Articles Posted in Sales and Acquisitions

Surveys are an essential element of any real estate acquisition. Whether it is a residential transaction or a commercial transaction, the purchaser should always obtain a new survey. The only exception is with the purchase of a condominium unit. Since a condominium is a subdivision of air rights, the declaration of condominium already includes a survey of the property and of the unit, and since once constructed the unit does not change in size, a survey is generally not necessary. Review of the recorded declaration of condominium is generally sufficient.

All surveys are certified to a number of parties: the owner, the title insurance company, the lender, and the attorneys involved in the transaction. The parties to whom it is certified are the parties that rely upon it. An issue that often comes up is whether the purchaser should obtain a new survey or have an existing survey re-certified to them. This is when an old survey is not updated nor is the property re-measured by the surveyor, but instead they simply change the names appearing on the certification. There is generally little cost in this as opposed to ordering a new survey. Generally we do not recommend this, as there is no assurance that something has not changed on the property since the last time the surveyor went and physically surveyed the property.

surveyor.jpgThe most common issue of concern in a residential survey is encroachments associated with fences and easements. Most real estate acquisition contracts treat survey issues as title defects. Therefore, it is critical to know whether your fence encroaches upon a neighbor’s property, or vice versa. Also, a purchaser needs to know whether any of the improvements constructed on the property encroach on utility or drainage easements. If they do, the homeowner may have to remove those improvements at their cost when water backs up on the neighbor’s property or when the utility comes calling because they need to maintain or replace an underground utility line. Easements must be kept clear by the owner for use by the easement interest holder, and if they are not clear, a potential purchaser needs to know of the encroachment and make a business determination of whether to proceed with the acquisition and assume the risk or declare it a title defect and have the seller correct it prior to closing.

In a commercial context, surveys can come in two forms: regular or ALTA (American Land Title Association) surveys. While both surveys will meet the minimum standards established by Florida statutes and show all items existing upon the property and the correct boundary lines, the ALTA survey is more detailed and therefore more costly. ALTA surveys require the purchaser to provide the surveyor with a copy of the title commitment for the acquisition, and the surveyor will then plot all easements, restrictions and other matters affecting title on the survey and delineate them by title exception number and recording information reference. They will also investigate zoning requirements (such as minimum number of parking spaces required, etc.) and building setback requirements and the like, and plot those items as well. From an attorney’s (and a buyer’s) perspective, an ALTA survey is always preferred. The higher cost differential may result in the client opting for the regular survey.

Purchasers should be aware that title insurance policies contain a standard exception excluding from coverage any item that could be discovered through a survey. That is why it is so important to obtain a survey for each acquisition. Our other real estate attorneys and I write regularly in this blog about important legal and business issues impacting commercial and residential real estate in Florida, and we encourage real estate industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

The Federal Deposit Insurance Corporation (FDIC) recently announced a change in the manner in which it sells real property. As of April 1, 2013, most properties owned by the FDIC will be sold with a reservation of mineral rights retained by FDIC unless the buyer specifically negotiates a higher price for the mineral rights to be included. The exceptions to this change in the method of sale of properties by the FDIC are condominium units and properties valued at $50,000 or less. All other properties will be subject to the exception for mineral rights. If the buyer elects to purchase the mineral rights, mineral contractors will provide a valuation of those rights and the buyer will be responsible for all associated expenses in obtaining the valuation.

For properties located in rural areas, the FDIC will also retain rights to use the surface of the property and have surface access to mine upon the property. The FDIC will waive those rights for properties located in incorporated cities, but it may retain the rights for subsurface access to mine from adjacent parcels. All of these reservations must be noted in the deeds of conveyance.

mrights.jpgAnyone considering purchasing FDIC-owned property which is not exempt from this new requirement should be aware of the impact on the future value and development potential. First, ordinary property analysis of comparable area properties likely will not be appropriate as mineral rights are not normally excluded from sales. Hence, existing comparables may be higher. In addition, buying the property subject to the mineral rights reservation may impair the ability to sell or develop the property. Any buyer who considers such a purchase from the FDIC must analyze both the risk of the FDIC exercising its rights and the chilling effect on future sales and development.

Another important point is the impact on financing. Lenders do not look favorably on a property which is subject to the rights of a third party to enter and conduct mineral exploration and any number of other detrimental activities. It is not likely that a third party lender would be willing to finance a purchase or provide any type of development or construction funds if these rights are floating out there.

In addition, there is no title insurance coverage available in Florida to protect an owner in this scenario. Title insurance policies would include the standard exception for mineral rights and access rights, if those rights have not been waived by the FDIC.

Since this program is just going into effect, it is possible that the FDIC will change course if there is push back from the purchasing and lending communities. In the meantime, all buyers negotiating purchases from the FDIC should be aware of the risks in purchasing properties subject to the new requirements.

Our other real estate attorneys and I write about important legal and business issues affecting the Florida real estate industry in this blog on a regular basis, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

Stuart H. Sobel.JPGStuart Sobel’s work since 2008 on behalf of the estate of the late interior designer James Wallace Tutt III was chronicled in an article in yesterday’s Miami Herald and another report in today’s Daily Business Review. Stuart prevailed before the Third District Court of Appeal in securing a judgment in favor of the estate in a case involving the famed designer’s $2.9 million sale of the one-acre Bahamian island Caribe Cay. Tutt was the interior designer for Gianni Versace’s South Beach mansion as well as a mansion owned by Cher, and he also became famous as the owner of the boutique Rock House hotel on Harbour Island near Eleuthera in the Bahamas where past guests have included Elle Macpherson, Naomi Campbell, Diane von Furstenberg, Barry Diller and Uma Thurman.

As a result of the ruling, creditors seeking title to the private island that Tutt had sold to a Coral Gables developer facing bank fraud charges will be required to await the ruling of a Bahamian court that is presiding over the matter.

“It’s been hundreds of thousands of dollars of legal fees to get to this point, and it never should have happened,” Stuart was quoted in the Daily Business Review article.

Tutt negotiated the sale of Caribe Cay to developer Guy Mitchell in 2006 but never signed a contract. Mitchell then relocated to the island, began making payments to Tutt and eventually paid all but $7,000 of the purchase price but did not want to take formal title. Tutt later learned Mitchell wanted Punto Larga Ltd. to be named as purchaser.

One creditor had obtained a $52.4 million judgment in New York against Mitchell and others over a failed hotel deal, and a second company won a $4.2 million stipulated judgment against Mitchell and others in Miami-Dade County.

These creditors served Tutt with a writ of garnishment to seize Mitchell’s assets, and Punto Larga sued Tutt in the Bahamas to demand that he transfer title to Caribe Cay to the company.

dbr logo.jpg“Sobel said he kept telling the others to take their complaints to the Bahamas, but they insisted on pursuing garnishment in the United States,” reads the Daily Business Review article. “That’s what I told these guys five years ago: Come down to the Bahamas. We don’t care who gets the property,” Stuart is quoted.

Initially, the Miami-Dade Circuit Court issued summary judgment in favor of Tutt, and the Third DCA reviewed the decision and sent the case back because Tutt had not asked for summary judgment and the hotel creditor had not been notified.

Tutt died of heart problems in June 2010, and in November 2010, his estate was sued by one of the Mitchell creditors for specific performance, unjust enrichment and breach of contract. The Miami-Dade Circuit Court last March granted summary judgment against the creditor and dismissed its complaint, and the decision was now affirmed by the appellate panel.

In the article from the business pages of Thursday’s Miami Herald, Stuart concludes: “We’re looking forward to delivering the deed to whichever entity the Bahamian court decides is entitled. As the court wrote, while the facts were complex and convoluted, the issues were really simple and always have been.”

Click here to read the article from The Herald.

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Sometimes a party leasing a parcel of property wants to have the right to purchase the parcel in the future, thereby protecting its leasehold investment in the property. The tenant typically asks for a right of first refusal to purchase the property if and when the landlord receives an offer. That is the key difference between a right of first refusal versus a right of first offer. The right of first refusal is triggered when a third party initiates an offer to the owner/landlord.

A right of first refusal is often seen by an owner as an impediment to selling the property because the owner is concerned that a third party will not want to incur the expense of drafting a contract and negotiating its terms only to have the property purchased by the tenant exercising its right of first refusal. This is a very legitimate concern for an owner.

A compromise might be to grant the tenant a right of first offer. The right of first offer is initiated by the landlord/owner when it decides to put the property up for sale. It must first offer it to the tenant before listing the property for sale to the general public. It may not be a total protection for the tenant, but it is a reasonable compromise.

cre2.jpgThe tenant will want to negotiate some price and timing protections so that the landlord is not able to offer the property to the tenant for unfavorable terms and then list it for more favorable terms to the public. The landlord should also limit the offer to a one-time situation such that if it does not achieve a sale to the public when it first offers the property it is not required to offer it again to the tenant. The landlord should also condition the right upon the tenant not being in default. It may also insist that it is personal to the tenant and is not available to any assignees. The landlord must also make sure that a transfer to the lender by way of foreclosure or deed in lieu of foreclosure is exempted from the right of first offer.

The tenant may also want to protect its interest by recording a memorandum evidencing its rights so as to make sure that the landlord does not go behind its back and sell the property without the tenant’s knowledge. If a memorandum is recorded, appropriate releases of this right should also be held by the landlord in escrow so as to release the title encumbrance when and if the tenant does not exercise its right to purchase.

These rights are difficult to negotiate and document, and the other South Florida real estate attorneys at our firm and I have a great deal of experience in negotiating and codifying them on behalf of landlords as well as tenants. We write regularly in this blog about important legal and business matters affecting commercial real estate in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

A letter of intent (“LOI”) is a preliminary agreement that is used to outline a general understanding of the basic business terms of an anticipated real estate transaction. LOIs are generally used to establish the general framework of the business deal and are intended to serve as an outline for the lawyers to use in drafting a binding, formal purchase and sale agreement or lease agreement.

There are many reasons parties enter into an LOI. Business owners generally prefer to have one to determine whether it is worthwhile to invest the time and money of hiring a lawyer to do a formal purchase agreement. If the parties are unable to agree to the general framework, then there is no need to incur the expenses of drafting a formal agreement that may never be acceptable to the other side.

Unfortunately, business owners do not always engage an attorney to draft the LOI, and that could lead to trouble. The legal implications of LOIs are often misunderstood, and unless drafted properly, an LOI could be found to be a wholly enforceable contract by a court of law. Rarely, if ever, do the parties actually intend for that to happen, but multiple courts have found LOIs totally binding, some have found them partially binding, and still others have found them non-binding.

Most LOIs include a provision at the end making them non-binding. Generally that is the intent of the parties. Once the LOI is accepted, the parties engage counsel to draft the formal agreement. Until the final agreement is signed, generally, neither party is bound to the other. The tricky part is the interrelationship between some of the business terms outlined in the body of the LOI and the exculpation clause at the end. If one of the terms requires that the parties will not deal with anyone else for a specified time over the real property in question, then the parties have created a partially binding LOI. Such obligation has been enforced by courts, and the failure to deal exclusively with the other party has been found to be a breach and subjected the violating party to damages.

Another issue that creeps up is the common law obligation of “good faith and fair dealing.” Such obligation is implied by law upon contracting parties in a number of jurisdictions, and the failure to negotiate in good faith towards a contract as contemplated in the LOI has also been found to be actionable. Therefore, unless excluded with specificity in the LOI (and depending on the language in the LOI), a party to the LOI may be forced to negotiate with the other party even if it has been approached by an independent third party who is willing to make a better offer.

To be safe, counsel that is familiar with the drafting of LOIs should review the LOI before it is sent to the other side or accepted by the receiving party. While, admittedly, the purpose of an LOI is to reduce the client’s legal costs, the failure to have counsel draft or review an LOI may have unexpected consequences that could have been easily avoided.

The South Florida real estate lawyers at our firm have substantial experience in the drafting of LOIs. We write regularly in this blog about important business and legal issues for the commercial real estate industry in Florida, and we encourage industry followers to enter their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

In many purchase transactions, a key element of the negotiation is the condition of the property and what representations, if any, a seller is willing to make as to the condition of the property being sold. Often the seller insists that the sale is in AS-IS condition and shifts all the responsibility for determining the true condition of the property to the purchaser by granting a time frame within which the purchaser has the right to have the property inspected and, if not satisfied, cancel the deal and walk away.

In commercial transactions the responsibility of the seller in disclosing known but hidden defects is often less than that in a residential transaction, but that depends on the jurisdiction, and state case law differs on this topic from state to state. So, all sellers and their counsel should be advised of the law in their particular jurisdiction. Even if the transaction is an AS-IS sale, the buyer will want to obtain some representations as to known and hidden defects, as well as other issues that may not be readily discernible during inspections.asis.jpg As such, even in an AS-IS deal, it is typical for the seller to make some representations. This typically results in some hybrid element with a statement in the contract which states that “other than as represented, the transaction is AS-IS.”

Sophisticated sellers and their counsel will often insist on an additional paragraph in the AS-IS paragraph (which is often inserted in bold print) stating that the buyers are sophisticated real estate professionals and are knowledgeable about inspections and the conditions of property and the like. This shields the seller from a potential claim or argument that the buyers did not really understand what AS-IS truly meant, and that they did not know how to conduct proper inspections. Often times disgruntled purchasers make these claims against the seller post -closing. In addition, the seller will often insist on including language that states that the purchaser conducted inspections of the property, was aware of its condition as of the end of the inspection period and agrees to waive all rights to object to the condition of the property if they elect to proceed to closing.

At the end of the day, AS-IS clauses create many challenges for the contract drafter. They can be truly and completely AS-IS or only partially so. Each word could be critical in the interpretation of the clause, should a claim arise post-closing.

The other real estate attorneys at our firm and I are extremely experienced in the drafting of commercial real estate contracts, and we are available to help clients with these contracts from our offices in Miami-Dade, Broward and Palm Beach counties. We write about commercial real estate legal and business issues in this blog on a regular basis, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

We were recently involved in a transaction where the buyer’s counsel insisted on numerous representations and warranties from the seller in a transaction involving the sale of a free-standing, single-tenant retail location where the tenant was primarily responsible for the operation and maintenance of the property. The seller resisted many of these requests given that the tenant was primarily responsible for many of the issues being addressed and the seller was in no position to make representations on issues for which it had no direct knowledge. It is not uncommon for the buyer and their counsel to ask the seller to make representations on many issues, as even if a transaction is an AS-IS sale or a variation thereof, the seller still is often required to make representations as to certain issues. Subsequently, this is where the negotiations begin.

The negotiations usually are centered on the scope of the representation and the level of knowledge of the individuals deemed to have knowledge, and imputing that knowledge to the selling entity. Assuming that both the buyer and seller have the same bargaining power, the non-controversial representations (those dealing with corporate good standing, corporate authority, authorized signatories and the like) are generally drafted to be absolute non-qualified representations, as the items discussed therein are absolute. For example, either the company is in good standing or it is not; and verification of such item is fairly easy. So those items are rarely negotiated.

warranties and reps.jpgThe issue becomes those areas that are not easily ascertainable and which are more appropriately within the domain of the seller’s knowledge. A typical one is the status of tenant leases, security deposits, rent rolls and the like. In a typical retail situation, the selling landlord has absolute control of these facts, and it is fairly common for the buyer to receive representations from the landlord as to these issues. In a large company or a REIT, the issue of “actual knowledge” becomes important when making representations. Not everyone at the company will have the same level of knowledge as to all issues. So, the standard of knowledge is negotiated, as is the liability of anyone making the representations. Generally, the resolution is that the liability for disclosure is limited to the “actual knowledge” of the individual signing the sales contract. Also, it is typical for the seller’s counsel to insist that even though the contract addresses the actual knowledge of that individual, the individual himself/herself will not have any personal liability in the event that the representations are later found to be incorrect. Only the selling entity shall have liability.

Another area of great negotiation is environmental disclosures. Nevertheless, since this is an area that is generally easily determinable through investigation during the inspection period, many times the seller refuses to make any representations except as to disclosing prior known and treated contamination.

Our firm’s other real estate attorneys and I have years of experience in negotiating warranties and representations in sales contracts. We write about important commercial real estate legal and business issues in this blog on a regular basis, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.