Definition
A representation and warranty (often called “reps and warrantiesâ€) consists of factual statements and contractual assurances made by one party to another in an agreement.
If a representation or warranty proves to be false, the non-breaching party may have legal remedies, including termination rights or monetary damages.
Representation vs. Warranty
- Representation: A statement of existing fact intended to induce the other party to enter the contract.
- Warranty: A promise that certain facts are true and will remain true for a defined period.
In modern contracts, the terms are typically combined and treated together.
Common Reps and Warranties in Real Estate
- Seller owns the property free and clear (subject to disclosed liens).
- No undisclosed litigation affecting the property.
- Compliance with zoning and building codes.
- No known environmental contamination.
- Leases provided are true and complete copies.
- Rent roll information is accurate.
Why They Matter
Representations and warranties allocate risk between buyer and seller. They protect the buyer from unknown conditions and incentivize full disclosure.
- Support underwriting assumptions
- Reduce informational asymmetry
- Provide post-closing recourse
- Enhance transaction certainty
Survival Periods
Contracts typically specify how long reps and warranties “survive†after closing. Some may expire at closing; others may survive 6–24 months or longer.
Remedies for Breach
- Indemnification claims
- Escrow holdbacks
- Purchase price adjustments
- Termination rights (pre-closing)
Remedies may be limited by caps, baskets, or materiality thresholds.
Example
A seller represents that there are no pending lawsuits involving the property. After closing, the buyer discovers an undisclosed tenant claim filed before closing. The buyer may pursue indemnification for damages under the contract’s reps and warranties section.
Common Pitfalls
- Overly broad or vague language.
- Failure to disclose known issues.
- Not negotiating survival periods.
- Ignoring caps on liability.
- Assuming due diligence replaces contractual protections.
Investor Checklist
- Align reps with underwriting assumptions.
- Negotiate survival periods appropriate to risk.
- Review disclosure schedules carefully.
- Consider escrow holdbacks for added protection.
- Coordinate with legal counsel before signing.