January 13th, 2014

Defect Disclosure Obligations IN As-Is Real Estate Transactions

There is a growing trend in residential real estate transactions for sellers to offer the property “As-Is”.  In the typical as-is transaction the seller does not provide a Sellers Property Disclosure Statement (SPDS) or make any representations about the condition of the property.  But does the as-is designation excuse the seller from all obligations to disclose?

The seller of real property in Arizona is must disclose latent defects in the property that are known to the seller, notwithstanding the existence of a burden-shifting as is clause or disclaimer of warranties in the agreement. S Dev. Co. v. Pima Capital Mgmt. Co., 201 Ariz. 10, 31 P.3d 123 (App., 2001).  A latent defect is defined as a hidden or concealed defect which could not be discovered by a reasonable inspection.  Id.  Examples of latent defects include foundation problems as well as plumbing and electrical issues.  The decision in S. Development, was based upon the duty of good faith and fair dealing implied in all contracts.  Id.  If a seller knows of a material issue that is unknown to the buyer, the seller must disclose issue.

The failure to disclose a latent defect could result in seller’s liability on a theory of negligent disclosure.  There is also potential liability for undisclosed repairs as fraudulent concealment if the repairs are not completed properly or are a symptom of a larger defect. 

Sellers must understand that the as-is clause only limits liability for undisclosed defects – it does not eliminate liability.