Redefining Real Estate Deals: Trends in Representations and Warranties in Purchase Agreements

Since the onset of the COVID-19 pandemic, real estate transactions have increasingly adopted concepts traditionally seen in merger and acquisition (M&A) transactions. The disruption and uncertainty prompted parties to pay even closer attention to risk allocation, including in the scope and structure of representation and warranty provisions.

Below are five key takeaways to help shape your next real estate purchase agreement negotiation:

1. Changing Trends in Representations and Warranties. Agreements typically include seller representations and warranties, which are statements of fact that a buyer can rely on, potentially in lieu of performing full due diligence. Buyers generally seek protection for anything that could be material to post-closing ownership, including any items for which the buyer cannot practically conduct due diligence. Recent trends reflect traditionally M&A-style modifications to these seller representations and warranties, including claim thresholds, claim caps, and pro- and anti-sandbagging clauses.

2. Minimum Claim Thresholds. Agreements increasingly include minimum dollar thresholds for damages that must be exceeded before a buyer can bring a claim for breach of a representation or warranty against a seller. These thresholds can function as protection against nuisance claims or function like a deductible under an insurance policy, and are typically expressed as a percentage of the purchase price.

3. Caps on Liability. After claim thresholds are met, agreements often impose aggregate caps on liabilities. These caps limit the total aggregate liability the seller could face due to breaches of representations and warranties. Depending on the deal size and other considerations, it may be preferable to express a cap on liability as either a percentage of the purchase price or an absolute dollar figure.

4. Anti- and Pro-Sandbagging Provisions. Anti-sandbagging clauses prevent a buyer who knew of a breach of a representation or warranty pre-closing from closing the deal and later suing for the breach. Pro-sandbagging provisions permit both closing and suing for the breach after a breach of a representation or warranty is discovered or disclosed. Business considerations, such as sunk costs incurred during due diligence, may inform the choice to include an anti- or pro-sandbagging provision.

5. Materiality “Scrapes.” A materiality “scrape” is another M&A concept that could potentially appear in future real estate purchase agreements. These provisions ignore, remove or “scrape-out” materiality qualifiers to representations and warranties when assessing breaches or damages. Materiality scrapes may facilitate closings where sellers give broader representations with materiality qualifiers while allowing buyers to retain clearer claim rights. These clauses would likely favour the inclusion of claim thresholds and claim caps.

Have more than five minutes? Watch our past webinar exploring key considerations for real estate purchase agreements or contact any member of our Commercial Real Estate group to learn more.