Litigation Over Purchase of Apartment Complex: "As is" Clause not End of the Road - Even with Merger Clause

On March 12, 2008, the San Antonio Court of Appeals found that an "as is" clause in a contract may not necessarily mean a purchaser is buying the property "as is" - - even if the contract also had a merger clause. 

In San Antonio Properties, L.P. v. PSRA Investments, Inc., --- S.W.3d ---, 2008 WL 647781 (Tex.App.-San Antonio 3/12/08), PSRA purchased an apartment complex "as is."  After PSRA purchased the complex, it began experiencing problems with the plumbing, a decline in occupancy rate, and crime. After failing to obtain concessions on the payment schedule, PSRA stopped making payments.  The seller reclaimed possession of the property, and sued PSRA for the balance of the payments owed under the Contract for Deed. PSRA filed a counterclaim against the seller alleging various fraud-based causes of action.

The Contract for Deed at issue contained the following provision: "Buyer agrees to. . .  accept the Property in its present condition 'AS IS,' after having inspected the Property to Buyer's satisfaction." It also contained a merger clause that stated: "This contract, including any attached exhibits, is the entire agreement of the parties, and there are no oral representations, express or implied warranties, agreements, or promises pertaining to this contract not incorporated in writing in this contract."

The court of appeals found these terms in the purchase agreement did not, as a matter of law, bar PSRA's fraud counterclaims against the seller of the property. Thus, it affirmed the jury's verdict for PSRA on one of the fraud claims.

More specifically, the court explained that a buyer is not bound by an agreement to purchase something "as is," if it is induced to make such an agreement due to a fraudulent representation or concealment of information by the seller.  Then, despite the "as is" provision, the court held that the "even sophisticated buyers have the right to rely on the veracity of the financial information provided to them by the sellers. We therefore conclude the evidence is legally sufficient to support the jury's common law and statutory fraud findings."

Further, the court held the merger clause did not negate PSRA's fraud claims, as a matter of law, because "if SAP is correct in its argument that the merger clause precludes PSRA's fraud claims because it negates the element of reliance, 'there could never be a cause of action for fraud in the sale of real estate unless the misrepresentation were contained in the deed itself.'" In sum, the court confirmed that a merger clause can be avoided for antecedent fraud or fraud in its inducement.

If you would like a copy of this opinion, or more information on the topic, please contact the Business Litigators at Clouse Dunn Khoshbin LLP at info@cdklawyers.com.