Seller Representations and Warranties in Commercial Real Estate Purchase Agreements

– [Narrator] The foundation
of a commercial property deal can have pitfalls. To keep the buyer and seller grounded even in an as-is transaction, there needs to be an agreement, covering the time before a property officially changes hands. – There are certain seller representations and warranties that a buyer
will expect to receive and which a seller should
be willing to provide. – [Narrator] The expected
representations and warranties are broken down between the corporate entity selling the property and the property itself. You can significantly cover your bases by focusing on these nine points. First, you wanna make sure
the seller is authorized to sell the asset. – The seller entity has
been properly formed, continues to be properly run and has all the necessary internal and external authorizations required to enter into the purchase agreement. – [Narrator] Next are
representations about bankruptcy. If a seller were in bankruptcy, the validity and enforceability of the purchase agreement would be subject to question. – So, a buyer is always
going to look for a seller to provide a representation that it is not in bankruptcy, and it’s not been put into bankruptcy and to rep that during the
course of the agreement, it won’t make actions that would cause it to go into bankruptcy. – [Narrator] The non-foreign
person representation is really a technicality. For tax reasons, the seller must not be a foreign person. However, after 9/11, the Office of Foreign Assets Control actually put together a list of bad actors to stay away from. – It’s called the OFAC rep, that the seller is not on this bad list. – [Narrator] Under the
property-related reps and warranties, leases are by far the biggest area. The purchase price of a property is based on that property’s
net operating income, which comes from lease rental streams. – A buyer is very, very
interested in validating through its due diligence that that income stream is real. – [Narrator] A buyer’s
due diligence checklist would focus on verification of leases and their material terms, economic and otherwise. – You’d hate to buy a
building that’s 80% full, and then all of a sudden, find out that someone contends that they’re a tenant in the remaining 20% at a dollar a year for the next ten years. – [Narrator] A detailed list identifying all leases
and occupancy rights will narrow the possibility
of any surprises. – You wanna know as the buyer that what you’re buying is what you’re getting. – [Narrator] A buyer
also wants to know that there are not any notices
of default from tenants contesting the landlord as failing to live up to the obligations in the lease. A buyer also wants to know where the landlord has
significant cost exposure. – The upfront brokerage commissions that the landlord pays, the upfront improvement allowances that the landlord will give to the tenant to build out its space, and then free rent and
other economic concessions that the landlord might provide. – [Narrator] The next group
of reps and warranties are focused on knowledge. The buyer wants to make sure the seller is not aware of
any code compliance issues. – Which basically means they haven’t received any notices from the applicable governmental agencies saying that the property
is not in code compliance. – [Narrator] The buyer
also wants assurance that there is no ongoing litigation and that the seller
hasn’t received any notice of anything pending or threatened. After the seller has
made all of these reps and warranties, the purchase agreement should address the short shelf life from signing it up to closing it. – There’s usually a
subsequent changes provision put in the reps and warranties section of a purchase and sale agreement, which basically simply
says that to the extent facts on the ground change and therefore, to the extent those changes affect the reps and
warranties that were made, the seller will communicate
those to the buyer. – [Narrator] It’s important to indicate when drafting these reps and warranties who’s in charge. The person with the actual knowledge about the property in question may not always be clearly defined. – Many of the reps and
warranties will be tethered to the actual knowledge
of a responsible person. The seller could face some liability if this knowledgeable
person made a misstatement. – [Narrator] Reps and
warranties don’t go on forever. Once the transaction is complete, there is a tail and a cap on the liability of the seller. – It’s usually nine or
12 months is the tail, after which if nothing has come up, if it’s not obvious to everyone that there was a breach
of the rep and warranty, then the liability goes away. – [Narrator] There can also be a provision that caps the liability even if there was a breach
of the reps and warranties. – So, in a 30 million dollar purchase, it might be that the cap is a million and a half dollars. – [Narrator] The purchase
agreement will fade, but the peace of mind of knowing exactly what you are getting and why will remain.

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