Beware the Boilerplate: “As-is” Provisions and Reliance-Negating Merger Clauses: A 1-2 Knockout Punch
Real estate lawyers should be particularly aware of how a disclaimer of reliance in combination with an “as-is” or “with all faults” provision in a lease1 or purchase agreement can cut off just about any claim relating to the condition of a property.
When a client agrees to purchase or lease commercial property "as is," the buyer/tenant agrees to make its own appraisal of the bargain and accepts the risks of the agreement. Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex.1995). In Prudential, the Texas Supreme Court approved the enforcement of "as is" clauses under certain circumstances. As long as the buyer is not induced by fraud into accepting the "as is" provision, the legal effect of the provision is to negate the causation element essential to recovery on claims associated with the physical condition of the property. Prudential, 896 S.W.2d at 161; Lee, 120 S.W.3d at 467-68. As the Court explained, contractual disavowal of reliance upon any representation is an important element of an arm's-length transaction and is binding unless set aside. Prudential, 896 S.W.2d at 161. Finally, an "as is" agreement negates the causation element essential to recovery on DTPA theories, fraud (excluding, of course, fraud in the inducement of the "as is" agreement), negligence, and breach of the duty of good faith and fair dealing. Id.
When considering the enforceability of an "as is" clause, courts generally consider five factors: (1) the sophistication of the parties, (2) the terms of the "as is" agreement, (3) whether the "as is" agreement was freely negotiated, (4) whether the agreement was an arm's length transaction, and (5) whether there was a knowing misrepresentation or concealment of a known fact. Procter III v. RMC Capital Corp., 47 S.W.3d 828, 833 (Tex.App.—Beaumont 2001, no pet.) (distilling Prudential into five-factor test). Although not an independent factor, whether the buyer was represented by counsel is also important. See Id. at 833-34.
It stands to reason that in the presence of a merger clause that disclaims reliance, the fifth factor drops from consideration. Moreover, if an “as is” clause can only be defeated if procured by fraud, having a disclaimer of reliance in the merger clause of a lease or purchase agreement for property makes the “as is” clause essentially bulletproof. While no case appears to have dealt with the interaction between these two provisions, I would expect the result to be fatal to any attempt by a tenant/buyer to avoid the as-is provision. Whichever side of the transaction you are on, be sure to look for these clauses and understand what they really mean, especially in combination.
1. Although most Texas case law concerns "as is" clauses in the context of commercial property sales, see, e.g., Prudential, 896 S.W.2d at 156, "as is" clauses can also apply to leases of commercial property. See Lee v. Perez, 120 S.W.3d 463, 467-68 (Tex.App.—Houston [14th Dist.] 2003, no pet.) (in which court considered applicability of "as is" provision in context of commercial lease and held that provision would waive physical defects of property but did not waive deed restriction); see also Hou-Tex, Inc. v. Landmark Graphics, 26 S.W.3d 103, 110-11 (Tex.App.—Houston [14th Dist.] 2000, no pet.) ("as is" provisions valid in lease of computer software).