THE IMPORTANCE OF THE “AS IS” CLAUSE IN EARNEST MONEY CONTRACTS

Posted by on Apr 26, 2013 in Real Estate

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“THE LEGAL CORNER”

By Sam A. Moak

THE IMPORTANCE OF THE “AS IS” CLAUSE IN EARNEST MONEY CONTRACTS

The information in this column is not intended as legal advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Unless you are in the practice of buying and selling real estate often, many of you may not be too familiar with the Earnest Money Contract.  An Earnest Money Contract is used in Texas when buying and selling property.  In such a contract both the buyer and the seller obligate themselves to buy and sell the property at some time in the future.  In order for the contract to be enforceable, it must be in writing and signed by all parties.

One of the more important sections of the Earnest Money Contract, Section 7, deals with the condition of the property and inspections of the property prior to closing.  It also deals with disclosures by the seller of the property’s condition, usually with an attached Property Condition Addendum.

In 1995 the Texas Supreme Court heard Prudential Insurance Company of America vs. Jefferson Associates Ltd.  This case has been the “gold standard” and gives real estate practitioners a set of rules to work with in resolving “as is” issues.

An “as is” issue deals specifically with the buyer’s acceptance of the property in a particular condition.  Many disputes have arisen over what was meant when the buyer signed a contract to accept the property “as is.”  The disputes usually revolve around the buyer discovering a defect in the property after they have signed the contract or sometimes concluded the purchase.  Based on the defect the buyer either wants out of the contract or wants the  seller to repair the defect.  The seller will argue that the buyer purchased the property “as is” and therefore refuse to cancel the contract or repair the defect.

What the courts call the “Prudential Rule” sets out the following conditions as prerequisites for an effective “as is” sale.  They are:

The Seller must disclose all known defects.  The “as is” clause would be ineffective and unenforceable if the purchaser is induced by the fraudulent misrepresentation or concealment of information.

The Seller cannot obstruct the buyer’s ability to inspect the property.

The “as is” clause must be an important basis of the bargain.  It cannot be an incidental provision or a part of the “boiler plate” of the provision.

The Purchaser and Seller must have relatively equal bargaining positions.

It is important to note that the “as is” clause protects real estate brokers. If a home owner has knowledge of a problem which should be disclosed, that knowledge is not imputed to the broker.  Additionally, the cases involving “as is” clause disputes are intensely fact driven.

If you are selling real estate, then it is imperative you disclose any defects you are aware of.  Failure to do so could result in lawsuit.

If you are buying real estate, then do not simply rely on the “as is” clause.  Have the property inspected by a professional.

If the buyer contracts to take property “as is” after inspection, they get what they bought if they had the opportunity to inspect, even if they did not find the problem.  This highlights the importance of having a professional inspector.  If you perform the inspection yourself, there are many items you may not catch, while a professional inspector will.

When selling or buying property you should make sure your agreement is in writing and that both parties understand  the “as is” clause.  Securing the services of an attorney to help prepare or review your Earnest Money Contract can help you understand the rights and duties of the seller.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

www.moakandmoak.com

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