What is the Effect of an AS-IS Clause in a Real Estate Contract? | Business Transaction Newsletter

In the case of Gottersman v. Heckler, the Court dealt with the issue of a real estate contract that had an “AS-IS” clause in it on behalf of the Sellers, but where the Buyer claimed that there had been fraudulent misrepresentation regarding the condition of the property. In the Complaint, the Buyer asserted that the Sellers had fraudulently induced her to purchase their home by misrepresenting the condition of the home and misrepresenting the condition of the home on the statutory required Residential Disclosure Form.

The contract stated that the home was being sold in an “AS-IS” condition and that the Buyer had “accepted” the condition of the home at the time of the closing. An Amended Complaint by the Buyer alleged that the homeowners had failed to disclose numerous defects on their Residential Disclosure Form. In reversing the Trial Court’s granting of Summary Judgment, the Court of Appeals ruled that the Buyer’s allegations concerning the severity and type of defects discovered in the home, if taken as true, would indicate that the Sellers had knowledge of the defects at the time the home was sold. Therefore, a genuine issue of material fact existed concerning whether the Sellers were aware of the significant defects in the home at the time they signed their Residential Disclosure Form and whether they misrepresented the home’s condition. The Court of Appeals wrote the same as the Trial Court that “AS-IS” clauses in contracts are enforceable, absent allegations of fraud or misrepresentation.

However, the Court of Appeals pointed out that Tennessee law has previously rejected the position that a buyer cannot prevail on fraudulent concealment claim because an “AS-IS” clause was placed in the contract. The Court said that enforcing an expressed disclaimer of warranties would be to blindly enforce a contract obtained by fraud. In the Gottersman case, the Courts said the “AS-IS” clause is but one consideration among other factors to determine whether the Buyer’s reliance on the Sellers’ alleged misrepresentations was reasonable.

The Court pointed out the elements that the Buyer had to prove to establish fraudulent misrepresentation and also the elements that the Buyer had to prove fraudulent concealment. Then the Court of Appeals reversed the Trial Court’s grant of Summary Judgment in favor of the Sellers and remanded the case to hear further proof on the allegations of fraudulent misrepresentation and fraudulent concealment.

MY RECOMMENDATION: Obviously, from a Seller’s perspective, having an “AS-IS” clause is better than not having one. Courts generally uphold “AS-IS” clauses. However, it is important to make sure that the Residential Disclosure Form is completed and accurately prepared.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law

This letter is intended to provide you with ideas for consideration in commercial transactions.  It is not intended to give a general solution applicable to all apparently similar individual problems, since slight changes in facts may require variance in legal advice.  Please contact legal counsel with specific questions.