No Teeth in Representations and Warranties
Every buyer of real property wants representations and warranties from its seller in the purchase contract. Every seller knows that the buyer is going to request that the seller make representations and warranties as to everything under the sun and the seller will do its best to eliminate as many of the requested reps and warranties as possible. Then, the seller will do whatever is possible to water down the remaining reps and warranties so that they have as little meaning as possible and the exposure to the seller is as minimal as possible.
In a recent contract negotiation, my client was assembling two parcels of property for development. The first parcel seller was actually going to flip the property to my buyer client. Having just acquired the property from the local government, the seller was very unwilling to provide any meaningful representations or warranties. What reps and warranties the seller was willing to provide, seller strictly qualified to “the best of Seller’s knowledge”. My client, understanding how the seller acquired the property and that the seller did not every operate a business on the property or have any plans to develop the property, was willing to rely on its own due diligence with respect to this parcel.
The second parcel, owned by a different seller, was owned by the seller for a number of years. There was not a lot of discussion concerning the warranties and we were able to get nearly all of the reps and warranties we requested, without much qualification and without much discussion. Together with the due diligence my client would do on this property and given the fact that the parcels were adjacent, my client had a great deal of comfort that there would be no issues with either parcel.
The trouble, however, began in negotiating the second contract on a similar issue as to representations from my client, the buyer. As part of the consideration for the acquisition for the second parcel, upon the closing, my client agreed to convey, or cause the first seller to convey, a 75 foot by 300 foot piece of the first parcel to the second seller. This strip (the “Conveyance Parcel”) would allow the second seller to “square off” property he was retaining adjacent to the total parcel my client was purchasing and would provide a better access point for his property. The second seller asked my client to provide all of the same reps and warranties for the Conveyance Parcel that seller was providing to the buyer for the main parcel. The second seller was adamant and would not listen to our logic that because we did not own the Conveyance Parcel, we could not make any reps or warranties about the Conveyance Parcel. And, in fact, because the first seller would be conveying directly to the second seller, we would never actually own the Conveyance Parcel.
Notwithstanding, the second seller insisted. We went so far as to show the second seller the provisions in the first contract that were the toothless representations and warranties from first seller, again explaining that we could not provide the same reps. A compromise was reached. My client was willing to provide the exact same reps and warranties that he received from the first contract seller, but these reps and warranties would be “to the best of Buyer’s knowledge” which was further diluted to mean solely as to the seller’s knowledge as set forth in the underlying contract. In essence, we were getting two layers of insulation in providing these reps. But the comfort factor meant enough to second seller to proceed with the transaction and that alone, provided enough teeth necessary to make the reps and warranties worthwhile. Sometimes, toothless representations and warranties are better than no representations and warranties at all.