Warranties to Survive Closing?

A purchase-offer contract for real estate starts when the last required party signs the document, lasts for the escrow period and ends when the closing occurs. The parties determine the length of the escrow, but typically it’s 30 to 90 days, and longer for large tracts of land for sale that require extensive due diligence or a regulatory decision.

A seller’s warranty deed — general or special — gives the buyer certain seller promises and guarantees regarding his ownership and title, which I’ve discussed in an earlier article. A general warranty deed provides the most protection for the buyer.

A standard broker’s contract usually includes a few conventional warranties from the seller to the buyer that end at closing, such as:

• Seller will maintain the property in substantially the same condition during escrow as it was on the date when the contract came into effect;
• No roof leaks as of closing; and
• All mechanical systems in working order as of closing.

The standard contract will also include a few warranties that survive closing, which keeps the seller on the hook to the buyer after the closing has occurred. These typically include:

• Seller is conveying the property free of all mechanic’s lien and other claims;
• Seller warrants that information in the listing agreement, or otherwise provided, regarding connection to a public utility or septic system is correct to the best of his knowledge;
• Seller warrants that he has disclosed to buyer all material latent defects that are known to him; and
• Seller warrants that he has disclosed any information in his possession that materially and adversely affects the consideration paid by the buyer.

If the seller’s warranties turn out to be less than complete or truthful, the buyer can bring suit for remedy and ask to be made whole.

In land deals, a buyer may also ask for, and receive from, the seller less conventional warranties, such as:

• Seller warrants that he will retain no reservation of interest or profit in the property or any of its assets (e.g., timber);
• Seller warrants that the property is free of unrecorded easements, claims, estates, covenants, permissions, tenancies, leases, encumbrances, and sale of rights or assets that would limit the buyer’s possession, use and enjoyment of the property; and
• Seller warrants the property is free, to the best of his knowledge, any claims of adverse possession and prescriptive easement, boundary disputes, encroachments, ongoing unauthorized expropriation of resources (water, timber, minerals, etc.) and defects.

To make these warranties real and enforceable, the buyer must include in his purchase contract a sentence like: “SURVIVAL: All warranties shall survive this Contract.” Without this sentence, the warranties — the standard ones that most conventional broker contracts include in their boilerplate and any special ones a buyer adds — are worthless, because they end when the contract ends.

Most sellers in my experience believe that they are free of a property once it has been sold. That’s not the case with respect to warranties that survive closing.

When a seller lists a property “as is,” it means he’s unwilling to do any repairs or fix any problem. “As is” should not be taken to mean that a seller can conceal defects in his property.

A buyer can chip away at an “as is” seller by asking for warranties that survive on the issues listed above. If the seller balks, the buyer may have discovered a deal-breaker– something bad the seller does not want to disclose. “As is” properties have always been one of my red flags, because sellers think the phrase means more than it does.

A seller needs to understand what his obligations are under any warranty that survives closing in his sale contract.  A buyer who proposes gratuitous warranties may be a person who likes to sue.

On the other hand, a seller with a clean property should not have a problem with signing on to fair warranties that survive closing. And a seller’s willingness to make such warranties is an argument for a higher price.