While sellers typically initiate the first drafts of commercial real estate purchase and sale agreements, some larger buyers have the leverage to require use of their own form agreements. Sellers in these situations should be aware of the effect of omission of certain “standard” seller-favorable contract terms. Inclusion of these terms is critical for sellers who want to limit exposure to post-closing liabilities.
‘As Is, Where Is’
Most sellers want to walk away from their properties without continuing liability once they are sold. Without an “as is, where is” clause in the purchase and sale agreement — a clause where the buyer agrees to accept the property in its current condition (including any potential flaws or defects) based on the buyer’s own investigations — a seller could be giving warranties about the condition of the property.
Although “as is, where is” clauses are highly favorable to the seller, they are generally viewed as fair so long as the purchase and sale agreement provides reasonable opportunity for the buyer to conduct due diligence investigations and terminate the agreement based on the results of those findings. In the typical transaction, the “as is, where is” clause would not stop a buyer from negotiating for repairs in a subsequent amendment to the purchase and sale agreement negotiated while the buyer has the leverage of potentially terminating the agreement on account of the results of their investigations.
A pro-seller “as is, where is” clause will expressly disclaim any implied warranties and confirm that the buyer is not relying on any statements from Seller or Seller’s agents with respect to the condition of the property except those expressly set forth in the purchase and sale agreement. A pro-seller clause will also contain a release of seller from liability for any claims based on the property being unsuitable for the buyer’s proposed use, any defects in construction and any environmental conditions.
Sellers should note that there are limits to the enforceability of “as is, where is” clauses. For example, an “as is, where is” clause generally does not protect a seller from liability for fraud or intentionally withholding information about defects from the buyer to induce the buyer to complete the transaction. While there are differences across jurisdictions, in general, courts might not enforce “as is, where is” clauses and associated seller releases unless they are conspicuous and negotiated at arm’s length with counsel representation.
Limitations of Liability
Pro-buyer forms of purchase and sale agreements typically provide for survival of representations and warranties without any associated cap on seller’s liability for breach. Sellers will want to add language that helps ensure that any likely damages are proportionate to the economic benefits received from the purchase and sale agreement.
Without a clause expressly indicating that a provision of the purchase and sale agreement survives the closing and the delivery of the deed, the only obligations that survive are those set forth in the deed (i.e., the purchase and sale agreement terms are “merged” into the deed). For this reason, silence as to survival would be favorable to a seller because the representations and warranties would not survive the closing. However, sellers typically agree to a survival period of six months to one year for representations and warranties to give buyers adequate time to discover breaches of seller’s representations and warranties.
If representations and warranties survive the closing, sellers will usually want to fill any silence as to the scope of liability. Sellers can negotiate a liability “basket” — a floor and a cap on liability for breach. While the floor helps to avoid small “nuisance” claims, the cap establishes maximum exposure (though claims of fraud are generally not subject to the cap). In addition, sellers can specify that in no event will any principals of the seller entity have personal liability. Sellers will also want to limit certain representations and warranties based on the actual knowledge of one or a few individuals, without any duty of investigation. In this manner, the seller can avoid having the representations interpreted to include constructive or imputed knowledge. Another common seller request is for buyers to waive all consequential and indirect damages.
Assignability
If a purchase and sale agreement is silent as to assignability, then the buyer may freely assign it without seller’s consent. Free assignment would potentially leave a seller with no control over the financial capacity and reputation of the buyer. Typically, sellers will agree that buyers may assign to an affiliated single-purpose entity to hold title to the real property, provided that the originally-named buyer remains liable for obligations under the purchase and sale agreement until closing.
Conclusion
Sellers should take care in reviewing pro-buyer forms of purchase and sale agreements to ensure no important clauses are absent or incomplete. By including strong “as is” language and exculpatory clauses, sellers can have a clear understanding of potential post-closing liabilities that enable sellers to proceed to distribute closing proceeds and dissolve single-purpose entities.
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