Representations and Warranties in a Contract

Every contract has representations and warranties, which are basically the underlying matters or facts as they are being presented in terms of the contract.

When a contract uses the terms “representations” and “warranties” together, they blend the past, present, and future together within terms of the contract. Every contract is different, but the language is basically the same. Representations and warranties are assurances that one party gives to another party in a contract. These assurances are statements that the purchasing party can rely on as factual.

It is important, however, to define the terms “representation” and “warranty” because they often are incorrectly used as synonyms.  Black’s Law Dictionary defines a “representation” as a “presentation of fact . . . made to induce someone . . . to enter into a contract.” Black’s Law Dictionary 1327 (8th ed. 2004).  On the other hand, a “warranty” is defined in terms of contracts as “[a]n express or implied promise that something in furtherance of the contract is guaranteed by one of the contracting parties.” Black’s Law Dictionary 1618 (8th ed. 2004).

Black’s Law Dictionary states that “[a] warranty differs from a representation in four principal ways: (1) a warranty is an essential part of a contract, while a representation is usually only a collateral inducement; (2) an express warranty is usually written on the face of the contract, while a representation may be written or oral; (3) a warranty is conclusively presumed to be material, while the burden is on the party claiming breach to show that a representation was material; and (4) a warranty must be strictly complied with, while substantial truth is the only requirement for a representation.”

A warranty generally moves from the present to the future. The product that you are buying is warranted as being free of defects, and the company agrees to fix any defects for a specified amount of time into the future.

Warranties can be either expressed or implied. Expressed warranties mean they are written into the contract, and, for the most part, buyers should insist upon them.  Implied warranties fall under the Uniform Commercial Code, which in all sales of goods implies that there be a “fitness for a particular purpose.”  Legally within contracts, expressed warranties hold up better in a court of law than implied warranties.

The seminal case was CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990). In that case, Ziff-Davis “represented and warranted” the financial condition of the division it was selling to CBS.  CBS, however, as part of its due diligence, sent in its own accountants to review the division’s financial statements.  They reported that the financial condition was not as represented and warranted.  The parties closed anyway, and then CBS sued.

In New York’s highest court, the issue was whether CBS had a cause of action for breach of warranty.  Ziff-Davis argued that CBS did not because it had known about the problems with the financial statements and had not justifiably relied on the warranties.  Stated differently, Ziff-Davis argued that the standards for a cause of action for a fraudulent misrepresentation and a breach of warranty both required justifiable reliance on the truthfulness of the statement.  Ziff-Davis lost.

According to the Court, a warranty is a promise of indemnity if a statement of fact is false.  A promisee does not have to believe that the statement is true.  Indeed, the warranty’s purpose is to relieve a promisee from the obligation of determining a fact’s truthfulness.

Generally, commercial real estate Purchase and Sale Agreements contain specific representations and warranties, disclosing certain facts about the parties and the subject property.  Obviously, given the liability of either misrepresenting or failing to represent material facts, these “reps & warranties” are often subject to great scrutiny and negotiation.

Naturally, Buyers will want the Seller to paint as full of a picture as possible about the status of the property, its history and any known defects/claims.  While sellers want to say as little as possible and ensure that the buyer will perform its own investigation.

Nevertheless, while great attention often gets focused on whether a party is willing to give a particular rep, often easily overlooked are basic principles concerning the scope, survivability and timing of these representations. This can of course either be intentional or a victim of poor “legal representation.”

When we work with these agreements, we strive to address a number of considerations beyond the mere giving of any “reps”.  Some important considerations for both Buyers and Seller include: When must the representation be true? (at the time made? As of the closing? both?); requirement to update the representations or disclose changes? Investigating the representations – Is there a duty of inquiry on the part of the party giving the “rep”?  Knowledge on behalf of the person giving the rep? is the knowledge imputed to the entity as a whole? Damages (is there a cap on the overall damages from the failure of a representation? Is there exposure for consequential damages? Punitive damages?); survivability (Do these reps only matter until closing? What is the post-closing liability? How long does it last?)

Without careful consideration and drafting, these provisions can undermine the intended purpose and create more uncertainty (and liability!) than clarity.

More than just focusing on whether an agreement will include a given rep, we help buyers and sellers understand their liability and the big picture regarding the giving (or not giving) of particular representations and warranties.

For further advice and the best possible representation, please do not hesitate to contact us.

Now is the Time to Buy!

January 28th, 2013 | Posted by alexander in Real Estate - (0 Comments)

As recently written on CNN Money, economists say this could finally be the year that housing lifts us out of the doldrums.

“Just over half of economists surveyed by CNNMoney identified a housing recovery as the primary driver of economic growth this year.

Homebuilding activity will likely remain the strongest growing component of the economy in 2013,” said Keith Hembre, chief economist of Nuveen Asset Management. “After several years of excess supply, demand and supply conditions are now in much better balance.”

Home sales rebounded to the strongest level in five years in 2012, as home building bounced back to levels not seen since early in the recession. Near record low mortgage rates, rising home prices and a drop in foreclosures have combined to bring buyers back to the market.

There’s a lot of pent-up demand for housing, and very little supply,” said Celia Chen, housing economist for Moody’s Analytics.

And economists say the tight supply and renewed demand for housing should lead to higher home values — about a 3.7% increase according to the survey.”

What does this mean for the average consumer?  Now is the time to buy!

And, after choosing the right house to purchase, the next most important decision is retaining an experienced attorney to help you close the deal.  Inevitably issues come up in every real estate transaction that have the potential to kill the deal.  Make sure you have the experienced attorneys at Alexander M. Fear, P.C. representing your interests so that you don’t let the house of your dreams get away.  Call us today.

Real Estate Transfers, Deeds

January 18th, 2013 | Posted by alexander in Real Estate - (0 Comments)

A deed is a document which indicates who owns a particular piece of real estate, from whom the person acquired their interest and a legal description of the property.

When the property is being sold, willed, given to another party other than the current owner, or otherwise transferred, the deed is being legally transferred from its current owner to a new owner.  The law requires that a transfer of real property be done in writing.  (Without a writing executed by the party to be bound, the transfer generally will not be enforced by a court of law.)

Prior to the actual transfer of real property from the Seller to the Purchaser, however, the Purchaser generally engages a title company to search the public records for any problems which may affect title to the property.  According to the American Land Title Association, 26 percent of title searches reveal an issue that must be corrected before purchasing the property. If these issues go uncorrected, they can pose big problems for the purchaser.  Title issues that come up with some degree of frequency include liens, unresolved foreclosure issues, violations which became liens or judgments, missing ownership interests and even fraudulent conveyances.

When dealing with title issues and deed transfer issues or disputes, the attorneys at the Law Office of Alexander M. Fear, P.C. have the legal knowledge and experience to uncover problems (whether you are the purchaser or the seller) and resolve them before they kill a deal.  It is important, however, to get experienced counsel involved early; waiting too long could mean the difference between a successful closing and a busted closing followed shortly thereafter by litigation.

The most common types of deed transfers are:

General Warranty Deed

The general warranty deed provides the greatest conveyance and protection to the grantee because it includes warranties or covenants that the seller conveys with the title.

Warranty of Title

Covenant of seisin: the grantor warrants the title that is being conveyed to the grantee. If the title proves to be defective, the grantee can sue for damages.  The following warranties can be construed as being corollaries of the covenant of seisin.

Covenant of quiet enjoyment: the grantor guarantees that the title is superior to any other claims by 3rd parties. If someone succeeds in establishing a superior claim, then the grantor will be liable to the grantee for the damage.  In fact, the “covenant of warranty forever” is the guarantee that the title will always be good, and that the grantor will compensate the grantee if it is later found that the title is defective.  If the title defect is something that the grantor may cure, then the “covenant of further assurance” requires that the grantor do whatever is necessary to clear the title.  Thus, if the grantor’s spouse had dower or curtesy rights to the real estate, but did not sign the deed, then the grantor may obtain a quitclaim deed to clear the title.

Warranty Against Encumbrances:  The covenant against encumbrances is the only warranty that does not cover the title in some way, but guarantees that the only encumbrances to the land, such as mortgages, mechanics’ liens, or easements, are those that are listed in the deed.  If, later, it is discovered that there was an encumbrance when title was transferred that was not listed in the deed, then the grantor is liable for the amount to have the encumbrance removed.

Special Warranty Deed

A special warranty deed guarantees less than the general warranty deed:   that the grantor received title, and that there were no encumbrances other than what is listed in the deed while the grantor held title.  The special warranty deed is usually conveyed with the phrase Grantor remises, releases, alienates, and conveys.  There is no guarantee against title defects or encumbrances that may have been present when the grantor received the property, nor does it obligate the grantor to do anything further once the title is transferred.

Special warranty deeds are frequently used by temporary holders of real estate, such as trusts, or other fiduciaries, or corporations, who do not use or occupy the land for their own benefit.  Often, the special warranty deed is issued when the real estate is sold in a tax sale.

Bargain and Sale Deed

The bargain and sale deed has no guarantee that the land being sold is free of encumbrances—the only implication is that the grantor has title, and not one that is necessarily free of defects.  The bargain and sale deed is most often the deed that is transferred from a foreclosure or tax sale—hence, the name.  Since the grantor, usually a bank or tax authority, did not occupy the land, it would not necessarily know of any encumbrances that may have been attached to the land by the previous owner, and, thus, the grantor does not want to guarantee against any encumbrances.  Generally, the bargain and sale deed are conveyed with the words that grantor grants and releases or grants, bargains, and sells.

Quitclaim Deeds

The quitclaim deed carries no warranties at all—it only conveys the interest that the grantor had in the property, whatever that may be. The real estate interest may be full title, but the grantor makes no guarantees of it.

The quitclaim deed is used in those cases where the grantor does not want to assume further liability, or feels no need to guarantee title, such as when a family member transfers title to another family member or the grantor is only transferring some of his rights and not conveying a fee simple estate.  A quitclaim deed is also used to cure a title defect, such as a misspelled name on the deed.  The quitclaim deed is also used when the grantor’s title is not clear.  For example, if the grantor inherited the property, but wants to sell it for the cash, she doesn’t want to guarantee something that cannot be known with certainty, and, thus, to limit her liability, she sells only her interest in the property—whatever it is.  If the title later proves defective, or, if the grantor did not even own the property, but only thought that she did, the grantee of the quitclaim deed has no legal recourse against the grantor of the quitclaim deed.

Deed of Trust, Reconveyance Deed, and Trustee’s Deed

Since property can be conveyed through a trust, there are 3 different types of deeds associated with trusts, depending on the grantor and grantee.  The trustor is the creator of the trust, the beneficiary is the party benefiting from the trust, and the trustee is the fiduciary administering the trust for the trustor.

A deed of trust (a/k/a deed in trust) is a deed that conveys title from a trustor to the trustee for the benefit of the beneficiary.  A deed of trust is often used in lieu of a mortgage, when the borrower, the trustor, transfers the deed to a trustee as security for the loan given by the lender.

A reconveyance deed is a deed conveying title from the trustee back to the trustor, such as when the trustor pays off the loan that was secured by the real estate.

A trustee’s deed is a deed conveying title to another party who is not the trustor.  In most cases, this would be the beneficiary. The deed must state that the deed was executed according to the terms of the trust.

Court-Ordered Deeds

State statutes stipulate the different kinds of deeds that are executed pursuant to court order: deeds by administrators and executors, sheriff’s deeds, and other types of deeds that are executed without the consent of the owner or through a will.  Most court-ordered deeds also list the actual price of the real estate as consideration.