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The Purchasing of Commercial Real Estate in California

While warranties allocate the risk of certain potential post closing events and can force sellers to make disclosures, the limits placed on the Seller's warranties can also serve as a road map for the Buyer's due diligence.

Beginning with the letter of intent, the Seller's objective is to give as few warranties as possible, to limit the scope of the warranties given, and to provide that if the Buyer approves the property, the Buyer will be relying solely on its own investigation and purchasing the property "as is."

Warranties are often heavily negotiated because of the parties' competing objectives: The buyer wants protection from unknown risks, while the seller wants to eliminate warranties or at least limit them to necessary disclosures. If the purchase price has been discounted, or if the seller is in a liquidation mode, or if the buyer has negotiated a substantial time period during which to conduct a due diligence investigation, the seller may be unwilling to give more than minimal warranties.

In the final analysis, the Seller's best protection is to make full and fair disclosure in writing about the property. This can be done by qualifying any representations and warranties by the disclosure of problems with the property set forth in one or more exhibits to the purchase agreement.

Warranties with respect to the accuracy of financial information regarding the Property can be a major source of negotiation. Warranties regarding compliance with zoning laws and building codes are virtually impossible to obtain from Sellers in view of the difficulty of knowing whether a building is in compliance. The usual compromise is to obtain a warranty that no written notice from a governmental agency that the property is not in compliance has actually been received. Sellers should be willing to warrant that they, and their tenants, have not created any environmental problems. However, if an environmental investigation has been conducted, the warranty should be qualified by the contents of the environmental reports which will be provided to the buyer.

Environmental insurance may fill the void of some environmental warranties. It can take weeks to months to negotiate a policy of environmental insurance, so start early if it appears that this insurance may be required to close the deal.

While the client might focus on economic issues, such as the viability of the leasing market and comparable land values, the attorney should properly advise the client regarding the possible risks and liabilities which could be imposed upon the Buyer of the property.

Of particular importance is the need to communicate with the client regarding the client's expectations of what the lawyer intends to do and what the client will do itself or through its staff. It is particularly important to discuss the entire due diligence program with the client and the probable cost of the legal work involved.

Undeveloped Land - - the Seller should make it clear he or she will not be responsible for any problems with entitlements or improvements to the land, and should provide that the Seller is selling the property subject to any unrecorded lien that may be created by a subdivision map or bonds to insure the completion of improvements, or that the Buyer should obtain its own bonds to complete the improvements.