The Texas Supreme Court heard the case of “Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995)” and subsequently those in Texas (and to some degree around the United States) refer to this ruling as the “Prudential Rule.”
The case involved a seller/broker selling real property “as is.” The Court ruled that there are specific conditions for an effective “as is” sale. Those prerequisites (as Sam A. Moak, Attorney at Law in Texas wrote) are:
- The seller must disclose known defects. An “as-is” clause would be ineffective and unenforceable if the purchaser is induced by fraudulent misrepresentation or concealment of information.
- The seller cannot obstruct the buyer’s ability to inspect the property.
- The “as is” clause must be an important basis of the bargain. It cannot be an incidental provision or a part of the “boilerplate” of the provision.
- The purchaser and seller must have relatively equal bargaining positions.
Mr. Moak’s complete treatise from 2013 on this subject case and the implications are here: https://moakandmoak.com/2013/04/the-importance-of-the-as-is-clause-in-earnest-money-contracts. We recommend you review his excellent analysis.
The concept of an “as is” transaction coupled with adequate disclosure and a right to inspect are not abstract. Many states require real estate licensees to disclose essentially “all known material facts” and sellers to provide some sort of disclosure of any property defects — regardless of selling “as is” or not.
In fact, the national real estate association’s code of ethics (in part) requires members to avoid exaggeration, misrepresentation, or concealment
of pertinent facts relating to the property or the transaction, although such disclosure is limited to what is reasonably known.
We have held, however — and continue to argue — that agents being only required to disclose what they “know” is untenable, as then agents can just claim, “I didn’t know.” The standard has to be (and really is in practical terms) “what you should know.”
Our question today is what if the subject property was personal rather than real? What if it was a tractor, car, horse, firearm, or the like … could (or would) these same standards potentially apply? In discussing with several attorneys I work with, the consensus was “It likely would.”
Maybe a better question would be, “Why wouldn’t these same standards apply?” Courts are known to consider fairness, reasonableness, equitableness, and wouldn’t it only be fair to disclose what you know (or should know) and provide for an inspection if selling “as is?”
We were recently hired as an expert witness regarding selling personal property at auction “as is” with basically no disclosure nor any opportunity to inspect. Our central argument will be that selling “as is” without allowing the buyer to discern what “it is” is perilous and not fair nor reasonable. It appears the Court will ultimately agree with our team’s assessment.
As we continue to analyze risk and auctioneer practice, would it not be less risk (of a lawsuit) for auctioneers to sell personal and/or real property “as is” while offering both disclosure of material facts and an opportunity to preview? I can answer that: It would.
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services, and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auctioneers Association’s Designation Academy and Western College of Auctioneering. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.