As-Is Deals May Not Be So As-Is

LOS ANGELES—Owners of real property rely on “as-is” and “independent investigation” clauses in their real estate contracts and leases to shield them from litigation over mistaken or misinterpreted statements made in the course of negotiations. However, recent court decisions have called into question the effectiveness of these provisions, giving buyers and tenants an unexpected new weapon in contract litigation. Property owners should tread cautiously from the beginning of negotiations to minimize litigation risk.

The “parol evidence rule” is a longstanding legal principle preventing parties to a contract from presenting evidence interpreting the contract, other than the terms contained in the contract itself. To reinforce that rule, real estate contracts and leases are drafted with strong “as-is” disclaimers expressly disavowing anything said in negotiations that doesn’t appear in the contract. Based on the rule and this typical contract provision, a buyer or tenant claiming to have been misled in negotiations can usually succeed in litigation only if the misrepresentation also appears in black and white in the agreement. However, new California cases have created an exception allowing the court to consider evidence beyond the terms of the contract itself.