The purpose of asking for a representation in a purchase contract, lease or other agreement is two-fold. The representation serves as a risk-shifting device and it serves as an element of the due diligence process. This is never clearer than when it comes to the ever contentious “environmental rep.”

The transferor (seller, landlord or borrower) and the transferee (buyer, tenant or lender) are not on even footing when it comes to representations. The property owner holds all of the environmental knowledge and all of the environmental risk before any transaction with the transferee takes place. So, the questions are: (a) how much risk should the buyer, tenant or lender take over; and (b) what should the seller, landlord or borrower be required to reveal before the “closing” takes place? We all know that, in practice, the answer differs depending on the type of transaction. Lenders rarely will lend their money without broad, all-encompassing representations from their borrowers, coupled with the fullest of indemnities. And, their borrowers honor that demand. [Read more…]