Originally published in Blakes Bulletin on Commercial
Real Estate, September 2009
Representations and warranties given by the vendor in favour of
the purchaser are the primary means of allocating the risk of loss
between the parties in the event that, either before or after
closing, the condition or value of the property falls below
expectations in some respect. While the scope of such
representations and warranties may vary widely from one transaction
to another, and may be influenced by factors such as the length of
the due diligence period, generally speaking the vendor will be of
the view that it should only provide assurances with respect to
matters that the purchaser cannot otherwise discover for itself in
the course of its own due diligence investigations. In practice,
however, the scope of representations and warranties often goes
farther than that. Also, in the current market environment, the
purchaser may be inclined to request, and the vendor may be
inclined to give, assurances which are broader in scope. Thus, it
is useful to have in mind various ways in which the effect of the
representations and warranties can be limited, to avoid a one-sided
allocation of risk to the vendor.
Wherever possible, the vendor should ensure that its
representations and warranties are appropriately qualified. In many
instances, exceptions should be made for matters which are
disclosed in the documents provided to the purchaser during the due
diligence process. Also, when speaking to a matter that the vendor
is unable to state with certainty (for example, statements as to
the condition, environmental or otherwise, of the building or the
lands), it is helpful to qualify the statement such that it is made
"to the best of the vendor's knowledge." In this
context, it may also be useful to define "to the best of the
vendor's knowledge" as being to the knowledge of specific
individuals in the vendor organization.
Another frequently used qualifier is a materiality threshold, to
the effect that the assurances given are true "in all material
respects." This is especially important if the truth of the
representations and warranties is a condition of closing the
transaction. It would be a significant deviation from the rights of
the parties at law, and likely not within either parties'
expectation, for the purchaser to be able to rescind the agreement
of purchase and sale in the event that, at closing, one or more of
the vendor's representations and warranties was untrue but only
in a trivial sense or where the loss resulting from the breach was
nominal. To address the vagueness of the term "material,"
the parties may consider agreeing on a threshold dollar amount of
loss to which the purchaser must be subject before the breach is
The potential exposure to which the vendor is subject can be
curtailed by specifying a shorter period of time within which the
purchaser must make a claim based on a breach by the vendor of a
representation and warranty. While a period of somewhere between
six months and two years is typical, it is open to the parties to
specify a shorter or longer period. It is also open to the parties
to specify a longer period for specific representations such as
environmental matters, or, where the transaction is structured as a
purchase of shares, tax matters. Such differentiation between the
various representations and warranties may be useful in helping the
parties reach agreement on the transaction.
The following provisions, which in most situations should not be
difficult for the purchaser to accept, may also serve to limit the
effect of the assurances given by the vendor and should not be
overlooked in drafting the agreement of purchase and sale:
An express disclaimer by the vendor of any representations and
warranties other than those specifically set out in the agreement
of purchase and sale, and a statement to the effect that, except
for the representations and warranties contained in the agreement,
the purchaser is purchasing the property "as is, where is,
with all faults" and without representation or warranty of any
An obligation of the purchaser, if it becomes aware of a breach
of a representation and warranty by the vendor, to notify the
vendor and afford the vendor an opportunity to remedy the situation
giving rise to the breach.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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