BUYING AND SELLING REAL PROPERTY IN THE CURRENT MARKETPLACE Alan Wayte Dewey Ballantine, LLP I. THE USE AND MISUSE OF LETTERS OF INTENT Usually sought by Buyers with nothing to lose Avoiding the creation of a binding agreement? To prevent a letter of intent from being deemed a contract, it is important that the parties indicate that they do not intend to be presently bound, this hopefully can be accomplished with text indicating that the terms are still subject to mutual agreement of the parties or that they do not intend to create a legally binding document. See Beck v. American Health Group International, 211 Cal. App. 3d 1555, 1562 (1989). However, even if a letter of intent contemplates future agreement and documentation, if a court holds that the parties intended a contract, then the letter of intent may be interpreted by the court as a binding contract, at which point a court will fill in the missing terms. See Clarke v. Fiedler, 44 Cal.App.2d 838, 847 (1941), see also the cases listed in subsection I. Are you willing to be committed to good faith negotiations? If a court reads a letter of intent as an agreement to agree then it may also impose a duty of good faith and fair dealing upon future negotiations regarding the subject matter of the letter of intent. A court may justify this position by interpreting the letter of intent as an agreement, even though the terms must still be finalized, and hence as a agreement, the letter of intent imposes duties of good faith and fair dealing under California law. See Seaman s Direct Buying Service, Inc. v. Standard Oil Co. 36 Cal.3d 752, 768 (1984). Any future documentation of the agreement contemplated by the letter of intent is also subject to the duties of good faith and fair dealing, hence the parties are obligated to negotiate the final terms and complete the documentation in good faith and in fair dealing with the other party. See Okun v. Morton, 203 Cal.App.3d 805, 817 (1988); see also, Ersa Grae Corp. v. Fluor Corp., 1 Cal.App.4th 613, 624 (1991). (d) Consider using an unsigned term sheet 1
II. OPTION AGREEMENTS CAN BE A SUITABLE DEVICE FOR ACQUIRING PROPERTY (d) Binds the Seller but also makes the Buyer's rights more definitive Psychological disadvantage to some Sellers Should be avoided if the Seller is likely to become bankrupt Must carefully define the full agreement to purchase III. PURCHASE AND SALE AGREEMENTS FOR COMMERCIAL PROPERTY FOLLOW A DISTINCT PATTERN The Buyer has 30/60 days to undertake its diligence with respect to the property The Buyer can reject the property for any reason Are there issues regarding a lack of consideration? Traditionally concerns that there was no mutuality of consideration, or the promises of the parties are illusory may have barred enforcement of a contract where the buyer can rescind without penalty. However under modern law this is probably no longer true, as the promise to abide by certain deadlines during escrow, and/or due diligence may be enough consideration to make the purchase and sale agreement binding on both parties. See Corbin on Contracts 5.29 and 6.1; see also, Stone v. Burke, 110 Cal.App.2d 748 (1952). In exercising your right of approval during the due diligence period, beware of the trap of rejecting the Property when you just want to negotiate an element of your approval, such as when dealing with title defects. The Seller may treat any disapproval given during the due diligence period as a rejection of the purchase and sale agreement, and then treat the agreement as terminated. See Beverly v Barham, 226 Cal.App.3d 49 (1990). In that case, the buyer and seller entered into a contract for the sale of real property, however the performance of the contract was conditioned upon the buyer s acceptance of a survey of that property. The court held that the buyer s rejection of the survey of the property was a rejection by the buyer of the entire real estate contract, and thus the contract was terminated, and the buyer can no longer waive its objection, and then enforce the purchase and sale contract against the seller. 2
The Earnest Money Deposit becomes non-refundable after expiration of the diligence period The Seller is unwilling to provide extensive warranties IV. THE ABILITY TO OBTAIN WARRANTIES FROM THE SELLER DEPENDS UPON THE STATE OF THE MARKETPLACE Liabilities of the Seller under common law may be extensive, or they may be unavailable. Sellers will usually give warranties regarding authority to sign and due execution. Sellers will usually not give title warranties, warranties on the condition of the building or warranties with respect to land use issues affecting the property. (d) Sellers often negotiate with respect to warranties on the rent roll and other financial results of the improvements. (e) The use and misuse of "knowledge" limitations What does "best knowledge" mean? The use of specified person as the one whose "knowledge" is relevant (f) Typical limitations of time and/or liability on warranties No liability unless claims exceed a specified amount and/or are less than a specified amount Liability for warranties expires after one/two years. (g) (h) Protecting yourself from a Buyer who discovers a problem before Closing Buyers customarily require estoppel certificates from Tenants Agree on the form of certificate in the Purchase Contract Anticipate delay problems with the tenants, even though the leases require delivery of the certificates To what extent can Seller execute certificates in lieu of the tenant? Will Sellers give warranties regarding Hazardous Waste issues? 3
The use of "knowledge" clauses does it change the result? Carefully worded indemnity will often be acceptable Seller bears certain responsibilities under law in any event V. LAWYERS SHOULD BE AWARE OF THE RESPONSIBILITY OF THE BUYER AND ITS LAWYER IN PERFORMING DUE DILIGENCE Assigning responsibility among the parties What diligence should be performed? (iv) Review title report, recorded documents and survey Engage engineers to review the condition of the improvements Determine whether the improvements comply with existing laws. Review court files for possible pending litigation (v) Ascertain from the City what permits and licenses are required to operate the facility. Can be a major issue if pollution control permits are involved. (vi) Financial information regarding property operations must be reviewed. (vii) Determine the current status of zoning compliance (viii) Determine whether a hazardous materials problem exists. A form of hazardous materials insurance is now available. (ix) Leases must be thoroughly reviewed and compared to estoppel certificates. (x) Ascertain what personal property is used in the operation of the property and whether any liens are filed with respect thereto 4
FORMS: Sample Representations And Warranties Due Diligence Checklist Option Agreement Sample Purchase & Sale Agreement 5