newark new york trenton philadelphia wilmington delvacca presents: real estate for in-house counsel:...

Newark New York Trenton Philadelphia Wilmington

DELVACCA PRESENTS:

Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals

May 6, 2010

Philadelphia, PA

Delvacca thanks Gibbons P.C. for sponsoring this event.


Real Estate For In-House Counsel: An Examination of Title Issues,

Contracts and Negotiations in Real Estate Deals

Panel:

Alfred R. Fuscaldo, Esquire

Michael G. Moyer, Esquire

Aileen Schwartz, Esquire


Agreements of Sale and Title Insurance

Presentations on these topics could take 1 ½ days (or more) as opposed to the 1 ½ hours we have today

Will provide a general overview of both topics

Re: Agreements of Sale – a discussion of the standard provisions with a focus on the three or four areas that are typically most important from a buyer’s perspective

Re: Title Insurance – a discussion of title commitments, title exceptions, title endorsements and title policies

Please feel free to ask questions


Agreements of Sale

Focus on agreements of sale for commercial property

There is no such thing as a “form” agreement of sale

Virtually every provision is negotiable

Every deal is different, so every agreement must be tailored accordingly


Agreements of Sale

Prepared an annotated form of agreement of sale

Compilation of provisions from number of different agreements

Included in the annotated agreement are practice tips and drafting tips to think about while preparing an agreement

Not comprehensive list by any means, but is a good starting point

Review basic provisions

Will be discussing certain areas in more depth

quality of title

due diligence

representations and warranties

default remedies


Property Description

What exactly is being conveyed/ purchased?

Land?

Improvements?

Personal Property?

Leases?

Intangibles?

What is not being purchased?

Is the seller retaining the rights to a portion of the “bundle of sticks”?

Coal rights?

Gas rights?

Timber rights?


Buyer Entity

Consideration should be given to the type of Buyer entity

Entity formation is typically involves considerations of the type of financing, liability and taxes

The preferred way to insulate a primary corporate entity from liability is to create an affiliated Single Purpose Entity (SPE) to take title to the property

Entity choice based on taxes varies by State. In PA, typically use a limited partnership with an limited liability company (LLP) as the general partner in order to get more favorable tax treatment


Property Description

How can the real property be described?

Metes and bounds legal description

Uniform Parcel Identifier or County Tax Parcel Number

Reference to a lot in a recorded subdivision plat

Reference to the parcel by the prior deed by recording book and page number

If the survey metes and bounds legal description of the property differs from the legal description contained in the deed into the Seller, then the Buyer should insist that both legal descriptions be contained in the deed into Buyer, and have the title insurance company insure both legal descriptions.


Purchase Price

What is the total purchase price?

Consider specifying an allocation of the purchase price between real property and personal property in order to lessen the amount of realty transfer tax.

Allocate the purchase among separate parcels if more than one lot is being sold/ purchased.


Purchase Price - Deposits

Is there a deposit/ multiple deposits based on certain milestones?

Does a deposit become non-refundable (“go hard”) at some point prior to closing?

Determine who will hold the escrow monies. Title Company.

Determine whether the deposit monies will be placed into interest bearing account and whether interest will be credited against purchase price.

There is no legal requirement that an escrow agent place the deposit monies in an interest bearing account.


Purchase Price

Have escrow agent execute a mutually agreeable (to Seller, Buyer and Escrow Agent) escrow agreement setting forth its obligations re: the deposit

Be comfortable with the Escrow Agent in the case of bankruptcy. The deposit monies may not be protected.

Closing monies should be in the form of immediately available funds not subject to stop payment

Cashier’s check

Certified check

Bank check

Wire transfer


Conveyance of Real and Personal Property

The real property (land and fixtures) is conveyed by way of a deed.

In PA, Seller will provide a Special Warranty Deed, as opposed to a General Warranty Deed

A Special Warranty Deed covenants to protect the grantee against adverse claims against title that arose during the grantor’s time of ownership

A General Warranty Deed covenants to protect the grantee from adverse claims against title from the time when title to the property was first created

Any personal property is conveyed by Seller to Buyer pursuant to a Bill of Sale


Quality of Title

Buyer should require that Seller provide “good and marketable title”

Marketable title is “title is one that is free from liens and encumbrances and ‘which a reasonable purchaser, well informed as to the facts and their legal bearings, willing and ready to perform his contract, would, in the exercise of that prudence which businessmen ordinarily bring to bear upon such transactions, be willing to accept and ought to accept’”. Barter v. Palmerton Area School District, 18 Pa Super 16, 20 (1990).

“Title is not marketable if it is such that the grantee may be exposed to the hazard of a lawsuit. However, where there is no color of outstanding title which might prove substantial, and there is no reasonable doubt either at law or in fact concerning the title, the mere possibility of some future litigation concerning it does not prevent the title from being good and marketable.“ Id.


Quality of Title

Buyer should never agree to take title “subject to encumbrances and other matters of record” because there will invariably be something recorded against the property, and until the Buyer obtains a title commitment, reads the exceptions and review those exceptions against the survey, the Buyer will not understand how those encumbrances impact the property or the Buyer’s intended use.

As a compromise, Buyer could agree to take title subject to encumbrances of record which do not materially adversely affect the Buyer’s intended use of the property

How does a Buyer determine what title issues exist with respect to the property?


Title Insurance

Title Commitments

Title Exceptions

Title Endorsements

Title Policies


Title Commitments

Schedule A

Schedule B-1

Schedule B-2

Schedule C


Title Exceptions

Standard Exceptions

Property Specific Exceptions

Easements

Deed Restrictions

Restrictive Covenants

Subdivision Plats

Removal of Title Exceptions


Title Endorsements

Endorsements available in PA

Endorsements not available in PA

Affirmative Insurance

Gap coverage


Title Policies

How is a title policy different from a title commitment?

What is a marked-up title commitment?


Due Diligence

Arguably the most important part of an agreement

Buyer needs the ability to make an independent examination of the property to make sure it is suitable for its needs

Buyer needs to create a Due Diligence Review Period of sufficient length to get comfortable with the property

Buyer needs the ability to terminate at any time during that Due Diligence Period for any reason or no reason and to be refunded its Deposit.

The decision to terminate during the Due Diligence Period should be completely subjective on the part of the Buyer


Due Diligence

Title Review

Review the vesting deed

Review title exceptions

Read all of the title back-up documents

Send a title objection letter requiring the Seller to cure title issues to the extent curable

Survey review

ALWAYS get a survey

It’s the only way to properly review the title report

The survey should contain a certification from the surveyor in favor of the Buyer, title company and Buyer’s lender, permitting them to rely on the accuracy of the survey. This certification will permit the title company to remove the standard survey exception from the policy.

Could be a long lead time item so set DDP length accordingly


Due Diligence

Survey review

ALWAYS get a survey

It’s the only way to properly review the title report

The survey should contain a certification from the surveyor in favor of the Buyer, title company and Buyer’s lender, permitting them to rely on the accuracy of the survey. This certification will permit the title company to remove the standard survey exception from the policy.

Could be a long lead time item so set DDP length accordingly

One potential alternative to a Buyer’s ordering its own new survey is to determine whether the Seller has a recent survey and have the surveyor recertify that survey as accurate


Due Diligence

Zoning Review

Zoning Code

Zoning File

Prior use approvals

Prior development approvals

Conditions attached to approvals

Current permitted use

Limitations on current use

Ability to get additional development approvals

Property Review

Access

Utilities

Building area


Due Diligence

Environmental Review

Phase I

Phase II

Structural Review of Buildings

Other items to review:

plans

leases (including subleases, if any) and rent rolls

brokerage agreements

environmental studies and reports

geotechnical studies and reports

option agreements, ROFO, ROFR,

casualty insurance policies

environmental insurance policies

Any agreements that do not terminate as of Closing


Due Diligence

employee records

engineering studies and reports

feasibility studies and reports

governmental permits and licenses

governmental applications

correspondence with government agencies

notices of violations

assessment notices

past, present or potential litigation actions

incident reports

third party licenses

service contracts


Representations and Warranties

The negotiation of the representations and warranties during the preparation of the Agreement of Sale is essentially the first form of due diligence for the Buyer

Allows the Buyer to flag issues before the execution of the Agreement.

A fishing expedition in a sense,

The reps and warranties that Buyer requests from Seller should be as expansive as possible.

The Seller refusal to provide certain reps, or its inability to give certain reps without qualification help the Buyer learn more about the property

It’s a form of discovery



Reps and warranties will merge into the Deed at Closing unless the parties agree that they will survive for a specific period of time after Closing. (Doctrine of Merger)

Buyer should seeks survival period of 6 months to a year at a minimum

Buyer should require that the Seller execute a Restatement of Representations and Warranties at Closing that also restates the survival period as additional guard against the doctrine of merger



Seller should limit the scope of its representations by qualifying them as to “Knowledge”. “Knowledge” should be defined as the “actual knowledge, without investigation or inquiry, of [a specific person or persons]”. This helps to prevent the Seller from being imputed to have the knowledge of all of its employees, and also avoids Seller having to expend funds to perform an investigation as to its representations.


Apportionments

Transfer Tax

The convention in Pennsylvania is the Seller and Buyer split the payment of transfer tax evenly, although the parties can negotiate a different split if they so choose. This is different from the convention in New Jersey where the Seller is responsible for the payment of all of the transfer tax (except in the case of a Mansion Tax in a residential transaction, which is typically the Buyer’s responsibility.)

In Pennsylvania, the realty transfer tax is two percent (2%) of the portion of the purchase price allocated to the real property, with one percent (1%) being paid to the County and one percent (1%) being paid to the Commonwealth; except that the transfer tax for transaction in the City of Philadelphia is four percent (4%) with the additional two percent (2%) being paid to the City.


Apportionments

Transfer Tax

Another option to consider is to purchase the entity which owns the property, particularly if the entity is an SPE, and that way avoid paying transfer tax

Generally all other charges and bills, such as water rents, sewer rents, real estate taxes (school and County) are apportioned pro rata as of the date of Closing


Collateral Closing Documents from Seller

Deed

Resolutions; Title Company Affidavits, Etc.

Certification Statement (Philadelphia “City Cert”)

Affidavit as to Liens

Bill of Sale

Assignment and Assumption of Licenses and Permits

Assignment of Service Contracts

Assignment of Intangible Personal Property

FIRPTA Affidavit

Closing Statement

Restatement of Seller’s Representations and Warranties


Bulk Sales Clearance Certificates

If the Property constitutes fifty-one percent (51%) or more of the assets of Seller located in Pennsylvania, the Seller must obtain a clearance certificate from the PA Department of Revenue stating that it owes no corporate or sales tax.

In the event that the Seller does not obtain that certificate prior to closing, then the Buyer becomes liable for any outstanding corporate or sales tax obligations of the Seller.


Casualty/ Risk of Loss

Under the doctrine of equitable conversion, the Buyer under an executed agreement of sale bears the risk of loss as the result of a casualty, unless the parties specifically agree otherwise in the agreement.


Default Remedies – Seller

Seller’s Default Remedies, generally unless otherwise negotiated

Rescission of Agreement and retention of Deposit with interest and reimbursement out of pocket expenses (capped?)

Rescission of Agreement and payment to Seller of difference between value of property on date of breach and the negotiated purchase price, plus out of pocket expenses (capped?)

Specific Performance (purchase of the property by Buyer in return for payment of the purchase price)


Default Remedies – Seller

Most often parties negotiate the retention of Deposit as liquidated damages as the Seller’s sole remedy

Liquidated damages are enforceable so long as:

The amount is not a penalty,

The amount is a reasonable forecast of actual damages

The harm caused by the breach is difficult to measure

The amount is reasonable compensation for the loss

Liquidated damages amounts of approximately 9% and 10% of the purchase price have been upheld in Pa as reasonable and not a penalty


Default Remedies - Buyer

Buyer’s Default Remedies, generally unless otherwise negotiated

Rescission of Agreement and repayment of Deposit with interest and out of pocket expenses (capped?)

Rescission of Agreement and payment to Buyer of difference between value of property on date of breach and the negotiated purchase price, plus out of pocket expenses (capped?)

Specific Performance (conveyance of the property to Buyer in return for payment of the purchase price)

At the very least, Buyer should be sure to negotiate right to rescind and be made whole, and the right to specific performance


Assignment of Agreement of Sale

As a result of a 2008 ruling by the PA Department of Revenue, the assignment by the Buyer of its interest in the Agreement of Sale (even to a related entity formed specifically for the purpose of acquiring the property) could be construed as a transfer by the PA Department of Revenue and result in imposition of transfer tax

Essentially a double transfer tax on the property

Revenue treats the assignment as a conveyance of the property

The position of the PA Department of Revenue appears to be contrary to the realty transfer tax statute and existing caselaw, so the area is uncertain


Assignment of Agreement of Sale

Buyer should consider creating the acquiring entity in advance and having that entity be the “Buyer” under the Agreement

This is not ideal as in most cases, the Buyer enters into the agreement and, when it is comfortable that the deal is going to close, it forms a related SPE and assigns the its interest to that entity

Seller should make sure that Seller’s obligation to pay its share of the transfer tax does not include transfer tax imposed as a result of an assignment by Buyer.

Not aware of instances where this has been enforced, but it is something to keep in mind, particularly if the transaction is high profile and a potential audit target by the Department of Revenue

newark new york trenton philadelphia wilmington delvacca presents: real estate for in-house counsel:...

Documents

real property

title exceptions

title endorsements

title policies

esquire slide

examination of title

form agreement of sale

property entity choice