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Representations and Warranties: Key Factors in Real Estate Transactions

By: John F. Lushis, Jr.

A key aspect of commercial and industrial real estate transactions centers around the representations and warranties made by the seller, which can often be subject to extensive negotiation. Not surprisingly, a seller strives to limit the representations and warranties but factors such as the nature of the property (e.g., improved vs. unimproved), its historical use, and the involvement of a lender will impact the negotiation process.

Key Factors to Consider

  1. The first factor is their extent. Typical representations and warranties cover the nature of the seller (e.g., limited liability company), the proper authorization of the transaction by the seller’s governing body, and a statement that the transaction will not violate any agreement to which the seller is a party. But buyers often want other representations and warranties, such as compliance with all applicable laws, the condition of the property (e.g., lead paint, asbestos, underground tanks, and the existence of any threatened litigation). Regardless of the extent of the warranties, a seller must be mindful of the duty to disclose material information about the property.
  2. The second concerns qualifiers. For example, a seller may seek to limit representation and warranty to the “best of seller’s knowledge.” But even these qualifiers must be carefully evaluated. For example, if a representation is made “to seller’s knowledge,” an immediate question is, whose knowledge? Everyone in the organization from the president on down, or only certain individuals?
  3. The third factor is the period of time the representations and warranties will survive the closing. The survival period is critical in the event a post-closing claim is made by the buyer for a breach of a representation and warranty.
  4. Lastly, if the purchase price is substantial, the buyer and the seller may wish to consider procuring representation and warranty insurance.

The real estate attorneys at Norris McLaughlin have substantial experience with commercial real estate transactions and are prepared to assist you. If you have any questions about this post or any other related matters, please email me at .