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‘As Is’ Clause Clears Seller Of Fraud

Judith Johnston owned a home in Mobile County, Ala., In 2001, the county placed drainage culverts on her property to drain runoff into a creek behind Johnston’s property. Johnston complained to the county that the drainage system was flooding her lot, although it did not flood her actual home. The county claimed it could not do anything about the flooding, and Johnston decided to sell the property, according to court records.

Wylene and Ross Teer offered to buy it, and Johnston provided them with a disclosure statement that expressly represented “that there were no ‘flooding, drainage or grading problems’ with the property and that the property had never flooded,” after which the Teers and Johnston signed a purchase agreement for the home.

The purchase agreement stated that the sale was an “as-is” transaction with the exception of a warranty Johnston would provide on the appliances, and also provided that the “contract constitutes the sole agreement between the parties and any modification hereto and any modifications of this contract shall be signed by all parties to this agreement. No representation, promise, or inducement not included in this contract shall be binding upon any party hereto.”

While the Teers claimed that they were induced to sign the purchase agreement by the disclosure statement, both the Teers and Johnston acknowledged that the disclosure statement was not formally incorporated into the purchase agreement.

The Teers purchased the property in 2005 and moved in, after which the property flooded several times. The Teers filed suit against Johnston in 2007, seeking to rescind the purchase agreement, reverse the sale and recoup damages they incurred in buying and moving into the home.

Their primary claim was that Johnston intentionally and fraudulently induced them into buying the property by representing that it had no flooding issues, when she knew that it did.

The trial court granted summary judgment in favor of Johnston, citing Alabama’s rule of caveat emptor in the “as is” purchase of real estate, and dismissed the Teers’ case.

The Teers appealed to the Alabama Supreme Court, which affirmed the trial court’s ruling. The high court of the state rejected the Teers’ invocation of the rule that when a seller knows or should know of a material defect in the property that affects health or safety, both the seller and the listing agent are required to disclose the defect to the buyers.

The court agreed with the trial court that the Teers had not shown that the flooding on the rear of the property’s lot was, in fact a material defect that affected health or safety.

Further, the court explained, in an as-is real property sale contract in Alabama, a fraudulent misrepresentation in pre-contract disclosures does not survive the execution of the purchase contract, unless that contract incorporates the pre-contract disclosures, which the Teers’ contract did not.

The state’s Supreme Court reiterated that in Alabama, on the resale of residential property, the caveat emptor rule applies, and sellers have no duty to disclose any property defects to buyers, unlike in many other states — even in cases of seller fraud; the court went on to expressly reject the Teers’ plea to reverse this “clear and consistent” line of cases upholding this rule.

The court concluded: “Because the ‘as is’ clause in the purchase agreement negated any reliance the Teers may have had on previous representations made by Johnston in the disclosure statement concerning the property in question, the Teers cannot establish their fraud claim against Johnston.” Accordingly, the trial court’s ruling was affirmed and the Teers’ case was dismissed.