WP: Disclosure: Exculpatory Language

VII. Exculpatory Language

An “as is” clause will act as a bar to a broker’s liability when sued under the theory of fraudulent nondisclosure (passive fraud). Fraudulent nondisclosure is an “act of omission,” or not acting when one is under a duty to act. An “as is” clause eliminates a broker’s or seller’s duty to disclose material latent defects, thus, the broker or seller is no longer under a duty to “act.”

An “as is” clause, however, will not prevent a broker from being liable on theories of fraudulent concealment, fraudulent inducement, or fraudulent misrepresentation, which are acts of “active fraud” requiring the commission of an act (i.e., concealment or making a misstatement). Thus, while the “as is” clause eliminates the duty to disclose latent defects, it does not authorize the commission of acts to defraud the purchaser and, therefore, will not limit a broker’s liability for such conduct.

Other types of exculpatory language will only be effective in Ohio where damages are a result of negligence. Therefore, exculpatory language, including an “as is” clause, will only limit the broker’s liability where the broker did exercise some degree of care. If the broker did not exercise any care at all or engaged in willful or wanton misconduct, exculpatory language will not act as a limitation on liability.

Brokers often try to include language in the contract which limits their liability. For example, the contract in Sanfillipo v. Rarden contained the following language:

“Purchaser is relying solely upon his own examination of the real estate, the owner’s certifications herein, and inspections herein required, if any, for its physical condition and character, and not upon any representations by the real estate agents involved, except for those made by said agents directly to the purchaser in writing.” 493 N.E. 2d 991, 996 (Ohio Ct. App. 1985).

The court held that while this sort of language is not uncommon, it is only effective in Ohio where the damages complained of are caused by the broker’s negligence. “[A] limitation of liability has no effect when there has been a failure to exercise any care whatsoever, . . . or where there has been willful or wanton misconduct . . . . Id. In case of fraudulent inducement, the limitation will have no effect if the representations did induce reliance, or if the representations were made under circumstances evidencing actual fraud. Id.

Other language often used by both sellers and brokers to limit or escape liability is the “as is” clause. The Ohio court of appeals for Summit County dealt with the effect of an “as is” clause on liability in the case of Kaye v. Buehrle, 457 N.E. 2d 373 (Ohio Ct. App. 1983). The Kayes were in the market to buy a new home. A broker recommended they look at the Buehrles’ home. The Kayes agreed to pay the full asking price of $129,000. While the Buehrles and the broker were aware the basement would leak during a heavy rain, this information was never disclosed to the Kayes.

The day after the Kayes moved into their new home, it rained very heavily and the basement flooded. Several months thereafter, one of the basement walls buckled in under the pressure of water built up in the ground around the house. The Kayes repaired the damage, then filed suit against the Buerhles and the broker for the nondisclosure. Kaye, 457 N.E. 2d at 374, 375.

The defendants disclaimed any liability due to the “as is” language in the purchase agreement. The contract stated that the sellers did not warrant the property, that the buyer examined the property and was taking it in as “as is” condition, and that the buyer had two weeks from the date of the agreement to have professionals come in and inspect the property. If major defects were found, the sellers could cancel the agreement or correct the defects at their option. Id. at 375. The agreement also stated that the buyer’s failure to have professionals come in within two weeks was a waiver and indication he was taking the property as it was. Id.

The court examined the three fraud claims individually. The court concluded the claim for fraudulent nondisclosure was properly disposed of by the trial court. The “as is” language in the contract placed the risk of the existence of defects upon the buyers. “[W]hen a buyer contractually agrees to accept property ‘as is,’ the seller is relieved of any duty to disclose.” Id. at 376. The existence of the “as is” clause successfully places the risk of defect upon the purchaser and relieves the seller of any duty of disclosure. The existence of an “as is” clause, however, is not a bar to claims of fraudulent concealment, fraudulent inducement, or fraudulent misrepresentation. In these cases, the fraud complained of “is ‘positive’ fraud, i.e., fraud of commission rather than omission.” Id. Therefore, where active fraud is charged, an “as is” clause will not preclude recovery. Despite this fact, the Kayes’ claims for fraudulent concealment and fraudulent misrepresentation still failed. There was no evidence of an intent to conceal defects or to prevent the Kayes from acquiring material information. The fraudulent misrepresentation claim failed for lack of reliance. The evidence showed that no representations were made prior to the sale, so nothing was said on which to rely at the time of the purchase. Therefore, the court of appeals affirmed the judgment of the lower court in favor of the defendants. See also, Donnelly v. Taylor, 122 Ohio Misc. 2d 24 (Medina Cty. C.P. 2002) (holding that sellers were not liable to buyers for existence of bats in their home, even though sellers were aware of the bats, because house was bought “as is,” and buyers could not show that the sellers took any steps to actively conceal the bats’ existence).

An “as is” clause can effectively preclude recovery by buyers, either because the court finds that (1) the buyers had no justifiable reliance or (2) the parties had agreed on a shift of the risk as to the existence of any additional defects. For example, in Berger-Vespa v. Rondack Bldg. Inspectors, Inc., 740 N.Y.S.2d 504 (N.Y. App. Div. 2002), a New York court found that the disclaimers contained within the purchase agreement as well as the dual agency disclosure form further supported the conclusion that the buyers were not justified in relying on any alleged negligent misrepresentations by the sellers and broker regarding the structural soundness of the house. Id. at 507. The purchase agreement stated that the property was being sold “as is” without warranty to its condition, while the disclosure form stated that the broker was not an advisor as to, among other things, the structural condition of the property. Id. at 505.

In Tipton v. Nuzum, an “as is” clause prevented the buyers from succeeding in a suit against the seller and the seller’s agent for fraudulent and/or negligent concealment of known defects in the foundation of the house. 84 Ohio App. 3d 33, 36 (Summit Cty. 1992). While inspecting the home prior to purchase, the buyers were aware that a sump pump had been installed in the basement and that the house was built below a hill. Id. at 38. After they moved in, the buyers noticed an accumulation of water on the basement floor. The seller told them that he did not mention water problems in the basement because he had taken corrective measures, such as installing a sump pump and pouring new concrete, and believed that the water problem had been resolved. Id. at 36.

The court found that the “as is” provision in the purchase agreement placed the risk as to the existence of any defects upon the buyer. Id. at 39. The contract stated that, subject to inspection, the property was to be accepted in its then “as is” condition. Therefore, the sellers had no duty to disclose any knowledge of past water problems with the basement. Id. Once alerted to the possibility of a defect in the property, the buyer had a duty to inquire further of the owner, or seek advice of someone with sufficient knowledge to appraise the defect. Id. at 38. The court noted that the “as is” clause would not bar a claim for positive fraud, such as fraudulent concealment or misrepresentation, however, the buyers presented no evidence that the seller made any attempt to intentionally conceal known defects. Id. at 39.

Note, though, that an “as is” clause will not protect a seller from liability when other provisions of the purchase agreement specifically state that the “as is” clause does not apply to them. Moore v. Daw, 2000 Ohio App. LEXIS 6146, at *19 (Muskingum Cty. Dec. 22, 2000). In Moore, the “as-is” provision did not shield the seller from breach of contract liability when the seller failed to fulfill its responsibilities in securing a termite report as specified in the purchase agreement. Id.

A “present physical condition” clause is substantially the same as an “as is” clause. Masten v. Brenick, 2001 Ohio 2500, at *15 (Hocking Cty. Mar. 6, 2001). If a buyer agrees to accept the property “as is,” the seller is relieved of any duty to disclose that the property was in a defective condition. Id. The “as is” clause places the risk upon the buyer as to the existence of the defects and relieves the seller of the duty of passive disclosure. Id. In Masten, the buyer purchased the property in its “present physical condition,” so the wet basement could not be a “latent defect,” and caveat emptor precluded the buyer’s recovery because he was unable to prove fraud by seller. Id. at *1.

ILLUSTRATION:

Mr. Smith lives in Ohio and has listed his house for sale with Mr. Brown’s real estate agency. Mr. Smith’s house has a problem with water in the basement during heavy rains and some structural damage as well, evidenced by some very small cracks in the basement walls. After a stretch of hot, dry weather, Mr. Smith has an open house. Mr. Jones attends and inspects the house. He notices a small crack in the basement wall and asks its cause. Mr. Brown says it is from some settling the house experienced a few years ago and tells Mr. Jones it is normal. Neither Mr. Brown nor Mr. Smith informs Mr. Jones of the water problem or the actual structural damage. Mr. Jones decides to buy the house. An “as is” clause is in the contract, indicating Mr. Jones has inspected the house and takes the property “as is.” The sale goes through. The following spring, after a heavy rain, Mr. Jones discovers water in his basement. Thereafter, he hires a general contractor to remodel his basement because of the damage done to the old furnishings and improvements. The contractor then informs Mr. Jones of the structural damage as well. Mr. Jones sues Mr. Brown and Mr. Smith for fraudulent misrepresentation of the structural damage and fraudulent nondisclosure of the water problem. Because of the “as is” clause, Mr. Jones loses on the claim for fraudulent nondisclosure of the water damage because the “as is” clause eliminated the duty to disclose latent material defects. However, Mr. Jones wins on his claim for fraudulent misrepresentation of the structural damage, however, because an “as is” clause will not prevent liability in a case of active fraud, such as Mr. Brown’s statement that the cracks were normal when, in fact, he knew of the damage.