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S Development Company v. Pima Capital Management Co.8/30/2001
AFFIRMED
We are called upon to determine the effect, if any, that a disclaimer of warranties, or an "as is" provision, in a purchase contract for commercial property has on a vendor's duty to disclose defects in the physical condition of a property being sold. We hold that latent defects in a property sold "as is" that are known to the vendor must be disclosed to the purchaser. We also hold that a vendor may be held liable for negligent nondisclosure of facts basic to the transaction when the purchaser is precluded by the vendor from discovering those facts.
The appellants, Pima Capital Management Company and Lincoln Life & Casualty, appeal a jury verdict awarding $3,690,000 in damages to the appellees, The S Development Company and Presidio North Limited Partnership, for the appellants' negligent nondisclosure of facts basic to the parties' transaction. For the following reasons, we affirm.
FACTUAL AND PROCEDURAL HISTORY
Because this is an appeal from a jury verdict, we view the evidence in the light most favorable to upholding the jury verdict. Warrington v. Tempe Elementary Sch. Dist. No. 3, 197 Ariz. 68, 69, 4, 3 P.3d 988, 989 (App. 1999). The appellees purchased two Phoenix apartment complexes, Presidio North and Bell Tower, from the appellants in July 1993. Both purchase contracts contained substantially similar provisions, which stated:
Disclaimer of Warranties. Buyer acknowledges that except as expressly set forth in this Agreement, Seller makes and has made no representations or warranties of any kind whatsoever, including but not limited to warranties concerning the condition of title, physical condition, encroachments, access, zoning, value, future value, income potential, any survey, environmental report or other information prepared by third parties, loan assumability, or the presence on or absence from the Property of any hazardous materials or underground storage tanks. Buyer is purchasing the Property as a result of its own examination thereof in its "AS IS" condition, and upon the exercise of its own judgment and investigation. (Emphasis added.)
Both contracts also contained provisions granting the appellees the right to inspect the property:
Buyer's Inspection. During the Review Period described . . . below, Buyer and Buyer's agents, servants, employees and independent contractors shall have reasonable access to the Property for the purpose of investigating the condition of the same, and for any other reasonable purpose which relates to the potential use, occupancy, operation and maintenance of the Property; provided, however, that in conducting such investigations . . . (ii) Buyer shall not injure or damage the Property . . . . (Emphasis added.)
Prior to the close of escrows, the appellees retained two engineering firms to inspect each of the buildings to be purchased. The inspections did not reveal any substantial problems with the plumbing in the buildings. Approximately two years after closing, however, the appellees learned that polybutylene pipe (PB pipe) had been used in both Presidio North's and Bell Tower's plumbing. PB pipe is a defective type of flexible tubing that will fail and leak when it is used to transport warm water under normal water pressures. The appellants claim that they were not aware that PB pipe had been used in the buildings when they sold the buildings to the appellees and, therefore, they could not and did not disclose that condition to the appellees prior to the sale.
The appellees sued the appellants alleging fraud and nondisclosure for failing to disclose the defective plumbing prior to the close of escrows. The appell
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