“WHEREAS” May Matter More Than You Think

Most people skim right past the “WHEREAS” clauses at the beginning of a contract. Those clauses, called recitals, usually explain the background of the transaction and the parties’ reasons for entering into the agreement. They generally are not intended to create the operative obligations of the contract.

But that doesn’t mean they are just boilerplate.

Recitals can be particularly valuable when a buyer is entering into a real estate contract in reliance on something the seller or the seller’s agent has said. If the seller represents that a roof was replaced five years ago, an apartment complex historically operates at 95% occupancy, or a property has never flooded, and that representation is important to the buyer’s decision, consider putting it in the contract.

That is particularly important in Alabama because of the potentially powerful effect of an “AS IS” clause.

In Teer v. Johnston, 60 So. 3d 253 (Ala. 2010), the buyers alleged that the seller had represented in a disclosure statement that there were no flooding or drainage problems. After purchasing the property, they discovered that it was prone to flooding. The Alabama Supreme Court held that the “as is” language in the subsequently signed purchase agreement negated the buyers’ reliance on the seller’s earlier representations. Because reliance is an essential element of fraud, the buyers could not maintain their fraud claim. Significantly, the Court noted that the buyers had not incorporated the seller’s disclosure statement into the purchase agreement.

The lesson is not merely beware of “AS IS.” It is put important representations into the contract.

A recital can identify the representation and state that the buyer has reasonably relied upon it in entering into the agreement. But don’t stop there. The operative provisions should make clear that the buyer’s reliance on the identified representation applies notwithstanding any “AS IS,” merger, integration, non-reliance, or similar provision elsewhere in the agreement.

Finally, think about what happens at closing. If the representation is supposed to remain enforceable afterward, the contract should expressly provide that the applicable recitals and representations survive closing.

The safest place for an important representation is not in a conversation, an email, or even a disclosure form sitting outside the contract. Put it in the agreement—and make clear that it matters.

And if the seller balks at including the buyer’s requested language, that should tell you something important, right? There may be perfectly understandable concerns about modifying a form contract. Or maybe the buyer needs additional inspections or due diligence before signing on the dotted line.