Does an “As-Is” Clause in a Michigan Residential Real Estate Contract Protect a Seller From Liability for Misrepresentations?
Many moons ago, a prominent politician hedged his answer to a deposition question by saying it depended on the definition of “is”. While that may seem like an extreme example of parsing words, similar language in many residential real estate contracts –”as-is” clauses – can raise questions about what that term actually means and the extent to which it protects sellers from liability claims by purchasers for defects with the property. While these clauses generally allow the seller to wipe their hands clean of any problems or repairs that need to be made to the property, what happens when they are less than truthful about the “is” in “as-is”? In other words, does an “as-is” provision relieve a seller from liability for known defects and other issues with the property that they failed to disclose or misrepresented during the transaction?
What Is “As-Is”?
An “as-is” clause indicates the buyer accepts the property in its current condition, with all its existing defects. It essentially puts the onus on the buyer to investigate any issues with the property or accept any problems that exist at the time of closing as their sole responsibility. The presence of such a clause means the seller is generally not obligated to make repairs or disclose defects they are unaware of, or that are readily discoverable by the buyer.
While an “as-is” clause may protect a seller from liability for unknown defects, it likely will not shield them from intentional misrepresentations or failing to disclose any known issues that could affect the value, use, or enjoyment of the property as required by Michigan’s Seller Disclosure Act (SDA).
That SDA mandates that residential property sellers make a host of representations about the condition of and information concerning the property “known by the seller.” It also provides that it is not a violation of the act and that the seller is not liable for any error, inaccuracy, or omission” in the disclosures that were “not within the personal knowledge of the transferor,” or based entirely on information provided by public agencies or provided by other persons so long as “ordinary care was exercised in transmitting the information.” Similarly, the seller is not liable for failure “to disclose information that could be obtained only through inspection or observation of inaccessible portions of real estate or could be discovered only by a person with expertise in a science or trade beyond the knowledge of the transferor.”
Note that the SDA emphasizes the seller’s lack of knowledge or the inability of an average person to discover a defect as the shields they can raise against liability for non-disclosures. Those same shields apply to “as-is” clauses.
“Silent Fraud”
What the SDA does not absolve sellers of is liability for fraud, in particular, “silent fraud.” As the Michigan Court of Appeals discussed in Kondrat v. Servitto, “silent fraud” occurs when a “seller was aware of a hidden defect, and failed to disclose it.” This can include “a misleadingly incomplete response” to an inquiry or disclosure requirement.
Similarly, the court in Coosard v. Tarrant held that an ‘as-is’ clause does not “transfer the risk of loss where a seller makes fraudulent misrepresentations before a purchaser signs a binding agreement,” although such a clause “does preclude a claim of innocent misrepresentation.”
“Means to Discover”
Sellers relying on an “as-is” clause to shield themselves from liability often assert a defense based on a defect being so obvious or easily discoverable such that reliance exclusively on a seller’s representation would be unreasonable. An extreme example would be a seller who represented that there were no issues with rodents on the property when a brief visit would reveal that it looked like a scene from the movie “Ratatouille.”
In Cossard, the court noted that an “as-is” clause can “transfer the risk of loss [to the buyer] where the defect should have reasonably been discovered upon inspection, but was not.” However, a buyer does not have “an independent duty to investigate and corroborate representations” unless they were presented with some information or affirmative indication that further investigation was necessary. Accordingly, the court held, “an ‘as-is’ clause will not protect a seller against a claim for fraud merely because the buyer could have discovered the truth. Instead, it must have been reasonable to expect the buyer to discover a defect upon inspection, and it must also be reasonable for the buyer to conduct the inspection in the first place.”
While a buyer who agrees to purchase a residential property with an “as-is” clause does agree to shoulder the risks and costs of unknown defects, they are not agreeing to being lied to, whether that lie comes in the form of an affirmative misrepresentation or a knowing silence.
If you have any questions or concerns regarding “as-is” clauses in Michigan residential real estate contracts, contact David Hart at Maddin Hauser.