“As Is” Contracts

As of February 2017, the Arizona REALTORS® Residential Purchase Contract (RPC) includes language in Section 5. WARRANTIES indicating that “THE PREMISES ARE BEING SOLD IN ITS PRESENT PHYSICAL CONDITION AS OF THE DATE OF CONTRACT ACCEPTANCE.” More about Warranties in the RPC can be found in the Arizona Real Estate: A Professional’s Guide to Law and Practice – Third Edition. Xulon Press (page 157). Kindle edition (location 3687-3714).

The use of “as is” is also generally interpreted to be a disclaimer of warranties or representations. In other words, in a clearly defined “as is” contract, the seller is saying that the property will be sold in its existing physical condition, and the buyer is taking the property’s condition into account when making an offer.

The courts often interpret an “as is” clause in a contract to imply that the property could be defective. See Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 619 P.2d 485 (App. 1980).

In a lawsuit, the effect of the “as is” provision varies with the type of claim and the particular circumstances of the case. An “as is” clause can insulate a seller from liability for defects in the property under certain circumstances.

For example, in La Placita Partners v. Northwestern Mutual Life Ins. Co., 766 F. Supp. 1454 (N.D. Ohio 1990), a federal court applying Arizona law stated that a seller did not have a duty to disclose certain information regarding possible asbestos in a commercial property, partly because of the existence of the “as is ” clause.

However, in conjunction with the “as is ” clause, the buyer was an experienced real estate developer who thoroughly inspected the commercial property, admitted to seeing the asbestos fireproofing and admitted that he would have purchased the property even if he had known the fireproofing contained asbestos.

Given these facts, the court found that the buyer was precluded from claiming that the seller had a duty to warn of the presence of asbestos in the property.

However, a seller may not simply insert an “as is” clause into a contract and assume the seller is safe from claims for property defects. The clause does not negate a seller’s common law duty to disclose known latent material defects. S Development Co. v. Pima Capital Management Co., 201 Ariz. 10, 31 P.3d 123 (App. 2001).

In S Development Co., the buyers purchased two Phoenix apartment complexes. Both purchase contracts at issue in the case contained substantially similar provisions, which stated:

Disclaimer of Warranties. Buyer acknowledges that except as expressly set forth in this Agreement, seller makes and has made no representations or warranties of any kind whatsoever, including but not limited to warranties concerning the condition of title, physical condition, encroachments, access, zoning, value, future value, income potential, any survey, environmental report or other information prepared by third parties, loan assumability, or the presence on or absence from the Property of any hazardous materials or underground storage tanks. Buyer is purchasing the Property as a result of its own examination thereof in its “as is” condition, and upon the exercise of its own judgment and investigation. Id. at 13, 31 P.3d at 26.

The contract also allowed the buyer to inspect the property. The buyer employed two engineering firms to perform the inspections, which revealed no substantial problems with the plumbing in the buildings.

However, two years after the close of escrow, the buyers discovered polybutylene pipe had been used in both buildings. Polybutylene pipe is a defective pipe that was the subject of a class action settlement because of its tendency to leak under normal water pressures.

The buyer sued the sellers alleging fraud and nondisclosure for failing to disclose the defective plumbing. The sellers argued that the “as is” clause relieved them of any duty to disclose the defective plumbing. The court held that the existence of an “as is” provision in a purchase contract operates only as a waiver of breach of warranty claims, not as a waiver of tort claims.

Therefore, the seller was obligated to disclose known latent defects in the property, notwithstanding the “as is” clause or disclaimer of warranties. Thus, the Court of Appeals upheld the trial court and the jury’s damage award.

Lind, K. Michelle. Arizona Real Estate: A Professional’s Guide to Law and Practice – Third Edition
Xulon Press (page 134). Kindle edition (location 3284-3316).

©2018 by K. Michelle Lind, Esq./Arizona REALTORS®

This post is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

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