Warranties and Representations 101

Posted on: Friday, February 10th, 2017

In order to understand the use of the terms “representation” and “warranties” we need to begin with a definition of each:

A representation is “a statement of fact made to induce another to enter into a contract”. One party provides information to the other at the time the contract is made and the contracting party decides whether to proceed with the contract.

A warranty is “a promise that a proposition of fact is true”, and they are assurances as to future events indicating that certain aspects of the deal will remain “as is” up to and through the closing.

Both representations and warranties refer to the underlying assurances that one party provides to another party in a contract. These assurances are statements that are supposed to represent factual information and can be relied upon by the both parties involved.

From the point of view of the Buyer, the major purpose of representations and warranties is to require the Seller to reveal certain facts that, when combined with due diligence, will disclose risks that can be assessed allowing the Buyer to make an informed decision as to whether or not to complete the purchase. If any representations or warranties made by either party prove to be incorrect or non-factual the other party is entitled to seek compensation.

What is the difference between the terminology ‘surviving’ closing and ‘merging’ on closing?

In real estate transactions the deal is closed and the transaction is completed once the Transfer/Deed has been exchanged for the money. However, certain warranties and representations can ‘survive’ the closing of the deal, if it is outlined in the contract as such. For example, a common clause that indicates survival is “this warranty (or representation) shall not merge, but shall survive the completion of this transaction”. This wording means that both parties agree that the representations or warranties made shall remain in full force and effect following the closing date. Inserting this type of clause keeps the Seller obligated to the Buyer after the closing has occurred.

On the other hand, representations and warranties can sometimes “merge” on closing which is represented by a clause such as this: “representations and warranties made by the Seller herein shall merge on closing”. This clause relates to the legal doctrine of merger which indicates that the contractual warranties and representations will not survive the closing. Instead, they are “merged” into the final representations and warranties that are stated within the closing documents that conclude the transaction. The Seller’s obligation ceases to exist and future claims cannot be made.

Recently, it has become more common for a hybrid of the merger and survival clause to be used as follows: “the Seller warrants that the chattels are in good working order and this warranty shall survive the closing but only to the condition of the chattels on the day of closing”. This is a way of ensuring that the main items like the fridge, stove and dishwasher that have been sold with the property are in working condition the day of the sale but does not provide any guarantees from the next day forward.

If there is a specific item for which a warranty has been given that is crucial to the transaction (like the pool equipment that is warrantied to be in good working order) a hold back should be set out in the agreement. This money would then be available to rectify any problems up to the amount of money held back for a specified period of time. An example of such a clause would be:

The Seller warrants that the equipment required to operate the pool is in good working order and this warranty shall survive the closing day, but only to the condition of the pool equipment on the day of closing. The Seller’s solicitor shall hold back the sum of $2,000 for 5 business days after the closing. If the Seller’s solicitor is not notified of any concerns with the pool equipment within 5 business days after the closing, the money shall be released to the Seller and this warranty will be deemed expired. If there are concerns expressed as to the condition of the pool equipment on the day of closing the Buyer shall be required to provide details of the concerns and an estimate for repairs to be considered by the Seller.

If you have any questions pertaining to common real estate clauses feel free to send us an email. We would be happy to write about any topics that are of interest to you.

The content of this Blog is intended to provide a general guide to the subject matter. The information does not constitute legal advice and a solicitor and client relationship is not created.

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