Court Rules that "As Is" Sale Does not Protect Sellers of Real Property

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01.03.2005

David Dreifus

The North Carolina Court of Appeals has ruled that property sold "as is" under the contract between the buyer and the seller does not necessarily protect the seller from liability when the buyer later discovers problems with the property.

In Little vs. Stogner, an individual sold two lots located on Lake Wylie in Mecklenburg County to individual buyers. On various occasions, the Seller represented to the Buyers, as well as others, that he had a firm perform soil tests on the property and that those tests showed that the property "perked" sufficiently for a septic system. The Seller also told the Buyers that there were two septic tanks already located on the property, that Mecklenburg County had "grandfathered" the use of both of the tanks and that the Buyers could connect the two septic tanks to serve houses to be built on the property. The parties entered into a standard offer to purchase and contract in which the property disclosure and inspection provisions were crossed out. The contract further provided that the Buyers waived the right to receive a residential property disclosure statement and that the property was being sold "as is".

After the purchase, the Buyers attempted to obtain building permits. The Buyers then discovered that soil testing had been done on the property at the request of the Seller. Those tests revealed that the property was not suitable to support a septic tank system and that the septic tanks already in place on the property had not been "grandfathered" at all. The Buyers then brought suit against the Seller alleging fraud, breach of implied warranty, and violations of The Residential Property Disclosure Act. The trial court dismissed the implied warranty and Residential Property Disclosure Act claims and ruled for the Seller’s favor on the fraud claim.

In reversing the trial court on the fraud claim, the Court of Appeals found that there was sufficient evidence to support a finding that false representations were made about the property and that the statements were made with the intent to induce the buyer to purchase the property. The only close question for the Court was whether there was sufficient evidence that the Buyers’ reliance on the fraudulent representations was reasonable. The Court cited the general rule that reliance on a representation is unreasonable where the party fails to make any independent investigation into that representation. However, where a party uses an artifice which is reasonably calculated to induce a party to forego investigation, a Buyer’s failure to conduct an independent investigation is not fatal.

The Sellers contended that reasonable diligence and inquiry by the Buyers would require them to discover results of the soil testing kept in the public records by Mecklenburg County which were discovered after the purchase. The Court disagreed, finding that there were definite representations by the Seller that soil work had been performed and that the property "perked" and that the septic tanks already on the property had actually been "grandfathered". There was also evidence presented about the Seller’s assurances that the property next to them "perked" and that the Seller himself had planned to build a three bedroom residence on the property similar to those planned by the buyers. The Court also found that the Seller’s striking through the disclosure provisions of the purchase contract (which included provisions regarding water and sewer systems) showed that he was taking steps calculated to induce the Buyers to forego their own investigation. The Court also found that the Buyer was induced into purchasing the property "as is" based upon Seller’s representations and that the Buyers were also induced into waiving their rights under the Residential Property Disclosure Act. As further evidence of this inducement, the Court found that the Seller and his attorney asserted that the property disclosure portion of the contract applied only to a cabin already located on the property which was to be removed. The Court disagreed, finding that had the Buyers not been induced to waive the Residential Property Disclosure provisions, the Seller would have had to disclose the findings concerning the septic system or state that no representation was being made about the system. Had the Seller made no representation, the Court found that it would be reasonable to assume that the Buyers would have been alerted to the potential fraud.

In light of the Court’s decision, both buyers and purchasers of real property should be aware of potential hazards of oral statements about a property’s condition. Sellers should be extremely careful in any representations made about property and should direct the buyer to public records for any particular questions regarding property or direct them to undertake their own investigation. Sellers should also consider having buyers sign a statement acknowledging that no representations have been made and that the buyers have not relied on any statements made by the sellers in purchasing the property. On the other hand, buyers should generally assume they are stuck with the property in its existing condition any time they sign an agreement that provides the property is conveyed "as is". Although the buyers in the Stogner case were able to get around this language, a Court usually will not be sympathetic to those who should have conducted an independent investigation on their own when there are merely general indications about the property’s condition by a seller.

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01.03.2005