Rule #4 for Attorney Review of Real Estate Transactions
Don't Undertake the Review of a Real Estate Transaction Unless You
Have the Knowledge, Qualification or Experience to Do So
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:
A transaction is governed by the contract terms, ordinances, statutes, and case law, and, in some circumstances, standard customs and practices. Now, I do believe that most attorneys, whether or not specializing in real estate, can effectively review a residential real estate transaction. However, notwithstanding this belief, I do believe that the quality of the attorney revew of real estate contract is dependent on the knowledge, training, and experience of the individual attorney.
Here are a few examples from the recent transaction that serves as the case study for this series:
Propose Changes in a Manner to Keep the Transaction Moving Forward
After working with other attorneys reviewing the contract documents for residential real estate transactions, I can conclude that there is no correct or preferred method for presenting proposed changed to form documents. However, I do believe that some methods are better or more effective than others:
Step 1 - Communicate the proposed changes at the earliest time. Pick up the telephone and discuss the change and reasons for the changes with the opposing party.
Step 2 - Make it easy to review by sending the proposed changes either by using a redlined copy or by setting forth the paragraph to be deleted and the alternate language proposed.
Step 3 - After assessing your comparative bargaining strength, use contract language that is balanced or is weighted towards the party with the greater bargaining strength.
Step 4 - The most effective way to keep the process moving forward is to reduce it to writing, to obtain its execution, and submit for review as an offer with a deadline for a response.
In this case, the revisions were submitted as an Lease Addendum as an Addendum to the Lease Purchase Addendum. It was written in a format that included questions and statements. For example, here is one of the proposed changes: "If the Lessor is not waiving its right to resort to the court process, Lessee should not be compelled to waive its right to trial by jury."
The better practice would have been either to outline the issue in a memo format and prepare proposed language or to use a format indicating what provisions is being deleted and what provision is being inserted. For example, it is a common practice to use language such as: ""Paragraph 12 of the Release Lease Agreement is hereby deleted in its entirety and this Paragraph 12 is substituted in its place as follows: Landlord and Tenant do hereby covenant and agree that, in the event any lawsuit is filed, to waive their right to a jury trial."
Before Drafting Changes - Know the Law
In reviewing real estate contracts, it is important to know the law. In this context, there are a number potential sources of the law including municipal and county ordinances, state and federal laws, state and federal regulations, and case law. Contract review isn't just interpreting the contract provisions as written. It is also important to ascertain whether or not the provision contradict, conflict or are inconsistent with the law. I don't use the the term "illegal" as contract provisions that vary from the law do not necessarily carry a penalty. Instead, I prefer to focus on whether or not the contract provision is enforceable or is void as against public policy. Here are a few of the provisions contained in the proposed revisions which may reflect a misunderstanding of the law:
Change from Lease Purchase to Lease Option. In my case, the Customer's Attorney unilaterally changed the structure of the transaction from a lease purchase to a lease option. This change is both important and substantive at least from the Owner's view. Instead of entering into a sales transaction at the outset, it allows the tenant to elect to either purchase or not purchase the Property. It caused the negotiations to start-off on rocky footing. More importantly, it was unnecessary. In my jurisdiction, the law governing the sale of condominiums requires the developer to provide an original sale certificate to the purchaser. The purchaser then has a statutory right to review and ratify or cancel the sale contract within 10 days after receipt of the original sale contract. As the transaction did not contemplate the provision of the original sale certificate until 90 days prior to closing, the revision made by the Customer's Attorney wasn't necessary because the Customer had a unilateral statutory right to cancel the Lease Purchase up and through 10 days after receipt of the original sale certificate.
Change in Disclaimer of Warranties in Lease. In my case, the Lease expressly disclaimed any implied warranty as to fitness for an intended use or purpose. Although this may be important in a commercial lease, it is rarely an issue in a residential lease unless the tenant intends to operate a business from his or her residence. This change was unnecessary because the property was zoned residential, the leased contained an express covenant of quiet enjoyment (which term can be loosely defined as the right of the tenant to enjoy the peaceful and undisturbed possession and use of the property during the term of the lease), and case law clearly sets forth that any attempt to disclaim the right to quiet enjoyment or implied warranty of habitability in a residential lease is void as a matter of law.
Waiver of Condominiums Fees during First Year after of Exercise of Option. The Customer's Attorney proposed revision sought to secure the waiver of condominium fees by the Owner in his role as the developer of the condominium. in my jurisdiction, the assessment of condominium fees must be uniform. That is, the condominium association has no authority to waive condominium fees. Now, the provision could have been drafted as mandating that the Owner pay the assessed condominium fees. However, waiver is not a possibility and as such the proposed change had to be rejected and alternate language proposed.
Change in the Survival of Terms of the Lease Option after Closing the Sale. The Customer's Attorney objected to language indicating that the terms of the lease option did not survive the closing of the sale of the Property. In my jurisdiction, absent fraud or items specifically set forth in a sales contract to be performed post-closing, the contractual obligations set forth in a purchase agreement are merged with the recording of the Deed. That is, you simply can't sue for breach of contract where you have accepted delivery and have recorded the Deed. Whether it is stated or unstated in the Lease Option, this principle remains true. More importantly, the Owner has essentially one duty under the Lease Option - namely, to convey marketable title to the Property by the delivery of the Deed. If the there is a defect in the title, then the Customer still has recourse under the warranties of title set forth in the Deed. There simply isn't anything else that survives closing under this scenario so the proposed revision was unnecessary.
Each of the proposed revisions set forth above were unnecessary. In some of the cases, even if the contract language was deleted, the revisions wouldn't have changed the respective rights of the parties secured by statutory or case law.
Before Drafting Changes - Understand the Structure and Terms of the Transaction
It is important to understand the structure of the transaction. The language used in a lease option is distinctly different than the language used in a lease purchase. Sometimes you do have to think before you speak or write.
Change the Lease Option to Include a Financing Contingency and a Building Contingency. In my case, the Customer's Attorney proposed revisions to include a financing contingency and building contingency in the lease option. In this transaction, such provisions simply don't make any sense. The Customer had 12 months to exercise the Lease Option. During this period, the Customer was the tenant and occupant of the Property. As such, the Customer would have unlimited opportunities to inspect the Property prior to exercising the Lease Option. If the Customer was dissatisfied with the condition of the Property, the Customer would simply decline to exercise the Lease Option. Similarly, the Customer could apply for financing at any point from the start of the option period to the end of the option period. If the Customer wasn't able to obtain financing, then the Customer simply wouldn't exercise the Option. Although some options should include financing or building inspection contingencies, these provision don't make any sense where the tenant is in possession of the property and has over 12 mos. to inspect the property and/or to obtain financing.
Change to Make Denial of Jury Trial Mutual under Lease. The Customer's Attorney proposed revisions to the Lease making the waiver of the right to a jury trial mutual - that is, applicable to both Owner and Customer. This provision is extremely odd because the Lease provides for the arbitration of disputes, except disputes relating to possession. In my jurisdiction, eviction either for non-payment of rent or breach of the lease requires judicial action. For non-payment of rent, the landlord must file a rent and possession lawsuit. In rent and possession lawsuit, there is no right to a jury trial. For lease termination, the landlord must file an unlawful detainer lawsuit. Although a landlord could request a jury trial, it is extremely unlikely that any landlord would do so. On average, jury trials take approximately 6 to 12 months longer to be resolved by trial. Landlords want to get tenants out of the property as fast as possible. It simply wouldn't make any sense to request a jury trial.
Change for Lease Termination for Cause. Now, the Lease sets forth a series of occurrences which, at the option of the Owner, could lead to or otherwise justify the termination of the Lease by the Owner. Such occurrences include non-payment of rent, property damage, unabated violations of the tenant conduct rules, bankruptcy, etc. However, there is a catch-all provision for termination for "good cause." Although I do not favor the use of undefined terms or catch-all phrases, the provision for termination for "other good cause" is standard in most residential lease agreements. The reason is simple. In the context of residential leases, you want the document to be short and readable. If the Owner was required to list every conceivable scenario justifying lease termination from the storage of nuclear waste to use of residence for meth production to zoning violations, the average lease would be 20 pages long. It simply isn't practical to draft a residential lease to address every possible factual situation. Attorneys regularly include catch-all phrases in this context such as "violations of the law" or "for other good cause."
When selecting an attorney to review your residential sales contract or lease, it is important to select an attorney who is knowledgeable of or specializes in real estate law, understands local customs and practices, and fully understands the applicable law. It isn't just a matter of interpreting the contract provision as written. It is about understanding what provisions are or are not unenforceable under the law.
So, here is a simple rule for attorney review: Before you undertake the review of a real estate transaction, the Attorney:
Should be qualified to handle the matter based on their knowledge, training or experience.
Should be familiar with the laws, case law, and common practices of their jurisdiction.
Should be able to apply basic common sense to distinguish between issues that are likely to arise and issues that are remote.
Should have a basic understanding of the standard provisions of lease, option, sales contract, etc. used in their jurisdiction.
Should be able to read and interpret provisions to determine the reason or reasons why the provision is included or excluded in the lease, option, sales contract, etc.
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