Enforceability of the “As-Is” Provision in Residential Real Estate Purchase Contracts

Given the hot housing market in Silicon Valley, buyers, in the face of multiple all-cash offers, feel pressured to make their offers as appealing as possible. Not only do these buyers make offers with no contingencies, they also take the property “As-Is.” Many people assume that by checking the “As-Is” box on the real estate purchase contract, the common law doctrine of caveat emptor, or “let the buyer beware” applies to protect the seller from any later claims by the buyer about the condition of the property. In reality, buyers may have some recourse for latent defects that the seller knew about and failed to disclose.

The “Optional ‘As-Is’ Provision” in the PRDS Purchase Contract states that the Buyer is purchasing the Property in its present condition at the time of acceptance, subject to four conditions: (1) the seller discloses known information about the property; (2) the buyer retains the right to inspect the property; (3) the seller is not responsible to fix Section 1 issues identified in the pest inspection nor address other repairs requested by the buyer; and (4) contract indicates the seller is to pay for Section 1 work to remedy termite or pest infestation or to repair or correct known problems with the property. If one of the four conditions is not met, the buyer may have some form of recourse.

Under California case law, buyer’s selection of the “Optional ‘As-Is’ Provision” means the buyer is taking the property in the condition visible or observable by him or her at the time of acceptance. In other words, sellers are protected from buyers making post-sale claims of property defects that were visible or observable to them or disclosed by the seller at the time of acceptance. This coincides with the buyer’s right to inspect the property before the close of escrow. Thus, a buyer cannot later sue the seller for an inoperable automatic garage door that could have been observed by the buyer prior to acceptance of an offer if the buyer had diligently inspected the property.

However, the buyer is not obligated to conduct independent inspections of the condition of the property. For instance, a buyer is not required to conduct a foundation inspection prior to purchasing the home. If the buyer later discovers major foundational issues that the seller knew about and failed to disclose, the buyer can either demand payment for repair, back out of the transaction, or if escrow has already closed, the buyer can sue for damages. For this reason, it is very important for sellers to disclose any known defects that may affect the value of the home.

According to California law, to fully comply with their duty to disclose, sellers are required to fill out, at a minimum, the Transfer Disclosure Statement in good faith. The contract also requires the seller to provide the buyer with a completed Supplemental Seller Checklist, Natural Hazard Disclosure Statement, and a Lead-Based Paint Hazard Disclosure. As an example, if a seller fails to disclose that there was a death on the property within the past three years and the buyer later discovers that fact, seller would be liable to the buyer for damages if seller knowingly or negligently withheld that information in order to get a better price for the property. In that scenario, even if the sellers filled out the required disclosure forms, they did so in bad faith because one of the questions asked in those forms is whether or not a death occurred on the property within the last three years.

In essence, a written contract is not the “end all, be all.” If a party to a contract acts deceitfully, there usually is a remedy for the injured party. Thus, real estate agents go by saying, “Disclose, disclose, disclose!”