Commercial real estate transactions are complex and would have been highly risky in the absence of necessary rules and regulations that support buyers and sellers in the industry. Most commercial real estate properties carry a substantial cost, and negligence or fraud can result in heavy losses.

Two critical concepts within the commercial real estate industry offer commercial real estate buyers protection from fraudulent activities, seller representation, and warranties. This blog will explore their meanings and their relevance, and discuss the types of representations and warranties that apply during commercial real estate transactions.

What is Seller Representation in Commercial Real Estate?

Seller representation is attestations that confirm that the seller has the right to sell the property without infringing on someone else’s right. It also confirms non-liable ownership of property, affirming that the seller is not facing bankruptcy and, thus, has every right to sell the commercial real estate property.

What are Commercial Real Estate Warranties?

Commercial real estate warranties refer to information relating to the property itself. Warranties are the seller’s guarantee that their information about the occupancy rights and compliance is accurate. They will be liable if the buyer receives proof to the contrary.

Types of Representations and Warranties

Representation and warranties are applicative concepts that apply directly to commercial real estate transactions. There are three main types of representations and warranties, two of which we have already covered above.

Type 1 – Seller’s Authority

Also referred to as seller representation, this type defines the legitimate position of the seller as the undisputed owner of the property. It legitimizes their ownership and makes them liable if anyone disproves their ownership claim after the transaction.

Type 2 – Property Status

Property status addresses several claims that the seller has made about the property during the transaction, including but not limited to:

  • Litigation status or liens
  • Environmental compliance
  • Property access
  • Part of undeclared contracts

These are some of the property statuses claims buyers are protected against through type 2 warranties and representations.

Type 3 – Property Operations

Since commercial real estate properties can also be factories, warehouses, malls, etc., sellers are required to state their purpose of use during a sales transaction clearly. How a property is used can affect its structural strength and life, making it essential for buyers to know what they are purchasing.

Hence, the seller must provide building records, tenancy agreements, and maintenance status to the buyer. It ensures that the buyer is not held accountable if the building was used for undeclared illegal activities they were unaware of.

Wrapping Up

To sum up, seller representations and warranties are a way to protect buyers from fraudulent claims issued by sellers. The lack of protection puts their investment or security at risk, making representations and warranties integral to commercial real estate transactions.

If you want to buy or sell commercial real estate, please don’t hesitate to contact the CHRE team. We have years of experience working in the industry to help you find the most secure deals possible.