The condition of a property is often a focal point in the negotiation of a sales transaction. Buyers usually want certain assurances or warranties regarding the condition of the property. Sellers, on the other hand, want to limit their liability regarding the condition of the property. Perhaps the easiest and most commonly used method for a seller to limit or eliminate their liability exposure is to include a provision in the contract stating the property is being sold “as is” while also stating that they “specifically disclaim all warranties.”
These methods are known as an “as is” clause and a warranty disclaimer. “As is” clauses can be inserted on their own or with a “where is” clause to form an “as is, where is” clause. In both situations, these clauses indicate that the seller is offering to sell their property in its present, existing condition to prospective buyers. Likewise, warranty disclaimers signify that the seller is not making any guarantees regarding the property.
All of these methods should give notice to buyers that they are taking additional risk with respect to the quality and condition of the property.
The purpose of an “as is” clause and warranty disclaimer is generally to force the buyer to perform and rely upon its own due diligence investigations, rather than upon the seller’s representations, in determining whether or not to purchase the property. These clauses can establish the presumption that the buyer is satisfied with the current condition of the property when they make an offer on a property, although the buyer must still perform all requisite due diligence.
When a warranty disclaimer is included in the purchase contract, the seller is able to avoid giving many representations and warranties associated with the property.
Buyers should certainly be more alert and aware of potential problems when an “as is” clause is present in an agreement. However, such language does not give sellers free reign to hide and or fail to disclose property defects.
The Arizona Court of Appeals made this clear in S Development Co. v. Pima Capital Management Co. The court found that a seller must disclose latent defects in property that are known to the seller and basic to the transaction. And this is true whether or not there exists a burden-shifting “as is” clause or disclaimer of warranties in the purchase and sale agreement.
Nonetheless, buyers should take extra care in inquiring into the condition of the property when an “as is” clause appears in their and sale agreement. Performing thorough due diligence is an essential part of the purchase process, and this should include, at a minimum, investigating title; the physical condition of the real property and its improvements (including environmental issues); obtaining proper zoning, permits and approvals; inquiring into any utilities issues; and assessing the property operating costs, taxes, and any assessments applicable for the property.
If you encounter an “as is” clause or warranty disclaimer when reviewing a purchase and sale agreement or you are in a dispute regarding a property’s condition, the best course of action is to consult with a qualified attorney.
Please contact Cameron Carter with any questions at firstname.lastname@example.org.