Michael D. Regan represents clients in the acquisition, financing, developing, management, leasing, and sales of real estate. Additionally, he counsels both borrowers and lenders in commercial real estate transactions and real estate mortgage financing.

One of the most feared phrases at the closing table consists of four words: "Oh, by the way..." Much of our effort as counsel is to ensure that our client does not say or even hear those words.

Pre-Closing: A fundamental issue in any business acquisition is allocating the risk of unknown liabilities, which may arise in the future from Seller's operation of the business prior to closing. It is to the Purchaser's advantage to establish at the outset that the Seller will remain responsible for any liability, known or unknown, from the operation of the business prior to closing. Most Sellers will generally accept responsibility for liabilities arising out of their ownership and operation of the business. This fundamental principle generally provides the Purchaser's basis for negotiating the general indemnification, environmental representations and warranties, and environmental indemnity provisions of the definitive agreement.

Post-Closing: There are reasonable arguments regarding which party should bear the risk of unknown liabilities post-closing. The Purchaser typically takes the position that the purchase price has been determined on the assumption that Purchaser is assuming only known liabilities and that if the Purchaser unknowingly inherits any additional liabilities, it will get less than the value for which it bargained. This position is often combined with a demand that the definitive agreements contain a holdback or escrow of funds to satisfy Seller's indemnification obligations and undisclosed liabilities.

The Seller, however, can make a valid argument that once the transaction closes and Seller is no longer in control of the business, it is unable to insure against or mitigate the damages, which may result from an unknown liability. Seller also will argue that there are certain business risks that the Purchaser must be willing to accept as part of the acquisition of a going business, especially since the Purchaser has acquired the goodwill of the business. A compromise position occasionally places the risk of unknown liabilities on the Seller, but permits the Seller to credit the value of any unknown assets not considered in the purchase price as an offset against Seller's obligation.

Representations and Warranties: Purchasers often begin the due diligence investigation of a target company by furnishing the Seller with a Due Diligence Questionnaire requesting certain factual information and requiring the preparation of certain disclosure schedules. The Seller is typically required to make very broad and comprehensive representations and warranties in the definitive agreement. Information obtained through the due diligence questionnaire and Seller's responses to the requested representations and warranties are a vital aid in Purchaser's investigation of the target company's business and in identifying possible problems.

The Seller's representations and warranties often serve as the framework for the assignment to Seller of the risk of any undisclosed liabilities. The definitive agreement typically requires the Seller to indemnify the Purchaser for any liability arising out of the breach of a representation or warranty. The Purchaser's goal is to preserve its remedies for breach if Seller's business is not exactly as represented.

Sellers often insist that certain representations be limited to the "knowledge of the Seller." This qualification attempts to allocate the risk of an innocent error to Purchaser and minimize Seller's post-closing liabilities. However, the typical Purchaser often resists this request because the Purchaser will want to preserve its remedies for breach of any representation or warranty, regardless of Seller's knowledge. Typically, the Purchaser's argument is that the purchase price reflects the business as represented by Seller, and the risk of any undisclosed or unknown liability should fall on the Seller.

Indemnification: Any compromise invariably involves a materiality limitation for undisclosed liabilities. The definitive agreement may include a threshold limitation upon Seller's indemnification obligations, below which the Seller is not responsible to indemnify Purchaser. For example, the definitive agreement might state that Seller is not required to indemnify Purchaser against undisclosed liabilities as long as such liabilities do not exceed $100,000 in the aggregate. However, if undisclosed liabilities reach or exceed the threshold, the Seller is typically required to indemnify Purchaser for liabilities exceeding the threshold, or in some situations, for all undisclosed liabilities.

Often, the Seller will request a cap on Seller's indemnification obligations. In certain situations, it may be reasonable to cap Seller's indemnification obligations at the amount of the purchase price. However, Purchasers generally resist indemnity caps regarding environmental liability.