The Dallas Court of Appeals recently revisited the meaning of “as-is” provisions in real estate transactions, affirming that properly drafted “as is” clauses may provide a basis for summary disposition of a case.  Steve Snelson and Maria Moffatt of our firm represented the contractor, CGC Construction, in the underlying case and on appeal.

In Potter, the Potters sued for personal injury damages arising from alleged exposure to mold in a rent-to-buy house that they occupied.  HP Texas 1, LLC (HPA) owned the house and leased it the Potters.  HPA retained a third-party inspection company to inspect the property and, for the house at issue, retained CGC Construction to make the recommended repairs.

As part of the rent-to-buy transaction, the Potters signed 4 separate documents containing “as is” provisions, including a lease agreement, a right-to-purchase agreement, a repair, maintenance and improvement addendum to the lease, and a real estate contract.  Although the each of the 4 documents serves a different purpose, each stated in capital font that the transaction was “AS-IS, WHERE-IS, WITH ALL FAULTS”.  In three of the documents, the “as-is” provision also contained language that waived any express or implied warranties.

The Potters never retained a third-party inspector before entering into the contracts, though did visit the house a few days before they moved in.  At that time, they observed a black substance coming out of the cable socket, a deformity of an interior wall, and a black substance under the carpet. After the move-in date, several months later, the Potters observed additional black substance on the walls and therefore, contacted a mold assessment professional.  A mold assessment professional inspected the home for the Potters and opined that that black mold was present in the house.  The Potters moved out and filed suit against everyone involved in the transaction or repair of the house, including HPA and CGC.  The defendants filed motions for summary judgment on the basis of the “as-is” clauses in the documents and the trial court granted the motions.  The Potters appealed to the Dallas Court of Appeals.

The Dallas Court of Appeals dispensed with each of the Potters’ arguments, affirming the dismissal of their claims.  “As-is” clauses are risk-shifting provisions in which the buyer assumes the full risk of determining the value and condition of the purchase.  In the words of the Texas Supreme Court, an “as-is” clause removes “the possibility that the seller’s conduct will cause him damage.”

As with every rule, this one has exceptions.  If the buyer fraudulently mispresents or conceals the condition or of the buyer is entitled to inspect the property and is prevented from doing so, the buyer will not be bound by the “as-is” provisions.  Texas courts also look to whether the “as-is” clause is  an important part of the agreement or buried in the boilerplate language of a contract, and whether the parties are in relatively equal bargaining positions.

The legal impact of an “as-is” clause is that it negates the causation and reliance elements of most tort and contract claims.  Without proof of causation, negligence and breach of contract claims fall by the wayside.  And without proof of reliance, claims under the Texas Deceptive Trade Practices Act also fall away.

In Potter, the Court held that the Potters taking the property “as-is”, agreeing in the contract to make their own appraisal of the property and accepting the risk if they were wrong, agreeing to be responsible for an independent examination of the house and, physically observing a black substance in the cable outlet and a deformed wall before move-in conclusively negated causation and barred their claims. There was simply no proof that HPA knew that the house had mold at the time of the transaction or concealed that information.

In examining the circumstances surrounding the transaction, the Court acknowledged that the “as-is” language was boilerplate, but was not buried in the contracts.  To the contrary, the Court found that the clauses were prominent and set in all capital letters.  As for disparity of sophistication, the Court noted that the Potters were represented by a realtor at closing and Mr. Potter routinely contracted with manufacturers for his business.  As such, the Court gave little credibility to the Potters arguments that the surrounding circumstances were sufficient to prevent enforcement of the “as-is” clauses.

Contracts involving real estate transactions routinely contain “as-is” clauses and waiver of warranties.  Those clauses are important risk shifting provisions that Texas courts enforce.  When entering into  a contract with any risk shifting provision, it is wise to consult with counsel.  The attorneys in our Austin and Dallas offices are available to answer any questions you may have.

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