Reps and Warranties in Commercial Real Estate Sales Contracts:...

Reps and Warranties in Commercial Real

Estate Sales Contracts: Buyer and Seller

Perspectives

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THURSDAY, MARCH 8, 2018

Presenting a live 90-minute webinar with interactive Q&A

Mitchell C. Regenstreif, Partner, DLA Piper, Los Angeles

Michael Kiely, DLA Piper, Los Angeles

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Presented by:

Mitchell C. Regenstreif & Michael Kiely DLA Piper LLP (US) 213.330.7700 [email protected] [email protected]

Strategies and Topics for Buyers and Sellers when Negotiating Purchase and Sale Agreements

REPRESENTATIONS AND WARRANTIES

IN COMMERCIAL REAL ESTATE SALES

CONTRACTS

mailto:[email protected]



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.


Critical Issues for Seller

Time and expense is issue for Seller as well - goal is

getting Buyer non-refundable.

Providing information not providing insurance.

Representations and Warranties are intended to

supplement a Buyer’s diligence investigations not

replace them.

Most initial drafts are prepared by Sellers.

Seller’s concerns are liability and unintended

exposure.


Bottom Line: The Market Dictates/Limits What is Realistic for Well-represented Sellers

and Buyers!!


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

– REO Sales

– Brownfields


Due Diligence (Cont’d) Timing and Scope of Due Diligence

– Due Diligence Period.

– Land Use Conditions.

– Intrusive Testing.

– Third Party Reports.

– Interviews and Estoppels.


Due Diligence Items Materials from Seller in Seller’s possession or control

– Books and records

– Plans and Specifications

– Agreements and other materials outside of public records.

– Permits, licenses and approvals.

– Leases and Contracts.

– Rent Roll vs. Schedule of Leases.

– Operating and Receivables Reports.


Due Diligence Items (Cont’d) – Notices of Violations.

– Repairs history.

– Threatened or pending litigation and insurance claims.

– Including condemnation proceedings

– Notice of Proposed Assessments.

– Seller’s Acquisition and Periodic Third Party and Internal reports.

– Seller’s existing financing documents (is it being paid off/ Assumed?).


Due Diligence Items (Cont’d)

Title and Survey

Third Party Reports

– Physical Condition Reports: Geotechnical Structural, Mechanical,

Electrical, Plumbing

– Zoning and Land Use Reports

– UCC, Litigation Searches

Interviews with Third Parties

– Property Manager

– Governmental Agencies

– Tenants, Contractors, REA Parties


Due Diligence Items (Cont’d) Estoppels, Beneficiaries Statements and Certifications.

– From Tenants.

– REA Parties.

– Lenders.

– Governmental Agencies.

NOTE: How delivered or made available?


Representation and Warranties Generally

Buyer wants Extensive Reps (as much as Buyer can

get); Seller wants Limited (as narrow as possible).

Usually Extensive Negotiations which deal with

standards, timing, qualifications, substance, and

remedies and limitations.

Note: Not just in R&W Section

– Brokers

– Implied reps in Deed, Closing Documents

– Agree when negotiating contract


Representation and Warranty Standards and Timing

Absolute

Knowledge

– Actual, Constructive or Duty to Inquire and Investigate

– Knowledge Group

Notice

– Oral or Written

Timing – At Execution/Remade at Closing?

– Matters discovered during Buyer’s diligence?

– Duty to Update?


Qualifications: AS-IS Language

AS-IS Language - Typically comprehensive provision

(“disclaimer”), may include release, waiver and

indemnity; CERCLA Waiver

Risk Shifting to Buyer; Clarification no implied

warranties

Exceptions to As-Is Language

– “Except as expressly otherwise provided in this Agreement, or

in the Closing Documents…”

Trade for longer due diligence period

Other qualifications: As disclosed in Deliveries or

Schedules


Remedies/Survival Protections under law

– Fraud, concealment

Merger By Deed/Survival-Survival Period?

Failure of Condition vs. Default…

– Pre-Closing vs. Post-Closing

– What are Buyer’s remedies/options? Reimbursement

Bringing suit/timing

Rights to Cure


Limitations and Seller Liability Issues Seller as “special purpose entity” (“SPE”)

Exculpation provisions

Forms of security

– Net Worth Covenants

– Escrow Holdback

– Common for environmental issues

– Letters of credit

– Personal Guaranties

Liquidity is always the issue


Representation and Warranties Substance

Seller Status and Authority

– Seller Entity, Good Standing, Qualification

– Authorization

– No Conflicts

– No Approvals of Consents

– Enforceability

Property Status

– Title/Title Affidavits and Indemnities

– Compliance with Laws


Representation and Warranties Substance (cont’d) Property Status (cont’d)

– No Litigation

– No Condemnation

– Notices of Assessments

– Environmental

Property Operations

– Leases; parties in possession

– Contracts

– Employees

– Documents, Defaults


Representation and Warranties Substance (cont’d)

Due Diligence Items; All Material Information

FIRPTA

OFAC; Anti-Money Laundering

ERISA


Conclusions Buyer to thoroughly investigate

Identify potential issues early

Carefully negotiate Limitations and Remedies

Maintain adequate security and survival of representations


DLA Piper LLP (US)

Los Angeles 550 South Hope Street

Suite 2300 Los Angeles, CA 90071-4704


THANKS. Presented by:

– Mitchell C. Regenstreif &

Michael Kiely DLA Piper LLP (US) 213.330.7700

– [email protected] [email protected]




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TRANSACTION. ANY USE OF THE ATTACHED PROVISIONS IS AT YOUR OWN

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