Representations and Warranties in
Commercial Real Estate Sales Contracts Strategies for Buyers and Sellers Negotiating Agreements of Sale
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THURSDAY, JANUARY 17, 2013
Presenting a live 90-minute webinar with interactive Q&A
Todd Evan Stark, Partner, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, Los Angeles
Mitchell C. Regenstreif, Founding Partner, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor,
Los Angeles
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Presented by: Mitchell C. Regenstreif & Todd Evan Stark Liner Grode LLP 310.500.3500 [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
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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.
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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.
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Bottom Line:
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
REO Sales
Brownfields
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Due Diligence (Cont’d)
Timing and Scope of Due Diligence
Due Diligence Period.
Land Use Conditions.
Intrusive Testing.
Third Party Reports.
Interviews and Estoppels.
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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.
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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?).
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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
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Due Diligence Items (Cont’d)
Estoppels, Beneficiaries Statements and
Certifications.
From Tenants.
REA Parties.
Lenders.
Governmental Agencies.
NOTE: How delivered or made available?
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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
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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?
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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
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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
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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
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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
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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
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Representation and Warranties
Substance (cont’d)
Due Diligence Items; All Material Information
FIRPTA
OFAC; Anti-Money Laundering
ERISA
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Conclusions
Buyer to thoroughly investigate
Identify potential issues early
Carefully negotiate Limitations and
Remedies
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 One California Street,
Suite 900 San Francisco, CA 94111
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Thanks. Presented by:
Mitchell C. Regenstreif & Todd Evan Stark Liner Grode LLP 310.500.3500
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Illustrative Provisions
DISCLAIMER- THE FOLLOWING PROVISIONS
ARE BEING PROVIDED FOR ILLUSTRATIVE
PURPOSES ONLY. THE PRESENTERS
EXPRESSLY DISCLAIM ANY REPRESENTATION AS
TO THEIR SUITABILITY FOR ANY PARTICULAR
TRANSACTION. ANY USE OF THE ATTACHED
PROVISIONS IS AT YOUR OWN SOLE RISK AND
LIABILITY.
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