordingly, the only safe way to construe the DTPA is to conclude that its provisions apply during the entire contract-to-closing real estate sale process. Viewed in this context, there is no escaping the existence of an ongoing duty of seller disclosure under the DTPA that applies for the duration of the transaction.
A seller of real property cannot avoid liability under the DTPA by conveying the property “as is.” Prudential Ins. v. Jefferson Assocs., 896 S.W.2d 156 (Tex. 1995).
The statute of limitations under the DTPA is “two years after the consumer discovered or in the exercise of reasonable diligence should have discovered the occurrence of the false, misleading, or deceptive act or practice” (Sec. 17.565).
Expressions of Seller Opinion under the DTPA
Mere puffing or opinion expressed by a seller is exempted. If a seller says “This is the most beautiful house in the neighborhood,” that is probably not an actionable misrepresentation. It is just the seller’s opinion. “Whether a representation is a warranty or merely an expression of [the seller’s] opinion depends in part upon whether the seller asserts a fact of which the buyer is ignorant, or merely states an opinion or judgment on a matter on which the seller has no special knowledge and on which the buyer may be expected to have an opinion and exert his judgment.” Also, a “general statement concerning a future event . . . should be looked at differently than a statement concerning a past or present event or condition.” Humble Nat’l Bank v. DCV, Inc., 933 S.W.2d 224, 230 (Tex.App.—Houston [14th Dist.] 1996, writ denied).
Attorneys and Real Estate Brokers are Exempt from the DTPA
So long as they are acting honestly in their professional capacities, attorneys and real estate brokers fall within the professional services exemption of Section 17.49(c) of the DTPA—an exemption that is lost in cases of fraud or misrepresentation. This is a consistent theme in Texas business and property law: edgy practices may be permissible some of the time but if actual fraud is involved then even statutory exemptions will not be available to protect the offender.
The Statutory Fraud Act
Moving on from the DTPA, we find that the Statutory Fraud Act (Tex. Bus. & Com. Code Sec. 27.01) is another potential pitfall for residential sellers who fail to make full disclosure:
(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducing that person to enter into a contract; and (B) relied on by that person in entering into that contract; or a (1) false promise to do an act, when the false promise is (A) material; (B) made with the intention of not fulfilling it; (C) made to a person for the purpose of inducing that person to enter into a contract; and (D) relied on by that person in entering into that contract.
Violations of the Statutory Fraud Act can result in actual as well as exemplary damages plus reasonable and necessary attorney’s fees, expert witness fees, deposition costs, and costs of court. Actual awareness of the falsity of the representation or promise is required for the award of exemplary damages but may be inferred by surrounding circumstances. Actions under the Statutory Fraud Act must be brought within four years of the time when the claimant knew or should have known of the harm.
Elements of statutory fraud under Section 27.01(a) are the same as the elements of common law fraud (discussed below) except that Section 27.01(a) does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages. Miller v. Argumaniz, 479 S.W.3d 306 (Tex.App.—El Paso 2015, pet. denied). This eases the plaintiff’s burden of proof under the Act considerably, increasing the risk of a judgment against a non-disclosing seller.
Unlike the DTPA, the Statutory Fraud Act “is applicable only when a conveyance of the property has been made or, in the very least, when there is a valid real estate contract. . . .” BLM of Brownwood, Inc. v. Mid-Tex Cellular, Ltd., No. 11-11-00311-CV, 2014 WL 1285765 (Tex.App—Eastland 2014, no pet.).
As to remedies under the Statutory Fraud Act in real estate cases, Section 27.0015(b) ties into the DTPA: “A violation of Section 27.01 [of the Statutory Fraud Act] that relates to the transfer of title to real estate is a false, misleading, or deceptive act or practice” as defined by the DTPA. Accordingly, DTPA remedies are available.
A buyer who believes he has been deceived in a real estate transaction may sue a non-disclosing seller on grounds of common-law fraud. The required elements are: (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation the defendant knew it was false or made the representation recklessly and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury. Shandong Yinguang Chem. Indus. Joint Stock Co., Ltd. v. Potter, 607 F.3d 1029, 1032-33 (5th Cir. 2010) (citing Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001)).
Fraudulent inducement as a cause of action is a subset of general common-law fraud and relates specifically to a contract between a seller and a buyer. Bohnsack v. Varco, LP, 668 F.3d 262, 277 (5th Cir. 2012). A cause of action for fraudulent inducement requires the existence of an enforceable contract. Zorilla v. Aypco Constr. II, LLC, 58 Tex. Sup. Ct. J. 1140 (Tex. 2015).
The Texas Supreme Court has stated that fraudulent inducement claims are not subject to the usual economic loss rule. Formosa Plastics Corp. United States v. Presidio Eng’Rs & Contractors, 960 S.W.2d 41 (Tex. 1998).
Generally speaking, the plaintiff in a common-law fraud case must prove that the defendant made a material misrepresentation that was false and which was either known to be false when made or which was asserted by the defendant without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused damage to the plaintiff. Sears, Roebuck & Co. v. Meadows, 877 S.W.2d 281 (Tex.1994).
Is an actively stated misrepresentation or false promise by the seller required in order to prove fraud at common law? What about failure to disclose? The answer depends on whether or not a duty of disclosure exists. “A misrepresentation may consist of the concealment or nondisclosure of a material fact when there is a duty to disclose. The duty to disclose arises when one party knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth. A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question.” Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.).
Given the broad definition of duty found in the Coldwell Banker case, it can be safely assumed that a seller who otherwise satisfies the elements of fraudulent misrepresentation or fraudulent inducement will not escape liability merely because there was no active misrepresentation—at least so long as a duty of disclosure exists, which is most definitely true in sales of Texas residential real estate.
Exemplary and punitive damages are available to plaintiffs who prevail in a common-law fraud action. Note, however, that various causes of action can be pursued simultaneously (and frequently are) by plaintiffs’ attorneys. This shotgun approach is designed to insure that at least one or more of the causes of action presented will be successful at trial. DTPA and statutory lawsuits are popular because attorney’s fees can easily be recovered as part of the judgment. It is reckless to assume that a seller will be sued only under Property Code Section 5.008 (the requirement of a seller disclosure notice) and not—at the very least—for an unconscionable act or practice under the DTPA.
ACHIEVING “AS IS” IN RESIDENTIAL CONVEYANCES
A seller of residential real estate who seeks to convey the property in “as is” condition should undertake four necessary steps to protect the seller’s interest:
(1) Check the box at 7.D.(1) of TREC 1-4 family 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: _____
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 the blanks that need to be completed rather than by a conscious intention to choose “as is” as specific strategy.)
The “as is” language of paragraph 7.D.(1) is minimally adequate at best. For a seller, it is better than nothing although not by much since it raises almost as many questions as it answers. 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. Some “as is” provisions are much better than others. Better provisions are also longer. When writing a good “as is” clause, brevity is not a virtue.
One sees more thorough “as is” provisions in commercial contracts. These often refer to the property being conveyed in its present condition while excluding seller representations and warranties, express or implied. Oral statements are nearly always disclaimed as well. Just adding these few additional points can vastly improve the quality and effect of an “as is” clause, yet the TREC contract does not give a residential seller that option.
It is worth asking: why should a comprehensive “as is” clause be limited to commercial contracts? 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 $3,000,000 residence?
(2) Include a custom special provisions addendum to the TREC contract. If a seller wants to maximize the “as is” nature of the conveyance then a more extensive “as is” provision must be included at the contract phase of the transaction. Since the TREC contract does not offer the ability to do this, a custom special provisions addendum (or “as is” addendum as it is sometimes called) is necessary. This addendum need not be lengthy or complex; but since it is not an officially promulgated form, it must be prepared by an attorney.
A properly-drafted special provisions will include two “as is” clauses: one applicable to the contract stipulating that the property is offered for sale “as is;” and a second clause, to be included in the warranty deed at closing, stating that the property is conveyed and accepted in “as is” condition. From a legal drafting perspective, these are conceptually different clauses that are designed to be inserted at two different points in the transactional process—the beginning and the end.
The special provisions addendum should include the verbatim “as is” language that (by agreement of the parties) will be included in the warranty deed at closing. Doing this has the effect of requiring that whoever drafts the warranty deed must include this exact language. Without such a requirement, the title company attorney (usually the preparer of the seller’s deed) will be under no obligation or incentive to include an “as is” clause in the text of the deed to the buyer.
Just as it is necessary in our health-care system for patients to actively advocate for their best interests, it is necessary for sellers and buyers in our real estate “system” to do the same. The professionals with whom residential sellers and buyers work often have a heavy bias against any deviation from what is considered standard (by them). They also have a bias against involving attorneys in residential transactions. In the case of agents and brokers, the reason is clear: adding a custom addendum to a residential contract not only pushes them out of their comfort zone but could jeopardize their commission. So when a seller raises the possibility of including an “as is” addendum to the contract he should not be surprised when his agent or broker immediately pushes back. There is no remedy for this situation other than for the seller to simply insist.
If the agent or broker says a custom addendum is unnecessary, one might respond by asking “Then why is the courthouse clogged with seller non-disclosure cases?” Real estate lawyers will tell you that they receive at least one or two inquires per week from residential buyers who want to sue a seller for failing to disclose this or that. (Our favorite is the case where the seller failed to disclose that a rooster would not be included with the chickens that were otherwise being transferred with the property.)
If the seller performs any repairs and treatments prior to closing (as paragraph 7.D.(2) may require) then the “as is” clause should specifically include these repairs within its scope, thereby preventing the buyer from later claiming that such repairs were warrantied by the seller. The promulgated form offers no easy way to do this, so (again) a seller must rely on a custom special provisions addendum to the contract.
“No comebacks” after closing should be the goal for sellers—and the time to begin working toward this goal is during the contract phase of the process. Attempts to add an “as is” provision after the contract is signed almost always fail. Doing so would require a formal contract amendment and a buyer will be reluctant to consent to a new provision that may not be in his best interest. As for the seller, the same agent who previously told him that a custom addendum was unnecessary will now say “Oh, you should have gotten that ‘as is’ clause in the contract if you wanted it.” Again, it is incumbent upon both parties to proactively advocate for their vital interests when dealing with agents and brokers.
Remember, however, that inclusion of an “as is” clause in the contract and warranty deed does not relieve the seller of the obligation to disclose material adverse facts concerning property condition. There is no clause, provision, or waiver that can be added to a residential real estate contract (or any other related document) that eliminates this duty on the part of the seller or that would allow actual fraud.
(3) Use the seller’s disclosure notice to disclose all known material facts relating to property condition. This is less a separate step in the process and more a consistent theme that should be woven throughout. Sellers are best advised to go beyond the seller’s disclosure form if it is useful to do so in order to provide clarity and detail. Include repair estimates and photos if these are available. Supply supplemental disclosures to the buyer if it seems like a good idea—and never rely on an oral disclosure.
(4) Include an effective “as is” clause in the warranty deed and require that the buyer sign and acknowledge the deed. It may not be sufficient (and it certainly is not safe) for a seller to rely solely on the brief “as is” wording of the TREC contract. Why? Because pursuant to the doctrine of merger, the final closing documents (the deed, note, and deed of trust) usually supersede the contract going forward from closing.
Absent an express provision in the earnest money contract that its terms shall survive closing, a contract is merged into these documents, which means that the contract is essentially gone for legal purposes. The closing documents, most especially the warranty deed, prevail. “When a deed is delivered and accepted as performance of a contract to convey, the contract is merged in 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).
Even if one argues that merger should not apply in a given case, this is a courtroom argument that will need to made later while defending a lawsuit. Why allow matters to get that far? By then, much damage may have been done (including expenditure of perhaps $50,000 or so in attorney’s fees).
If one is a seller or is advising a seller, why not resolutely seek to eliminate any possibility that the buyer can successfully sue the seller after closing? The goal should be to entirely close off the possibility of post-closing lawsuits against the seller. All uncertainty as to which contract terms survive closing and which do not should therefore be eliminated by express provision in the documents—and not left to be argued about later.
Execution of the Warranty Deed
It is also prudent to require that the buyer sign and acknowledge the warranty deed in order to confirm acceptance of the property entirely “as is.” (This requirement needs to be included in the special provisions addendum.) Doing this makes the warranty deed a contract as well as a conveyance and eliminates any ambiguity about the terms on which the buyer is accepting the property. Acceptance by the buyer is no longer implied. It is express according to the provisions contained in the deed.
In drafting legal documents, it never hurts to take an extra step or two in order to be absolutely clear as to the parties’ agreement and intentions. There is nothing wrong with a bit of overlap or redundancy in a legal document. It is what good contract lawyers do when protecting the interests of their clients.
Lawsuits involving Buyers and Sellers
The law applicable to seller disclosure in residential real estate transactions presents an aggrieved buyer with multiple effective avenues when seeking relief against a non-disclosing seller. Even in a rare scenario where no other cause of action applies, a judge or an emotional jury can still look to DTPA Section 17.50(a)(3)’s prohibition against “any unconscionable action or course of action by any person.” This provides ample legal means to find a remedy and assess punishment against a seller for withholding known adverse information about property condition—and it can result in treble damages, attorney’s fees, and costs of court.
Real estate investors in particular should take notice of buyers’ many opportunities for recourse. Given that investors are often viewed as greedy predators, investor-sellers who fail to disclose material facts are unlikely to win the fairness argument in court. Judges and jurors are more likely to see themselves in the shoes of the deceived party. Among the best advice that can be given to all sellers, but to investor-sellers in particular, is to disclose, disclose, disclose. Seller non-disclosure cases comprise the majority of residential property-related real estate lawsuits at the courthouse. Given this very real legal risk (and without resorting to moral arguments) it makes little sense for a seller to avoid full disclosure.
A buyer interested in learning about a property’s condition should consider using a custom lawyer-prepared special provisions addendum that affirms and clarifies that a seller’s legal duty to disclose material facts exists and is ongoing.
A seller interested in avoiding post-closing liability and lawsuits is always on firmer legal ground if there are two full-length “as is” clauses in the documents: one in the earnest money contract and one in the warranty deed delivered at closing. Even so, an “as is” clause (no matter how comprehensive) will be insufficient protect a seller of residential property if there is willful concealment or if the seller engages knowingly in fraudulent inducement. Ritchy v. Pinnell, 357 S.W.3d 410 (Tex.App.—Texarkana 2012, no pet.). Once again, the solution to these issues is a custom special provisions addendum.
Existing promulgated forms for the sale of residential property are deficient in how they address full disclosure and “as is” issues. It would be a significant benefit to sellers and buyers alike if a promulgated “as is” contract addendum existed that contained appropriate clauses pertaining to both seller disclosure and specific wording of an “as is” clause that the parties can agree should be included in the warranty deed at closing. Until such a promulgated form is available, both buyers and sellers of residential real estate should consider using a custom special provisions addendum to cover these legal concerns.
From Our Case Files
Amos loved playing ball in the backyard with his two Labrador retrievers. He had a stressful job and it was his way of unwinding each evening. His neighbor Leroy had a similar passion for gardening and tending to his rosebushes. Believing that if he raised the rose beds to a higher level they would benefit both from drier soil and better sunlight, Leroy trucked in several loads of rose-friendly soil and built up the beds about 18 inches. He also expanded the beds to include most of the backyard, intending to make tending roses his fulltime retirement hobby. The project took nearly a month to complete.
Unfortunately, Leroy did not make adequate provision for drainage. The first thunderstorm of spring brought a deluge that ran directly off Leroy’s elevated rose beds into Amos’ backyard, creating a standing pool of water around 30 feet in diameter and 8 inches deep. The water stayed for weeks with no place to go. Amos was unable to play fetch with his dogs and became incensed.
Discussions between the two neighbors quickly descended into acrimonious name-calling across the property line. Lawyers were engaged and they exchanged scholarly letters on property rights and nuisance law. Leroy began carrying his grandfather’s antique Colt .45 tucked into his waistband while he worked on his rosebushes. Amos searched Google for “how to make a Molotov cocktail” to toss over the fence onto the despised plants.
Summer arrived and the weather dried out a bit. Amos found 5 acres in the country with more room for his dogs and promptly put his house up for sale. It sold immediately to a couple who eagerly waived inspections (since it was a seller’s market) and told Amos that the backyard was perfect for their young children. Amos agreed enthusiastically, saying nothing about the drainage issues. “You’re going to love it!” Amos said as he pocketed their check at closing. They waived goodbye as Amos jumped into his pickup truck and sped toward a rose-free life in the country with his dogs.
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Copyright © 2023 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, www.LoneStarLandLaw.com.