Modifications to the AIR Purchase Agreement (Part 2)

In Part 1 of Modifications to the AIR Purchase Agreement, I discussed four areas of the AIR purchase agreement that Sellers frequently modify. Part 2 focuses on perhaps the greatest area of liability to Seller after the Closing – Seller’s 12 representations and warranties that it makes to Buyer.

Paragraph 12.1 of the AIR purchase agreement contains the representations Seller makes to Buyer. Every Seller should carefully read Paragraph 12.1 to ensure that each representation is true.

The following are 3 modifications that Sellers sometimes make to limit the likelihood that they will be sued after the Closing if a representation is untrue, or if Buyer believes a representation is untrue:

1. Shortening the Survival Period: According to Paragraph 12.1, Seller’s representations “survive” for 3 years after the Closing. Buyers can therefore sue Sellers for up to 3 years after the Closing for an untrue representation. Sellers frequently change the survival period to 6 months or 12 months.

Tip: To explain this change, Sellers often advise Buyers that the owners/members/shareholders wish to distribute the proceeds from the sale soon after the Closing, and should not have a contingent liability for 3 years after the Closing. This may prevent complete distribution of the funds for a long period of time.

2. Hazardous Substances Rep: Paragraph 12.1(c) states: “Seller has no knowledge, except as otherwise disclosed to Buyer in writing, of the existence or the prior existence on the Property of any Hazardous Substance, nor of the existence or prior existence of any above or below ground storage tank.” This representation may expose Seller to substantial liability. If a Hazardous Substance is discovered after the Closing that was not disclosed to Buyer in writing, Buyer may believe that Seller had knowledge and did not disclose it. As a result, Sellers sometimes delete this representation.

Tip: If Seller wishes to limit its exposure on this representation but nevertheless provide a Hazardous Substances representation to Buyer, it can modify this representation.  Seller can represent that it is delivering to Buyer all reports prepared by third parties relating to Hazardous Substances on the Property. In addition, it can qualify “Seller’s knowledge” as discussed in item 3 below.

3. Clarifying Seller’s Knowledge: Seven of the 12 representations in the AIR purchase agreement are qualified to Seller’s knowledge. For example, Seller represents that it does not know of any unpermitted improvement. Therefore, if an improvement was made to the Property without a permit, but Seller is unaware of it, Seller’s representation is true.

What if Seller suspects that an improvement may have been made without a permit, but is not sure? Or what if Seller’s property manager knew of an unpermitted improvement (made before Seller purchased the Property) but never told Seller? In these situations, does Seller have “knowledge” of an unpermitted improvement? To assist in limiting liability in these situations, Sellers frequently define Seller’s knowledge to mean the “current actual knowledge” of [person X] (a specific individual with Seller responsible for the Property), without any obligation to undertake any inquiry or investigation. Sellers also clarify that the named individual is named to establish an objective reference for measuring Seller’s knowledge, and is not making the representations in his individual capacity.

Tip: Seller should not view this qualification as a way to avoid disclosure of a material item. Even with this qualification, Seller can be liable for fraud for non-disclosure of a material fact.

In Part 3, I will suggest additional Seller modifications.

What do you think of these modifications?  Post your comments or questions below.

By | 2018-01-31T21:12:13+00:00 June 16th, 2015|Purchases/Sales|6 Comments


  1. Ryan Braun June 16, 2015 at 11:26 am - Reply

    Are there any other restrictions that the courts (or statutes) have put on Sellers that would limit their ability to limit their own liability? I see you have a sort of material misrepresentation mentioned in #3. Curious to know of any other nuanced ones. Thank you! Great Blog!

    • Usman Mohammed June 16, 2015 at 1:06 pm - Reply

      Hi Ryan,
      Thank you for your comment and the kind words! Great name by the way – I’m a huge baseball fan. The limitation that immediately comes to mind is that a party cannot contract to avoid liability for fraud (misstatement of a material fact, or failure to state a material fact). Part 3 of the Modifications to the AIR Purchase Agreement series of articles will focus on additional ways to limit liability. Part 3 will include perhaps the most powerful limitation that we see in purchase agreements – a “cap” on liability.

      • Ryan Braun June 18, 2015 at 8:11 am - Reply

        Thanks for the prompt response! I cannot wait to read about the “cap”! You know, there are no salary “caps” in baseball. Only baseball caps.

        • Usman Mohammed June 23, 2015 at 1:28 pm - Reply


  2. Anonymous June 16, 2015 at 2:32 pm - Reply

    Can you address the ramifications to and obligations by the Lessor in paragraph 39.1 Options of the AIR Office Lease Gross document? Does this paragraph mean the Lessee has all of these rights or would it only apply if there was a separate option/first right addendum included in the lease as an exhibit?

    • Usman Mohammed June 16, 2015 at 5:15 pm - Reply

      Paragraph 39.1 by itself does not grant any options, such as a right to extend the term, a right to lease an adjacent premises, or right to purchase the Premises. However, if one of these “Options” is granted elsewhere (such as in an attached AIR Option To Extend Addendum), then the provisions of Paragraph 39 apply. I hope I have answered your question.

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