July 2005 update

OLDFIELD & HELSDON, PLLC
ELECTRONIC NEWSLETTER

July 1, 2005
 
COURT OF APPEALS UPHOLDS "AS IS" CLAUSE IN REAL ESTATE TRANSACTIONS & DELIVERS LESSON FOR REAL ESTATE AGENTS

 
The Washington Court of Appeals Division II recently issued its decision in Warner v. Design and Build Homes, Inc.  In March 1999, the Warners entered into a purchase and sale agreement with Design and Build Homes, Inc. (Design) for the sale of a new home.  The agreement, drafted by the Warners' real estate agent, included a clause stating that the Warners had inspected the property and agreed to purchase the property 'in its present 'as is' condition.'  An addendum stated that the sale was conditioned on the Warners' approval of a general building inspection report.

The inspection report contained the following findings and recommendations: 
 
(1) '{e}xterior wall cracks' and 'bulging in the stucco' on the rear wall, which 'should be further evaluated to verify that a problem does not exist, and what correction is needed to repair/seal the cracks;'
 
(2) 'evidence of past water in the crawl space at the north wall,' which should be monitored; and
 
(3) the 'flashing at the front wall . . . should be checked, due to the potential of water leaking into the stucco.'  
 
The inspection report recommended that a certified professional engineer complete a further evaluation  The Warners declined to have a further evaluation completed, but they did request that Design repair certain conditions identified in the inspection report, including the exterior wall cracks and defects in the flashing and stucco.  After these conditions were repaired, the Warners completed a walk-through inspection and closed the sale of the property.
 
In September 2001, the Warners began noticing leaks and water damage inside the home.  They hired a consultant who concluded that the water intrusion was due to defective stucco installation.  The Warners also hired an industrial hygienist to evaluate mold contamination in the interior of the home.  The hygienist concluded that the water intrusion had led to a significant presence of 'several potentially toxic species of airborne fungi' throughout the house.  
 
The Warners moved out of the home when it became apparent that Ana Warner and the Warner children were having allergic reactions to the mold.  The Warners then hired an engineer and construction company to repair and replace the exterior siding as well as damaged structural components.  The engineer eventually concluded that 'substantial water intrusion {had} . . . resulted in substantial rot and fungal growth' which had caused 'structural damage to the sheathing and framing components of the Residence.'  The engineer opined that if the water intrusion, rot, and fungus had been allowed to continue, the home would have collapsed within a reasonably foreseeable period.
 
In November 2001, the Warners sued Design and Omega.  Design had subcontracted with Omega to install the stucco siding.  The Warners alleged that Design had breached the implied warranty of habitability and Omega had breached a warranty of workmanlike construction implicit in the contract between Omega and Design, to which the Warners claimed damages as third-party beneficiaries.  The trial court granted Design and Omega summary judgment dismissing the  Warners’ lawsuit.  The Warners appealed.
 
The decision of the Court of Appeals is as follows:

The appeal turned on two issues:  (1) whether the 'as is' clause in the Warners' purchase and sale agreement waived all implied warranties, including the warranty of habitability; and (2) whether the Warners are third-party beneficiaries to the contract between Omega and Design.

 Under the purchase and sale agreement, the Warners agreed to purchase the property 'as is' if (1) no conditions were identified in the report and a further evaluation was not recommended; or (2) Design repaired any conditions which the Warners wanted fixed.  Satisfaction of one of these two alternatives was a condition precedent to the Warners' agreement to purchase the home 'as is.'  Although the inspection report recommended further structural evaluations of the home, the Warners did not conduct them.  The Warners did request that certain conditions in the inspection report be fixed.  It is undisputed that Design honored the Warners' request.  These decisions triggered the purchase and sale agreement's 'as is' clause.

Because a warranty disclaimer is not favored in the law, it must meet two conditions to be effective:  (1) it must be explicitly negotiated or bargained for; and (2) it must set forth with particularity what is being disclaimed. . .

Here, the Warners do not assert that they were either unaware of the 'as is' clause or in a position of bargaining power which was grossly disproportionate to Design; either contention would be undercut by the fact that the Warners' real estate agent drafted the purchase and sale agreement.  As such, the 'negotiation' element is satisfied.

But the Warners maintain that the 'as is' clause is ambiguous and, therefore, ineffective and unenforceable, because it does not explicitly state the warranties being disclaimed.  We disagree.

Inexplicably, the Warners' agent drafted an agreement containing an 'as is' clause which a reasonable person would understand to waive all implied warranties, including the warranty of habitability.  Moreover, before the agreement became binding, the Warners were told about existing defects in the stucco and were advised that they should pursue further inspection and evaluation of potential nonvisible stucco and structural deficiencies.  The Warners chose not to pursue these further inspections.  As our Supreme Court has stated:  They had ample opportunity to inspect.  They had their own {real estate agent and inspector}.  The extent to which they inspected . . . was their choice.  The contractual language is clear.  This court not only should not, but it cannot, rewrite the clear agreement of the parties.'  [citation omitted].  [Emphasis added.}

The Warners next assert that they were third-party beneficiaries to the stucco contract between Design and Omega and are therefore entitled to bring a claim against Omega for breach of that contract's implied warranty of workmanlike construction.

The Warners do not cite a single Washington case recognizing an implied warranty for workmanlike performance.  Moreover, both Divisions One and Three of this court have concluded that such an implied warranty does not exist in a construction contract.  [citations omitted].  As Division One has noted:  'Contracting parties have their remedies for breach and can negotiate for warranties if they so choose.  An action for implied warranty of workmanlike performance in construction contracts would be strikingly similar to a cause of action for negligent construction, which is not recognized in Washington.'  [Citation omitted]

In the construction context, the prevailing rule is that a property owner is generally not a third-party beneficiary of a contract between the general contractor and a subcontractor:

It seems, therefore, that the owner has no right against the subcontractor, in the absence of clear words to the contrary. . . 

The Warners were not third-party beneficiaries to the construction contract between Design and Omega and consequently had no right of action against Omega for any breach of the sub-contract.  Thus, even if there were a cause of action for breach of the implied warranty of workmanlike construction, which we do not hold that there is, the Warners were not third party beneficiaries to the contract and had no right to bring such a claim against Omega.

Affirmed.

It is therefore important for any real estate agent who is working for a buyer to exercise extreme caution in negotiating any conditions of an "as is" clause that may affect their buyer.  Modifications to any terms contained in the pre-printed NWMLS or other form Purchase and Sale Agreements could subject real estate agents to liability to their clients for legal malpractice.

The Warner decision is noteworthy for the emphasis the Court of Appeals placed on upholding "as is" clauses if the necessary predicates are present.  The Warners had a pre-closing inspection that revealed defects.  The report recommended a structural inspection, which the Warners ingnored.  They requested repairs, which were made.  The Warners had no remedy for additional defects that were found to exist after closing.