LOS ANGELES—Owners of real property rely on “as-is” and“independent investigation” clauses in their real estate contractsand leases to shield them from litigation over mistaken ormisinterpreted statements made in the course of negotiations.However, recent court decisions have called into question theeffectiveness of these provisions, giving buyers and tenants anunexpected new weapon in contract litigation. Property ownersshould tread cautiously from the beginning of negotiations tominimize litigation risk.

The “parol evidence rule” is a longstanding legal principlepreventing parties to a contract from presenting evidenceinterpreting the contract, other than the terms contained in thecontract itself. To reinforce that rule, real estate contracts andleases are drafted with strong “as-is” disclaimers expresslydisavowing anything said in negotiations that doesn't appear in thecontract. Based on the rule and this typical contract provision, abuyer or tenant claiming to have been misled in negotiations canusually succeed in litigation only if the misrepresentation alsoappears in black and white in the agreement. However, newCalifornia cases have created an exception allowing the court toconsider evidence beyond the terms of the contract itself.

In one case, a landlord's statements during a prospectiverestaurant tenant's walkthrough were admitted as evidence of fraud.The landlord assured the tenant during the walkthrough that therestaurant equipment was in good working order. The tenant nevertested the equipment. Despite the provision of the executed leasethat tenant took the premises “as-is,” relying solely on its owninvestigation, the court held that the landlord's oral statementsduring the walkthrough could be admitted as evidence of fraud ininducing the tenant to sign the lease.