The Importance of Representations and Warranties in Contracts and Negotiations
A major concern for any transaction or real estate contract negotiation is the survival period for the representations and warranties. In simple words, how long will those promises be enforceable? For real estate buyers and sellers, the survival period – how long that promise is upheld – can impact each party differently.
Representations are mutually agreeable statements of fact within the contract. Warranties are statements about a fact that the seller promises to ensure. Sellers generally prefer to avoid representations and warranty provisions with long survival periods. The longer the survival period, the greater the liability there is for the seller. Buyers generally want multiple representations and warranties and prefer that they last as long as possible.
Whether you’re the buyer or the seller in a real estate transaction, it pays to understand how representations and warranties impact the overall contract or sale. This includes who is protected and for how long. The expert real estate attorneys at Holmquist + Gardiner support clients on both sides of transactions to help increase protections or mitigate the risk of possible liabilities. No matter the complexity or scope of the transaction, we work hard to protect our clients with efficient and quality legal advice.
Here’s a rundown of varying perspectives that separate buyers from sellers.
The Seller’s Perspective: Liabilities Increase Expenses
As an example, if you’re a condominium developer in Seattle, you need to be aware of the impact of survival periods for warranties. For instance, Washington’s recently revised Condo Act reduces defect liability terms for condo developers. Therefore, real estate developers looking to sell condos may have concerns over lengthy survival periods and will work to reduce the likelihood of potential defects. This is a great example of how liabilities for warranties can impact seller decisions.
For every individual representation and warranty outlined in a contract, buyer’s will want to know the termination date of the survival period – the moment the seller is no longer liable. As that end date arrives, eleventh-hour complaints may make it harder for a buyer to receive a remedy.
The Buyer’s Perspective: Protecting the Investment
Representations and warranties provide a forum for risks to be properly disclosed and allocated. It’s important for the buyer to understand that they don’t have an indefinite amount of time to bring a claim. Should a broken representation and warranty give rise to a claim, it’s important for the buyer-turned-plaintiff to acknowledge the problem and take action in a timely manner.
The statute of limitations clock starts as soon as the buyer discovers – or should have reasonably discovered – the facts of the claim. If you’re a buyer considering bringing a legal claim against a seller, it’s vital to immediately establish when the facts were discovered, and then act within a reasonable amount of time. This is a good time to consult with an experienced legal professional.
In competitive real estate markets, such as Seattle’s housing market, sellers will often compare two similar monetary bids and select the buyer who demands the fewest representations and warranties. A buyer’s strategy of reducing the risk of future liabilities for the seller can be very persuasive. It’s important to understand the risks involved when standard protections are reduced. The needle is always moving when liability and risk are being negotiated, therefore it’s important for the buyer and seller to understand what promises, and what levels of risk, they can afford.
Questions to Consider When Negotiating Representations and Warranties
When crafting a legal agreement, it’s wise to adapt language to the specific subject matter of the contract. Don’t rely on a one-size-fits-all contract. If a seller is involved with a transaction for a vacant plot of land, it is very different from a single-family home or a commercial high-rise. It’s important to cater to the unique elements of the subject matter. Take consideration of the specific nature of the business and circumstances involved. Be prepared to identify what inclusions, or exclusions, matter most to your side of the negotiating table.
Representations and warranties should be taken seriously. Buyers and sellers are effectively building the box they will live in for the duration of the contract. Think beyond the immediate benefits of the deal and take your risk management seriously.
Holmquist + Gardiner provides clients with honest and efficient legal counsel across all phases of real estate transactions and contract negotiations. Our expert attorneys are serious about protecting our clients by mitigating and evaluating the needs of each individual clients. If you’re interested in protecting your interests, contact us today.
