Rule #3 for Attorney Review of Real Estate Transactions
Pick Your Battles Carefully
Don't Sweat the Truly Small Stuff or Try to Draft a Risk-Free Transaction
As an attorney and a real estate broker, I understand the need for attorney review of some (not all) real estate transactions to protect the interests of the tenant or purchaser. However, this "How the Attorney Killed my Real Estate Deal" series will focus on how inexperienced attorneys can inadvertently kill a deal or transaction through overzealous negotiation, risk-proof contract drafting, and plain ineptitude. For the "How the Attorney Killed my Real Estate Deal" series, you may have to read each installment sequentially as facts or circumstances are not fully repeated or explained in each part of the series.
Transaction Killer Factual Scenario:
In prior installments, I discussed a real estate transaction where there was an extended delay in the preparation of a Lease and Lease Addendum. When it was finally received, there were 27 proposed revisions to the Lease and 12 proposed revisions to the Lease Purchase Addendum. While a few of the changes were substantive, most of the changes were frankly trivial or involved risks to the purchaser-tenant that were so remote as to not to warrant any change. Nevertheless, we made the most (but not all) of the changes. It didn't seem that there was any assessment of risk or any attempt to understand the underlying provision. Examples of some of the trivial changes are set forth below.
Assess the Risk First
Leases can often be one-sided in favor of the owner or landlord. However, there are often provisions that are included in a lease that involve remote or contingent issues that are unlikely to occur. In some cases, it may be advisable to address these issues. However, in most cases, it is better to pick your battles with care and focus on the provisions that matter or are at least likely to occur.
City Earnings Tax. In this case, the Lease had a rent escalation clause. It provided that, if the 1% City Earnings Tax was imposed on the collection of rent, the rent could be increased, after notice, to recapture this assessment. The issue only related to property owners who owned property as individuals. In this case, the Property was owned by a limited liability company. The issue didn't apply. Even if the issue did apply, the maximum increase in rent would be $12 per month. Under these circumstances, the risk was so remote and the potential consequences so small that addressing this item wouldn't seem to be worth the time and cost of drafting an alternate provision.
- Abandonment. The Customer's Attorney raised issues regarding the right of the Owner to re-enter the property after vacation and abandonment of the unit by the Customer. Specifically, the Customer's Attorney wanted to change the required number of days vacant from 10 to 30 days and to include a provision stating that medical emergencies, vacations, etc. were not incidences of abandonment. Under the Lease, the tenant would have to be behind on the payment of rent and would have had to vacated the premises. Again, this issue was so remote as to be nonsensical. In addition, the provision was co-existent with the rights granted to landlords by state law.
- Eminent Domain. The Customer's Attorney raised issues regarding the lease termination provision upon condemnation and regarding the division of any condemnation award between Owner as landlord and Customer as tenant. Such provisions are common in residential and commercial leases and, absent leasehold improvements, typically waive any tenant claims to any condemnation award or payment. More importantly, although the Property is located adjoining a highway ramp, it is extremely unlikely that the Property would be condemned by the Missouri Highway Department given that there is little or no likelihood that the state would ever attempt to acquire the entire parcel.
These are just three simple examples of remote or contingent risks that just weren't worthy of the cost of two attorneys reviewing and making changes. Notwithstanding the trivial nature of these items, the revisions were approved as requested.
Read the Incorporated Documents
When the leased premises is a condominium unit, it is common to see the condominium documents incorporated by reference. The owner of the unit doesn't have the authority to grant the tenant more rights than the owner has under the condominium documents. In most cases, the basis for the revision was clearly answered in the condominium documents.
Utilities. The Lease provided that the Customer was responsible for the payment of the electric. The Lease further provided that the Owner was responsible for the payment of the condominium fees and spelled out what utilities were provided by the condominium association. The Customer's Attorney actually wanted the gas bill to be included in the Customer's name, which wasn't possible, and also wanted a specific provision indicating that the Owner was responsible for sewer, water, and trash. There really wasn't any issue as to what utilities the tenant was and was not responsible for payment.
- Designation of Parking & Storage Space. The Customer's Attorney had concern about the lack of designation of specific parking and storage spaces in the Lease. The Lease did guarantee the use of 1 parking space and 1 storage locker. The management company assigns parking and storage spaces are assigned on "first come, first served basis." However, the condominium association reserved the right to reassign spaces. Under these circumstances, the Owner could only promise that a parking space and storage space would be provided, not a specific space.
Understand Your Customer's Status - Tenants are Tenants
In any transaction, each party commonly has certain rights and resposibilities. If you are a tenant, you are a tenant. When you ask for rights and privileges that are afforded to an owner, then you need to have a logical explanation of why the requested provision is necessary.
Appliance Warranties. The Lease provided that the Owner was responsible for repairs to appliance, except damage caused by the negligence or intentional acts of the tenant. Notwithstanding that the Owner was responsible for the repair and replacement of the appliances (except damage caused by the Customer), the Customer's Attorney requested an assignment of the appliance warranties to the Customer as the tenant. It was an unusual request for a number of reasons such as the allocation of responsibility for the appliances under the Lease, the fact that the assignment would cut off the Owner's rights under the warranty, etc.
Before Defining Every Term, Apply Common Sense
Although it is prudent to define common terms, it is not possible to define every term in a lease or other transactional document. Often, less important provisions do not include definitions simply because the contract or document would be overly cumbersome and too long if every term was defined.
- Designated Occupants. The Customer's Attorney was concerned by a provision that stated that occupancy was limited to "immediate family members as designated herein." At the end of the Lease, there was a series of lines where the "designated occupants" affixed their names agreeing to comply with the tenant rules of conduct set forth in the Lease. Now, the Customer's Attorney wanted a definition of "immediate family members," Now, I would agree that such a term was not well-defined. However, the Owner approved the "designated occupants" by signing the Lease. The provision was drafted for one simple purpose to require the Tenant to designate the person who were going to occupy the residence and require them to comply with the tenant code of conduct in the Lease.
- Installation of Blinds. The Customer's Attorney had concerns because the Lease required Owner approval for the installation of blinds. The reason for the rule is pretty simple - to maintain a uniform look from the exterior. The Customer's Attorney requested that the phrase "which approval by Owner shall not be unreasonably withheld." If installation of blinds is permitted and if the Owner has a clearly articulated rule with a legitimate business reason for mandating certain types, styles or colors of blinds, I would be hard pressed to figure out when the denial of approval would be reasonable or not.
In both of these cases, there was no need to change the language of the Lease. If there was a legitimate concern, a simple e-mail clarifying the reason or purpose of the provision would have saved time and would have eliminated the cost associated with drafting alternate provisions. These items were trivial and were made as requested.
Approaches to Drafting
Other attorneys may have different views. However, I view the role of the attorney in reviewing transactional documents as identifying risks and assessing likely outcomes. In this case, items like abandonment, eminent domain, earnings tax rent escalation, etc. were simply unlikely to occur and not worthy of much attention. Instead of using a sledgehammer, it is easier and more product to use a scapel when drafting revisions.
In addition, I view the role of the attorney as facilitating the transaction as opposed to impeding the transaction. As such, in the context of residential leases, I focus on changing provisions that relate to events that are likely to incur, that impair the reasonably contemplated use of the property, or that are fundamentally unfair. None of the issues described above rise to such a level as to raise substantial concerns for me. Although I would highlight the possible issue or risk for my customer, I wouldn't demand changes to these items. If I am going to fight about an item, impede the consummation of the transaction, and bill my client for the work associated with the fight, I am certainly going to make sure that the item is worthy of a fight and is relevant to the tenant, the tenant's use of the property or the tenant's situation or circumstances.
Similarly, I do not believe that you can through drafting of the contract or lease create a risk-free transaction. This is especially true where there is unequal bargaining power or where the obligations in the contract are to be performed in the future. Recognizing that you can't change everything, I subscribe to the belief that it is important to identify and assess risks and then allow the customer to choose which items are important knowing that delays risk the loss of the property to another party willing to immediately accept the terms offered by the owner.
In this case, the non-responsiveness of the Customer's Attorney, the shotgun approach to drafting, and delays caused by untimely communication from the Customer's Attorney led to the Property being leased to another party. When you obstruct and demand changes, sometimes you lose.
So, here is a simple rule for attorney review: When you are negotiating changes to the transactional documents and when you are drafting alternate provisions, the Attorney:
- Should identify and assess risk for the Customer.
- Should focus on provisions that relate to issues that are likely to arise, that impair the reasonably contemplated use of the property, or that are fundamentally unfair.
- Should avoid the use of a shotgun approach.
- Should balance the need to address risk with the need to assist and facilitate the transaction consistent with the informed directions of the Customer.
Looking for a real estate professional with a a commonsense approach to negotiating a sales contract or lease? Contact Ryan Shaughnessy at PREA Signature Realty at 314-971-4381.
Attorney Review Series
- Attorney Transaction Killers Series - Rule #1 for Attorney Review of Real Estate Transactions - Don't Change the Agreed Terms of the Transaction by Substituting Your Judgment for Your Customer's Judgment
- Attorney Transaction Killers Series - Rule #2 for Attorney Review of Real Estate Transactions - Understand the Impact of Drafting Delays - Time is Really of the Essence
- Attorney Transaction Killers Series - Rule #3 for Attorney Review of Real Estate Transactions - Pick Your Battles Carefully - There is No Such Thing as a Risk Free Transaction
- Attorney Transaction Killers Series - Rule #4 for Attorney Review of Real Estate Transactions - Stay within your Field of Expertise
- Attorney Transaction Killers Series - Drafting an Attorney Review Provision
Attorney Review Series - Residential Leases