Representations and Warranties - How to Buy a Residential Assisted Living

This week we will be discussing the “Representations and Warranties” section of the typical asset purchase agreement used when buying or selling a residential assisted living home. These are found in the “Agreement” Section of the asset purchase agreement.

A Brief Refresher Before Beginning

We have recently been writing several articles about the different elements of a typical asset purchase agreement used when buying or selling a residential assisted living. the asset purchase agreement A typical asset purchase agreement for the purchase of a residential assisted living business will include several important elements.  Blogs on the first paragraph, the background section, the agreement’s section, typical contingencies, and the business assets can be read by clicking the links.

What Are Representations and Warranties?

Representations and warranties are statements of fact and promises made by one party to another in a contract.

A representation is a statement of fact made by one party to another in a contract that relates to the present or past condition of the assets, liabilities, or other aspects of the business being sold.

 A warranty is a promise or guarantee made by one party to another in a contract that relates to the future performance or quality of the assets, liabilities, or other aspects of the business being sold. A warranty can be breached if the promise or guarantee is not fulfilled or turns out to be false.

Together, the “Representations and Warranties” are like enforceable promises about the truth of important matters. These can cover a wide range of topics, from the seller's authority to sell the assets to the absence of pending litigation, or the absence of regulatory enforcement actions by the agency licensing assisted living homes.

Key Components of the Representations and Warranties Section

A typical asset purchase agreement for assisted living homes, or giant senior living facilities, will include the items listed below:

1. Authority to Sell:

The seller promises the buyer that they're allowed to sell what they're selling. They're saying no one else has a right to it and there are no debts attached to it that would negate the authority to sell.

2. No Undischarged Obligations:

The seller represents (warrants/promises) that there are no outstanding obligations that would materially affect the assets being sold, unless disclosed otherwise to the buyer.

3. Absence of Liens:

There are no existing or pending liens or security interests against the assets being transferred. The buyer will want to be certain about what they are buying and their ability to purchase the business without surprise claims.

4. Consents:

The seller promises that no additional approvals or consents are required from governmental entities or other parties, to approve the sale. With assisted living residences, there is usually an exception for the license transfer. The license transfer must be approved by the government.

5. Inventory Quality:

There will be representations about the nature and quality of the material items associated with the business. However, generally, the seller insists that the material is “fit for its intended use and free from significant defects, suitable for normal business operations.” There can be more complicated representations if there is specialized equipment.

6. Tax and Staff Payment Obligations:

The seller will be required to confirm that all taxes owed have been or will be paid, and that staff-related obligations, including wages and benefits, have been or will be fully paid prior to the closing date.

7. Insurance Coverage:

The seller will be required to provide the buyer with copies of relevant insurance policies covering the business and assets being sold.

8. Compliance with Laws:

IMPORTANT: The seller will be required to confirm that they are in compliance with all relevant laws, regulations, and orders applicable to the business. This includes ensuring that any outstanding regulatory issues are addressed before the closing date.  A buyer will sometimes be shocked as they discover things during the first few weeks of operations. Sometimes those things are clearly illegal.

9. Non-Compete Agreement:

The seller will be required to confirm that they will not open a competing assisted living residence within a specified geographic area and time frame after the closing date without the buyer's written consent.

The representations and warranties section of a contract covers important matters that both buyer and seller rely upon when choosing to go forward with the exchange. By clearly outlining these assurances between buyer and seller, this section helps manage risks and ensures transparency in the transaction that can be taken to the bank – and, if necessary, to the courts.

In truth, you will find these same sections in the asset purchase agreements of $200 Million senior living transactions. They are fundamental.

The information herein is intended to be educational and an introduction to the subject matter presented. It is NOT specific legal advice to be relied upon for specific individual circumstances. Contact your own legal professional or reach out to our firm if you would like specific advice on this topic.

Look for additional blog posts on topics of interest to Assisted Living, Group Homes and Behavioral Health operators.  We welcome topic suggestions!  Write to info@pinkowskilaw.com if you are curious to learn more about a certain topic impacting assisted living or other group housing concerns.