Real Estate Contract

THE AS-IS CLAUSE AND THE SELLER’S DUTY TO DISCLOSE

In Washington DC’s red hot real estate market, the pressure on real estate sellers to showcase their real estate has an ugly underside. Increasingly real estate owners faced with the prospect of selling real property with latent defects are attempting to circumvent the seller’s disclosure requirement in a sales contract by using an as-is clause to shield them from liability.

By way of background, an as-is clause in a real estate contract is a type of contract clause that attempts to shift the burden to the buyer to determine the condition of the real property, or to signal to the prospective purchaser that she may not justifiably rely on seller's silence as a representation that there is nothing wrong with the real property. For seller’s of real estate, an as-is clause is often an attempt to avoid unpleasant disclosure that might otherwise make selling real estate difficult or impossible. In a hot real estate market it is increasingly a contract provision that buyers have to face as part of the purchase process.

However, under District of Columbia law, an as-is clause is insufficient to protect the seller of real property if the buyer can prove that the seller knew of the material condition and did not disclose it to the buyer.  Known defects in the real property must be disclosed to the buyer with specificity to fully protect and insulate the seller from potential liability for incomplete disclosure.  The logic used by the DC courts to support this analysis is that an as-is clause functions as a waiver by the buyer of only in the event of a breach of warranty claim. 

What this means in common parlance is that for claims fraud and misrepresentation are not waived by the as-is clause.  Furthermore, DC courts have held that latent defects, or defects that are hidden and not readily discoverable by a buyer’s reasonable inspection, unfairly shift the risk of non-disclosure to the buyer.  It's important to remember that the seller has an implied duty of good faith and fair dealing with the buyer and that regardless of the seller intent, inserting an as-is clause into the contract the seller must maintain those duties to the buyer throughout the pendancy of the transaction.

Thus, if you are the seller of real property the best thing you can do is to make full disclosure to the buyer. As they say, the truth is the best defense and in the case of seller's disclosures, it is good advice.  If a seller of real property fails to make disclose to the buyer, even if they believe the condition is not material they potentially run the risk of trigger costly litigation from their failure to disclose latent defects.