Using AS IS for New Construction? Don’t

ORLANDO, Fla. – Florida Realtors’ Legal Hotline has received an increasing number of calls focused on one of Florida Realtors®’ forms: using residential contracts for new construction. Either a small builder used these contracts on their own, or they employed a real estate agent and instructed them to use these contracts.

By the time we receive a call on the Legal Hotline, the parties have already signed the contract but have run into difficulties performing. It’s unfortunate because, due to the nature of construction law as opposed to residential real estate law, Florida Realtors’ contracts aren’t suitable for new construction.

In other words, do not use the Florida Realtors/Florida BAR, AS IS or CRSP contracts for new or pre-construction.

To be blunt, failure to retain a construction law attorney to draft a suitable contract may save money in the short run – but it almost inevitably leads to great expense in the long run when the dispute is litigated. Builders vary in how they construct homes and their individual timelines for completion, and a contract specific to that builder is the best route for the parties involved.

Though construction law and residential real estate law are related, construction law has its own special considerations when dealing with transactions that can, and do, change and evolve as they proceed. This article focuses on three parts of the AS IS contract that make its unsuitability apparent, though they’re not the only sections that don’t work with a new-build property. The same concepts apply equally to the similar sections of the FR/BAR and CRSP contracts.

At the outset of a transaction, the differences between the two types of law should be evident. In a residential sale, buyers have an existing home they can inspect, one that the seller must maintain. In a pre-construction sale, there is a vacant lot or, at most, a partially built structure.

A review of paragraph 12(a) makes it clear why the AS IS is unsuitable for new construction. Paragraph 12(a) permits the buyer to inspect the property and decide whether the property is suitable for their purposes within the agreed-upon inspection period. Since it’s virtually impossible for a builder to complete a home in 15 days – the default inspection period under the AS IS – there’s nothing for the buyer to inspect and approve. The most important inspection in new construction occurs after completion – weeks or months after the buyer has waived their right to terminate the contract pursuant to paragraph 12.

In contrast, the “inspection” at the end of the AS IS (paragraphs 12(b) and 11) is limited to a walk-through. Paragraph 12(b) permits a walk-through, in part, to “verify that Seller has maintained the property as required by” paragraph 11.

Paragraph 11 requires the seller to “maintain the Property [until closing] … in the condition existing as of Effective Date.” If a house is unbuilt as of the Effective Date, that would mean the seller is only required to maintain the property in an unbuilt state. The buyer may have a hard time convincing a court that an incomplete house breaches the contract.

In addition to the two sections discussed above, the AS IS throws in a particularly vicious kicker. Standard 18X states that: “Buyer waives any claims against Seller … for any damage or defects pertaining to the physical condition of the Property that may exist at Closing of this Contract and be subsequently discovered by Buyer …” In other words, if the buyer finds something wrong with the property post-closing, large or small, they’re out of luck. The AS IS residential contract has no provision for asking that something be fixed or completed.

The preceding should make it clear why the Florida Realtors’ residential contract forms shouldn’t be used for new construction. It should not, however, be used as a roadmap for self-help.

Amending the existing forms to fit the square peg of residential into the round hole of construction is, in many ways, worse than trying to use the existing forms as written – not to mention the likely unlicensed practice of law.

Long story short, if a member wishes to represent a builder in selling new or pre-construction, the seller should hire a competent construction attorney to draft the necessary contract. Failure to do so almost invariably leads to needless expense and litigation down the line.

Richard Swank is a Florida Realtors attorney
Note: Advice deemed accurate on date of publication

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