Reps and Warranties in Orlando Real Estate Contracts

warranty

What are Reps and warranties in real estate contracts

The “Reps and Warranties,” as they’re commonly referred to, are a more important part of a commercial real estate contract than most Buyers and Sellers realize. Many Buyers and Sellers regard the reps and warranties merely as part of the “boilerplate” legalese inserted by attorneys (a) to justify their fee, and (b) to complicate things for the sake of complicating things. That’s just not true. A large part of what your attorney should be doing for his or her client when drafting a contract (or reviewing a contract prepared by someone else) is to include provisions that protect the client from unnecessary risk and that benefit the client by putting him or her in a more advantageous position. The Reps and Warranties section is one place in the contract where the attorney can make these things happen.

First, some explanation on how reps and warranties differ and whether that even matters. A “representation” is a statement of present or past fact made to induce someone to enter into a contract. For example, “the Seller is not in default under any indenture, mortgage, deed of trust, loan agreement, or other agreement to which Seller is a party and which would have an adverse effect on any portion of the Property.” A “warranty” is a promise that a particular fact is true. For example, “the Property is and will continue to be, from the date hereof through the time of closing hereunder, free from all mechanics’ liens and any rights to mechanics’ liens.”

The difference between representations and warranties

Now, what’s the difference? Case law and legal articles about reps and warranties that are directed at attorneys do distinguish between the two, in a legal sense, because the remedies available for fraudulent misrepresentation versus a breach of a warranty differ significantly. If a representation is made that the representing party (usually the Seller) knows to be false that the receiving party (usually the Buyer), believing it to be true, relies upon to their detriment, a claim can be made for fraudulent misrepresentation and the damaged party may be able to sue to rescind the contract, obtain restitution and possibly even receive punitive damages. Pretty serious stuff. In our example above, if the Buyer incurs due diligence and other costs in reliance on the Seller’s statement before learning that the Seller is actually in default under their mortgage and the Seller’s lender is foreclosing on the property, the Buyer could potentially sue to recover their costs and terminate the contract. In our other example, however, if it is discovered that there is a mechanics’ lien on the property the Seller likely would just have to take whatever action necessary to remove the lien, such as paying the contractor in full. In other words, they would have to make the warranty true but would not necessarily be at risk of the Buyer terminating the contract or suing for damages.

From a practical perspective, however, I’m not sure this all matters a lot to Sellers and Buyers entering into a real estate contract. For one, the representations and warranties are usually lumped together as the “Representations and Warranties” rather than being specifically identified as one or the other, and sometimes they are even grouped together in a long list of items that may be identified as “Representations, Warranties, Covenants and Conditions.” It can be hard to decide what is what and, depending on how they are worded, many of the statements could be interpreted to be more than one thing – a representation, a warranty and maybe even a covenant. In other words, it may ultimately depend on a court’s ruling as to whether a particular statement is a rep or a warranty or whatever and to determine the appropriate remedy.

Risk allocation in real estate contracts

More importantly, as far as Buyers and Sellers are concerned, this is really all about (a) risk allocation (more so from the Seller’s perspective,) and (b) information gathering (more so from the Buyer’s perspective.) Typically, a sophisticated Seller will want to limit their risk by making as few representations and warranties as possible and, instead, forcing the Buyer to bear the burden of learning all they can about the property on their own. An extreme example of this would be an absolute, “as-is, where is” contract in which the Seller makes no representations or warranties about the property. On the other hand, a sophisticated Buyer will want to have as much assurance as possible that the Seller really does own the property and that the contract is enforceable against the Seller. The Buyer will also want to get a jump-start on their due diligence by gathering as much information as possible about the property from the Seller and limit their risk by availing themselves of certain remedies if they are misled or if the Seller fails to make good on their warranties.

Boilerplate reps and warranties

Most often, as in most things, the end-result is something in the middle. The Seller will make the reps and warranties it can truthfully and comfortably make within their own risk tolerance, while the Buyer will require certain basic representations that, if false, would be “deal-killers” from the their perspective and will also seek to gain as much information about the condition of the property as it can before expending funds on its own due diligence. Achieving this type of risk allocation while protecting the client, be it the Buyer or Seller, is one of the attorney’s primary roles in drafting the commercial real estate contract or reviewing any contract prepared by the other party. Don’t disregard the reps and warranties as mere “boilerplate.” There’s a lot more going on there than you may realize.

About Brad Hester

Former Florida dairy farmer turned real estate attorney; Architecture and MBA degrees from University of Florida ('87 and '90) (Go Gators!!); Law degree from University of North Carolina-Chapel Hill ('00) (Go Tarheels!!); Now practicing law at Frank A. Hamner, P.A., in Winter Park, Florida.

Comments

  1. As we all know by now, when an individual owes a debt to another person or entity and the debt is forgiven, the canceled debt may be taxable.

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