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Gold or Snowball? The Effect of an “As-Is” Clause on Real Property Purchase Agreements in California.

Real Estate Law

Often our clients ask us to review their California Association of Realtors (“CAR”) or Peninsula Regional Data Service (“PRDS”) real estate purchase and sale agreements.  One of the contractual provisions that our clients frequently inquire about is the “As-Is” clause.  Our clients want to know what effect this clause has on their purchase or sale.

One of the first instances of an “As-Is” provision can be seen in a U.S. Supreme Court case from almost 175 years ago.  In the case of Smith v. Richards, the seller of a “gold mine” stated to the buyer that “I, however, sell it for what it is — gold or snowballs — and I leave it to you to decide whether you will take it at my price or not.” Of course, the mine had no gold.  Nor snowballs.  In fact, it appeared that the seller may have provided the buyer with gold specimens – purportedly from the mine – to induce the sale.  The Court ruled that the seller was liable for fraud, despite the seller’s attempted “As-Is” clause.

Why did the Court rule this way?  Didn’t the “gold or snowballs” disclaimer exonerate the seller?  To answer these questions, it is important to discuss and understand the primary misconception about an “As-Is” clause.

The primary misconception about an “As-Is” clause is the belief that it completely shields the seller from making required disclosures.  For example, the seller knows the roof leaks or that a mine has no gold, but the contract states the sale is “As-Is.”  Under this scenario, does the seller have to disclose this property defect?  The answer is, yes.  The “As-Is” clause does not relieve the seller or his/her broker from making the required statutory and common law disclosures in a real estate transaction.  If the defect is neither reasonably observable nor capable of discovery and was known to the seller or his/her agent, the defect must be disclosed.

Please note that if a routine, diligent inspection would have revealed the defect, the buyer’s chances of successfully suing the seller are greatly diminished.

Thus, an “As-Is” clause simply puts the buyer on notice that the sale is being made without warranty and that the property is accepted in its existing condition.  It does not infringe on a buyer’s right to inspect nor to ask for repairs and does not excuse the seller’s required disclosures.  Indeed, the typical effect of including an “As-Is” clause is to discourage the buyer from asking for repairs or compensation for potential repairs.

Knowing of the common misconception that an “As-Is” provision insulates the seller from the requirement to disclose known defects, if your contract contains an “As-Is” clause we recommend that your property inspections be extremely diligent.  The reason for this recommendation is that the seller may think that the “As-Is” clause will completely protect him/her and has concerns that there may be problems with the property.

If you or anyone you know is buying or has bought a home and has questions regarding an “As-Is” clause and/or anything related to any CAR or PRDS form, please contact our firm.  We look forward to discussing with you any issues or concerns you might have with your property purchase.

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