abstract. Real estate purchase contracts often contain contract clauses whose meaning and scope can be interpreted differently1. This prompted me to conduct a survey of more than 1,000 lawyers (notaries and lawyers)2 to clarify how the contract terms are actually understood. Here are the results of my survey.
At the beginning of January 2016, I started the survey and sent out questionnaires to professionals. In my accompanying letter, I explained:
“In the course of writing an article on the subject of liability exclusions in real estate purchase contracts, I found that some contract clauses are frequently used in contract practice. However, I am not sure whether every contract author means the same thing with such clauses. Or in other words: The understanding of the scope of such clauses can vary greatly. [...] The survey is intended to empirically establish the prevailing understanding of these contract clauses in contract practice.”
I announced that I would publish the results of the survey and expressly assured all participants of anonymity. 365 lawyers sent me the completed questionnaires. The response rate was therefore 35%3.
I would like to take this opportunity to thank all those lawyers who have taken the trouble to answer the questions asked. Some of the survey participants were extremely positive, welcoming the idea of the survey and “waiting with interest for the result.” Some participants mentioned that they had already received some food for thought about drafting the contract just by answering the questions. It will be necessary to return to this in point E of this article.
The text of the questionnaire was as follows:
“Question: What is required is an understanding of the contract clauses contained in a purchase contract for a property with or without a building built on it.
According to the respective contract clause [...], several possible answers are offered. Please tick the meaning of the respective contract clause that you think is correct or add what you think is correct meaning by hand in the space provided for this purpose. It is also allowed to tick several answer options. [...]
Contract clause 1:
The seller is not liable for a specific characteristic of the object of purchase.
a) This clause means a general exclusion of warranty and liability on the part of the seller.
b) This clause only states that although the seller has not assured the buyer of any specific characteristics beyond the usually required characteristics, this does not limit or cancel the seller's legal warranty for the characteristics usually required in fair trade.
c) In my opinion, this contractual clause means that [own answer].
d) This contract clause is unclear.
e) Not specified
Contract clause 2:
The buyer acquires the property as the seller has previously owned or was entitled to own and use it.
a) This clause is based on the seller's property and is intended to attribute to the buyer the seller's previous ownership, which is important for the acquisition periods in accordance with Section 1493 of the Austrian Civil Code.
b) This clause constitutes an exclusion of warranty on the part of the seller.
c) This clause imposes obligations on the seller to the buyer of the property, but without mentioning them.
d) In my opinion, this contractual clause means that [own answer].
e) This contract clause is unclear.
f) Not specified
Contract clause 3:
Any liability on the part of the seller for defects in the purchased item is excluded as agreed.
a) This disclaimer includes both material and legal defects.
b) This disclaimer only covers material defects.
c) This clause only excludes the seller's liability under warranty.
d) In addition to warranty, this clause also excludes the challenge or adjustment of the purchase contract due to a business error by the buyer caused by the seller through no fault of his own.
e) In addition to the warranty, this clause also excludes the contestation or adjustment of the purchase contract due to a business error on the part of the buyer initiated by the seller, whether through no fault of his own or slightly negligent.
f) This clause also includes an exclusion of the seller's liability for subsequent damage.
g) In my opinion, this contractual clause means that [own answer].
h) This contract clause is unclear.
i) Not specified”
Individual participants have pointed out - quite correctly - that the contract clauses may be unclear in themselves, but must be interpreted in the overall context of the remaining text of the contract and/or the preliminary discussions/contract negotiations/circumstances by researching the parties' intent and that an interpretation result that deviates from the wording may then be achieved4. It was clear to me that this is naturally a weakness of such a written survey about the understanding of contract clauses. Nevertheless, this survey certainly has a positive effect: It makes the ambiguity/ambiguity/incomprehensibility of the respective contract clause more visible to lawyers and sharpens attention to the linguistic accuracy when drafting such contracts.
It should also be stated that the survey does not address those cases in which the seller's warranty and liability cannot be ruled out - for example when the seller is an entrepreneur and the buyer is a consumer within the meaning of the Consumer Protection Act or the seller is a home ownership organizer - and the obligations under the Energy Performance Certificate Template Act 2012 (EAVG 2012). In the survey, it was allowed to tick two or more answer options as applicable to each question. The participants had the opportunity to state a meaning of the contract clause that differed from the pre-formulated answer options. In addition, it was also possible to describe the contract clause as “unclear” or to provide “no information.” Many participants actually made use of it.
With regard to the possibility of giving two or more answers to each question, the percentages given for each answer choice can exceed 100% when added together. I will address the individual contract clauses below and evaluate the answers received.
The first contract clause was: “The seller is not liable for a specific characteristic of the object of purchase.”
The survey participants expressed the following understanding of this clause:
Ad a) 18% understood this clause as a general exclusion of warranty and liability on the part of the seller.
Ad b) 70% were of the opinion that this clause only expresses that although the seller did not guarantee the buyer any specific characteristics in addition to the usually required characteristics, it did not limit or cancel the seller's legal warranty for the characteristics usually required in fair dealings.
Ad c) The following self-formulated answers were given: According to this, this contract clause means
Ad d) Almost 24% described this contract clause as “unclear.”
Ad e) 0.3% did not provide any information on this clause. In my opinion - and therefore I am in agreement with the majority of answers and a Supreme Court decision5, but in contrast to three other Supreme Court decisions6 - the present contract clause only means that no special (“specific”) features were expressly or tacitly specified for the object of purchase. However, this clause does not contractually preclude the seller's legal warranty for “usually assumed characteristics” and for the characteristics of the object of purchase in accordance with its description (Sections 922 and 923 ABGB). Qualities (e.g. a particularly good state of preservation, equipment or structural design) may be defined as expressly or conclusive characteristics, for example by describing the state of construction in an expert opinion in accordance with Section 37 (4) WEG7 or in an information brochure8, 9 or quantities (e.g. the size of a plot10) be subject to conditions.
The contract clause in question therefore remains the seller's legal warranty for “usually assumed characteristics” of the property, such as
the freedom of a home from substances harmful to health11,
the construction of a single-family house on “grown soil” and not on a construction waste dump12 or
the freedom of a property purchased for the purpose of building a house from massive contamination13 upright. This contract clause also does not preclude publicly made statements by the transferor (or his assistants, such as the broker) in advertising or in information documents14; the removal of such incorrect information would probably have to be made expressly by correcting the incorrect information15.
The second contract clause read: “The buyer acquires the property as the seller has previously owned or was entitled to own and use it.”
The understanding of this contract clause was stated by participants as follows:
Ad a) 51% answered in the affirmative that this clause is based on the seller's ownership and should attribute to the buyer the previous ownership of the seller, which was important for the periods of time of seizure in accordance with Section 1493 ABGB.
Ad b) For 22%, this clause represents an exclusion from the seller's warranty.
Ad c) 10% saw this clause as a transfer of the seller's obligations to the buyer of the property, but without mentioning these obligations.
Ad d) The following self-formulated answers were given: According to this, this contract clause means
Ad e) 18% of the responses considered this contract clause to be “unclear.”
Ad f) 0.8% provided “no information”. Own opinion: The vast majority of answers (51%) correctly base mE on an attribution of the seller's ownership for the acquisition periods, which certainly applies in accordance with Section 1493 of the Austrian Civil Code, even in the case of individual succession, as is the case when buying a property.16,17
22% of the responses saw the present clause as an exclusion from the seller's warranty. In contrast, the case law has already stated twice that this clause cannot be interpreted as an exclusion of warranty. This is also true because it cannot be inferred from the clause; in this direction it is too indistinct, i.e. too vague (Section 869 ABGB).
The judicature18 Understands the present contract clause as meaning that it constitutes a transfer of the service right of the prevailing good (!) is to be considered the buyer of the prevailing property. This is true because the contract clause speaks of the purchase of the property “as the seller has previously owned or was entitled to own and use it.” As to the contrary opinion that this would include the transfer of obligations under a service agreement to the owner of the serving property - as assumed by 10% of respondents - the wording of the contract clause is completely indefinite in this direction. One of the interviewees formulated: “In no way can this mean the transfer of obligations to the buyer.” If, on the other hand, the contract clause states that the property is acquired “with all rights and obligations [liabilities] with which the [seller] had owned and used the subject matter of the contract”, this also means the transfer of the service as a burden (obligation) to the buyer, such as the Supreme Court19 said correctly.
“Any liability on the part of the seller for defects in the object of purchase is excluded as agreed.”
Ad a) 44% saw this clause as an exclusion of liability for both material and legal deficiencies.
Ad b) 23%, on the other hand, considered restrictively that this disclaimer only covers material defects.
Ad c) In the opinion of 24% of participants, this clause only excludes the seller's liability under warranty.
Ad d) 2.7%, on the other hand, considered it correct that, in addition to the warranty, this clause also excludes the contestation or adjustment of the purchase contract due to a business error by the buyer caused by the seller through no fault of his own.
Ad e) 17% saw in this clause not only an exclusion of warranty but also an exclusion of contestation or adjustment of the purchase contract due to a business error on the part of the buyer caused by the seller, whether through no fault of his own or slightly negligent.
Ad f) In the opinion of 21%, this clause also includes the exclusion of the seller's liability for subsequent damage.
Ad g) The following self-formulated answers were given: According to this, this contract clause means
Ad h) 32% of participants saw the clause as “unclear.”
Ad i) 1.9% did not provide any information on this clause. Own opinion: The present contract clause means a comprehensive exclusion of liability and contestation for defects, damage caused by defects, subsequent damage, culpa in contrahendo and error adjustment and contest20, in the B2B business also the exclusion of the challenge of the contract due to reduction of more than half of the true value - to the extent permitted by law. This is because the word “everyone” is comprehensive and therefore also includes other claims, and the term “liability” goes beyond the term “warranty”21. However, the clause is not recommended due to its slight clarification of the content.
However, in particular as a result of preliminary discussions, the contract interpretation of this clause mE may result in only material defects falling under the exclusion of liability of the present contract clause or at least providing for fundamental legal deficiencies - such as the acquisition of ownership and freedom from the burdens of the purchased property.
The answers received make it clear that the interviewees understood the discussed contract clauses in some cases very differently: While 70% had a similar understanding of contract clause 1 - but this contract clause was unclear for at least 24% - the range of different views on contract clauses 2 and 3 is widening: In the case of contract clause 2, the first-mentioned contract understanding (a) applies to the approval of at least 51% of the answers. Otherwise, however, the answers vary widely.
For contract clause 3 (“Any liability on the part of the seller for defects [...] excluded)” There is great uncertainty as to how far this exclusion of liability actually extends: namely whether it only provides the warranty for material or even for legal defects or even for damage caused by defects, the contestation of an innocently or culpably caused error, subsequent damage or, at best, liability arising from culpa in contrahendo22 Excludes or not.
A participant had written to me in his accompanying letter that the contract clauses mentioned in the survey “from the age of mechanical typewriters”, when “efforts were made to make particularly concise wording, have survived to the present day.” However, this “business argument” based on writing costs, i.e. “business argument” from the point of view of the contract author, should not be decisive for formulating contract clauses briefly and unambiguously rather than longer, meaningfully and unambiguously.
In another letter, one of the interviewees said about the present survey: “Since I am primarily concerned exclusively with the preparation of contracts in real estate law, I welcome your commitment. In particular, it was only through your questionnaire that my standardized or at least frequently used contract terms might also require further review or clarification.
In particular, contract clause No. 2, which, in my opinion, is found in almost all purchase contracts for real estate, shows that there is also a great deal of room for interpretation for a legally qualified person [...]. I would therefore be interested to see what ratio I can draw from this survey.” This letter sums up the question:
The contract clauses discussed here have “potential for optimization”. Or in plain language: You could express their regulatory content - scope and scope - much better, with clearer words and unambiguously.
Contract authors should also make every effort not only to offer “all-or-nothing solutions” - namely a complete exclusion of liability or none: This does not correspond to reasonable advice to the parties to the contract. The joint author of the contract must protect buyers and sellers from legal and economic disadvantages. Anyone who buys a house or a condominium cannot, understandably, expect that age-related defects, signs of wear and tear or minor defects would not exist. However, the buyer does not normally have to reckon with uselessness, fundamental defects or massive structural deficiencies unless they are notified to him or cannot be identified in the course of an inspection or an agreed due diligence check carried out by the buyer (with the assistance of experts).
In addition to the identified and identifiable deficiencies, there remains the “subset” of the “undetectable” or “secret” (“hidden”) defects and “unusual deficiencies” 23: Whether this risk of the existence of secret or unusual defects should be transferred to the buyer's sphere of risk with a contractual liability waiver should be explicitly addressed contractually. The same applies to properties of land, in particular in connection with contamination, contaminated sites or war relics24.
In addition to liability disclaimers which exclude the seller's “warranty”, it should also be remembered that the buyer could also claim claims against the seller under another legal title, for example under the right of error, from culpa in contrahendo, from the title of compensation for damage caused by defects and subsequent damage caused by a defect25, due to shortening over half. This should be considered when approving the seller. On the strategies for avoiding liability on the part of the seller, see my article in the December issue of the notarial newspaper26.
However, it should be borne in mind that the more fully the seller's liability is excluded - without explicitly contractually disclosing the defects or risks that the buyer assumes - contract provisions are all the more likely to be judged as immoral. In these cases, the judiciary often uses the “restrictive interpretation” of liability exclusions27 and with implied promises of properties, which then proceed with a general exclusion of warranty28.
In return for a general exclusion of warranty, the purchase contract could also, as an economic “consolation” for the buyer, regulate that the seller assigns his warranty and compensation claims against the builder, professional and, if applicable, against the previous owner of the seller to the buyer (if such [still] exist)29. In this way, the buyer can then retract from at least this group of people for the damage and risks assumed by him with the contractual disclaimer30. This would be (partial) economic compensation for the buyer.
Concluding remark: We lawyers should recognize the limits of our professional competence. If someone (here: the buyer) pays amounts of a few hundred thousand euros up to millions - as is regularly the case with real estate purchase contracts - it is probably advisable to first suggest to the buyer (prospective buyer) a purchase review (due diligence check) with the help of experts, because in this way he can obtain a great deal of certainty about the object of purchase. This is for his own safety, but at the same time also for the seller's safety, because then the scope of the “obvious defects”, for which the seller does not have to be responsible by law (Section 928 ABGB), is significantly greater, because knowledge of the defects and damage that can be identified by a specialist is now attributable to the buyer31. This increases contract stability and serves to avoid future legal disputes32.
About the author
Attorney Univ.-Prof. Dr. Johannes Reich-Rohrwig is a partner at CMS Reich-Rohrwig Hainz Rechtsanwälte GmbH, Vienna, and teaches corporate and corporate law at the Juridicum of the University of Vienna.
