USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
Representation and Warranty Insurance The purchase of representation and warranty insurance is uncommon, except in large real estate investment trust (REIT) share sale trans - actions and in mergers and acquisitions, where the damages that may result from a misrepre - sentation justify the premium costs. 2.6 Important Areas of Law for Investors Land use and tax law are two of the most impor - tant areas of law for an investor to consider when purchasing real estate. Investors need to have a comprehensive understanding of applicable regulations affecting the use and development of the property they are acquiring. Additionally, they 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 fed - eral 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 consider 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. Buyers should hire professionals to conduct a Phase I Environmental Site Assessment dur - ing the due diligence period, in which current
In commercial property transactions, a seller will, however, typically make the following contrac - tual representations: • 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 dispute, threatened claim or litigation affecting the property or the obligations of the seller; and • the status of any financing affecting the prop - erty. When the sale of real estate involves transferring leases, 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 stat - ed in such certificates. Buyer’s Remedies Against Seller for Misrepresentations In commercial real estate, if a buyer discovers a material misrepresentation before the clos - ing, the buyer can terminate the contract and seek damages. If the buyer discovers a material misrepresentation after the closing, and if such representation survives, the buyer can seek damages, equitable relief, or, in limited cases, rescission of the transaction. Although represen - tations 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.
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