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Breach Of Real Estate Contract Case Sheds Light On “As Is” Clause And More

A recent Tennessee case involving the breach of a real estate contract provides some straightforward and pragmatic analysis and discussion of two issues that arose from that contract. Those issues might easily arise in other real estate cases, construction cases, or breach of contract cases. Those two issues were: (1) Whether an “as is” clause in the real estate contract was effective; and (2) what damages the homebuyers (“Buyers”) could recover from the Sellers who had represented that the home in question was connected to the sewer when it was not.

Here are the facts that were before the trial court in the case:
• The Sellers provided the Buyers with a purchase and sale agreement which contained the statement: “The plumbing system is connected to the city sewer.”
• The purchase and sale agreement between the Buyers and Sellers also contained the following language: “Buyer shall, within 5 days after the Binding Agreement Date, make such inspections described herein AND by written notice to Seller, either: (1) accept the Property in its present “AS IS” condition with any and all faults and no warranties expressed or implied….”
• The Buyers had a home inspection performed, but it did not cover the sewer connection
• The Buyers purchased the home
• After purchasing the home, the Buyers discovered that it was not connected to the city sewer, but had a septic system.
• At trial, the Buyers testified that they would not have purchased the home had they been aware that it had a septic system and was not connected to the city sewer
• The Buyers paid $12,000.00 to have the home connected to the city sewer
• At trial, a property appraiser testified for the Sellers that the value of the home was not any less because of the fact that it was not connected to the sewer, but instead, had a septic system
The trial court held that the Sellers had breached the contract between the parties, and that the Buyers were entitled to an award of $12,000.00— the cost of connecting the home to the city sewer.The Sellers appealed to the Tennessee Court of Appeals which affirmed the decision of the trial court.

On appeal, the Sellers argued that “the trial court should have determined that the risk of loss shifted to Buyers based upon the ‘as is’ provisions of the contract.” The Court of Appeals made short work of the Sellers’ argument. It held that the “as is” provision in the contract was modified by the representation by the Sellers in the contract that the home was connected to the city sewer.

On appeal, the Sellers also argued that, even if there was a breach of the real estate contract, the Buyers did not suffer any damages because the value of the home was not affected by whether it was or was not connected to the city sewer. In analyzing the Sellers’ argument about damages, the Court of Appeals turned to several cases concerning the damages to be awarded in construction cases. The Court noted that the two ways of measuring damages in breach of construction contract cases were applicable.

The two alternative ways of measuring damages in breach of construction contract cases are: (1) The cost of repair; or (2) diminution in value. So, when does a court use cost of repair and when does a court use diminution of value to determine a plaintiff’s damages? The Court summarized Tennessee law on those questions as follows: “Generally, the measure of damages will be the cost of repair unless the repairs are not feasible or the cost is disproportionate to diminution in value.”

The Court of Appeals found that the proper measure of damages in the case was the cost of repair. What about the Sellers’ proof, from a real estate appraiser, no less, that the home was not worth any less because of the fact that it was not connected to the city sewer? The Court of Appeals held that the key was whether the home was worth less to the Buyers in the case. The fact that another buyer of the home in question might not have paid any less for the home because it was not connected to the city sewer made no difference at all, said the Court of Appeals. Thus, the Court of Appeals determined that the trial court correctly concluded that the Buyers were entitled to the cost of having the home connected to the city sewer.