Condition vs. Warranty Clauses In Real Estate – What’s The Difference?

As a prospective buyer or seller of real estate, you may have encountered the terms “condition” and “warranty” – or alternatively, the longer form “representation and warranty”. If not, it is only a matter of time until you do. These terms are distinct and refer to different types of contractual obligations. Prior to signing your Agreement of Purchase and Sale, it is important that you understand the difference.

What is a Condition?

In an APS, a conditional clause legally operates as a “condition precedent”. A condition precedent is a legal term for some sort of event or action that must occur before the transaction can be completed.

In real estate transactions, buyers will often insist or request that certain conditions be included in the APS. These conditions help protect the buyer against common pitfalls and give the buyer a chance to investigate and decide whether to proceed. However, these aren’t necessary clauses, and some buyers will purposefully make unconditional offers to increase the likelihood that their offer is accepted.

Generally, there are three possible outcomes for a condition:

1. The Condition is satisfied and the transaction proceeds as planned.
2. The Condition is waived by the buyer. The waiver may happen in two ways. First, the buyer may choose to waive the condition. Second, conditions will commonly include a specified timeframe, which, once elapsed, the condition will be considered waived.
3. The Condition is unfulfilled, and the transaction is void.

Contractual conditions should be reserved for items which are non-negotiable for the buyer. The most common conditions included in real estate transactions are:

• Home Inspection: The buyer, or a qualified home inspector, can obtain a satisfactory home inspection report of the property;
• Financing: The buyer can obtain a satisfactory first mortgage to finance their purchase of the property;
• Escape Clause: The seller can continue marketing their property even after accepting a conditional offer – to learn more, click here.

When inserted into the APS, buyers should ensure the conditional period is long enough to actually allow them to take advantage of the condition. For example, with a home inspection clause, buyers should give themselves enough time to retain a home inspector, conduct the inspection, and review the inspection results.

What is a Warranty?

A representation and/or warranty is a promise from the seller about the state of the property or system, which may give the buyer a remedy if the promise turns out to be false.

In real estate, buyers will request warranties on items of importance, but which are not vital to the transaction going through. If it turns out that the warranty is not true, then the buyer is typically entitled to damages for the value of their loss from the breach of warranty, but the core property sale remains in place. As such, warranties protect the buyer but not to the same degree as a condition, which allows the buyer to completely void the transaction if broken.

As with conditions, buyers willing to take on more risk may choose not to ask for certain or all warranties in their offer to increase the likelihood of acceptance. In the same vein, a condition may be reduced to a warranty.

The most common warranties in real estate transactions are:

• Fixtures & Chattels: The fixtures and chattels included are in good working order;
• Electrical, Plumbing, Etc.: The electrical, plumbing, mechanical, heating and A/C systems are in good working order;
• Illegal Substances: The property has not been used for the growth or manufacture of illegal substances;
• Stigmas: The property has not been affected by psychological stigmas, murders, suicides or similar;
• Defects: There are no known latent defects to the property.

Typically, real estate warranties will include language to the effect of “this representation and warranty shall survive and not merge on completion of this transaction but apply only to the state of the property on completion of this transaction.” This language accomplishes two things. First, the warranty will only apply to the state of the property on the closing date. Any failures, defects or other issues that only arise after closing will not be covered under the warranty. Second, the warranty will be enforceable after closing.

Final Thoughts

Understanding the difference between a condition and a warranty can help buyers and sellers better assess risk, remedies, and whether a transaction should proceed. Before entering into your Agreement of Purchase and Sale, make sure that you understand all of your rights and obligations.

This blog was co-authored by summer law student Trevor Herr.