Archives for October 2013

Contracts, Leases, Easements and Legal Stuff in general: Attorney review, first! Sign, second. Not vice versa!!

From time to time I’m going to post quick thoughts as they occur to me that I think are worth saying, and worth repeating, perhaps over and over, because as events happen throughout the day here in the law office I’m continually reminded of general rules that seem basic to attorneys yet aren’t understood by non-attorney folk, even those who, although they’re very smart, maybe even well educated, are just not well versed in legal matters.

One of these is this: When presented with a commercial real estate (“CRE”) contract, a residential real estate contract, a lease, an easement or, for that matter, just about any significant legal document, please have it reviewed by your attorney before you sign it! I can’t tell you how often people contact me and say “I just signed this contract. Will you look it over?” I can tell you already the answer is going to be “Sure, but no matter what it says you’re stuck with it because you already signed it. I’m glad to tell you what it says but I doubt we can change it at this point.” Sigh. Remember, attorney review, first, then sign. Not vice versa!

In the area of CRE leases, in particular, some prospective tenants don’t understand the impact of signing the Letter of Intent (the “LOI”) when negotiating with the landlord. Unlike most other types of transactions in which the LOI is just the beginning point of negotiations and is non-binding on the parties, the LOI in a CRE leasing situation is commonly understood to be, basically, the “contract” between the landlord and tenant, at least with regard to the business terms. After the LOI is signed in a CRE leasing situation, the tenant is generally stuck with the business terms stated in the LOI, which will be inserted directly in the lease. In commercial leasing situations, then, don’t even sign the LOI before you get attorney input unless you are a sophisticated commercial tenant and know what you’re doing.

So, if you learn nothing else from this blog, please remember: Attorney review, first! Sign, second. Please.

BH

Due Diligence – Title Review

In my last post I provided a broad overview of the types of things you should investigate during your due diligence period as the buyer under a commercial real estate contract. Now I’d like to start breaking that down into more specific topics. Typically, the due diligence to be performed can be broken down into at least three basic parts: (1) Title review, (2) Survey review, and (3) Analysis of the physical condition of the property, including the uses permitted on the property and its ecological and environmental status. Your transactional commercial real estate attorney will typically address the title and survey review, in particular, while the buyer and the buyer’s engineers, land use attorney, environmental professionals or others address the physical condition and land use matters. Therefore, in this article and future articles on this topic, I am going to focus on title and survey review … because that’s what I do. Although I do get involved in land use and environmental matters to some extent, I am not a land use or environmental attorney and shouldn’t be opining on those subjects as if I were.  So, to get started on our discussion of title review, then, lets just focus on the “title commitment” for the time being because the process starts with delivery of the title commitment to the buyer.

The Title Commitment

Within the time period required under your contract, you will either receive from the seller or obtain yourself (depending on who is paying for it under the terms of the contract) a title commitment. The title commitment is the title insurance company’s commitment to insure your ownership interest in the property provided certain requirements are met. The title commitment consists of three parts: (1) Schedule A, the first page of the commitment, which details the date through which the title has been searched, the identity of the proposed insured party (i.e. the buyer,) the current owner of the property and the legal description of the property, (2) Schedule B-I, which lists the requirements the title agent must satisfy in order to close the transaction and issue the title policy, and (3) Schedule B-II, which lists all matters against which the title company is unwilling or unable to insure, known as the “title exceptions.” In other words, your title insurance policy will  insure your ownership interest in the propery “except for” those items listed on Schedule B-II.

Title Commitment – Schedule A

Typically, Schedule A just needs to be reviewed for accuracy. Is the name of the proposed insured correct? Is the proposed amount of insurance correct (i.e. the purchase price of the property)? Is the legal description of the property correct? A close review of the legal description can be tedious but is critical. The legal description of the property as shown in the seller’s vesting deed, the survey of the property and the title commitment should, in almost all circumstances, be identical. No mistakes, typos or discrepancies allowed!

Title Commitment – Schedule B-I

Schedule B-I can be thought of as providing a road map for the title agent to follow in that it lists certain requirements that must be satisfied in order for the agent to issue the title insurance policy. For example, the first thing listed is always “payment of the consideration.” Obviously, the buyer has to pay for the property. In addition, all closing costs must be paid, including the title insurance premium. The second thing listed is always a description of the conveyance document(s) that are required to be recorded to convey title to the property. Usually, this is a deed from the seller to the buyer. If a loan title policy is being issued, a mortgage from the buyer to its lender will be listed. Other requirements that may be listed include things such as satisfying existing mortgages and liens, obtaining dismissal of any law suits or judgments affecting the property, obtaining a current survey of the property, terminating notices of commencement for previously performed or ongoing work and so on. In addition, if the seller is an entity, the title agent will be required to confirm the good standing of the entity and review its corporate, LLC or partnership documents, as the case may be, to ensure that it has the ability to lawfully convey the property and that the person executing the documents has the authority to execute documents on behalf of the entity. While it isn’t unusual to have to deal with more unusual requirements, such as completing the probate of an estate, for example, ideally all of the requirements would fall within the categories of (1) paying the consideration, (2) recording the deed and/or mortgage, (3) obtaining a current survey and (4) obtaining evidence of good standing and authority.

Title Commitment – Schedule B-II

Schedule B-II lists all of the title exceptions, meaning all of the things your title policy will NOT insure against. There are two kinds of title exceptions: (1) standard title exceptions, which are general in nature in that they are not specific to any particular matter or document and include vague statements like “[anything] that would be shown by a current survey,” and “rights or claims of parties in possession,” and (2) specific title exceptions, which are specific items affecting the title, such as recorded easements, current leases, taxes for the year of closing that aren’t yet due, recorded restrictions and other matters of record. This is one area where your real estate attorney, as title agent, can earn his or her keep. If you think about it, the standard exceptions, if not deleted, are very broad descriptions of matters that could adversely affect your ownership interest in the property. In fact, they’re just plain vague. Therefore, if you accept a policy containing all of the standard exceptions you have essentially purchased a title policy in which the title company says, in basic terms, “we are insuring the title to your property against everything … well, except for all of these broad categories that include almost everything we don’t want to insure against.” Keep in mind, your attorney’s/title agent’s duty is to provide you with the broadest possible coverage. The way to do that is to do the work necessary to eliminate all or most of the standard exceptions and to meticulously review all of the specific items listed to see if they can be deleted, as well. The more exceptions that are deleted, the more your title policy insures against and the more valuable the title policy is to you, the insured. Even aside from the title insurance aspect, the more exception items that can be deleted or resolved the greater your comfort level with respect to your ownership and use of the property, so a diligent effort to remove as many title exceptions as possible is a worthwhile endeavor.

The title exceptions in Schedule B-II must be read very closely to determine their effect on the property or its use. Attention to detail is important. For example, the plat of the property may contain setbacks or easements that affect where improvements can be located, easements may exist that give third parties rights to enter onto your property, property associations’ covenants and restrictions may impose rules, fees and obligations you may or may not be able to live with, leases may exist that should be assigned to the buyer or terminated, and so on. It takes an experienced commercial real estate attorney to properly assess and decide how to resolve these types of title issues so that you get the most insurance coverage for your money. An experienced Florida commercial real estate attorney can help you with the title review processes to make sure you get the most out of your new property and your title insurance policy. As always, get legal input early in the process!!  Thanks for reading, BH