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Representations and Warranties in
Commercial Real Estate Sales Contracts
Strategies for Buyers and Sellers Negotiating Agreements of Sale
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WEDNESDAY, FEBRUARY 15, 2012
Presenting a live 90-minute webinar with interactive Q&A
Mitchell C. Regenstreif, Founding Partner, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, Los Angeles
Larry N. Woodard, Shareholder, Robbins Salomon & Patt, Chicago
David P. Waite, Partner, Jeffer Mangels Butler & Mitchell, Los Angeles
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Presented by:
Mitchell C. Regenstreif
Liner Grode LLP
310.500.3570
mregenstreif@linerlaw.com
Strategies for Buyers and Sellers
when Negotiating Agreements of Sale
Important Topics for Buyers
when Negotiating a Purchase and Sale Agreement
Representations and Warranties in
Commercial Real Estate Sales Contracts
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Critical Issues for Buyer
Negotiating the Purchase and Sale
Agreement can be expensive and time
consuming
Outside pressures and costs can limit review
and negotiation
Most current form contracts favor Seller
Focus on fundamental issues to Buyer
The Market Dictates/Limits What is Realistic
for Well-represented Sellers and Buyers!!
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Due Diligence
Buyer is almost always entitled to perform
due diligence investigation of the property
Differing Requirements for Property Types:
Investment Property Types
Office, Industrial, Retail, Multi-family, Mixed Use,
Development Property
Special Situations
Brownfields
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Due Diligence (Cont’d)
Timing and Scope of Due Diligence
Due Diligence Period
Land Use Conditions
Intrusive Testing
Limitations on Contract Representations
based upon Findings of Buyer’s Due
Diligence
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Due Diligence Items
Materials from Seller in Seller’s possession
Books and records
Title and Survey
Plans and Specifications
Agreements and other materials outside of
public records
Permits, licenses and approvals
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Due Diligence Items (Cont’d)
Violations/emergency repairs
Threatened or pending litigation
Including condemnation proceedings
Proposed assessments
Engineering reports
Rent roll and arrears report
Leases and lease abstracts
Environmental reports and assessments
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Due Diligence Items (Cont’d)
Physical site inspection reports
Zoning/land use reports
Insurance
Existing financing documents
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AS-IS Language
Typically comprehensive provision
(“disclaimer”)
Risk Shifting to Buyer
Exceptions to As-Is Language
“Except as expressly otherwise provided in this
Agreement,…”
Trade for longer due diligence period
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Representation and Warranties
Usually heavily negotiated
Buyer wants Extensive Reps (as much as
Buyer can get)
All material information
Knowledge vs. absolute reps
Implied reps in Deed, Closing Documents
Agree when negotiating contract
Protections under law
Fraud, concealment
Remedies
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Representation and Warranties(Cont’d)
Seller wants Limited (as narrow as possible)
Shift responsibility to Buyer
No liability for matters discoverable during due
diligence
Duration and other limitations on remedies
See sample provisions
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Knowledge Standards
“Knowledge” and qualifications
Various Standards
Knowledge-of whom?
Investigation/inquiry?
Knowledge about due diligence materials?
Extensively negotiated
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Seller Liability Issues
Seller as “special purpose entity” (“SPE”)
Exculpation provisions
Release; indemnity
Forms of security
Escrow Holdback
Common for environmental issues
Letters of credit
Personal Guaranties
Liquidity is always the issue
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Remedies/Survival
Merge with deed or survive closing?
Failure of Condition vs. Default…
What are Buyer’s remedies/options?
Survival Period
Bringing suit/timing
“Floor”/“ceiling”
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Conclusion
Buyer to thoroughly investigate
Identify potential issues early
Use closing conditions/remedies provisions
as an “out”/possibility to get back to where
Buyer was before entering into the
Agreement
Maintain adequate security and survival of
representations
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Liner Grode Stein Yankelevitz
Sunshine Regenstreif & Taylor LLP
Los Angeles
100 Glendon Avenue,
14th Floor
Los Angeles, CA 90024
San Francisco
199 Fremont Street,
20th Floor
San Francisco, CA 94105
Representations and Warranties in
Commercial Real Estate Sales
Contracts
Wednesday, February 15, 2012
Larry N. Woodard
ROBBINS SALOMON & PATT, LTD.
25 E. Washington St., 10th Floor
Chicago, Illinois 60602
(312) 782-9000
LWoodard@rsplaw.com
Representations and Warranties
from the Seller’s Perspective:
You’ll Get Nothing and Like It!
Representations and Warranties in General
Representation: Statement of fact made to induce another to
enter into a contract
» Cause of Action: fraud or negligent misrepresentation
» Remedy: rescission/specific performance/damages for benefit of
the bargain
Warranty: A promise that a proposition of fact is true
» Cause of Action: breach of contract—no need to prove intent to
defraud or reliance
» Remedy: actual and benefit of the bargain damages; requirement
to cure
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Representations and Warranties in General
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General Types of Real Estate Contract
Representations and Warranties
Status and Authority of the Seller
Examples: Seller is valid entity in good standing; agreement will not default
other agreements; no bankruptcy or insolvency; contract enforceable against
Seller; no additional consents; FIRPTA/no foreign person; etc.
Current Status of the Property
Examples: Good title; no condemnation; compliance with codes and ordinances;
no litigation; no unrecorded liens; no other contracts concerning property; no
access issues; no environmental issues; no other parties in possession; no
increased taxes/special assessments; no litigation; all utilities present; no
strikes or work stoppages; etc.
Operation of the Property
Examples: All leases in effect; no breach of leases; rent roll and books and
records are accurate; no deferred maintenance; no bulk
sales/employment/sales tax issues; no management agreements or
agreements surviving sale; etc.
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Status of the Seller
Representations and Warranties (“R/W”)
I. Seller’s entity: no knowledge carve out (?); limit to selling entity; Limit to
good standing as of the date of the contract; What is a “valid” entity?
II. Authority to enter into agreement: no knowledge carve out—do not want
to have to share operating or partnership agreement; Limit to as of the date of
the contract
III. Pending litigation: limit to selling entity; Limit to actual knowledge, or better,
R/W received no notice of pending or threatened litigation; Limit notice
received only to selling entity and not to any agent or affiliate; Cannot give
absolute as litigation may be pending but not yet served; Limit to actions
affecting ability to perform agreement
IV. Bankruptcy/insolvency: no knowledge carve out for bankruptcy; Define
insolvency or delete it (if single purpose entity, sale of property could render it
“insolvent”); Delete representations about settling or compromising debts to
creditors—or better define and limit
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Status of the Seller
Representations and Warranties
V. Does not Violate Other Agreements: Knowledge carve out (?) or
limit to written agreements
VI. Is not Prohibited by Governmental Regulations: All R/Ws
regarding governmental issues must be with knowledge carve out
VII. Enforceability of Sales Contract: Will Purchaser pay for legal
opinion?; Limit to knowledge as calls for legal conclusion
VIII. Foreign Person and No Consents Required: No issue with
representing
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Status of the Property
Representations and Warranties
I. Marketable Title: Limit definition or change to “indefeasible title”; Subject to
permitted exceptions or attach commitment; Issuance of title policy
constitutes proof of marketable title
II. Property Complies with all Applicable Laws: Need knowledge carve out,
or better, “received no notice” carve out; Limit definition of “applicable laws”
III. No Condemnation: Limit to knowledge, or better, no notice received; Omit
any reference to personal property;
IV. No Litigation Affecting Property: Same concerns as Seller’s pending
litigation; Left hand-right hand issues; Ideally, “received no notice”
V. No Liens Affecting Property: Why have title insurance?; In large projects,
ongoing work done and professional property managers that have lien rights
that Seller may not be able to make this representation
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Status of the Property
Representations and Warranties
VI. No Other Parties in Possession: Limit to knowledge; Exception to Leases
and licenses provided during due diligence; Exceptions to matters shown on
survey or in title commitment
VII. No Other Contracts relating to Property or Seller: Carve out for contracts
with seller in normal course of business, that do not survive closing or that are
cancelable within X days; Exception to contracts provided during due
diligence
VIII. No Environmental Violations: Attempt to strike completely; Limit to
knowledge or notice; Carve out for time limits, damage limits and types of
damages (only to remediation costs and exclude lost profit or benefit of
bargain damages); Limit warranty to purchaser only
IX. No Change in Assessed Value: Limit to notice
X. No strikes or Work Stoppages: Limit to notice
27
Operation of the Property
Representations and Warranties
I. Tenant Leases in Effect: Try to omit or give only to the extent not
Purchaser provided estoppel certificate; Limit to knowledge
regardless; Limit to as of the date of the statement provided; Limit
due diligence production to all leases and exhibits in possession or
control (there is always an exhibit missing)
II. Books and Record Accurate: Attempt knowledge carve out;
Attempt to limit to that which is not otherwise disclosed in the leases;
Carve out materials not prepared by Seller (“blame the manager”)
III. Operations/Maintenance: Try to avoid, especially if AS IS (any rep
may limit AS IS clause); Limit to knowledge; Limit to as of the date of
the contract
IV. Bulk Sales/Employment/Sales Tax: Depends on state and type of
property; Obtain clearance from local departments to eliminate
representation
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General Seller Warranty Limitations
I. Identify Party/Parties having “Knowledge”: Limit knowledge of
R/W to a particular person or persons, ideally property manager or
operations personnel; Left hand—Right hand issues; Multiple entities
II. Limit Knowledge to “Actual Current Knowledge”: Avoids
constructive knowledge (filed but not served); Avoids matters arising
after date of contract
III. Limit Warranties Only to Particular Paragraph: Only R/W are
contained in Paragraph X; Cannot rely on any statements from
anyone other than in Paragraph X
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General Seller Warranty Limitations
IV. Warranties Limited to Due Diligence Materials: Limit all R/W to
matters that were provided during due diligence or discovered during
due diligence; Attempt to carve out matters that could have been
discovered during due diligence; Attempt to carve out for matters that
could have been reasonable inferred or implied from due diligence
material
V. No Warranties on Any Documents Provided: “Popeye” carve out:
They are What They Are
VI. Omit Requirement to Investigate or Confirm: Knowledge limited
to just that—knowledge; Why have Purchaser’s due diligence?
VII. Only Reaffirm Particular Reps at Closing: Pre-closing versus
post-closing breach
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Seller Warranty Remedies Provisions
I. Time and Dollar Limits: Create time limitation in which to bring claims; Limit
warranty liability to minimum and maximum amounts—warranty damages too
indefinite to not limit
II. Pre-Closing Breach: Right to Cancel/Failed condition to closing; Out of
pocket costs; Specific Performance; Agreed reduction in purchase price
(Seller’s reluctant because uncertain—include limits); If relating to property’s
income, agree on cap rate to determine purchase price
III. Post-Closing Breach: Specific performance useless?; Cap damage
amounts to the lesser of actual costs incurred or pre-determined X dollars;
Benefit of the bargain damages; Rescind contract
IV. No Escrows or Letters of Credit: Invites claims; Agree to not disburse
proceeds to members/partners/shareholders until claim time expires
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Warranties and Representations:
A Philosophy
I. Insurance Against Fraud
II. Should not Cause Seller’s Counsel’s Insomnia—If
you don’t know it; don’t say it
III. Argument for SPEs—Buyer may be S.O.L.
IV. Are you “Judgment Proof”? Do you want to find
out?
V. Buyer’s should not Rely—Not a Substitute for Due
Diligence
32
Larry Woodard is a shareholder in the Real Estate Group and chair of the
Construction Law Group of Robbins, Salomon & Patt, Ltd., in Chicago,
Illinois. Larry has represented Fortune 500 companies, private developers,
condominium associations, units of local government, investors, landlords,
tenants, private REITs and syndications in the development, financing,
leasing, zoning, acquisition or disposal of their real estate interests. His
practice also extends into general business transactions and governance,
construction and mechanics lien litigation and asset protection. He has
experience negotiating and documenting a broad range of transactional
matters, including letters of intent, asset and stock sales, joint ventures, buy-
sell agreements, operating agreements, partnership agreements and non-
disclosure agreements.
Larry is a real estate developer and investor and is an Illinois licensed real
estate broker and Illinois licensed real estate brokerage instructor. He is a
periodic speaker and contributor on the subject of real estate law to
numerous publications and is the General Editor for Illinois Institute for
Continuing Legal Education’s (IICLE) ILLINOIS CONDOMINIUM LAW
handbook.
33
LARRY N. WOODARD
ROBBINS, SALOMON & PATT, LTD.
DISCLAIMER
This information and any presentation accompanying it (collectively the "Content") has been prepared
by Larry N. Woodard of Robbins, Salomon & Patt, Ltd., an Illinois corporation (collectively “RSP”) for
general informational purposes only. It is not intended as and should not be regarded or relied upon
as legal advice or opinion, or as a substitute for the advice of counsel. You should not rely on, take
any action or fail to take any action based upon the Content.
As between RSP and you, RSP at all times owns and retains all right, title and interest in and to the
Content. You may only use and copy the Content, or portions of the Content, for your personal, non-
commercial use, provided that you place all copyright and any other notices applicable to such
Content in a form and place that you believe complies with the requirements of the United States'
Copyright and all other applicable law. Except as granted in the foregoing limited license with
respect to the Content, you may not otherwise use, make available or disclose the Content, or
portions of the Content, or mention RSP in connection with the Content, or portions of the Content, in
any review, report, public announcement, transmission, presentation, distribution, republication or
other similar communication, whether in whole or in part, without the express prior written consent of
RSP in each instance.
This information or your use or reliance upon the Content does not establish a lawyer-client
relationship between you and RSP. If you would like more information or specific advice of matters
of interest to you please contact us directly.
© 2012 Robbins, Salomon & Patt, Ltd., All Rights Reserved.
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David P. Waite
310.785.5319
DWaite@jmbm.com
February 15, 2012
DISTRESSED TRANSACTIONS:
How Much Risk Can You Afford?
©2012 Jeffer Mangels Butler & Mitchell LLP. All Rights Reserved
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Distressed Deals
•The lender/seller may have little or no information or
operational experience with respect to the property
•The lender/seller unwilling to provide any representations
even as to what is at least theoretically "known"
•The property was or is a troubled property (low occupancy,
deferred maintenance, uncertain entitlement status,
environmental liabilities undefined, etc.)
•The lender/seller is a single purpose entity with no other
assets
37
Distressed Deals
•The buyer is paying a “REO Price”
instead of “Retail Price”
•The lender/seller is particularly risk
adverse
•Decision making control and authority
over the asset uncertain
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Distressed Sale Risk Factors
•The realities of REO sales
•How the lender/seller acquired the loan
(originator, syndicator, note purchaser, etc.)
•How the lender/seller acquired the property
(judicial or non-judicial foreclosure, receiver,
deed in lieu, etc.)
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Distressed Sale Risk Factors
•How the property was managed/operated before
acquisition by the lender/seller (decision making
and control during forbearance period)
•How the property has been managed/operated by
the lender/seller (active or passive?)
•How long has the lender/seller operated the
property?
40
Understanding the Seller's History
Understanding the history of the property will
help the buyer understand and assess:
–The extent to which the lender/seller may be willing
(or unwilling) to negotiate various provisions in the
Purchase Agreement and the Lender’s/Seller’s
rationale for that position
–The risks that the buyer will be taking on with its
purchase of the property and the magnitude of those
risks.
41
What is the Loan History?
•How did the lender/seller acquire the loan?
•How long did the lender/seller hold the loan?
•How does the length of the loan affect the
information available and the lender/seller's
risk tolerance?
42
How Was the Property Acquired?
•How did the lender/seller acquire the
property?
•What does a more cooperative
borrower mean?
43
Property Management
•How has the property been
managed/operated?
–Prior to the lender/seller’s acquisition?
–After the lender/seller’s acquisition?
–Entitlements, Approvals, Regulatory
Compliance?
44
Type of Lender/Seller (Bank or Servicer?)
•Lender/seller’s experience with REO
•Lender/seller’s internal approval issues
•Lender/seller’s particular risk tolerance
issues
•Closing timing may be driven by financial
statement dates
45
Buyer Beware: Discounted Price = Risk
Beyond the dirt and the improvements,
it’s important that the buyer identify
critical components of the acquisition
and confirm that, as a legal matter, they
will be conveyed to the buyer as of the
closing.
46
Transactional Shifting of Risk of Unknowns
•Analysis of the lender/seller’s
acquisition
•Concern re express or implied
representations/warranties by
lender/seller
•Purchase Agreement Limitations
47
Leases and Foreclosure Issues
If the lender/seller acquired the property by
foreclosure, the buyer will need to confirm whether or
not the Leases survived the foreclosure.
•Analysis of the effect of the foreclosure
•Lease vs. Lease amendments
•Comfort regarding survival
•Estoppels, Security Deposits, Unfunded TI's
48
Buyer's Due Diligence
The buyer’s due diligence is even more critical
because of the nature of a REO sale.
•Limits on information provided by the
lender/seller
•Limits on the lender/seller’s representations
49
Representations and Warranties
•Limited representations and warranties from
the lender/seller reflect the allocation of risk
•Buyer post-closing considerations
50
Seller's Representations and Warranties
•Typical lender/seller Representations:
–Lender/seller organization
–Lender/seller authority to sell
–FIRPTA compliance
•Representations may also (though not always) include:
–OFAC compliance
–Pending litigation naming the lender/seller relating to the property
51
Buyer's Wish List
•Property related matters (physical condition,
environmental matters, tenant and lease issues)
•Material adverse conditions of which the
lender/seller has actual knowledge
•Delivery of material information in the
lender/seller’s possession (including
representation as to accuracy and completeness)
52
Buyer's Wish List
•Leases and Assigned Contracts (copies,
estoppels, termination rights, adequate
review period)
•Governmental Actions
•For loans acquired from the FDIC, receipt of
all necessary FDIC approvals
53
Expanding Seller's Representations
•Limit representations to actual knowledge of specified
individuals
•Limit representations to lender/seller’s period of
ownership
•Limit representations to material adverse matters
•Cap Survival period and damages
•Each limitation dilutes the value of the representation to
the buyer
54
Limitations on Recourse
•Reality of SPE lender/seller
•Time limit for assertion of
representation breach claims
•Additional dollar limitation on the
lender/seller’s liability
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Jeffer Mangels Butler & Mitchell LLP
Los Angeles
1900 Avenue of the Stars, 7th Floor
Los Angeles, California 90067
Phone: 310.203.8080 Fax: 310.203.0567
Orange County
3 Park Plaza, Suite 1100
Irvine, California 92614
Phone: 949.623.7200 Fax: 949.623.7202
San Francisco
Two Embarcadero Center, 5th Floor
San Francisco, California 94111
Phone: 415.398.8080 Fax: 415.398.5584
jmbm.com

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