Navigating Commercial Real Estate Deals
The Importance of Negotiating Representations, Warranties, and Survival Periods
By Clint Wilson, Real Estate & Business Attorney
In the intricate world of commercial real estate, every transaction is unique and comes with its own set of challenges and uncertainties. Buyers and sellers alike tread cautiously as they seek to protect their interests in what often amounts to significant financial investments. In the pursuit of a successful deal, negotiations play a pivotal role. Representations, warranties, and their associated survival periods hold particular importance among the many components of these negotiations. In this blog post, we will delve into why sellers and buyers of commercial properties negotiate heavily over representations and warranties and why their survival period matters.
What are Representations and Warranties?
Before diving into the “why,” let’s clarify what representations and warranties mean in commercial real estate transactions.
Representations are statements made by either the seller or buyer about the property and/or the transaction. From the seller’s side, these statements can encompass various aspects of the property, such as its condition, compliance with laws and regulations, or financial performance. Representations serve as assurances that certain facts or conditions about the property are true and accurate, which are then relied upon by the Buyer in purchasing the property.
Warranties, on the other hand, are legally binding assurances that the representations made are true and will remain so for a specified period. If a warranty is breached, the party in breach may be liable for damages or other remedies, depending on the terms of the contract.
Why Negotiate Representations and Warranties?
1. Risk Mitigation
For buyers, representations and warranties provide a layer of protection. They ensure that the property they are acquiring meets the standards and conditions the seller promises. This can include assurances about the property’s legal status, physical condition, financial performance, and more. Negotiating these terms allows buyers to minimize the risks associated with their investment.
For sellers, negotiations around representations and warranties are an opportunity to limit their potential liability. By specifying the scope and limitations of the representations and warranties, sellers can protect themselves from future claims if certain conditions change after the transaction. (is completed is not necessary at a transaction infers completion.)
2. Due Diligence
The negotiation of representations and warranties often goes hand in hand with the due diligence process. Buyers conduct thorough investigations to verify the accuracy of the representations made by the seller. If discrepancies or undisclosed issues arise during due diligence, negotiations can be used to address these concerns before the deal closes.
3. Allocating Responsibility
Negotiating representations and warranties also helps allocate responsibility between the parties. It clarifies which party is responsible for specific aspects of the property, such as environmental compliance, tenant leases, or property maintenance. This clarity can prevent disputes down the road.
The Significance of Survival Periods
Survival periods are a critical aspect of representations and warranties negotiations. A survival period defines the timeframe for a party to make a claim based on a breach of the representations and warranties. The length of this period can vary and is subject to negotiation.
Why do survival periods matter?
- Time Sensitivity: They establish a finite window within which a party must identify and address any issues arising from a breach. This time sensitivity ensures that claims are made promptly.
- Protection for Both Parties: Survival periods strike a balance between protecting the buyer’s interests in discovering post-closing issues and limiting the seller’s long-term liability.
- Risk Management: They encourage timely resolution of disputes, reducing the potential for prolonged legal battles.
In summary, the negotiation of representations, warranties, and survival periods is a crucial aspect of commercial real estate transactions. For buyers, it offers protection and assurance, while for sellers, it allows for the limitation of potential liabilities. These negotiations serve as a means of risk mitigation, due diligence, and responsibility allocation, ultimately contributing to the success and transparency of commercial property deals. In this complex field, understanding and skillfully negotiating these aspects can make all the difference in a smooth and successful transaction.
Please note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.