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.
Newark
New York
Trenton
Philadelphia
Wilmington
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
Newark
New York
Trenton
Philadelphia
Wilmington
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
Newark
New York
Trenton
Philadelphia
Wilmington
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
Newark
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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
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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?
Newark
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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
Newark
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Philadelphia
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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.
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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.
Newark
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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.
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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
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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
Newark
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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.
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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?
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Title Insurance
Title Commitments
Title Exceptions
Title Endorsements
Title Policies
Newark
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Title Commitments
Schedule A
Schedule B-1
Schedule B-2
Schedule C
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Title Exceptions
Standard Exceptions
Property Specific Exceptions
Easements
Deed Restrictions
Restrictive Covenants
Subdivision Plats
Removal of Title Exceptions
Newark
New York
Trenton
Philadelphia
Wilmington
Title Endorsements
Endorsements available in PA
Endorsements not available in PA
Affirmative Insurance
Gap coverage
Newark
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Trenton
Philadelphia
Wilmington
Title Policies
How is a title policy different from a title commitment?
What is a marked-up title commitment?
Newark
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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
Newark
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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
Newark
New York
Trenton
Philadelphia
Wilmington
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
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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
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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
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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
Newark
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Philadelphia
Wilmington
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
Newark
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Representations and Warranties
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
Newark
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Representations and Warranties
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.
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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.
Newark
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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
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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
Newark
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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.
Newark
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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.
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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)
Newark
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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
Newark
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Trenton
Philadelphia
Wilmington
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
Newark
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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
Newark
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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
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