LOS ANGELES-Commercial property buyers spend a lot of time carefully negotiating for seller representations and warranties that the seller is authorized to do the deal, no litigation affects the property, the property is in good condition, and the seller is not a registered terrorist.

Sellers counter by carefully negotiating time limits on survival and a cap on their liability for these representations and warranties, as well as a dollar threshold that claims must exceed before the seller can be sued.

Buyers frequently miss, however, one structural issue that may make all that careful negotiation rather pointless.

Most real estate owners hold each of their properties in a separate limited liability company whose sole asset is the property. This structure helps insulate a real estate portfolio from a bad property's ill effects, and many lenders require it to reduce the concern that the parent company's financial problems or bankruptcy will impair their ability to recover the loan.

Once the sale of real property closes, though, the seller immediately distributes the money up to its owners. Why leave all that money in a company that just sold its only asset and has no other business?

That means, of course, that the seller from whom the buyer just got all those comforting representations hasn't a nickel to its name with which to answer the buyer's claims on those representations.

There are other seller post-closing obligations on which buyer may be relying. Provisions allocating the property's revenues and expenses between the buyer and seller often call for a post-closing true-up when estimated revenues and expenses are finally determined. If the post-closing true-up requires a payment from the seller, the buyer may be out of luck.

What is a buyer to do?

One approach might be to make a claim against the seller's parent entities to which the sale proceeds were distributed, on the theory that the distribution was inappropriate in light of seller's remaining obligations under the purchase agreement. In some states this may have merit, particularly if the seller entity has dissolved. For this reason, seller parents will often delay dissolving the entity until the survival period has expired. In other states, it is quite difficult to pierce the entity's veil.

Another approach is to require in the purchase agreement that the seller leave a portion of the purchase price in escrow until expiration of the survival periods to answer claims on seller's post-closing obligations. However, sellers will resist leaving money in a low-interest escrow account.

Probably the best approach in most situations is to require that the seller's parent—the entity receiving the sale proceeds, or another deep-pocketed entity—guarantee seller's post-closing obligations. This gives the seller's parent the ability to put all of the sale proceeds to work elsewhere, and gives the buyer the comfort that if he needs to make a claim on the carefully-crafted reps, someone will be there when he calls.

Tom Muller is co-chair of the land use and real estate practice group at Manatt, Phelps & Phillips LLP. The views expressed in this column are the author's own.

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