An article was published recently in the Minneapolis-St. Paul Star Tribune by Kenneth Harney, a nationally syndicated real estate columnist, that discusses the underwriting changes by Fannie Mae and Freddie Mac, and new restrictions being put into place by private mortgage insurers. As a result of these changes condo loans and refinancings could be more difficult to obtain. According to Mr. Harney, AIG United Guaranty, a major private mortgage insurer, will be changing its underwriting requirements effecive May 1 and will no longer write coverage on condominiums located in certain geographic locations, which it designates as having "declining" market conditions. The ban is across the board in those zip codes, regardless of a borrower's credit score, assets or equity position.
Buyers will see more requirements of at least 10% down. Applications for loans to purchase or refinance a condo located in projects where 30% or more of the units are not owner-occupied may be rejected.
If you are buying a condo and can put 20% or more down, then you will not be affected by the new private mortgage insurance standards.
The new due diligence requirements from Fannie Mae and Freddie Mac essentially shift significant paperwork and time burdens onto the lenders and brokers and also forces them to warrant the accuracy of their research. Another example is Fannie Mae now requires loan officers to ensure that at least 10% of the condominium's current operating budget is reserved for capital expenditures and deferred maintenance. The loan officer will not have any wiggle room to take into consideration other factors that might mitigate or compensate against an lower percentage in the "reserve" category. Due to the up front paperwork burden and rigid requirements an overworked and understaffed lender or broker may simply look at a condo project's line item for "reserves" and if it is below the 10% threshold, then simply reject all loan applications for units in that project.
The end result will likely be that lenders will back off of condos and condo owners will be the losers.
For more information, check out Kenneth Harney's article.
If the Form Does Not Fit, You Must Alter It - #2 (Watch Your Language [and Intent] With Letters of Intent)
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“Time kills all (commercial) deals” – Fred Richman.
Most real estate investors/developers feel the way Mr. Richman (this author’s father and favorite real estate client) does. Since the time from handshake to signed purchase agreement can range from weeks to months, many commercial buyers/sellers and landlords/tenants feel the need for some written semblance of a deal in the interim. Typically, an agreement in principle, or “letter of intent (LOI)” is signed which details agreed basic terms (e.g. price, payment terms) but conditions the parties’ obligations on preparing/executing a more formal, definitive contract. Frequently, the LOI is crafted without legal assistance or review, and ranges from paragraphs to pages in length. Other considerations such as outlining the deal for lenders, avoiding full disclosure requirements or establishing an exclusive negotiation period may also dictate the need for a LOI.
Most real estate investors/developers feel the way Mr. Richman (this author’s father and favorite real estate client) does. Since the time from handshake to signed purchase agreement can range from weeks to months, many commercial buyers/sellers and landlords/tenants feel the need for some written semblance of a deal in the interim. Typically, an agreement in principle, or “letter of intent (LOI)” is signed which details agreed basic terms (e.g. price, payment terms) but conditions the parties’ obligations on preparing/executing a more formal, definitive contract. Frequently, the LOI is crafted without legal assistance or review, and ranges from paragraphs to pages in length. Other considerations such as outlining the deal for lenders, avoiding full disclosure requirements or establishing an exclusive negotiation period may also dictate the need for a LOI.
The question buyers, sellers, landlords, tenants and their attorneys must answer before utilizing an “off the shelf”, form letter of intent is: what is the intent of their letter of intent? Some parties intend to be bound by the letter of intent, while others utilize same merely for initiating or monopolizing negotiation with the other party. Under Ohio law, both parties must have a clear understanding of the terms of the agreement and an intention to be bound by its terms before an enforceable contract is created. Arnold Palmer Golf Co. v. Fugua Industries, Inc. 541 F.2d 584 (6th Cir. 1976); Normandy Place Assoc. v. Beyer, 2 Ohio St. 3d 102, 105-106 (1982) (“The enforceability of [an agreement to make an agreement] depends… on whether the parties have manifested an intention to be bound by its terms and whether these intentions are sufficiently definite to be specifically enforced”). Unless absolutely clear in the LOI, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The problem is that juries, for example, may not be familiar with contract formation language or the difference between final agreements and letters of intent. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call.
In the Arnold Palmer case, the initial agreement in question clearly had as a condition, a later, definitive agreement to be prepared between the parties. The District Court (lower court) in “Palmer” found for the Defendant, reasoning that there could be no breach of contract claimed by the Plaintiff, because no final contract was created by signing their conditional, agreement to agree. The Sixth Circuit in Palmer reversed the District Court’s decision, determining that the initial agreement was a six page, detailed contract, with enough contract language to send the issue back to the lower Court to determine intent. Clearly, the Defendant in Palmer intended the initial agreement to be no more than an “agreement to agree”, and the Plaintiff intended the contract to have been virtually finalized at the initial agreement stage.
Courts will often look to determine whether or not essential terms of the deal are spelled out in an LOI (or other initial agreement) to help determine the undeclared intent of the parties re: enforceability. In the context of leases, the fact that terms such as maintenance and repair obligations, buildout obligations, indemnity provisions, default provisions and insurance terms were missing from a letter of intent led the Court in Joseph v. Doraty, 77 Ohio L. Abs. 381 (1957) to the conclusion that since material lease terms were missing, no final lease agreement was reached at the LOI stage. See also Cannon Rd. LLC v PSC Metals, 2002 Ohio App. LEXIS 5876 (8th Dist.).
As a result of these cases, {and contract law cases confirming general requirements for contract formation, such as offer and acceptance, consideration, meeting of the minds and certainty as to essential contract terms [See, e.g., Nilavar v Osborn, 711 N. E. 2nd 726 (Ohio Ct. App, 2nd Dist.1998)], parties intending to be legally bound by a letter of intent should: (a) include all material terms of the deal; (b) make a clear statement of intent to be bound; (c) sign the document; and (d) provide for an exchange of money or other consideration. Why a “binding LOI”? A party believing that it is making a fabulous deal will want to “seal the deal” as early as possible. Any mention of a later agreement should clarify that such agreement is merely to memorialize the terms agreed to in the letter of intent.
Parties not intending to be legally bound by a letter of intent should consider not utilizing same. For example, a seller of a property in great demand may be better off not to risk that its early negotiations become a binding deal with the first party that expresses interest. If abstinence is not a practical option, the risk of the letter having binding effect may be minimized by the following, nonexclusive drafting suggestions:
(i) Entitle the document “Negotiation Proposal,” or something similar, instead of “Letter of Intent”;
(ii) Draft, in bold, a provision containing clear language, indicating that the document is not binding and should not be relied upon as such, and the parties do not intend to create legal obligations unless/until a formal, written purchase agreement (lease or other “final agreement”) is later prepared and executed by the parties;
(iii) Do not provide a signature block (or have signature indicate receipt only, not assent);
(iv) Make sure the proposed terms in the document contain the contingencies that would appear in the formal contract. If the document is held to be binding, but the contingencies do not occur, the result should be that performance obligations are excused due to non-satisfaction of the contingencies.
(ii) Draft, in bold, a provision containing clear language, indicating that the document is not binding and should not be relied upon as such, and the parties do not intend to create legal obligations unless/until a formal, written purchase agreement (lease or other “final agreement”) is later prepared and executed by the parties;
(iii) Do not provide a signature block (or have signature indicate receipt only, not assent);
(iv) Make sure the proposed terms in the document contain the contingencies that would appear in the formal contract. If the document is held to be binding, but the contingencies do not occur, the result should be that performance obligations are excused due to non-satisfaction of the contingencies.
Finally, parties that desire their letters of intent to be no more than agreements to agree re: the substance of the deal, but want to clearly agree on an exclusive negotiation period, or deal with preliminary due diligence and confidentiality matters can easily do so. In such instance, a simple, clear declaration to the effect that: “this LOI is non-binding and subject to a final definitive agreement between the parties hereto, EXCEPT FOR the provisions contained in Section___, which the parties hereto agree shall be binding upon them, from and after the Effective Date …” would be in order.
The simple moral of this story: “Watch your language with Letters of Intent”. If the LOI for your transaction “does not fit” (your intent), you must alter it. Otherwise, it may be worth a lot more than the paper it is written on, especially to an aggrieved party.
Upcoming Teleconference: Common Pitfalls of Certificates of Insurance
MortgageWatch Seminars is presenting a teleconference on June 4, 2008 titled "Common Pitfalls of Certificates of Insurance." The teleconference runs 1 hour, 30 minutes, beginning at 1:00 pm ET and is sponsored by Lorman Education Services. Learn more about this teleconference.
Upcoming (NAIOP) Seminar- Commercial Real Estate in Northeast Ohio
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April 30, 2008, 7:30 a.m. – 10:00 a.m. NAIOP (National Association of Industrial and Office Parks) is sponsoring a two-part event focusing on the state of the commercial real estate market in Northeast Ohio. Part one will be a panel discussion (Panelists: David Browning of CB Richard Ellis; Daniel Walsh, of Key Real Estate Capital Markets; Daniel Mullinger, of National City Bank Real Estate Finance; Peter Rubin of The Coral Company and Spencer N. Pisczak, of Premier Development Partners, LLC) on topics including current regional real estate statistics; the credit crunch and lending practices; trends in commercial real estate; and where lending is headed. The second part will be an economic forecast both for the region and nationally by top economist, Dr. Ken Mayland. An opportunity for Q & A is to follow each part.Fees: Members: $50.00; Non-Members: $75.00; Location: Western Reserve Building 1468 W. 9th Street Cleveland, OH 44113; For More Information: Contact NAIOP’s Northeast Ohio Chapter at (440) 889-0010: www.naiop.org/NORTHERN_Ohio
USA.gov - The U.S. Government's Official Web Portal
USA.gov is a web site designed for citizen access to governmental information on the Internet. It provides links to all branch’s of the federal government, government agencies, and to state, local and tribal government. Through this web site you can:
- access an an A-Z agency index
- search for government information by topic
- access mortgage calculators or conversion calculators for any type of measurement
- search for homes and other real estate for sale by the government
- shop government auctions
- search and apply for government jobs
- find federal forms
- contact elected officials
- access the FAA’s Flight Delay Information - Air Traffic Control System Command Center
- check out the beachgoer’s water quality map
The site provides a link to state governments in all 50 states and in the U.S. territories, and to the web sites of towns, cities and county governments. You can even access links to the various tribal governments. Best of all, if you find all the information on this web site to be overwhelming, USA.gov provides online tutorials on finding government information.
SEC Ruling Will Set Future of the TIC (Tenant - in- Common) Industry
If you are a licensed real estate agent, you probably aren’t sitting on the edge of your seat, but you should be. In the last ten years, we’ve witnessed the birth of the tenant-in-common (TIC) industry as a replacement opportunity for 1031 exchanges and the subsequent boom when the IRS publicly gave favorable guidance to these transactions in 2002.
TIC’s are a wonderful tool for real estate investment. They offer investors the ability to own professionally managed, high quality and well located assets that were previously only available to institutions and the ultra-wealthy. Not only are TIC investors attracted to more predictable cash flows, TIC deals often come pre-packaged with debt, management and leasing pre-negotiated. What makes them really work well for 1031 treatment, however, is that an investor can often exactly match their purchase price requirement in completing a 1031 exchange. For example, it might be difficult to find a property that costs exactly $367,489.52, but a buyer may find a TIC property in which they can buy a deeded share for a percentage the works out to be exactly that amount.
Unfortunately, shortly after the boom in the number of TIC offerings, the U.S. Securities Exchange Commission (SEC) and securities brokers weighed in and claimed the TIC territory as their own. Because the SEC can instill fear and uncertainty, what many people understand to be a real estate transaction has in large part shifted away from the real estate industry and onto the plates of the securities brokers.
Tugging on the other side of the rope is the real estate brokerage community and the National Association of Realtors (NAR), who stand behind state laws governing the sale of real estate. TIC interests are, in fact, the purchase of a deed in bricks, mortar, and land. It seems unusual at best that a securities broker, not licensed in real estate, would be selling real estate. And so the battle grounds were laid, real estate agents on one side and securities sales persons on the other; neither it appeared, were willing to compromise.
It now seems, however, the SEC has broken its silence and offered a compromise. On November 9, 2007, the SEC published a notice for public comment that, if implemented, will allow real estate agents to receive a fee from securities brokers in ‘securitized’ tenant-in-common sales transactions. The public comment period ended in December and the SEC is rumored to be assembling the comments and contemplating the myriad of issues brought to light.
The SEC is calling the rule an ‘exemption’, that is, it exempts real estate professionals from being licensed by the SEC (through FINRA) for the purpose of selling TIC securities. This compromise, although not perfect, seems to make sense. Real estate professionals, after all, are certainly the best trained and most experienced people to help investors decipher real estate markets and analytics.
Assuming the SEC determines to move forward, the conditions placed on real estate agents who want to participate will be set. If nothing changes then a few of the rules, generally, will be (1) the agent cannot advertise that he sells TIC securities, (2) the agent has to have a signed representation agreement with the buyer, (3) the agent must have adequate experience in commercial real estate, and (4) the agent must be substantially in the business of commercial real estate other than TICs.
Even with these limitations (and because of them) several issues are giving folks some heartburn. Securities brokers are concerned that the limitation on advertising might be ignored and allow real estate agents to get around SEC rules governing general solicitation in private offerings. Real estate agents are concerned that they will be viewed as being ‘in the business’ of selling TICs and wind up in violation of SEC rules against selling a security without a license. These issues should be resolved in the final version of the exemption, but it remains to be seen how it will happen.
Several people in the industry close to the SEC believe the exemption will be issued in the coming months. And there are many reasons to be excited.
Real estate agents get a win here because they can represent their clients in finding replacement property for their 1031 and can now live without fear of the SEC and get paid for representing their clients. The same people can still get paid from non-securitized TICs.
The Sellers (or Sponsors) also get a win here. They now have access to more sales agents and more investors, which may be a boost of growth for an industry that has appeared to be slowing down.
The clear winner, however, is the investor. TIC transactions can be complicated and are typically sold with all of the financing and management in place. While these are good attributes for the investor, it can often be difficult to decipher the value of the bricks and mortar underneath the marketing materials and the pages of legalese. An experienced real estate professional can cut through the projections, analyze the market, and ultimately help the buyer make the best decision possible in a fast moving industry.
Edited and produced with permission and appreciation from the author, Mr. Todd Phillips, and publisher, Midwest Real Estate News Magazine. Mr. Phillips is Chief Financial Officer of Minneapolis-based Upland Private Equity Group. Midwest Real Estate News Magazine is one of the Country's pre-eminent commercial real estate publications, 'providing useful, unbiased and accurate coverage of the industry and its professionals since 1985'.
TIC’s are a wonderful tool for real estate investment. They offer investors the ability to own professionally managed, high quality and well located assets that were previously only available to institutions and the ultra-wealthy. Not only are TIC investors attracted to more predictable cash flows, TIC deals often come pre-packaged with debt, management and leasing pre-negotiated. What makes them really work well for 1031 treatment, however, is that an investor can often exactly match their purchase price requirement in completing a 1031 exchange. For example, it might be difficult to find a property that costs exactly $367,489.52, but a buyer may find a TIC property in which they can buy a deeded share for a percentage the works out to be exactly that amount.
Unfortunately, shortly after the boom in the number of TIC offerings, the U.S. Securities Exchange Commission (SEC) and securities brokers weighed in and claimed the TIC territory as their own. Because the SEC can instill fear and uncertainty, what many people understand to be a real estate transaction has in large part shifted away from the real estate industry and onto the plates of the securities brokers.
Tugging on the other side of the rope is the real estate brokerage community and the National Association of Realtors (NAR), who stand behind state laws governing the sale of real estate. TIC interests are, in fact, the purchase of a deed in bricks, mortar, and land. It seems unusual at best that a securities broker, not licensed in real estate, would be selling real estate. And so the battle grounds were laid, real estate agents on one side and securities sales persons on the other; neither it appeared, were willing to compromise.
It now seems, however, the SEC has broken its silence and offered a compromise. On November 9, 2007, the SEC published a notice for public comment that, if implemented, will allow real estate agents to receive a fee from securities brokers in ‘securitized’ tenant-in-common sales transactions. The public comment period ended in December and the SEC is rumored to be assembling the comments and contemplating the myriad of issues brought to light.
The SEC is calling the rule an ‘exemption’, that is, it exempts real estate professionals from being licensed by the SEC (through FINRA) for the purpose of selling TIC securities. This compromise, although not perfect, seems to make sense. Real estate professionals, after all, are certainly the best trained and most experienced people to help investors decipher real estate markets and analytics.
Assuming the SEC determines to move forward, the conditions placed on real estate agents who want to participate will be set. If nothing changes then a few of the rules, generally, will be (1) the agent cannot advertise that he sells TIC securities, (2) the agent has to have a signed representation agreement with the buyer, (3) the agent must have adequate experience in commercial real estate, and (4) the agent must be substantially in the business of commercial real estate other than TICs.
Even with these limitations (and because of them) several issues are giving folks some heartburn. Securities brokers are concerned that the limitation on advertising might be ignored and allow real estate agents to get around SEC rules governing general solicitation in private offerings. Real estate agents are concerned that they will be viewed as being ‘in the business’ of selling TICs and wind up in violation of SEC rules against selling a security without a license. These issues should be resolved in the final version of the exemption, but it remains to be seen how it will happen.
Several people in the industry close to the SEC believe the exemption will be issued in the coming months. And there are many reasons to be excited.
Real estate agents get a win here because they can represent their clients in finding replacement property for their 1031 and can now live without fear of the SEC and get paid for representing their clients. The same people can still get paid from non-securitized TICs.
The Sellers (or Sponsors) also get a win here. They now have access to more sales agents and more investors, which may be a boost of growth for an industry that has appeared to be slowing down.
The clear winner, however, is the investor. TIC transactions can be complicated and are typically sold with all of the financing and management in place. While these are good attributes for the investor, it can often be difficult to decipher the value of the bricks and mortar underneath the marketing materials and the pages of legalese. An experienced real estate professional can cut through the projections, analyze the market, and ultimately help the buyer make the best decision possible in a fast moving industry.
Edited and produced with permission and appreciation from the author, Mr. Todd Phillips, and publisher, Midwest Real Estate News Magazine. Mr. Phillips is Chief Financial Officer of Minneapolis-based Upland Private Equity Group. Midwest Real Estate News Magazine is one of the Country's pre-eminent commercial real estate publications, 'providing useful, unbiased and accurate coverage of the industry and its professionals since 1985'.
SAY WHAT YOU MEAN, PRECICELY, OR A JUDGE WILL DECIDE WHAT YOU MEANT- #1 (Watch Your Language with "Repair Clauses" in Commercial Leases)
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Courts will typically uphold language in a commercial lease, unless it is contrary to statutory law or public policy. Consequently, commercial landlords and tenants have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases. For example, a commercial landlord leery of its tenant’s credit could draft a provision calling for a one year vs. a one month security deposit and not be obligated to provide to tenant, the interest on that deposit (See Ohio Revised Code Sec. 5321.16 for rules governing security deposits in residential leases in Ohio).
When allocating responsibility for maintenance and repairs, most commercial landlords intend for their tenant to make most of the repairs, especially in a long term, triple net (NNN) lease. But what about “replacements”? Does repair mean replacement? Some landlords may think so, however, most courts have decided that if a landlord wants a tenant to replace the roof, for example, vs. patch it periodically, the lease must provide, to the effect, that “it shall be the tenant’s obligation to repair and replace the roof.” See ASP Properties Group v. Fard, 35 Cal Rptr 3d 343 (Court of Appeals, 2005). See also Robert A. Schoshinski, America Law of Landlord and Tenant, §5:18 at 271 (1980). In the ASP case, a lease amendment was prepared after the lease was signed, to add the roof to the list of items that the tenant was to repair and maintain in good and safe condition. However, the Court determined the list to be a list of repair obligations, not replacement obligations for the tenant. Simply stated, “the courts have held that an express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace”. Ohio Real Property Law and Practice, Sec. 20.08 [1]-[3] (2007).
Even the failure to follow a seemingly trivial grammar rule (the use of i.e. vs. e.g.) can result in unintended consequences. See Wolf v. Mitwalli, 1995 Conn. Super. Lexis 1480. In the Wolf case, the tenant intended for the landlord to make all of the “structural repairs”. The lease, which failed to define “structural repairs,” contained the following language: “The landlord is responsible for structural repairs only, i.e., air conditioning, boiler, wiring and utility replacements, provided tenant keeps up the maintenance.” The Court in Wolf held that the landlord was not responsible to make roof repairs, because “roof” was not included in the list of items provided in the lease.
The Court explained that “i.e.” means “that is” and “e.g.” means “for example.” In other words, the use of i.e. served to limit landlord’s structural responsibility to only those items listed in the lease. The Court determined that the language of the lease was clear and unambiguous, and therefore, it would not consider extrinsic evidence of the parties’ intent. The Court declared that it had no sympathy for the tenant who claimed he misunderstood the term i.e. and intended the lease to be interpreted as merely providing examples of the kinds of structural repairs to be effected by the landlord.
The moral of the story? Say what you mean, precisely, or a judge will decide what you meant.
Ohio Apartment Market on the Rebound
As is common in the real estate industry, when there is a slowdown in the home sales market, the apartment market speeds up and occupancy rates climb. Crain’s Cleveland Business, for the week of April 7-13, 2008, published an article by Stan Bullard titled “Rebound in apartment market lures developers.” In his article, Mr. Bullard highlights the entry of Indianapolis builder, Flaherty & Collins Properties, into the Westlake market, the move by the developers of Crocker Park in Westlake to build additional rental apartments, and plans by Harsax Inc. of Middleburg Heights to construct an apartment community in Medina County. These three projects are representative of other projects that area developers are pursuing in Northeast Ohio. As noted by Mr. Bullard:
For more information, check out Mr. Bullard’s article in Crain’s Cleveland Business
(Note: a digital or print subscription is required for access to certain content on Crain’s web site).
"Other new apartment communities also are under development in Northeast Ohio by developers who have remained active in rental projects through the years. Those projects, from Wadsworth to Solon, are by developers such as Richland Communities Ltd. of Middleburg Heights, Goldberg Cos. of Beachwood and Gross Buildings of North Royalton."
For more information, check out Mr. Bullard’s article in Crain’s Cleveland Business
(Note: a digital or print subscription is required for access to certain content on Crain’s web site).
IF THE FORM DOES NOT FIT, YOU MUST ALTER IT- #1 (Watch Your Language with "Off the Rack" Purchase and Sale Agreements)
The purchase/sale agreement is probably the most misunderstood, but most important document utilized in a real estate transaction. Some of the unwary mistakenly refer to the agreement as merely an offer, not understanding that if signed by (accepted by) the seller, it becomes a binding contract. Others, usually to justify not obtaining legal advice, fool themselves into believing that they only signed a standard form with unenforceable “boilerplate” (one-sided, protective) language. Whether the agreement is contained on a “standard,” printed form, is replete with boilerplate, or is entitled “offer to buy real estate and acceptance,” once signed by both parties, it will be held to be a binding, enforceable agreement to purchase/sell real estate with rights and obligations of the parties arising thereto (absent contract law-type defenses – i.e. no offer, acceptance, consideration; illegal; contrary to public policy).
It is true that title to a property cannot transfer without a deed and a closing. The closing however, merely carries out the provisions of the agreement. The agreement is of paramount importance as it defines the interest to be conveyed by deed, and determines the rights of the parties.
There are many different types of purchase/sale agreement forms is use. Real estate broker or legal stationary company “standard” forms are used in most residential and simple commercial deals. The inherent problem is that there is little that is standard about a real estate transaction. Every purchase/sale is unique since there are different types of property, different buyers and sellers (with different levels of motivation and sophistication) and different potential liability in each transaction. This author, however, is not advocating abolishment of standard forms. Obviously, the attorney looking to change custom, and prepare ten page contracts for small, “brokered” single family house deals will not generate a lot of business.
The real estate attorney’s optimal role can be analogized to that of a clothing store tailor. If the off the rack suit (contract form) does not fit, you must alter it. Inapplicable clauses can be crossed out and initialed by the parties on the form. Small insertions can be written in and initialed, and large insertions can be added by way of addendum.
One clause we rarely see in residential form contracts is the “Drop Dead Date” clause. The danger in not putting a deadline for both parties to sign (“Drop Dead Date”) is that the contract is not over until it’s over. For example, let’s say the buyer signs a purchase agreement for House #1 and sends it to the seller for signing. The seller takes two weeks to decide if it wants to accept the deal, and then signs the contract. If the buyer signs an agreement to buy House #2, one week after the buyer signed the contract for House #1, (figuring the seller of House #1’s silence meant it was not going to accept buyer’s low offer), the buyer must buy House #1, as well as House #2. The buyer can always send a notice to a seller, that it is terminating its offer (provided the notice is received by seller, prior to seller signing/accepting buyer’s offer), but buyers often forget to do that. An automatic Drop Dead Date clause, declaring the agreement void if not signed by seller within a week of buyer’s signing, would easily have prevented the problem exemplified above.
In commercial transactions, standard forms can rarely be relied upon, since the commercial transaction usually involves more dollars and more complexities. The problem we see most often with commercial contracts, is the over reliance on originally drafted forms for previous, “similar” deals, that are in reality, different in some way. For example, if the contract for seller’s “new deal” does not contain the clause: “subject to rights of tenants in possession”, because there were no tenants in seller’s previous, “similar deal”, the Seller would be in default, unless its Tenant voluntarily leaves the property before closing. This situation is more of a problem when a developer buys a property and wants to develop it for a new use, free from existing tenants.
Please note that brokers crossing out contract provisions and drafting new language may be crossing the line into the “unauthorized practice of law.” Contract modification is best effected with advice of counsel.
Finally, it is important to remind buyers and sellers to consult an attorney before the purchase agreement is signed. The disgruntled suit buyer can insist that the seller re-alter or accept the return of an ill-fitted suit. The disgruntled property buyer (or seller) however, has no legal grounds to insist that the other party accept changes to the contract after it is signed.
AUTHOR”S NOTE: In the “Watch Your Language” section of our Blog, we plan to:
1) Discuss, in general, language issues with various real estate forms and documents (The “If the form does not fit, you must alter it” Series). For example, this week we discussed the need to alter “standard” Purchase and Sale Agreement forms so they are tailor made for each unique real estate transaction.
2) Illustrate how specific wording and grammar (even placement of a comma) can change the meaning of a document, contrary to what one party intended, often with costly results (The “Say what you mean, precisely, or a judge will decide what you meant” Series).
It is true that title to a property cannot transfer without a deed and a closing. The closing however, merely carries out the provisions of the agreement. The agreement is of paramount importance as it defines the interest to be conveyed by deed, and determines the rights of the parties.
There are many different types of purchase/sale agreement forms is use. Real estate broker or legal stationary company “standard” forms are used in most residential and simple commercial deals. The inherent problem is that there is little that is standard about a real estate transaction. Every purchase/sale is unique since there are different types of property, different buyers and sellers (with different levels of motivation and sophistication) and different potential liability in each transaction. This author, however, is not advocating abolishment of standard forms. Obviously, the attorney looking to change custom, and prepare ten page contracts for small, “brokered” single family house deals will not generate a lot of business.
The real estate attorney’s optimal role can be analogized to that of a clothing store tailor. If the off the rack suit (contract form) does not fit, you must alter it. Inapplicable clauses can be crossed out and initialed by the parties on the form. Small insertions can be written in and initialed, and large insertions can be added by way of addendum.
One clause we rarely see in residential form contracts is the “Drop Dead Date” clause. The danger in not putting a deadline for both parties to sign (“Drop Dead Date”) is that the contract is not over until it’s over. For example, let’s say the buyer signs a purchase agreement for House #1 and sends it to the seller for signing. The seller takes two weeks to decide if it wants to accept the deal, and then signs the contract. If the buyer signs an agreement to buy House #2, one week after the buyer signed the contract for House #1, (figuring the seller of House #1’s silence meant it was not going to accept buyer’s low offer), the buyer must buy House #1, as well as House #2. The buyer can always send a notice to a seller, that it is terminating its offer (provided the notice is received by seller, prior to seller signing/accepting buyer’s offer), but buyers often forget to do that. An automatic Drop Dead Date clause, declaring the agreement void if not signed by seller within a week of buyer’s signing, would easily have prevented the problem exemplified above.
In commercial transactions, standard forms can rarely be relied upon, since the commercial transaction usually involves more dollars and more complexities. The problem we see most often with commercial contracts, is the over reliance on originally drafted forms for previous, “similar” deals, that are in reality, different in some way. For example, if the contract for seller’s “new deal” does not contain the clause: “subject to rights of tenants in possession”, because there were no tenants in seller’s previous, “similar deal”, the Seller would be in default, unless its Tenant voluntarily leaves the property before closing. This situation is more of a problem when a developer buys a property and wants to develop it for a new use, free from existing tenants.
Please note that brokers crossing out contract provisions and drafting new language may be crossing the line into the “unauthorized practice of law.” Contract modification is best effected with advice of counsel.
Finally, it is important to remind buyers and sellers to consult an attorney before the purchase agreement is signed. The disgruntled suit buyer can insist that the seller re-alter or accept the return of an ill-fitted suit. The disgruntled property buyer (or seller) however, has no legal grounds to insist that the other party accept changes to the contract after it is signed.
AUTHOR”S NOTE: In the “Watch Your Language” section of our Blog, we plan to:
1) Discuss, in general, language issues with various real estate forms and documents (The “If the form does not fit, you must alter it” Series). For example, this week we discussed the need to alter “standard” Purchase and Sale Agreement forms so they are tailor made for each unique real estate transaction.
2) Illustrate how specific wording and grammar (even placement of a comma) can change the meaning of a document, contrary to what one party intended, often with costly results (The “Say what you mean, precisely, or a judge will decide what you meant” Series).
Upcoming Seminars on Real Estate Topics
The following information relates to various real estate-related seminars that will be taking place in Ohio in the coming months. While we title this feature column as Continuing Legal Education, many of the seminar programs listed below provide credit hours for licensed professionals other than attorneys.Commercial Real Estate Financing in Ohio
Independence Ohio – May 7, 2008 – 8:30 to 4:30
For information see Lorman Education Services Website at www.lorman.com
Commercial Real Estate in Today’s Market
Cleveland, Ohio – Friday, April 11, 2008 – 8:30 AM to 11:45 AM
Cincinnati/Fairfield, Ohio – Friday, April 18, 2008 – 8:30 AM to 11:45 AM
Columbus, Ohio – Friday, April 25, 2008 – 8:30 AM to 11:45 AM
Canton, Ohio – Thursday, May 1, 2008 – 8:30 AM to 11:45 AM
Perrysburg, Ohio – Thursday, May 8, 2008 – 8:30 AM to 11:45 AM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Examining and Resolving Title Issues
Independence, Ohio – June 2, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Land Use and Zoning
Columbus, Ohio – Wednesday, April 9, 2008 – 8:30 AM to 4:15 PM
Cleveland, Ohio – Wednesday, April 16, 2008 – 8:30 AM to 4:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Land Use and Zoning Law Litigation
Cuyahoga Falls, Ohio – June 9, 2008 – 8:30 AM to 4:30 PM
Cleveland, Ohio – June10, 2008 – 8:30 AM to 4:30 PM
For more information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Landlord-Tenant Law in Ohio – Beyond the Basics
Akron/Fairlawn, Ohio – June 10, 2008 – 8:30 AM to 4:30 PM
For more information call 715-855-0498 or visit the
Sterling Education Services, Inc. website at www.sterlingeducation.com
Ohio Environmental, Energy & Resource Law Seminar
Mount Sterling, Ohio – Thursday, Friday and Saturday, April 24 - 26, 2008
(see website for times each day)
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Title Transfer
Beachwood, Ohio – Tuesday, June 24, 2008 – 8:30 AM to 4:30 PM
Cincinnati, Ohio – Wednesday, June 25, 2008 – 8:30 AM to 4:30 PM
Columbus, Ohio – Thursday, June 26, 2008 – 8:30 AM to 4:30 PM
For information see PESI website at www.pesi.com
The OSHA Top 10 Violation List
Free Breakfast Seminar
Independence, Ohio – Wednesday, April 16, 2008 – 8:00 AM to 11:00 AM
For information visit the BureauVeritas website at www.BureauVeritasHSE.com
Real Property Seminar
Columbus, Ohio - Thursday, May 15, 2008 - 9:45 AM to 12:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Residential Landlord Tenant Law
Cleveland, Ohio – Thursday, June 5, 2008 – 1:00 PM to 4:15 PM
Columbus, Ohio – Thursday, June 19, 2008 - 1:00 PM to 4:15 PM
Cleveland, Ohio – Thursday, June 5, 2008 – 1:00 PM to 4:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Residential Evictions
Cleveland, Ohio – Thursday, June 19, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Resolving Boundary Disputes Without Going to Court
Cleveland, Ohio – Wednesday, May 21, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Tax-Free Like-Kind Exchanges under Section 1031
Independence Ohio – May 7, 2008 – 8:30 to 4:30
For information see Lorman Education Services Website at www.lorman.com
Commercial Real Estate in Today’s Market
Cleveland, Ohio – Friday, April 11, 2008 – 8:30 AM to 11:45 AM
Cincinnati/Fairfield, Ohio – Friday, April 18, 2008 – 8:30 AM to 11:45 AM
Columbus, Ohio – Friday, April 25, 2008 – 8:30 AM to 11:45 AM
Canton, Ohio – Thursday, May 1, 2008 – 8:30 AM to 11:45 AM
Perrysburg, Ohio – Thursday, May 8, 2008 – 8:30 AM to 11:45 AM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Examining and Resolving Title Issues
Independence, Ohio – June 2, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Land Use and Zoning
Columbus, Ohio – Wednesday, April 9, 2008 – 8:30 AM to 4:15 PM
Cleveland, Ohio – Wednesday, April 16, 2008 – 8:30 AM to 4:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Land Use and Zoning Law Litigation
Cuyahoga Falls, Ohio – June 9, 2008 – 8:30 AM to 4:30 PM
Cleveland, Ohio – June10, 2008 – 8:30 AM to 4:30 PM
For more information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Landlord-Tenant Law in Ohio – Beyond the Basics
Akron/Fairlawn, Ohio – June 10, 2008 – 8:30 AM to 4:30 PM
For more information call 715-855-0498 or visit the
Sterling Education Services, Inc. website at www.sterlingeducation.com
Ohio Environmental, Energy & Resource Law Seminar
Mount Sterling, Ohio – Thursday, Friday and Saturday, April 24 - 26, 2008
(see website for times each day)
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Title Transfer
Beachwood, Ohio – Tuesday, June 24, 2008 – 8:30 AM to 4:30 PM
Cincinnati, Ohio – Wednesday, June 25, 2008 – 8:30 AM to 4:30 PM
Columbus, Ohio – Thursday, June 26, 2008 – 8:30 AM to 4:30 PM
For information see PESI website at www.pesi.com
The OSHA Top 10 Violation List
Free Breakfast Seminar
Independence, Ohio – Wednesday, April 16, 2008 – 8:00 AM to 11:00 AM
For information visit the BureauVeritas website at www.BureauVeritasHSE.com
Real Property Seminar
Columbus, Ohio - Thursday, May 15, 2008 - 9:45 AM to 12:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Residential Landlord Tenant Law
Cleveland, Ohio – Thursday, June 5, 2008 – 1:00 PM to 4:15 PM
Columbus, Ohio – Thursday, June 19, 2008 - 1:00 PM to 4:15 PM
Cleveland, Ohio – Thursday, June 5, 2008 – 1:00 PM to 4:15 PM
For information visit the Ohio State Bar Association Website at www.ohiobar.org
Residential Evictions
Cleveland, Ohio – Thursday, June 19, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Resolving Boundary Disputes Without Going to Court
Cleveland, Ohio – Wednesday, May 21, 2008 – 9:00 AM to 4:30 PM
For information call 800-930-6182 or visit the
National Business Institute website at www.nbi-sems.com
Tax-Free Like-Kind Exchanges under Section 1031
BNA Tax & Accounting Audioconference
Thursday, April 24, 2008 – 12:30 PM to 2:00 PM
For information call 800-372-1033 or register online at
http://tmstore.bna.com/Pagemanager.aspx?pageId=7135
Thursday, April 24, 2008 – 12:30 PM to 2:00 PM
For information call 800-372-1033 or register online at
http://tmstore.bna.com/Pagemanager.aspx?pageId=7135
An Overview of Our Feature Columns
In our efforts to provide you with consistently useful content, we have designed several feature columns that will be published periodically on the Ohio Real Estate blog. These columns are: “CLE Update,” “Featured Resource,” “Hot Off the Press,” “Real Estate Law 101,” “Vendor Spotlight” and “Watch Your Language.”
The columns may be easily recognized by unique headline images that will precede each of the posts. Each special headline and a description of the corresponding column follows.
In our CLE Updates we will provide information on upcoming continuing legal education seminars in Ohio that address real estate issues. The title of the seminar, dates, times and location will be included, along with contact information and a web site line so you can obtain further information if you are interested.
There are many useful and informative web sites on the Internet. It’s just a matter of knowing which sites those are and what information can be found on each site. In the “Featured Resource” site we will review those sites and summarize for you what information and useful resources can be found on each of them.
In our “Hot Off the Press” column we will update you on recent federal and state court decisions and statutes on real estate matters.
“Real Estate Law 101” is devoted to the fundamentals in real estate law, where we will provide an overview of basic real estate documents and issues.
Our “Watch Your Language” feature columns will cover two aspects of drafting real estate documents. First, on the macro level, we will address general language issues in various real estate forms and documents. Second, on a micro level, we will get into specific wording and grammar issues and can change the meaning of a document, frequently contrary to what one party intended, and often with costly consequences.
Finally, in our “Vendor Spotlight” we will feature vendors that provide services in the real estate arena, including descriptions of the companies and of the various services they provide.
The columns may be easily recognized by unique headline images that will precede each of the posts. Each special headline and a description of the corresponding column follows.
In our CLE Updates we will provide information on upcoming continuing legal education seminars in Ohio that address real estate issues. The title of the seminar, dates, times and location will be included, along with contact information and a web site line so you can obtain further information if you are interested. There are many useful and informative web sites on the Internet. It’s just a matter of knowing which sites those are and what information can be found on each site. In the “Featured Resource” site we will review those sites and summarize for you what information and useful resources can be found on each of them. In our “Hot Off the Press” column we will update you on recent federal and state court decisions and statutes on real estate matters. “Real Estate Law 101” is devoted to the fundamentals in real estate law, where we will provide an overview of basic real estate documents and issues.
Our “Watch Your Language” feature columns will cover two aspects of drafting real estate documents. First, on the macro level, we will address general language issues in various real estate forms and documents. Second, on a micro level, we will get into specific wording and grammar issues and can change the meaning of a document, frequently contrary to what one party intended, and often with costly consequences. Finally, in our “Vendor Spotlight” we will feature vendors that provide services in the real estate arena, including descriptions of the companies and of the various services they provide.The 5 W's in Every Real Estate Transaction
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“A good reporter must cover the ‘five w’s’ (who, what, where,
when, and why) in every story.” – Perry White
A good real estate attorney (and brokers, lenders and buyers/sellers) must be cognizant of the answers to Mr. White’s seemingly simple, but often forgotten questions in every real estate transaction:
when, and why) in every story.” – Perry White
A good real estate attorney (and brokers, lenders and buyers/sellers) must be cognizant of the answers to Mr. White’s seemingly simple, but often forgotten questions in every real estate transaction:
1. a) Who is being represented? If it is the buyer, for example, standard seller-oriented form contracts should not be utilized without alteration. (Note: Every standard form should be modified to fit each particular transaction)
b) Who is the broker representing? Prospective buyers should know this before they unwittingly divulge their maximum offering price to seller’s broker.
2. a) What type of property is involved? The commercial transaction usually involves more dollars and more complexities. Standard forms can rarely be relied upon. Extensive, originally drafted purchase/sale agreements, environmental consultants, ALTA surveys and title insurance with endorsements are usually required for commercial transactions.
2. a) What type of property is involved? The commercial transaction usually involves more dollars and more complexities. Standard forms can rarely be relied upon. Extensive, originally drafted purchase/sale agreements, environmental consultants, ALTA surveys and title insurance with endorsements are usually required for commercial transactions.
b) What is the “law behind the language”? For example, a poorly drafted letter of intent may be held to be a legally binding contract, not the agreement to agree it was intended to be.
3. Where is the property located? Land near an environmental problem may be land with an environmental liability which far exceeds the property’s value. General, geographical location is also important. Deals in Northern Ohio typically utilize title companies, title insurance, and escrow closings. In other parts of Ohio, abstracts of title, opinion letters, and round table closings may be the norm. Finally, retention of out of state counsel may be necessary for transactions outside of Ohio.
4. a) When should the attorney be consulted? This is one general rule without exception. The attorney should always be retained prior to signing the real estate contract. Bargaining strength is reduced to near zero after the contract is executed.
b) When is the transaction scheduled to close? Coordination of inspection, financing, and closing time periods is crucial.
5. Why is the seller selling and/or buyer buying? An understanding of each party’s motivation is a crucial element to good negotiating/lawyering. A seller who must desperately sell in a soft market should focus more on “major issues” during contract negotiations. Conversely, a buyer who wants a real estate investment as risk free as possible should not gloss over anything.
Keeping in mind the above-questions will maximize the odds for a successful real estate transaction, as well as for a good story for The Daily Planet.
How Do You Spell Relief? LOWER PROPERTY TAXES
Last year, the Ohio General Assembly made changes to the "Homestead Exemption" which provides for annual property tax relief to "Eligible Homeowners" (all homeowners 65 and older, and all totally and permanently disabled homeowners). In the past, many homeowners were deemed ineligible for the Homestead Exemption due to annual income thresholds, but, under the new law, those income levels no longer apply. Eligible homeowners now may be able to reduce the market value of their homestead by up to $25,000 for property taxation purposes.
For example, through the Homestead Exemption, a home with a market value of $100,000 would be billed as if it is worth $75,000. The exact amount of savings will vary from location to location. But overall, across Ohio, qualified homeowners should save an average of about $400 per year. The tax exemption is limited to the "homestead", which Ohio law defines as an owner's dwelling and up to one acre of land.
If you were not previously eligible, you must fill out and file a short application with your local county auditor by June 2, 2008 to receive relieve on your 2008 property tax bills. Also, you may still get relief for 2007 taxes (payable in 2008) even if you failed to file the application by October 2, 2007 deadline. More information, including an application for the exemption, can be found at the Ohio Department of Taxation website listed below.
http://tax.ohio.gov/divisions/communications/homestead_exemption_information.stm
Information provided by Stephen D. Richman Esq.
For example, through the Homestead Exemption, a home with a market value of $100,000 would be billed as if it is worth $75,000. The exact amount of savings will vary from location to location. But overall, across Ohio, qualified homeowners should save an average of about $400 per year. The tax exemption is limited to the "homestead", which Ohio law defines as an owner's dwelling and up to one acre of land.
If you were not previously eligible, you must fill out and file a short application with your local county auditor by June 2, 2008 to receive relieve on your 2008 property tax bills. Also, you may still get relief for 2007 taxes (payable in 2008) even if you failed to file the application by October 2, 2007 deadline. More information, including an application for the exemption, can be found at the Ohio Department of Taxation website listed below.
http://tax.ohio.gov/divisions/communications/homestead_exemption_information.stm
Information provided by Stephen D. Richman Esq.
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