Perhaps no area of a commercial real estate purchase agreement is negotiated as intensely as the seller’s representations.

The seller’s representations provide prospective buyers with information about the target property that buyers can’t confirm independently through their own due diligence.  

A breach of a seller’s representations – whether it concerns ongoing litigation, tenant leases or violations of law – can saddle buyers with significant liabilities and obligations following the closing. That’s why it’s critical that buyers understand their rights and remedies if there is a breach.

Pre-Closing Breaches

Purchase agreements may allow buyers the option of terminating the agreement if they learn of a breach of representation prior to closing. If that happens, the deposit is returned to the buyer. Buyers should make sure that the purchase agreement does, in fact, provide them with a right to terminate the agreement pre-closing upon discovering a seller breach.  Sellers will often seek to tie the buyer’s termination right to material breaches only. Examples of material breaches might be if someone selling an office building has misrepresented the rents from the leases at the property or failed to disclose a governmental notice of the property’s violation of laws.

If the buyer terminates the purchase agreement because of a material breach, it should not only get its deposit returned, but also recoup from the seller its out-of-pocket, third-party costs, such as attorneys’ fees and costs paid to vendors in the course of diligence.

Some sellers may offer to “cure” a breach of a representation, but buyers should only agree if the proposed cure is to their satisfaction.

Post-Closing Breaches

Because buyers often don’t discover a seller’s breach of a representation until they own the property, buyers should focus on their rights to bring claims following closing.

Typically, “survival periods” – the time frame following the closing during which the buyer can bring a claim against the seller for breach of representation – range from six months to one year. To avoid having to file a claim in court on the last day of a survival period, buyers may negotiate the right to only notify the seller of a breach before the survival period’s expiration, with the obligation to file an actual claim within 30 to 60 days after the expiration of the survival period.  

The purchase agreement may also contain a provision that establishes a “basket” for liabilities that must be exceeded before the buyer can pursue a post-closing breach of representation claim. For example, if the basket is set at $20,000, the buyer would be precluded from filing a claim against the seller until its damages for all breaches of representations exceed $20,000.  Buyers should negotiate to have the right to bring claims for all of their damages once the $20,000 basket is reached – not just claims for those damages exceeding the $20,000 basket. Baskets typically range from $10,000 to $50,000, but can be higher depending on the purchase price.  

Buyers should also pay close attention to the overall cap on the seller’s liability for post-closing claims. While negotiable, the market range for liability caps is typically between 1 percent and 5 percent of the purchase price.

Because legal fees incurred in bringing a breach of representation claim can be substantial, savvy buyers will carve out from the liability cap any legal fees that they may be entitled to in the event that they prevail in the applicable litigation.  

Finally, attention should be paid to the financial ability of the seller to fund any post-closing liabilities. In most circumstances, sellers are formed as single purpose entities with no assets other than the property being sold.

When buying from a seller with no other assets, buyers should seek to have a creditworthy affiliate of the seller guarantee the seller’s obligations post-closing.  As an alternative, buyers may negotiate to have a portion of the purchase price held back until the expiration of the survival period and applied to any claims successfully asserted prior to the expiration of the survival period.  This remedy is more likely to be acceptable to a seller of certain assets, such as hotels and senior centers, where the potential for a breach of a representation regarding the operation of the asset is more likely to have a substantial economic effect.  

Experienced attorneys can help buyers safeguard their rights in complex commercial real estate transactions by negotiating purchase agreements that ensure buyers have the right to file claims and exercise remedies when sellers’ representations are breached.

Eric Lemont is a senior associate in the real estate department of Sullivan & Worcester in Boston.