reps and warranties in commercial real estate sales...
TRANSCRIPT
Reps and Warranties in Commercial Real Estate
Sales Contracts: Buyer and Seller Perspectives
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TUESDAY, SEPTEMBER 17, 2019
Presenting a live 90-minute webinar with interactive Q&A
Michael J. Kiely, Partner, Abram Roy LLP, Los Angeles
Mitchell C. Regenstreif, Partner, DLA Piper, Los Angeles
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Presented by:
Michael J. Kiely
Abram Roy LLP
310.203.2683
Mitchell C. Regenstreif
DLA Piper LLP (US)
213.330.7700
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 WarrantiesSubstance
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 WarrantiesSubstance (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 WarrantiesSubstance (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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THANKS Presented by:
Michael J. Kiely
Abram Roy LLP
11400 West Olympic Boulevard, Suite 1450
Los Angeles, California 90064
310.203.2683
Mitchell C. Regenstreif
DLA Piper LLP (US)
550 North Hope Street, Suite 2400
Los Angeles, California 90071
213.330.7700
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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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