Knowledge Qualifiers in Loan Representations

Efficient markets rely, in part, upon an exchange of information between participants and pricing mechanisms that account for unequal access to any such critical information. Accordingly, transactional real estate attorneys negotiate complex documents such as loan agreements and purchase-and-sale agreements that, among other things, attempt to address and appropriately quantify the risks of information inefficiencies. Generally speaking, both mortgage lenders and purchasers of real estate rely upon physical inspections and due diligence, bolstered by legal representations of the party having superior knowledge of any particular state of facts. The maker of any representation, in essence, warrants the accuracy of its representations, normally incurring some degree of liability to the extent such statements are untrue.

The maker of a representation must necessarily temper the risks associated with its statements by qualifying the degree to which it has investigated the matters at hand, including qualifications as to the scope of such party’s “knowledge,” whether being “to the best of,” “actual knowledge” or “actual knowledge after due inquiry.” Negotiations over representations and any accompanying liability, not dissimilar to the legal wrangling associated with the differences between “best efforts,” “commercially reasonable efforts” or “good faith efforts,” hinge on the duty of inquiry assumed by the maker with its representation. This article addresses the legal protections (on the part of the maker) and risks (on the part of the relying party) afforded by representations and any related qualifications in transactional matters.

Flat Representations