In a significant opinion released last summer the Alabama Court of Civil Appeals focused on “as is” language in real estate sales contracts.  The case is styled ERA Class.com and Robert Mikkelsen v.  Charles David Stoddard and Rita Stoddard, having been appealed from the Circuit Court of Baldwin County.  The Alabama Supreme Court transferred the case to the Court of Civil Appeals.

The facts are hard to summarize, but I will have a go at it so the case can be understood. The Stoddards were looking for commercial property on which to locate a dental office. Dr. Stoddard is a dentist. Mikkelsen was the listing agent with ERA.  Mikkelsen had advertised the two lots, one with a used building located on it, as commercial property. The master zoning map of the City of Gulf Shores accurately indicated that both lots were zoned for residential use only; however, the zoning map the city made available to the public erroneously indicated that both lots were zoned for mixed use, i.e. residential and commercial. Personnel of the city planning commission told Mikkelsen that the property was zoned for commercial use. Upon a second check, city personnel told him that one of the lots was zoned for residential use only and the other was mixed use. Mikkelsen did not change the listing, sign, or other advertising showing it as commercial property. Before an offer was made, the Stoddards’ own agent inquired with the city zoning office and was told that the property was zoned commercial.  The Stoddards eventually contracted to buy the property. They negotiated to delete a proposed contingency for city approval to build a new building, accepting a counteroffer stating in part: “AS IS. No termite bond, guarantee on electrical, heating, & cooling, etc. AS IS. No survey.”

After closing, the Stoddards learned for the first time that the property was zoned for residential use, only. Although the city agreed to an expedited rezoning, the Stoddards sued ERA and Mikkelsen for damages sustained in the delay. They alleged negligence, wantonness (a reckless act), fraud, and suppression. The trial court said that the doctrine of caveat emptor in Alabama would ordinarily apply, which would mean that the plaintiffs’ claims would be denied. The trial court allowed the case to go to the jury on the idea that this was a direct misrepresentation of the facts and the plaintiffs relied upon the misrepresentation. The jury returned a verdict against the defendants. This appeal followed. In the end the Court of Civil Appeals reversed the trial court’s judgment and remanded the case to the trial court with instructions to enter a judgment in favor of Mikkelsen and ERA.

Caveat emptor (let the buyer beware) as spelled out by Alabama courts means that sellers and their agents in used real estate transactions, as opposed to new construction, have no duty to disclose defects in the property. The main exceptions to this are if a fiduciary relationship exists between the parties; if a buyer specifically inquires about a material condition concerning the property; or if there are defects or conditions known to the seller or any agent involved, but not known to or readily observable by the buyer, which said defects affect health or safety.

The court analyzed case law regarding caveat emptor and “as is” provisions in sales contracts. It seems to me the court goes out of its way to leave no question about the law in these cases. Here is what the court said: “The Stoddards...argue on appeal that the Stoddards’ signing the “as is” sales contract does not bar their fraud and suppression claims because, they say, Mikkelsen made an affirmative misrepresentation. However, the supreme court has indicated that all fraud claims are barred if the sale is subject to the doctrine of caveat emptor and the purchaser signs an “as is” sales contract.  This is so, because an ‘as is’ clause negates the element of reliance essential to any claim of fraud and/or fraudulent suppression.  ...signing an “as is” sales contract...barred not only the purchasers’ fraud claim but also their negligence claim. ...the Stoddards’ signing an “as is” sales contract to purchase used real estate barred all the Stoddards’ claims.”

Buyers and their agents better pay attention.  On these sales it does not matter what the seller or the seller’s agent tells a buyer about a property. It is the buyer’s job to do whatever inspections are necessary to satisfy themselves about what they are getting.  If it turns out to be a raw deal, then the buyer is stuck with a raw deal. The courts will not entertain an action against the seller or the seller’s agents to give the buyer any relief. The court did not address the buyer’s agent’s responsibilities. A buyer in a case like this should play it safe and not rely on information provided by any agent.

“As is” provisions sometimes have a place in sales contracts. If, for example, the parties cannot agree about repair provisions in the contract, they may negotiate for the sale to be “as is.” This is especially true where a property is in poor condition. There can be other reasons for “as is” provisions. The court has sent a clear message to buyers here. Real estate practitioners need to understand the messages well.

Again, it should be noted that the information presented in the preceding article relates ONLY to people buying & selling houses in the state of ALABAMA and their agents.