One of the most important, yet often overlooked section of a real estate contract is the representations and warranties section. Each of the parties to a transaction relies on the other to provide true information regarding the transaction. A “representation” is a statement of current fact, for example, “The Seller represents that there are no tenants currently occupying any portion of the Property.” A “warranty” is a statement or promise of a future fact, for example, “The Seller warranties that there will be no tenant occupying any portion of the Property at the time of Settlement.”
There are generally three types (or states of knowledge) of representations and warranties: 1) unqualified statement of fact; 2) to the best of the undersigned’s knowledge and belief; and 3) to the undersigned’s actual knowledge.
Unqualified statement of fact – the representations and warranties are effective regardless of whether the person making the representation of warranty had knowledge of the covered matter. The representation or warranty is either true or it isn’t. If the statement is, in fact not true, the representation and/or warranty maker misrepresented the representation or warranty regardless of the seller’s actual or constructive knowledge.
Knowledge qualifiers limit the reach of the contractual provision so that the provision only applies to what the relevant party knows. One such knowledge qualifier is “to the best of my knowledge and belief.” This statement suggests that the party making the representation and/or warranty has made a good-faith inquiry, study, or analysis in order to form the basis for this representation. A second and even more limiting knowledge qualifier is “actual knowledge.” To have “actual knowledge” of a piece of information, the representation and/or warranty maker must in fact be aware of it. There is no requirement to make any inquiry, study or analysis and no constructive knowledge is imputed.
It is important that both parties involved in a contract are aware of the definitions of the different types of knowledge and more importantly their potential implications on the parties’ responsibilities in the contract.
ABOUT JAMES LANDON
Jim Landon has practiced real estate law since 2002 and has been involved in real estate investment and construction for most of his life. Jim’s practice focuses on real estate transactions and land use.
Jim represents individuals and privately and publicly held companies in the purchase, sale, leasing, financing, and development of real property. He also represents title insurance companies on commercial purchases and refinancing transactions, as well as providing third-party legal opinions regarding Delaware law related to Delaware entities.
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