[DIRT] DD 1/18/07 "As Is" vs. implied warranties and remote purchasers of residential property. The mud deepens.

Daily Development for Thursday, January 18, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

VENDOR/PURCHASER; IMPLIED WARRANTIES; “AS IS” CLAUSE: Texas continues its struggle with effect of “as is” language in real estate deals.

Welwood v. Cypress Creek Estates, 205 S.W. 3d 722 (Tex. App. 2006)

Texas is building up a large and diverse body of precedent discussing the ability of transferors in various kinds of real estate agreements to avoid liability for defects in that real estate. This case takes its place in that swirling universe. Although it narrowly distinguishes a number of other recent cases, a reading of this case alone suggests that some of those cases are not exactly on the same page with this court, and that we are likely to see further development as the issue continues to swirl.

Here, a subdivision developer sold lots to HWH, a custom home builder company. Welwood was the chairman and a partner in HWH. Welwood individually purchased a home from HWH . There was a slope at the rear of Welwood’s property, and, after landscaping and development of the lot were completed, the slope slipped, leading to extensive damages and creating a need for reingineering .

Welwood alleged that the lot developer’s engineers had advised that a slope stability analysis be conducted on any slope in the development that exceeded certain tolerances. The original slope on Welwood’s lot had exceeded those tolerances, but the developer had not conducted a slope stability analysis. Consequently, Welwood alleged, the developer had been negligent and Welwood sued on the basis of an implied warranty of good workmanship in the development of the lot.

The developer, however, asserted that it was entitled to invoke the “as is” clause in its contract with its purchaser, despite the fact that the plaintiff was not a party to that contract. The court of appeals agreed and affirmed summary judgment for the developer.

It is important to note that the implied warranty upon which Welwood was relying was not the general implied warranty of habitability. The court indicated that this warranty cannot be disclaimed, as it is based upon public policy. Rather, as habitability of the home itself was not an issue, Welwood was asserting an implied warranty of good workmanship - specifically an implied warranty of “good and workmanlike development service.” The court appeared to acknowledge or at least assume that such a warranty is recognized in Texas law. The contract set certain explicit standards relating to the soil work in the development. The builder agreed to develop according to the standards of the local city and to deliver all compaction studies and tests to HWH. Welwood did not allege that the developer had failed to comply with these provisions.

Here is the “as is” language (the court refers to it as a “disclaimer:”

. . . Seller expressly disclaims and purchaser acknowledges and accepts that Seller has disclaimed making any representations, warranties or assurances with respect to the subdivision or the lots, express or implied, or arising by operation of law, oral or written, incluidng but not limited to, representations or warranties as to . . . physical condition . . . habitability, merchantability, or fitness for a particular purpose. Purchaser agrees that with respect to the subdivisions and the lots it will rely upon its inspection thereof or its determination not to inspect the same, and upon closing shall accept the lots in their “as is” condition, with all faults, and without warrant to merchantability or fitness for any specific purpose.”

Certainly this was a powerful defense against any claims by HWH (a fact that plaintiff appeared to acknowledge), but was it good against Welwood, who was not a party to the contract containing the disclaims?

The court starts out by attempting to narrow significantly its ruling. It indicates that it states no opinion as to whether the disclaimer would be valid against a remote purchaser who had no knowledge of its terms. But here, it says, since Welwood was the chairman and a partner in HWH, he had express knowledge of the contents of the disclaimer. Notwithstanding the lack of privity, the court viewed Welwood as standing on different policy grounds that less informed remote home purchaser. This analysis appears to be based upon Welwood’s knowledge of the disclaimer, rather than any perceived identity of interest with HWH, the court later states that Welwood’s “interests are aligned with HWH in relation to the ‘as is clause.’” Thus we don’t know for sure whether Welwood’s knowledge of the disclaimer or his involvement with the initial purchaser, or both, were significant to the court.

The court further holds that the effect of the disclaimer was to transfer responsibility for any defect to HWH. In fact, the contract elsewhere stated that the developer was relying upon the skill and experience of HWH as a builder. Consequently, the court held that the disclaimer clause shifted “causation” of Welwood’s damage to HWH, which bore the responsibility to identify the defects in the soil itself.

Of course, this analysis, useful here, would not apply where the defect in question would not be discoverable after the original developer had completed its work. Some parts of the opinion indicate that the disclaimer language would protect the developer anyway, but, again, this is not so clear. It may be that the case stands only for the point that Welwood is effectively bound by the contract disclaimer because of his identify of interest with HWH. Then again, the case may stand for much more.

Another interesting section of the opinion deals with the question of whether, on the basis of public policy, courts ought to invalidate disclaimers of quality construction by real estate developers. Apparently a number of implied warranties, dealing with services that are critical to public safety, cannot be waived, including the implied warranty of habitability. But the court analogizes the warranty at issue here to one arising out of contract implication and not based upon public policy. It refers to the warranty of workmanlike construction as a “gap filler,” useful to infer the intentions of parties to a services contract when the parties have not expressly detailed the desired standards that the service provider is to meet.

Here, the court emphasized, the sale agreement with HWH had set forth express performance standards with respect to the soil of the subdivision lots. They were to conform to the standards of the local city and the developer was to preserve and transfer copies of all compaction and soil tests. It apparently did comply with these requirements. The court concluded that in light of the parties’ determination to set forth specifically the performance standards for the developer, it was appropriate to permit the parties to stipulate that no other performance was expected, as the disclaimer clause did.

Comment 1: The importance of this case is that it discusses “as is” clauses as a shield to claims based upon implied warranties as opposed to misrepresentation or nondisclosure claims. The “causation analysis” that it partly embraces is quite far reaching and could lay a foundation for utilization of the clause in many cases involving remote purchasers.

Comment 2: But the court’s initial emphasis on the business relationship between the plaintiff and HWH - the “middle man” - muddies the whole situation and may limit the significance of the case to that relatively rare situation. Two steps forward, one step back.

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