In a special industry spotlight feature, Bloomberg BNA turned to Manatt's Tom Muller, co-chair of the firm's Real Estate & Land Use Practice, for insight into hidden snares in real estate law and the need for escrow accounts with the limited liability companies that make up the majority of real estate agreements.
Bloomberg BNA reports that in the last year alone, Muller has represented borrowers in more than $1.5 billion in financings, including securitized loans, mezzanine loans, and bank and life company financings. When asked about negotiating for seller representations and warranties, Muller said:
"It's not due diligence. When you sign up to buy a piece of real property, whether it is a house or a downtown office building, there are a lot of things that you [consider]- such as the state of title to the property, the physical condition of the property. You might review the leases, and so on and so forth. But there are some things [for which] you can't very well do diligence because some of the information resources aren't available to you to do it. So, what a normal buyer of commercial property does is to say, 'You need to give me a representation and warranty that states the facts as I think they are-or should be.' Those are reps and warranties. Because we do want to look to the seller to see [that] the seller is authorized to sell the properties, or that this doesn't violate the various Patriot Act statutes that would prohibit me from doing business with them. In the environmental world, there could be some sort of public record of an environmental problem that hasn't been reported and there is no way [the buyer] could know about it.
So there is a range of things . . . from a handful of reps and warranties that you as a buyer might negotiate for, to maybe a dozen or more. And it depends on the complexity of the property and the buyer's and seller's respective negotiating positions. [There is a] sort of mismatch, in a lot of deals, between the comfort being obtained by the buyer by getting those reps and warranties and the fact that sometimes buyers don't think through from whom are they getting these reps and warranties. If you are getting a portfolio from IBM and IBM is the seller, then you can be pretty comfortable that if, God forbid, you have to call out a claim on reps and warranties . . . then IBM is going to be able to pay you the damages that you suffer as a result."