In a commercial real estate transaction, representations and warranties serve as statements of fact or assurances made by the parties involved. These statements help to allocate risks between the buyer and seller and provide a basis for legal recourse if a party’s representations or warranties are found to be false or misleading. In this article, we delve deeper into ten types of representations and warranties typically found in a commercial real estate purchase agreement.
1. Ownership and Authority
The seller usually represents that they have the legal right to sell the property and the authority to enter into the purchase agreement. This may include representations regarding the seller’s legal status (e.g., corporation, partnership, or individual) and confirmation that all necessary corporate or partnership approvals have been obtained.
2. Title and Encumbrances
The seller typically represents that they hold clear and marketable title to the property, free from any encumbrances or defects, except for those explicitly disclosed in the agreement (e.g., recorded easements, rights of way, or liens). The seller may also warrant that they will deliver the title at closing, subject to any agreed-upon exceptions.
3. Property Condition
The seller often provides representations regarding the physical condition of the property. These may include statements about the structural integrity of the buildings, the absence of hazardous materials or environmental issues, and the functionality of mechanical systems, among others. In some cases, the seller may provide an “as-is” representation, which limits their liability for the property’s condition, but they are still required to disclose any known material defects.
4. Compliance with Laws and Regulations
The seller generally warrants that the property complies with applicable federal, state, and local laws, regulations, and ordinances. This may include representations regarding zoning, land use, building codes, environmental regulations, and any permits or licenses required for the property’s current or intended use.
5. Leases and Tenancies
If the property is leased, the seller should represent that all leases have been disclosed to the buyer and provide accurate information regarding the terms, rental amounts, security deposits, and lease expirations. The seller may also warrant that there are no defaults by the tenants or the seller under the leases.
6. Financial Statements and Records
In some cases, particularly when the property generates income, the seller may be required to provide representations about the accuracy and completeness of financial statements, rent rolls, or other property-related records. This helps the buyer evaluate the property’s financial performance and potential future revenue.
7. No Material Adverse Changes
The seller may represent that there have been no material adverse changes in the property’s condition or financial performance since a specified date (often the date of the purchase agreement or the buyer’s initial due diligence review). This representation ensures that the buyer receives the property in a condition consistent with their expectations.
8. Taxes and Assessments
The seller typically represents that all property taxes and assessments have been paid or will be paid by the closing date, and that there are no outstanding or delinquent tax liabilities.
9. Litigation and Claims
The seller should disclose any pending or threatened litigation, claims, or governmental investigations related to the property. This representation informs the buyer of potential liabilities or issues that may impact the property’s value or future use.
10. Brokerage Commissions
Both the buyer and seller may represent that they have not engaged any brokers or agents in connection with the transaction other than those expressly disclosed in the agreement. This helps protect both parties from unexpected brokerage commission claims.
Conclusion
Understanding the types of representations and warranties in a commercial real estate purchase agreement is crucial for both buyers and sellers. Engaging an experienced real estate attorney can help to ensure that the representations and warranties protect you and appropriately reflect your expectations upon closing.
For assistance on drafting representations and warranties in your commercial real estate purchase agreement, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
