Issues regarding liability are common in real estate. There are several risks that can lead to a lawsuit. You can’t ever fully remove the possibility of legal action against you. But there are a few common-sense measures you can take to protect yourself from some of the most common claims, including
One measure you can take is an "as-is" clause. Real estate sellers will often insert an “as is” clause into purchase contracts to avoid liability.
Let's take a closer look.
An as-is clause is included in a purchase agreement to force the buyer to rely on their own investigation to determine whether or not to purchase the property. Without an as-is clause, the seller’s representation of a property and its condition forms the basis of the buyer’s decision.
The clause protects you (the seller) from litigation stemming from a failure to disclose property defects that you are unaware of. In some cases, the seller will know of a defect but choose not to disclose it to the buyer. In this case, the seller is protected if the problem is discoverable by the buyer should they conduct a reasonable investigation of the property.
As-is clauses can protect property sellers from a slew of costly lawsuits. A property with undeclared flaws can land you in hot water for a variety of reasons, including:
#1 Breach Of Duty. It is an agent or broker’s duty to act in the best interest of their client. Dishonesty on the agent or broker’s part can come in a few forms, such as:
If a seller is willingly breaching, they may be guilty of a breach of duty. Of course, agents and brokers aren’t infallible. Honest mistakes happen, and property defects are sometimes hidden to all parties.
#2 Breach Of Contract. A breach of contract is a simple lawsuit. If the buyer feels the contract hasn’t been fulfilled, they may take legal action.
#3 Negligence and Gross Negligence. Negligence implies that the defendant (in this case the seller) caused harm through inaction. However, negligence differs from other allegations through the lack of intent to cause harm. This means the seller failed to do their due diligence or or to handle problems promptly, causing bodily harm as a result.
Gross negligence, on the other hand, is defined as “the failure to exercise even the slightest amount of care" and often involves the deliberate disregard of another person’s safety. A seller who is found guilty of gross negligence knows (or should have known) of the danger involved.
#4 Property Damage. This one is pretty self-explanatory.
#5 Willful Concealment/Misleading Clients. A claim for misleading a client can stem from one of several issues. Normally, when the buyer believes that the seller intentionally hid property defects from them before the sale was complete. For example, sellers are expected to disclose known issues such as flooding before completing the sale.
An as-is clause isn’t a universal get-out-of-jail-free card. It will not protect you from litigation from failing to disclose defects if:
An as-is clause won’t protect you from all allegations. But they offer you a strong layer of protection against a claim regarding an issue you can’t reasonably have been expected to know about.
Lawsuits are all-too-common in the U.S. If you’re dealing with enough real estate transactions, you’re bound to end up in a disagreement at some point.
In addition to using an as-is clause, documenting as many details as possible is always recommended. By staying on top of your property’s defects, you can avoid problems and have evidence of your reasonable efforts to provide a well-maintained property to buyers.
You shouldn’t have to suffer when you’ve already done what you can to ensure your property is in good condition. Honest oversights occur.
Consult a professional to make sure your contract provides maximum protection against claims of property fraud. And consider adding an as-is clause to your contracts before selling. It’s a simple, easy step that protects you in many situations where you would otherwise land in hot water.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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