Why "As Is" Really Isn't How It Is:...

The Legal Effect Of "As-Is" Clauses in the Context of Homeowners Association Defect Claims - Part 2

by Matt J. Malone, Esq.

In the first part of this article, we examined “as-is” provisions from a legal perspective, and saw how they do not operate as an absolute bar against later claims by a buyer. Now, we turn from the legal to the practical, and move our attention away from case law and statutes and toward the homeowners association specifically. First, we will see how homeowners associations are distinct legal entities, empowered to bring their own claims. And since they are not signatories to the agreements containing “as-is” provisions, those provisions cannot bar their claims. Second, we will look at condominium conversions specifically, to see precisely why “as-is” clauses have no more impact in the conversion context, even though conversions are by definition not new construction.

“As Is” For HOAs: Understanding the Association's Independent Right to Bring Defect Claims

In the homeowners association context, the “as-is” clause has an additional wrinkle in its application. Homeowner associations have the power to bring their own independent claims, separate and apart from those of their owners – including claims for construction defects.¹⁴ And in virtually no case does an association sign a purchase and sale agreement containing an “as-is” provision. Developers often argue that because all of the owners had to sign the same purchase and sale agreement, its terms should be imputed to the association, which is, after all, comprised of the owners. But this is not the law. In fact, “as-is” clauses in individual owners' purchase and sale agreements do not prevent an association from bringing its own claims for defects in construction.

Understanding why this is the case requires a brief discussion of corporations law (a proposition that threatens to be terribly boring, but is terribly important). A homeowners association is a corporation and is effectively its own legal “person.”¹⁵ It may bring its own claims for construction defects without joining its individual members.¹⁶ These include claims for damages to common areas, or damages to separate interests that arise from or are integrally related to common area damages.¹⁷

The board of directors is responsible for making decisions on behalf of the corporation. In homeowners associations, the CC&Rs almost universally spell out the board's power in this regard. But even in the absence of such specific language, the law is clear that “the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board.”¹⁸

Ultimately, then, the association's power to enter into contracts and to waive its claims resides with its board. As a result, no individual owner can waive an association's claim. At most, when a buyer signs an agreement containing the “as-is” provision, all that has happened is a waiver of some of that individual's claims against the developer/seller. But it does not waive the association's separate claim. First, the association did not execute the purchase and sale agreement containing the clause – it is not a party to that agreement, which is between the owner and the seller. And second, it does not matter that the owners, who are parties to the agreement, will eventually become members of the association. Even if all of the owners separately signed purchase and sale agreements containing “as is” clauses and/or warranty waivers, this would not prohibit an association from bringing its own claim. Why? Because the board has not authorized the waiver.¹⁹ It signed no “as-is” provision and it is not a party to the purchase and sale agreements containing the clause.

But recently, some developers have become particularly creative, crafting their “as-is” provisions to expressly waive the right of the Association to bring its own independent claim in exchange for a limited warranty from the developer. Here is how one such provision reads:

BY BUYER'S SIGNATURE BELOW, BUYER ACKNOWLEDGES THAT THE WARRANTY IS A LIMITED WARRANTY AND IS THE ONLY WARRANTY BUYER WILL RECEIVE REGARDING THE PHYSICAL CONDITION OF THE UNIT AND COMMON AREA. SELLER HAS NO OTHER OBLIGATIONS WITH RESPECT TO CONSTRUCTION DEFECTS IN THE UNIT AND THE COMMON AREA. THE WARRANTY REPLACES ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, AND ALL OTHER RIGHTS OF ACTION (INCLUDING RIGHTS OF ACTION FOR NEGLIGENCE) IN FAVOR OF BUYER OR IN FAVOR OF ANYONE ELSE INCLUDING THE ASSOCIATION.
…
FINALLY, UNDER THE WARRANTY THE ASSOCIATION MAY NOT ASSERT ANY INDEPENDENT RIGHT OF ACTION AGAINST SELLER FOR CONSTRUCTION DEFECTS IN THE UNIT OR IN THE COMMON AREA …
(emphasis added)

What is the effect of this? In short, nothing. Association members simply cannot waive the association's claims in this manner. Think about it this way: I want Apple to waive a claim against me – say, for improperly “acquiring” and selling a prototype of its 4G iPhones after one of its employees leaves it at a bar. So, I go to all of Apple's shareholders – yes, including Steve Jobs himself – and get each of them to sign a waiver that expressly states that they waive all of Apple's claims. Has Apple effectively waived its rights? Absolutely not. Why? Because Apple is a corporate entity – in legal terms, its own person – and its board holds its decision-making authority. Unless the board votes to authorize execution of the waiver, the company has not acted, no matter how many individual shareholders sign my waiver and even if all of them do.²⁰

This brings up a final logical problem with using “as is” provisions to bar an association's claim: At the time purchasers sign their agreements, they aren't even members of the association yet! Under most CC&Rs, purchasers do not become “Owners” and members of the association until they hold a recorded interest in the property – that is, a recorded deed. But that does not occur until after close of escrow and well after signing the purchase and sale paperwork. So, these purchase and sale agreements would have these purchasers waive claims on behalf of an association they don't even belong to! Of course, such an act would be no more effective than your signing a document that waived Apple's claims against me for that 4G iPhone I lost. Even if the owners had the power to make such a waiver on behalf of the association, they could not do so before they become association members.

“As Is” For Condominium Conversions

Finally, what about condominium conversions? Conversions are obviously not new construction. So, do “as-is” provisions have any additional teeth in the conversion context, given that there is no dispute that the property is “used”? No, they do not, for two reasons.

First, remember that a condominium conversion is still, after all, a condominium. It has a homeowners association. That association has as much independent right to bring a claim as an association that governs a newly-constructed project. So all of the analysis in the last section applies to conversions as well. Unless the association's board somehow signed such an agreement (and trust me, it didn't), that provision will not operate to bar the association's independent claims.

Second, the fact that a conversion is indisputably not new construction does not give more weight to the “as-is” provision. Remember that a conversion is not simply an apartment project sold off in pieces. In order to convert a project, the developer has to prepare a budget and set the reserve and assessment amounts. A developer must do this with reasonable care. Certainly, if a converter knows the roof is failing and yet represents the roof has fifteen more years of useful life, an “as-is” clause will not save it from its misrepresentation. And it is no different if the developer simply hides its head in the sand: If, for example, the developer has reports of problems with the roof from the time it was held as apartments, then fails to investigate these problems before conversion but still represents the roof to have a substantial useful life, that is actionable as a negligent misrepresentation. And, as we saw earlier, that action may be brought by the association all on its own.

Homeowner associations facing construction defect actions invariably confront questioning – both from the developer and their own members – as to whether an “as-is” provision operates to bar any defect action they might bring. As this article shows, that clause does no such thing. This author has challenged those clauses in court on behalf of associations, and won on precisely the theories identified here. And the alternative to such a challenge is for your association to bear the cost itself, meaning increased regular assessments or, worse, huge special assessments. If your association is facing a potential defect claim in the face of an “as-is” provision, you are ill-advised to simply walk away without first consulting competent, experienced counsel to guide you through the potential challenges you might raise. You may find that it is not always so clear what the meaning of “as is” actually is.