A Matter of Survival
A Key Contract Component
As many of us who do real estate transactions for a living know, co-op and condo contracts contain representations about the parties, the apartment in question and the co-op or condo in which the premises are located. Those representations are contained in the printed portion of the contract, and in most cases, also arrive via the riders to the contract prepared by the respective attorneys for the buyer and seller.
Rider as War Story
Contract riders run the gamut from reasonable to paranoid, based upon the cumulative bad experiences suffered over the years by the attorneys preparing the riders. Once something goes wrong in a transaction, lawyers have a habit of including a rider provision in future deals to make sure that bad thing doesn’t happen again. Think of it as an occupational obsession. Here are a few of the classic “reps” usually found in co-op and condo contracts:
--that there have been no leaks in the apartment in the past 12 months;
--that the alterations have been completed with Board approval and with all governmental sign offs;
--that the purchaser has not recently filed for bankruptcy nor does the purchaser have any credit problems;
--that there are no pest or vermin problems, including the pest du jour, bedbugs;
--that the unit owner has not made any complaints about noise, other shareholders, a lack of heat or hot water, or other quality of life issues.
I could go on and on, but you get the idea.
A Very Important Sentence
Despite the best efforts of the attorneys to consider and cover every possible issue with contractual representations, most contracts include a very important qualifier that goes something like this:
“No representations are deemed to survive the closing, unless expressly stated to survive the closing in this contract.”
In human speak, that means that unless a representation is specifically stated to “survive the closing”, the liability for making that representation terminates at the closing table. As a result, no matter what is stated in the contract about the condition of the apartment or the condition of the co-op or condo itself, if that representation does not survive closing, at the end of the day, that representation has no value once the closing occurs.
Does Anything Ever Survive?
Although there are a few provisions that usually survive closing, such as liability for payment of transfer taxes, allocation of tax abatements, correcting adjustment errors and, of great importance, making good on bad checks, most provisions creating possible liability for a party, do not survive closing. Attorneys will always ask for survival, but the other attorney will always say “no”. There is a slightly tricky way of getting reps in co-op contracts to survive that sellers’ attorneys sometimes snooze on (and which I will not reveal here), but as a general rule, co-op and condo contracts rarely create ongoing liability for a party after the closing takes place.
If the Representations Don’t Survive Closing, What’s the Point?
One could argue that since the representations don’t survive closing, why bog down the contract negotiation process with voluminous riders that don’t have continuing value anyway? Well, there are several reasons. First, the contract representation serves as a “red flag” generator. If you add a representation about leaks, the seller will usually own up to a leak and give the status. A representation about noise complaints or problems with another unit owner, can result in a disclosure about a past or ongoing problem. Think of representations as a sort of truth serum. Further, there is a period of time between contract and closing, when the representations are effective. If a party knowingly makes a false or misleading statement in the contract, there is always the risk that the truth of the matter will be discovered prior to closing. That’s when the fun begins, as those of us in the business know all too well.
What Happens When There is a Material Misrepresentation in the Contract?
Whether a contractual misrepresentation is material, thereby potentially creating liability for a buyer or seller for making a false statement, is a complicated subject unto itself. Let’s just say that proving that a party has made a material misrepresentation that actually caused the other party to suffer significant economic loss, can be a difficult, costly and time-consuming process that often has unsatisfactory results for both parties. Particularly for the buyer, if the accuracy of the seller’s representation can be determined by pre-contract due diligence (such as reviewing the minutes, reading the governing documents, checking building department records or interviewing the managing agent), the buyer’s assertion that there has been a material misrepresentation won’t get very far. That’s what “Caveat Emptor” is all about.
Residential Reality: Trust, But Verify
Although most contractual representations don’t survive closing, carefully constructed representations can reveal material information about the parties, the property and building in which the apartment is located. As I always tell my clients, I’ll get as much as I can when it comes to representations, which is usually a lot. At the end of the day, each party should conduct due diligence appropriate to the transaction and should not rely on the contractual representations as the ultimate protector of a party’s rights.
