The Shortcomings of “As Is” Clauses in Commonly Used Forms

Lawyers see our contract drafting services, and the fees that we receive for them, as an investment in a positive outcome for the client.  But most if not all clients still see legal fees as an expense.  I don’t expect this to change during my professional career.  So the realistic focus for lawyers is on providing solid value for clients, and in real estate transactions that means spending less time drafting the sales contract. 

Some clients, and their brokers, try to eliminate legal fees for drafting altogether by using some commonly available forms, such as those promulgated by the Texas Association of Realtors (TAR), North Texas Commercial Association of Realtors (NTCAR), or Texas Real Estate Commission (TREC). But sellers who intend to sell a tract of Texas property “as is” should not use any of these contract forms, because they are all deficient under Texas law to sell property “as is.”  They don’t get the job done, and there’s a reason why. 

Why You Should Not Use a Commonly Used Form for As-Is Clauses

The drafters of forms are intentionally attempting to draft a form that hits a middle ground between buyers and sellers in some modicum of “fairness”.  The “as is” term is almost entirely favorable to sellers, to the detriment of buyers, and so most if not all forms are not even designed to meet these rigorous requirements.  “As is” is not just a clause, it’s really more of a concept that takes an entire contract (plus conforming conduct by the seller) to become enforceable.  I described in this post what must be included in an effective “as is” contract.  Below I will list the deficiencies in three commonly used real estate forms.

TAR and TREC Forms

The TAR form does not include an “as is” provision, instead providing that the Buyer accepts the property “in its present condition except for repairs to be completed by Seller before closing.” The TREC form also does not include the words “as is”, using the same “Buyer accepts the Property in its present condition” phrase as in the TAR form.  So among other terms, the TAR and TREC forms have these deficiencies:

1.    no use of the words “as is”;
2.     no acknowledgment by the buyer that the “as is” provision was bargained for;
3.     no acknowledgment by the buyer that it did not rely on the seller;
4.    no disclaimer of specific warranties;
5.    no “no oral agreements” clause;
6.     no buyer acknowledgment that it is represented by counsel;
7.     no merger clause;
8.    no environmental indemnity or release; and
9.    no DPTA waiver.

NTCAR Form

Surprising to me, the NTCAR form may be even more “fair”, and therefore more deficient, due mainly to these two provisions:

1.     [Section 7.A.5 Material Defects]. Seller has disclosed to Purchaser any and all known conditions of a material nature with respect to the Property which may affect the health or safety of any occupant of the Property. Except as disclosed in writing by Seller to Purchaser, the Property has no known latent structural defects or construction defects of a material nature, and none of the improvements have been constructed with materials known to be a potential health hazard to occupants of the Property.

2.     [Section 7.A.6 Hazardous Materials].  Hazardous Materials. Except as otherwise disclosed in writing by Seller to Purchaser, the Property (including any improvements) does not contain any Hazardous Materials (defined below) other than lawful quantities properly stored in containers in compliance with applicable laws.

So if you intend to sell property “as is”, it’s best to not even start with one of these forms.

As-Is Forms Used by Lawyers

When I was first learning to practice commercial real estate in 1990 upon graduating from law school, the law firm had four sets of real estate contract forms, and I was taught to select the particular form depending on whether the property was improved or unimproved, and whether we represented the buyer or seller.  Over the years I have developed my own sets of forms, and I continue to revise them to keep up with changes in the law, suggestions from colleagues, and my experiences.

The less time any lawyer must spend tailoring the first draft to the deal, property and parties, the more time we can provide value to our clients.

Of course, the next concern is how many changes should be made when the “other side” generates the first draft, but that is a topic for a different post.

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