The 'Representations, Warranties and Covenants' Triumverate

Many retail leases contain provisions in which a party to the lease “represents, warrants and covenants” to some proposition. These three terms are often used together, as if the drafter were hoping to cover all bases by the belts-and-suspenders approach. It is quite possible, however, that many attorneys are not sure what bases they actually need to cover, so they throw in all the words just in case.

But what does each of these words really mean in the context of a lease? What protection is each term actually giving the party for whose benefit they are stated? What obligations does each word impose on the party stating them? Do you need to say them all, or will two, or even one, do just as well?

Unfortunately, there is a dearth of case law interpreting these words in the commercial lease context. And an examination of the general case law and commentaries that discuss these concepts reveals more confusion than clarity on the subject.

The Confusion Between Representations and Warranties

A seminal contract case distinguishing representations and warranties with regard to the sale of goods, stated:

Representation is an antecedent statement which is made to induce the entering into the contract, but which is not a term in or element of that contract. Its purpose is accomplished when the contract is made. Warranty is an ' agreement, collateral but annexed to the agreement to transfer the title, by which the seller undertakes to vouch for the title, quality or condition of the thing sold ' [it] is, by the intention and agreement of the parties, a term in, a part of, or an incident to, that contract, and cannot exist without it.

AmericanFruit Product Co. v. Davenport Vinegar & Pickling Works, 154 N.W. 1031, 1036 (Iowa 1915).

But later in that same case, the court said, “A warranty, as counsel correctly define it, is a statement or representation [emphasis added] of quality or condition, made by the seller to induce the sale and relied upon by the buyer.” See also Quality Wash Group V, Ltd. v. Hallack, 50 Cal. App. 4th 1687; 58 CACal. Rptr. 2d, where the court describes a list of the seller's representations in a land purchase agreement as a warranty.

The overlapping of the representation and warranty concepts is also present in the definitions of each of these terms in the mergers and asset purchase arena, where representations are defined as “statements of past or existing facts” and warranties as ” promises that existing or future facts are or will be true.” (Emphasis added.) See Model Stock Purchase Agreement (1995) and Model Asset Purchase Agreement (ABA's Section of Business Law). In these definitions, both representations and warranties address “existing facts.”

As a result of this confusion, more than one commentator has concluded that the terms “representation” and “warranty” are virtually synonymous, and practitioners should avoid redundancy by using only the word “representation” and foregoing the word “warranty” entirely. See Kenneth A. Adam, “A Lesson in Drafting Contracts: What's Up with 'Representations and Warranties'?” Business Law Today, Nov./Dec. 2005; T. David Cowart, “Representations, Warranties and Risk: A Request for Restraint,” ALI-ABA Course Study Materials, Vol. II, March 2007.

Other commentators have tried to find a distinction by looking instead at the remedies available for a violation of a representation versus a violation of a warranty. Courts have consistently confirmed that when a party to a contract represents something to be true that such party knows (or should have known) is false, that misrepresentation is a tort. A successful claim would thus permit the injured party to be compensated for the injury proximately caused by that party's reliance on the misrepresentation, as well as punitive damages to discourage such socially unacceptable behavior.The misrepresentation also permits the injured party to rescind the contract. See Glenn D. West and W. Benton Lewis, Jr., “Contracting to Avoid Extra-Contractual Liability ' Can Your Contractual Deal Ever Really Be the 'Entire' Deal?'” The Business Lawyer, 64 Bus. Law 999, August, 2009, for an exhaustive examination of remedies for misrepresentation and breach of warranty.

An action for a breach of warranty, on the other hand, consistently has been held to give rise only to contract damages and not to rescission of the contract. Knowledge of the truth or falsity of the statement or representation is irrelevant. By making the statement in a contract, the contracting party has promised the fact to be true, has assumed responsibility for it, and will be liable to the other party to the contract if the statement is not true and the other party relied upon it to his or her detriment. However, because there is no guilty knowledge, there is no social harm that requires tort remedies to discourage. See, e.g., Metropolitan Coal Co. v. Howard, 155 F.2d 780, 2nd Cir., 1946 ["A warranty is an assurance by one party to a contract of the existence of a fact upon which the other party may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the promisor cannot control what is already in the past." See also Glen and Lewis, above.

Thus, another commentator, rejecting the position that the term "warranty" should be excised from contracts in favor of the term "representation," advocates instead that both terms should always be used in every contract, to permit the beneficiary to obtain the benefits of all possible remedies. See Tina L. Stark, "Another View on Reps and Warranties," Business Law Today, Jan./Feb. 2006.

The Confusion Between Warranties and Covenants

The term "warranty" can also dress up as a covenant.

Covenants have been distinguished from representations because they are promises of performance in the future, in contrast to statements of the existence of a past or present fact. See Central States v. Wintz, 1996 U.S. Dist. Lexis 1438.

In real estate contracts, a covenant is "an agreement or promise of two or more parties that something is done, will be done, or will not be done. In modern usage, the term covenant generally describes promises relating to real property that are created in conveyances or other instruments." Hollis v. Garwall, Inc., 137 Wn.2d 683, 690 (1999).

But warranties are also defined as promises or covenants. As noted above, in mergers and asset purchase agreements, warranties are defined as "promises that existing or future facts are or will be true."

And in the context of real estate conveyance instruments, a "warranty" is defined as a covenant by the grantor of the condition of title to property. See Ochse v. Henry, 202 Md. App. 521, 2009.

It is also interesting to note that in contrast to the definition of covenants as promises of future performance in the mergers and asset purchase context, a "covenant" in the Hollis case, above, involving covenants of real estate interests, is defined as a promise not only that something will be done, but also that something is done, which is the same as a "warranty" of an existing fact.

So What Is the Drafter of a Retail Lease to Do?

Amidst this confusion of cases and commentaries, a scheme can be discerned that is useful for the leasing professional. The litany of representations, warranties and covenants retail landlords and tenants want from each other arises because a lease is both a conveyance of a real estate interest and a contract establishing the rights and obligations of the parties during the term the tenant possesses the leasehold. But this jumble can be sorted into three separate categories.

Representations should be made about "past or present facts" that one party knows or should have known, and that the other party does not know or does not want to spend the time or money to learn, as "antecedent statements which [are] made to induce the entering into” the lease. Examples of this type of statement are that a party has the power and authority to enter into the lease; that a party is duly organized under state law and authorized to transact business in the state; that the shopping center is zoned for a particular use; that the premises have not and do not contain hazardous materials; that there are no current or threatened eminent domain proceedings.

Since a misrepresentation of any of these facts can give rise to tort damages if the party making them knows or should have known they are untrue, the party making the representation should always try to limit its representation to actual knowledge as of the date of the lease, without duty of inquiry or investigation.

Warranties should be made only about the “title, quality or condition of the thing sold,” which in a lease is the title to the leasehold and the existence of encumbrances. Thus, a landlord can warrant that it holds fee simple title to the property; or that there are no encumbrances on landlord's title other than those revealed in a title commitment.

Since a party can be held liable for a breach of warranty even if it has no knowledge that the fact or thing warranted is untrue, warranties should only be made about things that the warranting party can ascertain are true at the time, in this case based on holding a deed to the property or through examination of title records.

Covenants should be made only about future performance. A landlord can covenant that premises to be built in the future will not contain hazardous materials; that on a future delivery date the premises will be zoned for a tenant's use; that throughout the term landlord will provide access to the premises from public roads. A party should never make a representation about a future condition, since it cannot have knowledge about what will happen in the future, but could be held liable for tort damages if the other party can establish negligence because the representing party should have known about the condition it was representing.

Conclusion

Although there is much confusion in the case law and disagreement in the commentaries about the distinct meanings and usefulness of each term in the “representation, warranty and covenant” triumvirate, there are ways to use each of these terms that make each term meaningful and provide known remedies for their breach.

M. Rosie Rees, a member of this newsletter's Board of Editors, is a Partner in the Chicago office of Pircher Nichols & Meeks in the firm's real estate department. The emphasis of Ms. Rees' practice is shopping center leasing on behalf of both landlords and tenants. David A. Schubert is with the Chicago office of the firm.

Many retail leases contain provisions in which a party to the lease “represents, warrants and covenants” to some proposition. These three terms are often used together, as if the drafter were hoping to cover all bases by the belts-and-suspenders approach. It is quite possible, however, that many attorneys are not sure what bases they actually need to cover, so they throw in all the words just in case.

But what does each of these words really mean in the context of a lease? What protection is each term actually giving the party for whose benefit they are stated? What obligations does each word impose on the party stating them? Do you need to say them all, or will two, or even one, do just as well?

Unfortunately, there is a dearth of case law interpreting these words in the commercial lease context. And an examination of the general case law and commentaries that discuss these concepts reveals more confusion than clarity on the subject.

The Confusion Between Representations and Warranties

A seminal contract case distinguishing representations and warranties with regard to the sale of goods, stated:

Representation is an antecedent statement which is made to induce the entering into the contract, but which is not a term in or element of that contract. Its purpose is accomplished when the contract is made. Warranty is an ' agreement, collateral but annexed to the agreement to transfer the title, by which the seller undertakes to vouch for the title, quality or condition of the thing sold ' [it] is, by the intention and agreement of the parties, a term in, a part of, or an incident to, that contract, and cannot exist without it.

AmericanFruit Product Co. v. Davenport Vinegar & Pickling Works, 154 N.W. 1031, 1036 (Iowa 1915).

But later in that same case, the court said, “A warranty, as counsel correctly define it, is a statement or representation [emphasis added] of quality or condition, made by the seller to induce the sale and relied upon by the buyer.” See also Quality Wash Group V, Ltd. v. Hallack , 50 Cal. App. 4th 1687; 58 CACal. Rptr. 2d, where the court describes a list of the seller's representations in a land purchase agreement as a warranty.

The overlapping of the representation and warranty concepts is also present in the definitions of each of these terms in the mergers and asset purchase arena, where representations are defined as “statements of past or existing facts” and warranties as ” promises that existing or future facts are or will be true.” (Emphasis added.) See Model Stock Purchase Agreement (1995) and Model Asset Purchase Agreement (ABA's Section of Business Law). In these definitions, both representations and warranties address “existing facts.”

As a result of this confusion, more than one commentator has concluded that the terms “representation” and “warranty” are virtually synonymous, and practitioners should avoid redundancy by using only the word “representation” and foregoing the word “warranty” entirely. See Kenneth A. Adam, “A Lesson in Drafting Contracts: What's Up with 'Representations and Warranties'?” Business Law Today, Nov./Dec. 2005; T. David Cowart, “Representations, Warranties and Risk: A Request for Restraint,” ALI-ABA Course Study Materials, Vol. II, March 2007.

Other commentators have tried to find a distinction by looking instead at the remedies available for a violation of a representation versus a violation of a warranty. Courts have consistently confirmed that when a party to a contract represents something to be true that such party knows (or should have known) is false, that misrepresentation is a tort. A successful claim would thus permit the injured party to be compensated for the injury proximately caused by that party's reliance on the misrepresentation, as well as punitive damages to discourage such socially unacceptable behavior.The misrepresentation also permits the injured party to rescind the contract. See Glenn D. West and W. Benton Lewis, Jr., “Contracting to Avoid Extra-Contractual Liability ' Can Your Contractual Deal Ever Really Be the 'Entire' Deal?'” The Business Lawyer, 64 Bus. Law 999, August, 2009, for an exhaustive examination of remedies for misrepresentation and breach of warranty.

An action for a breach of warranty, on the other hand, consistently has been held to give rise only to contract damages and not to rescission of the contract. Knowledge of the truth or falsity of the statement or representation is irrelevant. By making the statement in a contract, the contracting party has promised the fact to be true, has assumed responsibility for it, and will be liable to the other party to the contract if the statement is not true and the other party relied upon it to his or her detriment. However, because there is no guilty knowledge, there is no social harm that requires tort remedies to discourage. See, e.g., Metropolitan Coal Co. v. Howard , 155 F.2d 780, 2nd Cir., 1946 ["A warranty is an assurance by one party to a contract of the existence of a fact upon which the other party may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the promisor cannot control what is already in the past." See also Glen and Lewis, above.

Thus, another commentator, rejecting the position that the term "warranty" should be excised from contracts in favor of the term "representation," advocates instead that both terms should always be used in every contract, to permit the beneficiary to obtain the benefits of all possible remedies. See Tina L. Stark, "Another View on Reps and Warranties," Business Law Today, Jan./Feb. 2006.

The Confusion Between Warranties and Covenants

The term "warranty" can also dress up as a covenant.

Covenants have been distinguished from representations because they are promises of performance in the future, in contrast to statements of the existence of a past or present fact. See Central States v. Wintz, 1996 U.S. Dist. Lexis 1438.

In real estate contracts, a covenant is "an agreement or promise of two or more parties that something is done, will be done, or will not be done. In modern usage, the term covenant generally describes promises relating to real property that are created in conveyances or other instruments." Hollis v. Garwall, Inc. , 137 Wn.2d 683, 690 (1999).

But warranties are also defined as promises or covenants. As noted above, in mergers and asset purchase agreements, warranties are defined as "promises that existing or future facts are or will be true."

And in the context of real estate conveyance instruments, a "warranty" is defined as a covenant by the grantor of the condition of title to property. See Ochse v. Henry , 202 Md. App. 521, 2009.

It is also interesting to note that in contrast to the definition of covenants as promises of future performance in the mergers and asset purchase context, a "covenant" in the Hollis case, above, involving covenants of real estate interests, is defined as a promise not only that something will be done, but also that something is done, which is the same as a "warranty" of an existing fact.

So What Is the Drafter of a Retail Lease to Do?

Amidst this confusion of cases and commentaries, a scheme can be discerned that is useful for the leasing professional. The litany of representations, warranties and covenants retail landlords and tenants want from each other arises because a lease is both a conveyance of a real estate interest and a contract establishing the rights and obligations of the parties during the term the tenant possesses the leasehold. But this jumble can be sorted into three separate categories.

Representations should be made about "past or present facts" that one party knows or should have known, and that the other party does not know or does not want to spend the time or money to learn, as "antecedent statements which [are] made to induce the entering into” the lease. Examples of this type of statement are that a party has the power and authority to enter into the lease; that a party is duly organized under state law and authorized to transact business in the state; that the shopping center is zoned for a particular use; that the premises have not and do not contain hazardous materials; that there are no current or threatened eminent domain proceedings.

Since a misrepresentation of any of these facts can give rise to tort damages if the party making them knows or should have known they are untrue, the party making the representation should always try to limit its representation to actual knowledge as of the date of the lease, without duty of inquiry or investigation.

Warranties should be made only about the “title, quality or condition of the thing sold,” which in a lease is the title to the leasehold and the existence of encumbrances. Thus, a landlord can warrant that it holds fee simple title to the property; or that there are no encumbrances on landlord's title other than those revealed in a title commitment.

Since a party can be held liable for a breach of warranty even if it has no knowledge that the fact or thing warranted is untrue, warranties should only be made about things that the warranting party can ascertain are true at the time, in this case based on holding a deed to the property or through examination of title records.

Covenants should be made only about future performance. A landlord can covenant that premises to be built in the future will not contain hazardous materials; that on a future delivery date the premises will be zoned for a tenant's use; that throughout the term landlord will provide access to the premises from public roads. A party should never make a representation about a future condition, since it cannot have knowledge about what will happen in the future, but could be held liable for tort damages if the other party can establish negligence because the representing party should have known about the condition it was representing.

Conclusion

Although there is much confusion in the case law and disagreement in the commentaries about the distinct meanings and usefulness of each term in the “representation, warranty and covenant” triumvirate, there are ways to use each of these terms that make each term meaningful and provide known remedies for their breach.

M. Rosie Rees, a member of this newsletter's Board of Editors, is a Partner in the Chicago office of Pircher Nichols & Meeks in the firm's real estate department. The emphasis of Ms. Rees' practice is shopping center leasing on behalf of both landlords and tenants. David A. Schubert is with the Chicago office of the firm.