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S Development Company v. Pima Capital Management Co.8/30/2001
Comment j to Section 551 describes a fact basic to a transaction as a fact that is assumed by the parties as a basis for the transaction itself. It is a fact that goes to the basis, or essence, of the transaction, and is an important part of the substance of what is bargained for or dealt with. Other facts may serve as important and persuasive inducements to enter into the transaction, but not go to its essence. These facts may be material, but they are not basic.
Section 551 sets forth a plaintiff's burden when claiming that a defendant negligently failed to disclose facts basic to the transaction:
(1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question. (Emphasis added.)
According to Section 551(2)(e):
(2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated,
(e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of the facts.
Thus, Section 551(2)(e) imposes a duty of disclosure on a commercial seller only if certain conditions are met. Specifically, the seller must (1) know the basic fact that is not disclosed; (2) know that failure to disclose the basic fact may induce the potential buyer to enter the transaction; (3) know that the buyer is under a mistake as to the basic fact and (4) know that the buyer reasonably expects disclosure of the basic fact. Whether a buyer may reasonably expect disclosure of a basic fact depends on the contract - the relationship between the parties, the customs of the trade or other objective circumstances. Again according to comment j of Section 551, "if the parties expressly or impliedly place the risk as to the existence of a fact on one party ... the other party has no duty of disclosure."
By expressly providing that the property was being sold "as is," the purchase contracts between the appellants and the appellees placed the risk as to the existence of defects on the appellees. Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 215, 619 P.2d 485, 487 (App. 1980); see Haney v. Castle Meadows, Inc., 839 F. Supp. 753, 757 (D. Colo. 1993); Richey v. Patrick, 904 P.2d 798, 804 (Wyo. 1995); Arbor Village Condominium Ass'n v. Arbor Village Ltd., 642 N.E.2d 1124, 1132 (Ohio App. 1994); Omernik v. Bushman, 444 N.W.2d 409, 411 (Wis. App. 1989). Consequently, absent fraud or misrepresentation, a contractual agreement to accept real property "as is" with the right to inspect defeats liability pursuant to Section 551 because it relieves the seller of the duty to disclose that the property was sold in defective condition. Richey, 904 P.2d at 804; Kaye v. Buehrle, 457 N.E.2d 373, 376 (Ohio App. 1983).
The presence of an "as is" clause in a contract for the sale of real property substantially increases the buyer's duty to exercise diligence in discovering defects in the property prior to purchase. This is especially true in contracts for sale of commercial property because in cases involving the sale of such property it is presumed that the business persons involved know the meaning of the "as is" phrase and prote
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