The “as is” clause can be an invitation to real trouble

“LET the buyer beware” was first used in 1523. By 1640, the term came into usage, “the Buyer has need of 100 eyes; the seller, not one.” Now, 360 years later, the California Association of Realtors purchase contract contains the clause “Except as specified in this agreement, the property is sold ‘as is’, without warranty, in it’s present physical condition,”

If the seller or the seller’s broker intends for such a provision to relieve a seller from liability for the seller’s failure to disclose a material defect in the property, the intention is sorely misplaced. The clause has very little practical effect in modern real estate transactions. For many years most cases have held that “as is” clauses only require the buyer to accept the property in the condition that was visible or observable to the buyer at the time of inspection.

As long ago as 1839, the U.S Supreme Court in Smith vs Richards held that an unsuspecting buyer could not be duped by a fraudulent seller with an “as is” clause. In that case, the property sold was a gold mine. In the letter contract between the parties, the seller stated: “I however, sell it for what it is, gold or snowballs, and leave it to you to decide whether you will take it at my price or not.”

The Supreme Court had no trouble in holding the seller liable for fraud.

In another case, Katz vs Department of Real Estate, decided in 1979, Katz, a real estate agent, purchased a dwelling knowing that the Los Angeles Department of Building and Safety had issued an order to comply with various municipal building codes directing that the unit be fixed or demolished. Katz decided to sell the property to an unsuspecting buyer, advertise it as a “fixer-upper” and offered it for sale “as is.”

At the hearing to revoke his license, Katz contended the buyers were obligated to investigate the property themselves, since it was being sold” as is” and he had included a disclaimer in the contract relating to the violation of any municipal code regulations. The court did not agree with Katz and revoked his license.

Another leading case is Gingrich vs. Savage, decided in 1963. The brothers and sellers knew that the property, an apartment house in San Francisco, had been condemned by building officials. They did not reveal the information to the buyer but instead put in the purchase contract that the property was being sold in “its present state and condition.” The court held that:

“It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach, the diligent attention and observance of the buyer, the seller is under a duty to disclose them to the buyer.”

On the other hand, cases also have held that when it can be proved that the seller does not know of the defect in the property, the” as is clause” will protect the seller in a situation where the buyer asks for additional money because of defects.

Buyers and their attorneys frequently contend that the “as is” does not protect sellers and their agents because they know or should have known about material defects. It takes a trial or arbitration to determine who is right, and no one really wins in that situation, except perhaps the lawyers.

What about when the seller demands that the buyer waive inspection? Or the buyer waives inspection because it is a hot market, and the only way to get the property is by not making inspections.

In the case of Schapiro vs. Hu, a similar situation occurred. The buyer was a real estate agent and businessman, and the property was commercial. The buyer bought the property “as is.” The seller did not know about defective conditions  in the basement wall. The court held: “Certainly nothing prevented them (the buyer) from at least undertaking a termite inspection, a routine step in any sale of real property. In this case, such an inspection would probably have revealed the problem in the basement wall prior to close of escrow. Appellant’s own testimony in the record indicates that in their excitement and haste to purchase the subject property, they made a conscious decision to forgo an inspection on the assumption that any problems that might turn up could be inexpensively fixed up by a ”handyman.”

The cases I have cited are not new. The principles of “let the buyer beware” have long since disappeared in California law. There is very little serious debate among California attorneys as to whether or not an “as is” clause will prevent a seller from escaping liability when the seller knows of a defect in the subject property. Most real estate trial attorneys will agree that it can be difficult to prove a seller didn’t know about a problem.

Some cases have even said the use of an “as is” clause amounts to a red flag and bits of potential buyer on notice of potential problems.

It is better to allow the buyer to make frequent inspections of the property. Better yet, why not have the seller make inspections upfront so that the seller knows what the problems are?

Selling real estate should not be a guessing game. Buyer will great sympathy from courts, juries and arbitrators when one considers that the purchase of a home is the most expensive expenditure in the average person’s lifetime. While sellers and buyers should rely on experience real estate agents to chart a course through this process and advise them why and how as is clauses should not be utilized.

Ron Rossi is a San Jose attorney. Write him in care of the San Jose Mercury News, 750 Ridder Park Drive, San Jose, California 95190.

San Jose Mercury News

Saturday, April 24, 1999