Hotel Online
News for the Hospitality Executive


advertisement
.


The Hotel Purchase and Sale Agreement -- What is the Value of the Seller's
Representations and Warranties to a Hotel Buyer?



 
For the most recent update on this topic, click here

By Jim Butler, David Sudeck
and the Global Hospitality Group®
Hotel Lawyers
| Authors of www.HotelLawBlog.com
November 9, 2012

Representations and warranties in the documentation of a hotel purchase and sale agreement (or agreement for purchase and sale of any type of hospitality property): What is the value of the seller's representations and warranties? When does it matter?

Hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties are different than most real estate. They involve operating businesses that are integrally intertwined with special purpose real estate.

So the documentation to buy or sell such a property (and business) needs to be different than that used for other commercial real estate. One of the areas that is most apparent is in the seller's representation and warranties.

The article below is by hotel and timeshare lawyer David Sudeck, a senior member of JMBM's Global Hospitality Group®, and someone very experienced in the purchase and sale of hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties. In a recent article, David wrote about representations and warranties in a purchase and sale agreement -- what they are, what areas they cover, and what you want to get in a typical deal.

In this article, he writes about the value of these representations and warranties, hurdles to enforcing them and common terms used today.

This article is one of a series of insights that will be published initially as articles on the Hotel Law Blog at www.HotelLawyer.com and then they will be assembled into the HOW TO BUY A HOTEL handbook for our "We wrote the book™" series, much like the HMA Handbook and the Lenders Handbook for Troubled Hotels (see Resource Center at HotelLawyer.com for free copies).

The hotel purchase and sale agreement:

What do representations and warranties
in a hotel purchase and sale agreement mean?
Are they really worth anything?
by
David Sudeck | Hotel and timeshare lawyer

Purchasing real estate along with an operating business (whether a hotel, restaurant, resort, vacation ownership project, spa, golf course or tennis facility) can be complex and risky. There are practical and financial limitations to the information that can be secured and reviewed during what is typically a short (e.g., 15-60 day) due diligence period. In most traditional sales (as opposed to note or foreclosure sales), the seller of the business and property will have knowledge of the assets, and securing representations and warranties from the seller regarding the subject assets will provide the buyer with some additional information, or comfort that the information the buyer already has is comprehensive and accurate.

What is the value of a seller's representations and warranties in a hotel purchase and sale agreement?

Pre-closing breach - The seller's representations and warranties can have significant value

The purchase and sale agreement typically includes closing conditions in favor of the buyer which, if not satisfied, will provide the buyer with the opportunity to terminate the agreement and receive a refund of its earnest money deposit. These closing conditions almost always include a statement that the seller must have performed its covenants under the agreement and that the seller's representations and warranties must be true and correct (typically both when made and as of the closing date).

So are the seller's representations and warranties important prior to the closing date? YES, as they may support a termination of the agreement by the buyer. In some circumstances, if the inaccurate representation or warranty also constitutes a breach of the agreement by the seller, the buyer may also be able to seek damages for the breach by seller (which may be capped and limited to buyer's out-of-pocket costs incurred to date or may not be capped/limited, depending on what the buyer and seller negotiated in the default section of the agreement).

The proper drafting of both the seller's representations and warranties and the buyer's conditions to closing is critical. Depending on the knowledge qualifier used in the representations and warranties section and the wording of buyer's conditions to closing, the seller's representations and warranties may be true and correct even if inaccurate. In such case, the buyer may not be able to terminate the agreement even if it discovers the inaccuracy prior to the closing date. At the same time, if the conditions to closing section is not drafted carefully, a buyer may be able to terminate the agreement and secure a full refund of its deposit (effectively securing a very extended "free look" period) if it discovers even an immaterial service contract that was not scheduled in accordance with the seller's representations and warranties.

Needless to say, these areas of the agreement should be reviewed and drafted with great care, as they are interrelated. Sloppy drafting may result in unintended consequences, including the ability of the buyer to terminate the agreement without liability right up until the closing date.

Post-closing breach - The seller's representations and warranties may have relatively little value (depending on what the purchase agreement provides)

If the buyer discovers post-closing that a representations or warranty of the seller is false, then the buyer may have an opportunity to pursue a claim for damages incurred by the buyer (e.g., reduction of property value) or indemnification for amounts paid to third parties.

However, the protection is typically limited in a number of ways. For example, it is not unusual for a purchase agreement to provide that any breach of a seller representation or warranty known by a buyer prior to closing is waived if the buyer elects to proceed to close escrow rather than terminate the purchase agreement. Such a provision is generally enforceable.

As a practical matter, I cannot remember even one of my buyer clients pursuing a claim against a seller post-closing for a breach of representation and warranty. That might be a sign of the high quality sellers on the other side of my transactions, but it is more likely the commercial reality of the marketplace. That is, purchase agreements often include limited seller representations and warranties, and little recourse if a breach is discovered, particularly in overcoming the hurdles of enforcement.

What are the hurdles to recovering?

Proving knowledge: If the seller's representations are qualified by knowledge, then in order to successfully recover from the seller in an action against the seller based on a claim of breach, the buyer will need to prove that the seller had knowledge (or in some limited cases, where the knowledge qualifier is not limited to "actual knowledge," then the buyer must prove the seller should have had knowledge) of the inaccuracy of the statement in question. This can be an extremely difficult hurdle to overcome unless the buyer has found the "smoking gun" memo evidencing such knowledge.

Limited survival period: The seller typically will seek to limit the survival of any of its representations and warranties to a fairly short period of time (e.g., 3 to 12 months), and this will provide the buyer with a limited period of time to both discover an inaccuracy and make a claim.

Bucket and Cap: The seller will often negotiate for a "bucket" (i.e., a dollar amount below which seller will have no liability for a breach of its representations and warranties). This may be documented as a threshold above which seller will have liability for the entire claim or a deductible above which seller will begin to have liability . (Obviously, the former is preferable if you are the buyer!) and a "cap" (i.e., a maximum liability for such breach). This will sometimes mean that the buyer will have no recourse for "small" claims (even if the seller breached its representations and warranties) and will have limited recourse for larger claims. This sort of arrangement may remove much of the incentive of the seller to carefully review its files and its statements, and therefore, the buyer should carefully consider the implications of agreeing to this provision.

Limitation on Remedies: The purchase agreement may provide that the sole remedy of the buyer in connection with a post-closing claim of breach and representation or warranty will be a claim for indemnification. This may effectively prevent the buyer from seeking to rescind the contract based on the inaccurate statements of seller, which may otherwise be available to the buyer under contract law; however, there are numerous cases (including the 2006 ABRY Partners case out of Delaware) that provide that buyers have remedies under tort law (e.g., based on claims of fraud or negligent misrepresentation) even where the contract purports to significantly limit available remedies.

Holdback or Joinder: The seller will likely be a single purpose entity. So what if the seller does breach its representations and warranties and what if such breach is discovered during the survival period and it is of a sufficient amount to support a claim for damages or indemnification? If the seller, after the close of escrow, distributes its sales proceeds to its members/partners, then the buyer will be in the unenviable position of having to trace the proceeds by making claims of fraud or inadequate capitalization of the selling entity to cover expected contingent liabilities.

Therefore, as a buyer, it is important to make sure that the seller has a pool of funds to cover the damages associated with a breach (as well as the seller's post-closing indemnification and proration obligations). This issue can be addressed in a number of ways, but the easiest and most typical way to address the issue is to require either of the following:

(a) Holdback. The seller to holdback with a escrow agent (and therefore not distribute to its members/partners) a mutually agreed upon amount expected to cover contingent liabilities for the period during which such claims may be brought by buyer, or

(b) Guaranty or joinder. The parent company or principals of the seller (i.e., an entity or person with substantial assets or liquidity) to sign a guaranty or joinder to be jointly and severally and primarily liable for the post-closing liabilities and obligations of the seller.

The take-away?

If drafted with care, the purchase agreement can be negotiated and drafted to avoid an unintended extended "free look" period for the buyer and yet provide a meaningful incentive for the seller to make accurate statements with respect to the subject property that help the buyer complete its due diligence as quickly and as comprehensively as possible.

David Sudeck, is a senior member of JMBM's Global Hospitality Group®. He helps clients create value for their hotels and other hospitality properties in the purchase and sale, development, construction, financing, leasing, sale-lease back, and operation of (including management and ADA compliance issues associated with) such properties.

David's practice primarily involves the complex issues associated with hotels, resorts, vacation ownership properties (including clubs, timeshares, fractionals and private residence clubs), restaurants, golf courses and spas. He represents several financial institutions and private equity funds as special counsel relating to their hospitality interests.

David has a pragmatic approach to practicing law, and he adds value through his business experience and legal expertise, his finance, entitlement and development knowledge, and his extensive relationships with investors, lenders, brokers, developers, and service providers.

Contact David Sudeck at 310.201.3518 or dsudeck@jmbm.com.

HOW TO BUY A HOTEL -- Free handbook

Until the free handbook on HOW TO BUY A HOTEL is published (expected in Summer 2014), you can access all the materials on this subject at www.HotelLawyer.com. Look on the right hand side of the home page and click on "Buying & Selling a Hotel."

Here are a few of the articles on the subject under this topic:

__________________________

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?
__________________________

Our Perspective
. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.
 
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.


 

Contact:

Jim Butler
jbutler@jmbm.com
310.201.3526


.
Receive Your Hospitality Industry Headlines via Email for Free! Subscribe Here

To Learn More About Your News Being Published on Hotel-Online Inquire Here
.
Also See: Seller Representations and Warranties in a Hotel Purchase Agreement -- What are the big issues today? / Jim Butler & David Sudeck / November 2012

Hotel Lawyer Alert: U.S. Hotel Owners could lose $2.1 billion in hotel value with new Expedia program / Jim Butler / November 2012

David Loeb Shares the Robert W. Baird Industry Analysis on C-Corps and REIT's / Jim Butler / October 2012

Hotel Lawyer with PKF's 'U.S. Lodging Market Outlook' - What if we hit the Fiscal Cliff? What if we postpone it? Recession in 2013? / Jim Butler / October 2012

How to Buy a Hotel - What you don't know about undocumented workers could really hurt you! / Jim Butler & Guy Maisnik / October 2012

3 Nuggets of Information from Vail Brown of STR on Hotel Industry Prospects for 2013 and Beyond / Jim Butler / October 2012

JMBM's Hotel Lawyers Post 500th Blog; HotelLawyer.com and Hotel Law Blog are resources for hotel owners and lenders / Jim Butler / October 2012

Phoenix Rising - Insights from the Phoenix Lodging Conference / Jim Butler / October 2012

Hotel Liability for Guest Information - What you need to know and how to avoid liability. / Jim Butler & Robert Braun / October 2012

JMBM's Global Hospitality Group® releases 2nd Edition of The HMA Handbook, Hotel Management Agreements for hotel owners, developers, investors and lenders / Jim Butler / September 2012

Finally, Some GOOD NEWS from Washington, DC / Jim Butler, Catherine Holmes and Victor T. Shum / September 2012

EB-5 Financing for Hotels is Now Mainstream Institutional / Jim Butler / September 2012

JMBM's Chinese Investment Group Happenings and Events / Jim Butler / August 2012

Dodd-Frank Act Presents Hotels with Decisions on Credit and Debit Card Charges / Jim Butler & Robert Braun / August 2012

Hotel Restructuring, Workouts, Receiverships and Bankruptcy. The Art of Heavy Lifting. / Jim Butler / August 2012

How to Buy a Hotel Handbook: Franchise issues in hotel purchase and sale transactions / Jim Butler / August 2012

Hotel Lawyer: Experts Share Top 5 Tips on Picking the Right Hotel Operator and Brand for Your Hotel / Jim Butler & Robert Braun / July 2012

Losing the Expectation of Privacy bit by bit, byte by byte / Jim Butler and Mark Adams / July 2012

How to Buy a Hotel Handbook: Labor and Employment Tips; Buying a hotel - the Hotel Purchase Agreement documentation and process / Jim Butler, Catherine DeBono Holmes and Marta M. Fernandez / July 2012

How to Terminate a Hotel Management Agreement: A Tale of Two Hotels - Marriott's Edition Waikiki and Fairmont's Turnberry Isle Resort; Two owners terminate long-term hotel management agreements, seize control of their hotels from branded operators, and then settle their litigation / July 2012

EB-5 Lawyer Alert #3: Update on California TEA designation procedure. What's the problem in California! / Jim Butler, Catherine DeBono Holmes and Victor T. Shum / June 2012

How to Finance Hotel Development in 2012....Alternate financing for new hotel construction in a brave new world / Jim Butler / June 2012

'Cyber Accessibility' is the New Frontier for ADA Lawsuits. Your Next DOJ Investigation or ADA Class Action Could be Just a Mouse Click Away! / Jim Butler / June 2012

ADA Compliance and Defense Lawyer: ADA Experts Discuss Hottest Issues Facing the Hotel Industry Today / Jim Butler / May 2012

HotelLawyer.com Launches; Portal to Knowledge for the Hospitality Industry; JMBM's Global Hospitality Group® of Hotel Lawyers Provide Comprehensive Hospitality Resource / May 2012

Update on California's EB-5 Policy Regarding Designation of Targeted Employment Areas or TEAs / Jim Butler / May 2012

Successful Joint Ventures for Hotel Development, Acquisition and Financing / Jim Butler / May 2012

Hotel Lawyer: Clarification on the DOJ's Amendment to the Pool Lift Extension / Jim Butler / May 2012

Hotel Lawyer from Meet the Money® - Lodging Industry Investment Council (LIIC) Announces its Top 10 Challenges for Hotel Industry in 2012 / Jim Butler / May 2012

Meet the Money® Conference Talks about Hotel Loans and Equity Investment, Creating Value with Hotel Value-add and Repositioning, Hotel Opportunistic Investment, Deal Making and Much More / Jim Butler / May 2012

ADA Compliance and Defense Lawyer Alert: Charles Schwab settles claim over website accessibility / Jim Butler / May 2012

EB-5 ALERT: California's New TEA Approach will Discourage EB-5 Investment in California / Jim Butler / May 2012

JMBM is One of 20 Hottest Law Firms in the U.S. Per the National Law Journal's Latest List / April 2012

Hotel Labor Lawyer: California Supreme Court Finally Gives Employers Some Good News in Brinker Restaurant Corporation v. Superior Court / Jim Butler & Travis Gemoets / April 2012

How to Negotiate a Hotel Management Agreement. 10 Tips for a Smoother Process / Jim Butler / March 2012

ADA Defense Lawyer: What does the ADA pool lift compliance extension mean to you? / Jim Butler / March 2012

DOJ Turnabout: Pool lift compliance deadline extended to May 15 / Jim Butler / March 2012

5 Things to Remember when Buying Hotel Notes / Jim Butler / March 2012

ADA Defense and Compliance Lawyer: More clarification or confusion on March 15 ADA standards? / Jim Butler / March 2012

ADA ALERT - A Call to Action Before the March 15, 2012 ADA Deadline / Jim Butler / February 2012

GlobeSt.com Interviews JMBM's ADA Defense and Compliance Lawyers: Hotels Handle Pool Lift Regulations / Jim Butler / February 2012

FBI Tips for Hotels; How to spot terrorists and what to do. / Jim Butler / February 2012

ADA Defense and Compliance Lawyer Advisory: DOJ Clarifies March 15, 2012 Mandatory Pool Lift Requirement! (Uh-oh!) / Jim Butler & Martin Orlick / February 2012

Quick! Can You Pass This 3-Question ADA Pop Quiz? / Jim Butler / January 2012

Hotel Lawyer in Los Angeles: ALIS - What's the commotion all about? Closing the conference hotel to outsiders. / Jim Butler / January 2012

Hotel Management Contract Disputes: Importance of 'Fiduciary' Duties in Owner-Operator Lawsuits / Jim Butler / January 2012

Litigation and Disputes Between Hotel Owners and Operators are on the Rise? Why? / Jim Butler / January 2012

ADA Defense Lawyer: New ADA Regulations Kick in Soon. Say goodbye to 'grandfathering' under the ADA / Jim Butler / November 2011

Hotel Lawyer in Washington D.C. - Why the Lodging Industry Will Continue to Do Well Despite Bumpy Markets and More / Jim Butler / November 2011

Chinese Investment in U.S. Hotels: What the Real Estate Professionals Want to Know / Jim Butler / October 2011

Hotel Lawyer in Dallas Listening to the Special Servicers / Jim Butler / October 2011

Hotel Lawyer with Optimism for the Hotel Industry from the Dallas Lenders Conference, Fishing for Solutions 2011 / Jim Butler / October 2011

Updating Service Animal Policies of Your Hotel or Other 'Place of Lodging' / Jim Butler, Martin Orlick and David Sudeck / October 2011

Hotel Industry Alert: Some things to feel (very) good about! / Jim Butler / September 2011

Hotel Lawyers in Phoenix: It's not just me. The market has changed in just the last 60 days! / Jim Butler / September 2011

Hotel Labor and Employment Lawyer Update: Controversial Union Rights Notice Subject to Legal Challenge - Employers Should Not Rush To Post It / Jim Butler & Scott Brink / September 2011

Hotel Franchise Lawyer: Hotel Franchise Agreements and the 5 Biggest Mistakes a Hotel Owner Can Make / Jim Butler & Robert Braun / September 2011

Hotel Labor and Employment Lawyer Alert: The NLRB is making it harder to stay union free / Jim Butler & Scott Brink / September 2011

Tips from Hotel Franchise and Management Lawyers: Beware the Trap of Changing Brand Standards / Jim Butler & Robert Braun / September 2011

Labor and Employment Alert: New Law Requires Employers to Post Employee Rights Notice by November 14, 2011; NLRB Publishes Final Rule for Notification of Employee Rights / Scott Brink , JMBM / September 2011

Hotel Lending Lawyer: What every hotel lender needs to know about hotel due diligence / Jim Butler & Guy Maisnik / September 2011

Hotel Lending Lawyer: What every hotel lender needs to know about Cash Controls / Jim Butler & Guy Maisnik / August 2011

Hotel Lawyers on Terminating Hotel Operators: M Edition Lawsuit Against Marriott Has a New Twist Marriott is Replaced Overnight / Jim Butler / August 2011

Hotel Lawyers on Terminating Hotel Operators: Turnberry Resort Drops Fairmont Flag / Jim Butler / August 2011

Hotel Lending Lawyer: What every hotel lender needs to know about SNDA's / Jim Butler & Guy Maisnik / August 2011

Hotel Lending Lawyer: What every hotel lender needs to know about HMAs and hotel franchise agreements / Jim Butler & Guy Maisnik / August 2011

Hotel Lawyer on the Importance of Brands - Intellectual Property Rights and What They Mean: Family Suites Resorts v. Viacom International d/b/a MTV Networks - a Suit Over Branding / Jim Butler / August 2011

Hotel Lawyer on the Fiduciary, Contractual and Agency Duties of Hotel Brokers - Host Hotels & Resorts LP v. Molinaro Koger Litigation / Jim Butler / August 2011

M Waikiki's Edition Lawsuit Against Marriott International and Ian Schrager - an Owner's HMA Dispute with Marriott and What it All Means / Jim Butler / August 2011

Hotel Investment: Why Asian investors are targeting U.S. hotels for purchase and investment, and what could it mean for you? / Jim Butler / August 2011

Hotel Developers: Why a "regional center" may be the key to financing your next hotel development or expansion. And what you need to know... / Jim Butler / July 2011

How to use the EB-5 Immigrant Investor Visa Program for financing / Jim Butler / July 2011

JMBM Announces Formation of the Chinese Investment Group™ - Hotels, Real Estate, EB-5 Immigrant Investor Visas / July 2011

Hotel Lawyer: How do you know when you should set up a captive insurance company for your hotel? Take our "litmus test". / Jim Butler & Gordon Schaller / July 2011

Hotel Lawyer: What you need to know about the "ancillary benefits" of setting up a captive insurance company / Jim Butler & Gordon Schaller / June 2011

Hotel Lawyer: Are you thinking about setting up a captive insurance company? Maybe you should be. . . / Jim Butler & Gordon Schaller / June 2011

Hotel Lawyer in New York with pre-NYU industry forecast: Sunny with occasional clouds and NO storms on the horizon / Jim Butler / June 2011

Hotel Lawyer with the Executive Roundtable Results; Debt is returning, equity is out looking, and we've passed the bottom of the trough. Why now is the time to purchase a hotel. / Jim Butler / June 2011

ADA Defense Lawyer: How to Quickly Lose Business. (No ADA-Compliant Reservation System) / Jim Butler & David Sudeck / May 2011

Hotel Lawyer with Fresh Perspectives on the Hotel Industry from Smith Travel / Jim Butler / May 2011

Hospitality Lawyers with PKF and Mark Woodworth's Lodging Overview / Jim Butler / May 2011

Hotel Lawyers' Updates on Capital and Debt Markets for Hotels, Transaction Sales Data and Financings / Jim Butler / May 2011

Hotel Lawyer with Updates on Hotel Cap Rates, Values and Transactions / Jim Butler / May 2011

Hotel Lawyer with nuggets from JMBM's Meet the Money® 2011 / Jim Butler / May 2011

Hotel Lawyer: The hotel transaction market is heating up! / Jim Butler / April 2011

Hotel Lawyer with good news! A new federal court decision upholds condo hotel structure. No "securities" involved as structured. Disgruntled condo hotel unit purchaser lawsuit dismissed. / Jim Butler / April 2011

Meet the Money®: Hotel Financing Renaissance is Underway! / Jim Butler / April 2011

JMBM’s Global Hospitality Group® announces publication of The HMA Handbook, a FREE practical guide for negotiating Hotel Management Agreements for Hotel Owners, Developers, Investors and Lenders / March 2011

Buying a Hotel? Don't Buy an ADA Lawsuit or DOJ Investigation / Jim Butler / March 2011

Hotel Lawyer on Hotel Management Agreements: Exculpation Clauses for Protecting the Owner's Assets / Jim Butler / February 2011

ADA Defense Lawyer: How to handle an ADA lawsuit....and How not to do it / Jim Butler / February 2011

Hotel Lawyer: 5 Key Elements for Good Hotel Management Agreement Budget Provisions / Jim Butler / February 2011

How improving fundamentals make 2011 the year of "Great Expectations" for the Hotel Industry / Jim Butler / February 2011

Ask the Hotel Lawyer: 2011 is starting as the year of "Great Expectations" for the hotel industry! / Jim Butler / January 2011

Hotel ADA Defense Lawyer: How a recent ADA case affects all hotels but particularly conference centers and meeting hotels / Jim Butler / January 2011

Hotel Lawyer: So, You Think You Want to Buy a Hotel? For savvy investors, the time could be right / Jim Butler / January 2011

Sheraton Universal Hotel Sale Facilitated by JMBM's Global Hospitality Group® / Jim Butler / January 2011

.


To search Hotel Online data base of News and Trends Go to Hotel.OnlineSearch

Home | Welcome | Hospitality News
| Industry Resources

Please contact Hotel.Online with your comments and suggestions.