“AS IS,” is it as Simple as it Sounds?
The real estate market has seen a tremendous resurgence in the past few years. In just the first six months of 2015, Johnson Pope wrote more than $200 Million in title insurance policies. In the first quarter alone of 2015, Auction.com, LLC, reported $124.3 Billion dollars in commercial real estate activity, representing a 47.4% increase from the previous year. This activity is supported by year-over-year price increases of 16.6% and 10.8% for the hotel and apartment sectors respectively, two of the largest operating areas for our commercial clients.
As the market has shifted past equilibrium and is represented more favorably on the demand side of the supply and demand curve, sellers have been less willing to offer favorable concessions to buyers. Sellers are increasingly taking steps to reduce their liability, often contracting with buyers under purchase agreements that include various forms of an AS IS provision. The old adage of “Buyer Beware” is brought to the forefront in an AS IS agreement. The concept sounds simple, right? But what does it really mean and how does it affect the liability of not only the seller, but also of the buyer?
An AS IS agreement is generally utilized by a seller to disclaim various statements, warranties or guaranties as to the condition of the property being sold. In Florida, the application of the AS IS provision is not a creature of statutory law but a body of common law that has evolved over time. Sellers must have an understanding that this body of common law does not allow for the insertion of an AS IS provision to escape all liability, but rather an AS IS provision will provide a wide disclaimer. Courts will not tolerate fraudulent misrepresentation by a seller. Additionally, the application of AS IS provisions is not consistent between residential and commercial agreements as the Bowman v. Parker court found residential sellers have a duty to disclose known defects in the property and an AS IS provision does not allow the seller to escape this duty. This duty can give buyers some confidence when entering into an AS IS agreement, but buyers must keep in mind the AS IS provision is for the benefit of the seller and not the buyer.
In J.C. Penney Company v. Koff, the buyer attempted to overcome a specific performance claim by arguing the property was contracted for under a specific zoning designation, which was subsequently changed prior to closing. The buyer claimed the AS IS provision should have permitted the buyer to introduce evidence that the purchase was contingent upon specific zoning and since the zoning was changed, the buyer should be permitted to rescind the contract. The court found the AS IS provision contained within the agreement permitted the seller to disclaim any representations, statement, or warranty of the condition of the property and the seller was entitled to specific performance.
Additional practical considerations should also be given to the use of the AS IS provision in contracts. The provision not only has the positive ability of reducing or even eliminating warranty claims against the seller, but conversely, it may be seen negatively by a buyer and cause the buyer to offer a lower price for the property or cause increased scrutiny during the inspection period, which may uncover other negative defects in the property, both of which may yield an unanticipated result to the seller.
Often the interpretation of an AS IS provision is specific to a set of facts and considers not only the specific words of the provision, but the sophistication of the parties and the relationship of the AS IS provision to other provisions contained within the agreement. Therefore, if you are selling or buying commercial real estate in Florida, let us discuss with you the use of an AS IS agreement giving due consideration to its benefits and detriments in connection with your specific goals.