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