| THE ALLOCATION OF FUTURE RISKS IN THE SALE OF | | | | provisions: |
| | | | |
| COMMERCIAL REAL ESTATE | | | | If the seller provides any warranties, it |
| | | | will seek a very short expiration period for |
| By Joel D. Ruben, Esq. | | | | the warranties. This survival period is |
| | | | negotiable, but will probably be shorter than |
| The chess game involved in negotiating the | | | | the applicable statute of limitations. |
| sale of commercial real property involves | | | | |
| more than the sale price. Warranties are | | | | It is also helpful for a seller to negotiate |
| often heavily negotiated because of the | | | | a floor (a claim will not be allowed unless |
| parties' competing objectives: the buyer | | | | the alleged damages exceed a minimum amount) |
| wants protection from unknown risks, while | | | | and ceiling or upper limit on warranty |
| the seller wants to eliminate warranties or | | | | liability (except where a claim is based on |
| at least limit them. | | | | intentional fraud). |
| | | | |
| A warranty is an affirmation by the seller of | | | | Depending on the nature of the buyer's |
| a fact relating to the property. Since the | | | | concerns about the property, the buyer may |
| breach of a warranty by the seller generally | | | | seek to negotiate hold back in escrow of a |
| entitles the buyer to damages, a seller will | | | | portion of the purchase price during the |
| endeavor to sell the property as is, without | | | | survival period. The seller will resist any |
| any representations or warranties. If the | | | | hold back. |
| sale price has already been discounted or if | | | | |
| the buyer has negotiated a substantial time | | | | Warranties with respect to title matters are |
| period during which to conduct an extensive | | | | not customary if the buyer can obtain title |
| investigation of the property while reserving | | | | insurance and special endorsements to address |
| the right to cancel, the seller may be | | | | title risks. Also, a seller may provide the |
| unwilling to give more than minimal | | | | buyer with an ALTA survey. The buyer can then |
| warranties. | | | | specify which title exceptions in a |
| | | | preliminary title report and survey matters |
| To Warranty or Not to Warranty, That is the | | | | should be eliminated or cured before the |
| Question | | | | closing. An exception may occur with respect |
| | | | to unrecorded matters and leases. A seller |
| Some types of properties are traditionally | | | | should be willing to warrant that no |
| sold without any warranties, such as real | | | | unrecorded matters affect title, except as |
| estate owned or REOs which have been | | | | disclosed in an exhibit to the purchase |
| foreclosed upon by an institutional lender. | | | | agreement or by the ALTA survey discussed |
| | | | above. |
| There are some warranties that a seller is | | | | |
| likely to give. Warranties that the seller is | | | | Warranties regarding compliance with zoning |
| duly organized, has authority to execute the | | | | laws and building codes are virtually |
| documents and has obtained all necessary | | | | impossible to obtain from sellers in view of |
| consents to the sale will customarily be | | | | the difficulty of knowing whether a building |
| given by a seller. In addition, a seller will | | | | is in compliance. The usual compromise is to |
| customarily provide warranties regarding a | | | | obtain a warranty that no written notice from |
| list of tenants, the rent roll, the list of | | | | a governmental agency that the property is |
| service contracts and that true and correct | | | | not in compliance has actually been received. |
| copies of documents have been provided to the | | | | |
| buyer. | | | | Environmental warranties may also present |
| | | | serious negotiation problems. Sellers should |
| Even where an REO is not involved, sellers | | | | be willing to warrant that they, and their |
| will seek to limit certain types of | | | | tenants, have not created any environmental |
| warranties to the actual knowledge of those | | | | problems. However, if an environmental |
| employees who have had hands on involvement | | | | investigation has been conducted, the |
| with the property. Warranties with respect to | | | | warranty should be qualified by the contents |
| absence of claims, litigation, condemnation | | | | of the environmental reports which will be |
| and similar matters are often given by | | | | provided to the buyer. Environmental |
| sellers if qualified by the actual knowledge | | | | insurance may fill the void of some |
| of specific persons who are knowledgeable | | | | environmental warranties. It can take weeks |
| regarding the property. The seller will also | | | | to months to negotiate a policy of |
| want to provide that the employee with actual | | | | environmental insurance, so start early if it |
| knowledge will not be personally liable for | | | | appears that this insurance may be required |
| breach of a warranty. The use of the | | | | to close the deal. |
| qualification "to the best of Seller's | | | | |
| knowledge" may create problems since it may | | | | Full Disclosure Is The Seller's Best |
| imply some level of diligence which is not | | | | Protection |
| adequately defined. The buyer will argue that | | | | |
| such a warranty includes what the seller | | | | In the final analysis, the seller's best |
| actually knows, plus what the seller should | | | | protection is to make full and fair |
| have learned through a reasonable | | | | disclosure in writing about the property. |
| investigation. | | | | This can be done by qualifying any warranties |
| | | | with the written disclosure of problems with |
| The seller's goal to limit potential future | | | | the property in one or more exhibits to the |
| liability can also be achieved by the | | | | purchase agreement. |
| negotiation of the following contract | | | | |