Sunday, May 19, 2019

The As Is Contract May Not Be As Is

LAW MATTERS

Most of the contracts used for residential real estate sales include provisions that allow buyers to inspect the property before consummating their purchase. Some contracts require the seller to make repairs, albeit most of those place a cap on the seller’s obligation. Others give the buyer the right to inspect and request repairs, but give the seller right to refuse and buyer right to terminate contract if the seller refuses a reasonable request.

Most residential real estate contracts define what may be inspected and what is considered a defect under the contract. Most contracts confirm that a buyer cannot complain about a cosmetic defect and many state that a buyer cannot complain about something that is open and obvious. The contract form must be read carefully to determine the buyer’s inspection rights and what the buyer has a right to complain about.

Perhaps the most frequently used contract form in Florida requires a seller to replace or repair torn screens, fogged windows and missing roof tiles or shingles. The contract form most frequently used in Collier County states those same items are cosmetic and a seller is not required to repair them, plus goes on to add minor cracks in windows, driveways, sidewalks, tile, lanai and patio floors, corrosion, tears, worn spots and discoloration of floor covering, wallpaper or window treatments to the list of items that a seller need not correct. The contract language is controlling and not the desire of one party or the other.

In a small percentage of cases, a buyer will make an offer to purchase property “as is.” A true as is contract means the buyer is accepting the property in its then current condition, inclusive of all defects. A seller will not be obligated to make any repair and the buyer accepts any problems with the property if purchased as is.

Buyers willing to purchase property as is are either familiar with the property or plan to substantially renovate or tear it down. That limits the field of potential buyers significantly. Most as is purchasers utilize a contract form that gives them the right to inspect and terminate the contract within a specified period of time if they are unhappy about its condition.

Those contracts are generally known as “as is with right to inspect.” Most of these forms grant the buyer a limited period of time within which to terminate the contract for any reason or no reason. The buyer can use that time to inspect, contemplate or simply change his or her mind. Many sellers mistakenly believe that a contract with the words “as is” in the title means exactly that and are often disappointed to find the contract really gave the buyer an option to terminate and a free look for the period stated in the contract.

Some sellers will demand an as is contract. Some of them make that demand to avoid having to make any repairs. Others do not want to allow the buyer to terminate because the buyer discovers problems with the property. They may have lost a sale before, and do not want to repeat the experience. For those sellers, an as is contract is a great option.

Other sellers think they can force a buyer to accept hidden defects known to the seller if they use an as is contract. That might work if commercial property is involved, as the rule of caveat emptor (let the buyer beware) still reigns in commercial transactions. Caveat emptor’s role in residential sales was ended by the Florida’s Supreme Court in the 1985 case of Johnson v. Davis.

In Johnson v. Davis, the Davis’ entered contract to purchase a home from the Johnsons. Before making a second deposit payment, Mrs. Davis noted some buckling and peeling plaster around a window frame and stains on the ceilings. Mr. Johnson told her the window had previously had a problem and had long been repaired and the stains were wallpaper glue and the result of ceiling beams being moved. The Davis’ made their second deposit. Several days later, following a heavy rain, Mrs. Davis revisited the home and found water “gushing” in from around the window frame, the ceiling, light fixtures, doors and kitchen stove.

The Davis’ sued, demanding return of their deposit and termination of the contract. The Johnsons fought back arguing caveat emptor controlled and they did not have to tell the buyer about the leaks. The case reached Florida’s Supreme Court.

The court explained that caveat emptor does not protect a seller’s false statements and representations made to induce a buyer to act. That could have been the end of the case. The court explained a seller could not use caveat emptor to protect the seller from fraud and misrepresentation. But, the court went on. Not only would caveat emptor not protect the seller, it would not apply in any residential sale transaction at all. From that date forward, Florida’s Supreme Court confirmed that Florida law requires sellers of residential property disclose all known material defects in the property that are not readily observable by the buyer.

Johnson v. Davis provides protection for a buyer when the seller knows about defects, but is not much help when the seller lacks knowledge. Proving the seller has knowledge can also be difficult. That certainly does not stop a buyer from filing suit when the buyer finds a big problem after closing and claims the seller “must have known about it.” But, it can make it affordable for the buyer to win that sale.

Residential sellers have to tell buyers about hidden defects. Do they have to do anything else? Most contracts provide that if the property is damaged between time of contract and scheduled closing, the damage is the seller’s problem. The contract may provide that the seller has to repair the damages, give the buyer right to terminate or both.

Most contracts require the seller maintain the property in the same condition it was in at time of contract until the closing. In that respect, using a form contract is probably in the buyer’s best interest, since most form contracts provide that the seller is responsible for maintenance and damage between the date of contract and closing.

Florida law provides that unless the contract makes the seller responsible, risk of casualty loss is placed on the buyer by the doctrine of equitable conversion. Equitable conversion provides that a buyer gains an equitable ownership in the property at time of contract and the risk of loss shifts to the buyer at that time. If the house burns down, the buyer is still obligated to purchase, although the buyer has right to claim any insurance proceeds that might otherwise be payable to the seller due to the casualty loss. Buying a burned down house with assignment of insurance proceeds is probably not what the buyer would have agreed if given an option. The contract can place the risk of loss on the seller.

Even thought a seller must tell a buyer about known defects that are not readily observable, terms of the contract can significantly affect the rights and obligations of both parties. As is may not mean as is, if other provisions of the contract alter the meaning. Relying on the comfort of a pre-printed form with as is in the title may prove a poor choice. Time for professional advice to understand all terms of a contract is before signing, not when a later problem arises.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.

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