The simple phrase “AS IS” is widely used in today’s transactional society. But what exactly is AS IS?
The condition of the property is often a major sticking point in the negotiation of a sales transaction. Buyers usually desire assurances or warranties regarding the condition of the property. Sellers, on the other hand, prefer to limit their exposure regarding the condition of the property. Perhaps the easiest and most common method for a seller to limit or eliminate this liability exposure is to include a provision in the contract stating the property is being sold AS IS.
The legal effect of an AS IS provision often becomes critical when a disgruntled buyer sues the seller after the buyer discovers defects in the property. The buyer’s lawsuit is often based on various claims, including breach of contract, breach of warranties, fraud, and negligence. The seller frequently argues the AS IS language contained in the contract should preclude the buyer’s complaint about the condition of the property. The seller could be in for a rude awakening when the buyer prevails in the lawsuit because the AS IS provision was not properly drafted in conformity with applicable laws.
AS IS language is essentially a warranty disclaimer. Warranties can be either express (agreed to by the parties) or implied (imposed by law). The effect of an AS IS disclaimer on express and implied warranties differs depending on a variety of circumstances. This difference is most pronounced when comparing sales of goods verses sales of realty.
Sales of goods are governed by the Uniform Commercial Code (UCC). The UCC specifically states that, unless circumstances indicate otherwise, all implied warranties (such as merchantability and fitness for a particular purpose) are excluded by AS IS language. Express warranties in the sale of goods are not affected by AS IS language, and therefore must be excluded by proper drafting of the contact. Additionally, Florida courts have overlaid certain limitations (or protections from the consumer’s perspective) on the UCC’s AS IS disclaimer of implied warranties. For example, if the AS IS language is not “conspicuous,” the courts have held it to be ineffective. The effect of these court decisions can often blindside unrepresented sellers who mistakenly think they have literally complied with the UCC’s statutory structure for selling goods AS IS.
The sale of real property is not covered by the UCC. Therefore, warranty disclaimers in real estate contracts are governed by the common law (i.e., court decisions). Although an AS IS disclaimer used in the sale of goods mainly impacts implied warranties, AS IS language in the sale of real estate can substantially diminish a disgruntled buyer’s claim that seller breached an oral or written express warranty. For example, in a recent case where a buyer of residential property sued alleging breach of various express warranties, the court dismissed the claim under the rational that “the transaction closed AS IS with no warranty provisions.”
First purchasers of homes are protected by an implied warranty of proper construction or habitability. To what extent can a builder use AS IS language to disclaim this implied warranty? The axiom that a seller is not required to repair defects in an AS IS sale does not apply to builders. A builder can, however, negate this implied warranty of proper construction with other disclaimer language, although most reputable builders do provide replacement express warranties.
Aside from breach of warranty claims, a buyer of AS IS property often sues a seller based on numerous other claims, in particular fraudulent misrepresentation and fraudulent nondisclosure. In the case of fraudulent misrepresentation, the legal analysis is essentially the same whether the transaction involves the sale of goods or realty. The courts are all over the boards as to whether an AS IS disclaimer mitigates the seller’s liability, depending on the nature of the misrepresentation, other provisions of the contract, and of course what the judge had for breakfast.
Fraudulent nondisclosure, on the other hand, only applies to residential real estate. The seller of a home, unlike the seller of car, is required by law to disclose hidden material defects. While an AS IS clause may allow a seller to avoid having to make costly repairs, this disclaimer does not relieve seller from the duty to disclose defects. Defects, however, sometimes fall into a gray area. When there is a question as to whether the defect is “material” or “hidden,” judges are increasingly ruling in favor of sellers who sold their homes AS IS.
There are some downsides to selling property AS IS. For instance, AS IS language is often interpreted as a red flag indicating problems. The decision whether to include an AS IS provision (or other disclaimers) in the contract involves a careful evaluation of numerous legal and practical considerations.