USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
Sellers often require prospective buyers to sign non- disclosure or confidentiality agreements before pro - viding the buyer with documents and financial infor - mation during the due diligence period. 2.5 Typical Representations and Warranties Representations and Warranties Commercial properties are frequently sold in an “as is” condition and without representations or warranties regarding the state of title or the condition of the prop - erty. During a due diligence period, typically provided as a purchase agreement applicable to real property, a prospective buyer usually purchases a title report to ensure that the seller has marketable title and to learn of any encumbrances or defects affecting the prop - erty. Prospective buyers may also retain profession - als, such as engineers, architects and environmental analysts, to assess the property’s condition. In commercial property transactions, a seller will, how - ever, typically make the following contractual repre - sentations: • that it has the lawful authority to enter into the transaction; • that the “rent roll” and lease schedule (usually included as exhibits to the purchase contract) are true, complete and accurate, and that there are no obligations between the owner and tenant except as set forth in the leases or any amendments or modifications thereto; • whether there is any default, dispute, threatened claim or litigation affecting the property or the obli - gations of the seller; and • the status and extent of any financing affecting the property. When the sale of real estate involves transferring leas - es, the buyer generally requires the seller to obtain “estoppel certificates” from the tenants, which serve to confirm the terms and current status of the leases and bar the tenants from asserting any claims that contradict what is stated in such certificates. Buyer’s Remedies Against Seller for Misrepresentations In commercial real estate, if a buyer discovers a mate - rial misrepresentation before the closing, the buyer
can terminate the contract and seek damages. If the buyer discovers a material misrepresentation after the closing, and if such representation survives (such sur - vival rights are often provided for under the contract), the buyer can seek damages, equitable relief, or, in limited cases, rescission of the transaction. Although representations and warranties made by the seller may not survive closing, the parties can negotiate for some to last for a limited time period, frequently up to one year. Representation and Warranty Insurance The purchase of representation and warranty insur - ance is uncommon, except in large real estate invest - ment trust (REIT) share sale transactions and in merg - ers and acquisitions (M&A), where the damages that may result from a misrepresentation justify the pre - mium costs, which are typically substantial. 2.6 Important Areas of Law for Investors Land use and tax law are two of the most important areas of law for an investor to consider when purchas - ing real estate. Investors need to have a comprehen - sive understanding of applicable regulations affect - ing the use and development of the property they are acquiring. Additionally, investors should be aware of any pending or potential changes to the applicable zoning codes, such as whether an area may be “up- zoned”, so that future developments may be larger than what is currently permitted. It is also important to understand which federal and state tax laws apply to the investment property, how they are calculated, and whether there are any “caps” on incremental increases, as tax expenditures directly affect investment returns. Investors should also con - sider whether the property benefited from any deferred taxes based on a land-use exemption, and whether the property, if acquired, would continue to be eligible for such exemption. 2.7 Soil Pollution or Environmental Contamination Buyers of commercial real estate can be held liable to remediate contamination that arose prior to acquiring the property, though they can take measures to avoid such liability.
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