A representation and warranty about commercial real estate property is the Seller’s statement of fact which, if false, entitles the Buyer to a remedy that may include a claim for damages and/or the right to terminate the contract. The Seller typically negotiates to limit the scope of representations and warranties or even to eliminate them with confirmation that the Buyer is purchasing the property in an “as is, where is condition” and will satisfy itself about such items. The Buyer will seek representations and warranties that are as unrestricted as possible, depending on the Buyer’s bargaining strength. Representations and warranties limited by time and language such as “to the best of the Seller’s knowledge” or “which may have a material adverse effect” are of much lower value to the Buyer. The kinds of representations and warranties that a Buyer should negotiate are statements from a Seller confirming:
- the corporate status of the Seller and its authority to enter the Agreement of Purchase and Sale;
- the status of the property including that there are no taxes owing, no encumbrances or liens on title or which may arise or listing those that are;
- that the Seller has good and marketable title to the property and that there are no title defects;
- that there is no pending litigation or expropriation proceedings in relation to the property;
- that there are no options to purchase or rights of first refusal in connection with the property in favour of other parties;
- that leases, contracts and permitted encumbrances are in good standing;
- that there are no encroachments on the property or over adjoining properties;
- that there is no environmental contamination, no underground storage tanks, no hazardous substances and that the property is in compliance with environmental laws and has not been used as a waste disposal site, and
- that the property and zoning will permit the Buyer’s intended use.
The Buyer investigates the representations and warranties during the due diligence conditional period, but there are some that cannot be determined during that time. The parties will negotiate if these will stand on their own for a period of time beyond the closing date, or end with the closing.