JR KASMAN, PLLC TRANSACTION TIP SERIES: REPS, WARRANTIES, DEFAULTS & “RECORDABLE DOCUMENTS”

September 14, 2016 | by

We are pleased to announce that our Trending Report will include a series of “transaction tips” for drafting and reviewing commercial real estate and business contracts. Our first transaction tip in this series concerns representations and warranties in recorded documents. A variety of documents may be recorded in the land records where a property is located in connection with commercial real estate transactions. For example, a lender will record a mortgage or deed of trust (and sometimes a separate assignment of leases and rents) at the closing of a loan transaction. Often times, when a commercial loan is made, an unrecorded loan agreement contains a host of representations and warranties made by a borrower to the lender in connection with the subject loan. However, if a loan agreement is not required (or if the forms used in a transaction happen to do so) the representations and warranties may be contained in other documents outside of an unrecorded loan agreement – such as the mortgage or deed of trust. When representing, or acting as, a borrower it is best to avoid having representations and warranties contained in a recorded document. Recorded documents can be viewed by members of the public including tenants and adversaries. If, for example, a recorded document contained an ongoing representation and warranty that no litigation was pending against an owner or that no lease was in default — an interested tenant or adversary might use such information in connection with conflict or negotiation strategy. Representations and warranties might also contain confidential information about an owner or property that is better left out of the land records. Similarly, be wary of including itemized defaults in a recorded document that an owner would not want tenants or adversaries to be aware of. If there is no unrecorded loan agreement in place to host representations and warranties, consider offering the lender an unrecorded certificate of representations and warranties to be provided to the lender at closing and include itemized defaults in another unrecorded document.

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