When “As-Is” Leaves Out “Is-Not”

January 13, 2016

We’ve all heard the warning “buyer beware.” If that maxim applies anywhere, it certainly applies when buying a property that is bank-owned due to a foreclosure, as sales of bank-owned real properties are almost always sold “as-is.” However, a recent Court of Appeals decision explains that “buyer beware” does not relieve a bank of the duty to disclose known problems with a property.

When a bank sells a foreclosed property, it routinely includes an “as-is” clause that is designed to relieve the bank of liability for any defects or problems with the property. An effective “as-is” clause prevents a buyer from suing the seller for any defects that are discovered after the sale. An “as-is” clause is generally enforceable in Wisconsin as long as it clearly sets out the rights being waived by the buyer.

In Fricano v. Bank of America, 15AP20, Bank of America acquired a foreclosed property that had been extensively damaged by water. Prior to selling the property, the Bank made some significant repairs to the home to limit the damage. The repairs included replacing drywall in the living room, master bedroom, and kitchen, along with replacing flooring in several rooms and replacing the kitchen cabinets. Even after the repairs, however, there were still issues with the home which, based on subsequent home inspections, included substantial mold problems that needed to be addressed before the home could be occupied.

When the Bank listed the home for sale, there was a lot of interest in the property. In total, 14 offers were submitted to the Bank, and the Bank asked each of the potential buyers to make their best offer. Of the 14 offers, Fricano’s was the one accepted, and the Bank sent an email to Fricano with some forms to sign as part of the sale. One of the forms included an “as-is” clause that informed Fricano she was buying the property “as-is,” based on her own information and investigation, and that there may be mold on the property. The Bank also told Fricano that because the property was a foreclosure, it had “little or no direct knowledge about the condition of the property.” Fricano signed the agreements and purchased the property.

Shortly after closing, Fricano learned the property was “saturated” with mold and, as a result, the property was stripped to the studs for mold remediation and then the interior was rebuilt. Fricano filed suit against the Bank under Wisconsin’s anti-fraud statute, Wis. Stat. § 100.18(1), claiming the Bank knew the property had extensive water and mold damage and, therefore, had misrepresented its knowledge about the condition of the property.

At trial, the Bank argued the “as-is” clause prevented Fricano from bringing her lawsuit. The trial court disagreed and allowed the jury to consider whether Fricano relied on the Bank’s statement that it had “little or no direct knowledge about the condition of the property.” The jury awarded Fricano $50,000, and the Bank appealed.

On appeal, the Court of Appeals upheld the trial court’s decision and the jury’s verdict. The Court of Appeals explained the “as-is” clause does not prevent a buyer from bringing a deceptive representation claim under § 100.18(1). The fact Fricano signed the “as-is” clause was relevant to the question of whether or not she relied on the Bank’s statement that it had no direct knowledge about the property; it was not enough to prevent her from bringing her claim in the first place.

The Bank also argued Fricano could not have reasonably relied on its statement about the condition of the property. Again, the Court of Appeals disagreed. At trial, Fricano testified that she believed the Bank had no knowledge about the condition of the property because it was a foreclosure.  Fricano’s inspections of the property prior to closing did reveal some mold, but that appeared to be limited to a few areas in the basement, not throughout the property. The Court of Appeals concluded if the Bank had disclosed the extent of the water damage, Fricano would not have purchased the property.

So what does this mean for banks when selling properties they purchase at foreclosure sales? The takeaway for banks, and really for any seller of real property, is to be careful about the statements you make to potential buyers. The problem for Bank of America in Fricano is that it did know the extent of the damage, and it should have disclosed it. If it had, the “as-is” clause likely would have been enforceable and it should have prevented Fricano’s lawsuit.

An “as-is” clause is an effective tool to put buyers on notice that they are responsible for any issues that come up with the condition of the property. But it is important to remember that an “as-is” clause is not a “get out of jail free” card.