- A waiver-of-reliance clause is standard language in most commercial real estate purchase agreements.
- The waiver clause solidifies that buyer is not relying on the representations of seller when purchasing the property but is doing its own due diligence.
- If worded properly, a waiver of reliance clause may nullify any fraud or fraudulent inducement claims that the buyer could have.
Commercial real estate purchase agreements can be very long and detailed. They contain a lot of information and clauses. The ones we draft for our clients are often 30-40 pages long and have a lot of brilliant lawyer-speak in them. And while that can be irritating, the language is often essential for us to protect our client’s interest and help them navigate purchases and sales and minimize risk.
One of the areas we often use to minimize risk is a waiver of reliance (“WOR”) section. This section came up recently for us when one party sued another for fraud after the purchase. The arguments from the buyer were much less effective because of the WOR clause.
But how do you determine whether a WOR clause is effective? This is what we will be discussing this week and how it can be beneficial to you.
What is a Waiver of Reliance Clause and What does It Cover?
When a buyer is purchasing commercial real estate, it generally relies on its own due diligence to determine whether the acquisition is a good one for it. The buyer needs to request the documents and information it wants from the seller and then do its own analysis to determine whether it wants to acquire the property. It should not rely on what the seller is telling it about the property.
A WOR clause basically codifies this position in writing in the purchase agreement. It generally states that the buyer is not relying on any representations the seller has made and it is doing its own due diligence and analysis of the project. Because it is doing its own due diligence, the buyer cannot blame the seller if something goes wrong after purchase.
But a WOR clause may have even more power than that. If drafted properly, it may nullify the possibility of a suit for fraud. But to do this, it must be written in accordance with the Texas Supreme Court guidelines.
Determining Whether a WOR Clause is Effective Against Fraud Claims
It is black-letter Texas law that proof of reliance is an essential element of fraud and fraudulent inducement claims. That’s why a WOR clause may be so important in nullifying a fraud or fraudulent inducement claim. If the parties’ intent is clear and specific, a WOR clause may disclaim reliance on certain representations, thereby negating reliance-based claims like fraud and fraudulent inducement.
To determine whether a WOR clause is sufficient to nullify a fraud or fraudulent inducement claim, the Texas Supreme Court has instituted a two-step analysis. First, the Court determines whether the parties to the contract used clear and unequivocal language. Second, the Court evaluates the circumstances surrounding the contract’s formation to determine whether the disclaimer is binding. A court will then also use a five factor analysis to evaluate the circumstances around a contract’s formation. This includes determining whether:
- The terms of the contract were negotiated or boilerplate;
- the parties specifically discussed the topic of the later dispute during negotiations;
- the complaining party was represented by counsel;
- the transaction was arm’s length; and
- the parties were knowledgeable in business matters.
Assuming that the language of the WOR clause and the circumstances surrounding the contract show that two sophisticated parties freely entered into the agreement, then the buyer may very well have waived any fraud or fraudulent inducement claims it could have against the seller.
Its extremely important, therefore, to understand what waiver language is included in your purchase agreement and the full extent to what you may be waiving.
