Unintended Consequences in Purchase and Sale Agreement Drafting: Liability Caps

Louis Monti is a partner in the Sullivan & Worcester.

In most commercial real estate transactions, one issue that is often heavily negotiated is the caps on seller’s potential post-closing liability. Although the title company is rarely involved in these negotiations, seller often tries to structure the caps in a way that may limit buyer’s title insurance coverage. Therefore, buyer should take steps to avoid this potential unintended consequence.

In most commercial real estate purchase and sale agreements, seller insists on capping its post-closing liability at a specific amount, typically 1-5% of the purchase price, and/or for a specified period of time, typically 6-12 months after closing. Such limitations are generally considered “market” and allow Seller to distribute closing proceeds and dissolve entities knowing its maximum potential post-closing liability.  Seller typically wants such limitations to apply to all of its representations, warranties, covenants, indemnifications and obligations in the purchase and sale agreement as well as any closing documents, including the deed.  Buyer may push back for certain carveouts to which the liability cap will not apply, such as post-closing reconciliations, broker fees, attorney fees and Seller’s fraud.  However, the liability caps usually extend to closing documents, including the deed.