The Importance of a Custom-Tailored “As-Is” Clause for Sellers

Every tract of real property is unique.  That’s a big reason why the law allows real estate sales contracts to be enforced by specific performance. Sellers should design an “as is” sales contract as uniquely as the tract of land being sold. Commonly available forms won’t cut it.

As-Is Clauses in Texas

In Texas the “as is” clause is even more important than the provision stating the sales price, especially for properties with a history of environmental contamination.  Property owners in the chain of title have continuing liability for remediation costs related to the condition of the property during each owner’s ownership.  And so it is critical to successfully terminate that continuing liability upon the sale of the property.  Remediation costs can quickly eliminate all of the seller’s  net profit in the deal, as well as all of a purchaser’s equity, which is why buyers should conduct all appropriate inquiries.  Simply put, costs to remediate properties with environmental contamination can exceed sales prices.

The “as is” clause basically provides that the seller is selling, and the buyer is buying, the property in its “as is” condition.  But under Texas law this is much easier to say than enforce. Continuing legal education seminars teach consumer lawyers how to attack and defeat “as is” clauses.  And making an “as is” clause enforceable can depend as much on how a seller conducts themselves during negotiations and through the closing, as on the particular language in the contract.

As-Is and Landowner Liability

A landowner is always ultimately responsible for the environmental condition of the property owned.  So if/when someone, or a governmental agency, seeks to force a landowner to remediate a property and incur all those costs, that landowner can practically move that liability onto a prior owner of the property who happened to own the property while the contamination condition existed, absent contractual provisions otherwise. 

This is where the “as is” clause comes in.  The seller says “but I sold you the property in its ‘as is’ condition and you accepted it, so it’s yours, lock stock and barrel.”  And then the buyer says “Not so fast, my friend.”

Creating an Enforceable As-Is Clause

The following provisions must be included in a sales contract to make an “as is” clause enforceable (this list is non-exclusive):

1.    The buyer needs a reasonable inspection period and access to the property (this is property-specific and party-specific);
2.    The contract should state “as is” or equivalent language;
3.    The buyer should acknowledge that the “as is” provision was bargained for;
4.    The buyer should acknowledge that the buyer has relied solely on its own investigation and is not relying on any representation, statement, or other assertion with respect to the property condition;
5.   The “as is” clause should survive closing and be inserted in the deed;
6.   The contract should specify the particular implied warranties being disclaimed or waived;
7.   The buyer should expressly acknowledge a lack of reliance on the silence of the seller;
8.   The buyer should acknowledge that it is being represented by counsel and that buyer’s counsel has explained the meaning of the “as is” provision to the buyer.

Be sure the contract does NOT have any representations of the property’s condition.  Clearly, a sale is not “as is” if the contract makes some representation about the property’s condition.  These can be less obvious than you may think.

The contract should also specifically address known issues, especially environmental and regulatory matters.  Obviously, the contract cannot include intentional misrepresentations regarding known material facts, or else it will be subject to the buyer voiding it for fraud in the inducement.

How Actions Can Void an As-Is Clause

More than the language, an “as is” clause needs to be supported with the actions of the seller from the very first negotiation through the closing, because actions can void the effectiveness of the “as is” clause. 

For example, if the seller agrees to make certain documents available for inspection, or the seller represents that certain documents or access have been provided to the buyer, the seller must actually make those documents, or access, available.  Sellers should clearly document what it provides to the buyer (for example, a cover letter listing every document enclosed), and keep a complete record of what is provided. 

This is actually more difficult in this age of Email, where more than one Email address is used to send documents from the seller.  Wise sellers will limit the ability of employees to communicate with buyers.

Reviewing Documents for Additional Disclosures

Finally, prior to closing, sellers should review all documents and other information provided to the prospective buyer, to see if additional disclosures should be made in order to avoid being tagged with making a misrepresentation, or an incomplete representation that is misleading.  If the seller has kept a clean record of what has been provided to the buyer, this step is at least administratively easy.  As may be obvious by now, once a seller starts making statements about a property’s condition, it can be a slippery slope that seems to beg for more and more disclosures.  The wiser course of action is to say “as is” and leave the burden of due diligence on the buyer.

At the beginning of this post I said that commonly used real estate forms don’t include enforceable “as is” clauses. Hire competent counsel, and tailor the contract to the particular property tract being sold, and the parties involved.

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