When it comes to real estate transactions, buyers are protected by the Purchase and Sale Agreement which operates as a contract between the buyer and seller. Purchase and sale agreements typically contain numerous representations and warranties from the seller relating to the property sold. These promises survive the closing of the transaction for a defined period of time which can be anywhere from three (3) to twenty-four (24) months, depending on what is negotiated between seller and buyer. During this time period, buyers may have recourse against the seller if any of the representations and warranties are deemed untrue. However, there is a common problem: if the seller is a single purpose limited liability company, or some other entity, that is dissolved quickly after the closing with no other assets. When that happens, buyers may find it difficult to collect on a post-closing claim. In that situation, who is the buyer suing and will the buyer be able to collect damages? To avoid this issue, buyers can negotiate appropriate protections into the Purchase and Sale Agreement including post-closing liability escrow, guaranty, and minimum net worth.

Post-Closing Liability Escrow

The Purchase and Sale Agreement may require that the seller create a post-closing escrow, where a certain amount of money at the closing is available to the buyer should there be a post-closing claim against the seller. The parties will, of course, have to negotiate the amount of the escrow. The Purchase and Sale Agreement should spell out how these funds will be handled, as well as the circumstances in which the buyer may call on the escrow funds. A third-party, an escrow agent, will be involved to hold the funds and manage the escrow process.

Guaranty

Another option for protecting a buyer is to have a post-closing guaranty put in place at the closing. The “guarantor” could either be an individual (or series of individuals) or an entity, depending on the creditworthiness of each. There could also be a requirement for the guarantor to maintain a certain net worth or a certain amount of assets during the pendency of the guaranty. The parties will have to negotiate these details.

Minimum Net Worth

A third option is to require the seller entity to remain active, in legal existence, for the survival period of the seller’s representations and warranties. Further, it could be required for the seller entity to maintain a net worth of at least a certain dollar amount. At the very least, this option provides that the seller entity is not dissolved post-closing and perhaps maintains the wherewithal to satisfy a post-closing claim against the representations and warranties in the Purchase and Sale Agreement.

In the complex world of real estate transactions, protecting your investment is as critical as the deal itself. By understanding and implementing these protective strategies, buyers can significantly reduce their exposure to risk and safeguard their hard-earned assets. Whether it’s through post-closing escrows, personal guarantees, or maintaining the seller’s financial health, these tools can provide buyers with financial security. Working with experienced legal counsel is the best way to achieve a well-negotiated Purchase and Sale Agreement, which not only represents the path to a successful closing but also the foundation for a thriving real estate venture.