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

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

"It depends on what the meaning of the word 'is' is." — Bill Clinton

Let's be honest: The only people young enough not to recall that quote from our 42nd President are also far too young to be reading this article. Support him or not, we all remember that gem from his videotaped grand jury testimony. And we also remember the backlash that followed: Could such a seemingly simple word like "is" be stretched into something debatable, questionable or somehow indefinable?

Now, residential purchase and sale agreements are not quite as, shall we say, sexy as a presidential scandal. But in this case, they do implicate a similar problem. Almost all such agreements contain disclaimers and warranty waivers whereby a buyer acknowledges that he or she takes the property without representations by the seller as to the fitness of any particular component. Similarly, these agreements almost universally contain "as is" provisions, which act as a confirmation that the buyer takes the property in its presently-existing condition. But, as this article will show, "as-is" clauses and related waivers do not stop claims by all purchasers, and do not necessarily apply to all claims a particular plaintiff might have especially if that plaintiff is a homeowners association. In short, it is not as simple as you might think to determine what the meaning of "as is" is.

So, when might "as is" not be the way it is? The first part of this article describes California law on "as is" clauses, illustrating the reluctance by both the legislature and the courts to allow such provisions to operate as catch-alls universally protecting sellers from any problems a buyer might later discover with the property. In the next part, we will look at the particular problem of homeowners' association defect claims. We will see how as-is clauses do not block such actions because the association never executed the contract containing the "as-is" provision. Indeed, even if the clause appeared in every purchase and sale contract signed by the members of an association, it is not enough to show that the association which is its own separate, distinct legal entity waived any of its claims. The second part will also include a discussion about the unique issue of condominium conversions older properties that are nonetheless governed by new associations to see whether a homeowners association is on weaker ground with the "as-is" clause because a conversion is, unquestionably, not new construction.

What The Law Says "As Is" Is: The "Visible Or Observable" Rule and Seller Disclosure Requirements

Over the past several decades, both the legislature and the courts have grappled with the meaning and effect of "as-is" provisions in California. As it stands now, the law is this: An "as-is" clause protects a seller from post-sale claims by the buyer as to conditions that the buyer could view or observe. It does not protect sellers where they either actively or passively conceal known problems with the property that might affect its value, or otherwise fail to meet the disclosure obligations set forth in the Civil Code.

An "as-is" provision "means that the buyer takes the property in the condition visible or observable by him."1 It does not impose upon the buyer any additional obligation to conduct independent investigations as to the state of the property.2 Of course, this does not give the buyer carte blanche to sue for anything he or she happened not to see. If a matter was obvious or could have been discovered through reasonable diligence such as a standard termite inspection the buyer is the one on the hook.3

But the "as-is" provision will not protect the seller who knew about a condition that would materially affect the property's value and failed to disclose it, either actively (by hiding it) or passively (by merely not mentioning it).4 Likewise, a general disclaimer denying any warranties will not protect a seller who fails to disclose known problems.5 At least one case has held that, to the extent "as-is" clauses seek to remove sellers' liability for such failures, they violate Civil Code section 1668, which prohibits contractual terms that seek to exempt someone from responsibility for their own fraud or negligence.6 Ultimately, the rule is that where a seller knows of a condition that materially affects the value or desirability of the property, he or she must disclose this information.7

Likewise, an "as-is" provision does not free a seller from making the disclosure requirements imposed by statute. The Civil Code requires a seller to provide a Real Estate Transfer Disclosure Statement to a buyer.8 The form of the disclosure is specifically set forth in the statute, and its topics include such items as environmental hazards, additions or modifications to the property, flooding, major prior damages, etc.9 Moreover, the seller must complete the statement in good faith.10 And most importantly, an "as-is" clause cannot waive the obligation of a seller to provide this statement.11 "As-is" provision or no, a failure to comply with the statutory requirements whether willfully or negligently subjects the seller to liability for damages the buyer suffers.12

In sum, regardless of what the meaning of "as is" may appear to be, it assuredly does not mean that caveat emptor remains the absolute rule for residential real estate purchases.13 Where a seller knowingly or negligently withholds information, including by failing to provide the requisite disclosures in the Real Estate Transfer Disclosure Statement, an "as-is" clause will not provide protection. In short, under the law, "as-is" isn't always how it is.

But the problems with applying an "as-is" provision to bar potential claims are not merely legal. They are also practical. In the next part of this article, we will tackle one of these practical problems, and see how "as-is" provisions do not bar defect claims by homeowners associations even if they are specifically written to do so. We will also see how "as-is" provisions have no greater strength in the context of condominium conversions, even though conversions are unquestionably not new properties.

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.

1 Lingsch v. Savage (1963) 213 Cal.App.2d 729, 742.

2 See Katz v. Department of Real Estate (1979) 96 Cal.App.3d 895, 901.

3 See Shapiro v. Hu (1986) 188 Cal.App.3d 324, 333-334 (affirming trial court's determination that an "as-is" clause barred plaintiff's claim in part because termite inspection would have revealed the claimed defect).

4 Lingsch, supra, 213 Cal.App.2d 729, 740-741.

5 Id. at p. 743.

6 Orlando v. Berkeley (1963) 220 Cal.App.2d 224, 228.

7 See Civil Code 1102.6, 1102.7.

8 Civil Code 1102 et seq.

9 Civil Code 1102.6.

10 Civil Code 1102.7.

11 Civil Code 1102.1 (emphasis added), overruling Loughrin v. Superior Court (1993) 15 Cal.App.4th 1188.

12 Civil Code 1102.1, 1102.13.

13 At first blush, Shapiro v. Hu, supra, 188 Cal.App.3d at pp. 333-334, does appear to be contrary to this rule. There, a buyer purchased a commercial property subject to an "as-is" provision and thereafter found a bulge in the basement wall. After the jury returned a verdict in the buyer's favor, the judge overruled the jury and entered judgment for the seller. The Court of Appeal affirmed, holding that the "as-is" provision put the buyer on notice that no warranties were made, and the only exception to its application was fraud or misrepresentation by the seller. Id.

But some commentators argue that Shapiro is "an aberrant decision based on unique facts." Miller Starr, 1 Cal. Real Est. 1:154 (3d ed. 2009), at fn. 10. The jury had found no fraud despite affirmative representations and failure to disclose by the seller's agent. Shapiro, supra at p 330. Additionally, the court took pains to note that the buyers were businessmen and real estate agents who should have known what "as-is" meant, and in any event, a simple termite inspection would likely have revealed the bulge. Id. at p. 333. Thus, the court was skeptical that the bulge was not readily observable, ultimately confirming the rule that the "as-is" clause absolves a seller of defects in the observable condition. See id; see also, Miller Starr, supra at fn. 10.

14 See Civil Code §1368.3.

15 Code of Civil Procedure §17.

16 Civil Code §1368.3.

17 Id.; see Raven's Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 790.

18 Corporations Code §300(a) (emphasis added).

19 A developer does control the board initially, and in theory could execute a wavier or “as-is” agreement on behalf of the association at that time. But this would be a clear violation of the developer's fiduciary duty to put the association's interests ahead of its own while it controls the board. See Raven's Cove, supra, 114 Cal.App.3d at p. 799. A developer in control of the board cannot use that power to force the board to execute an agreement that only benefits the developer itself.

20 In fact, in the case the author litigated from which this as-is provision was taken, the seller/converter attempted to use this clause to obtain summary adjudication against the association plaintiff. The court denied that motion on the grounds that the board never acted to waive its rights, and the case eventually settled on terms favorable to the association.

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