Small loopholes in real estate documents can cause major issues

Overlooking small loopholes in real estate documents can lead to significant problems, potentially causing legal disputes, financial losses, and delays in property transactions. These seemingly minor details can have major consequences if not addressed properly, affecting the security and value of your investment. Ensuring thorough review and proper legal guidance can help identify and resolve these issues before they escalate, protecting your interests in real estate dealings.

Challenges in Transactional Law: Addressing Future Issues in Real Estate Documents

One of the primary challenges in transactional law, particularly in real estate, is that the person drafting the document must anticipate and address numerous potential future scenarios. Small loopholes in contracts, leases, and other real estate documents can escalate into significant issues later on. Below are some areas that a careful drafter must consider to avoid future problems.

Contracts in General

In many states, clauses that leave certain issues "to be negotiated later" or "to be agreed upon later" are often deemed unenforceable because they do not constitute a solid agreement and instead leave matters to the "whim" of the parties involved.

If any terms are not fully settled, it’s important to provide an objective method for resolving them rather than simply stating that they will be addressed at a later time. Objective methods can include mathematical formulas, arbitration, or appraisal by one or more experts.

When a deadline falls on a weekend or legal holiday, disputes often arise. For instance, if a deadline is on a Sunday, should it move to the previous Friday or the following Monday? To avoid such ambiguity, the contract should include a clear provision that specifies whether the deadline moves to the first previous business day or the first subsequent business day. It’s also essential to clearly define what constitutes a "legal holiday."

Most contracts include an "attorney's fee" clause, which typically allows the "prevailing party" to recover legal fees and costs from the other party. However, defining the "prevailing party" can be problematic. For example, if one party achieves only part of what it wanted, or if a party negotiates for what it wants without going to court, does that make them the "prevailing party"?

To address these issues clearly, it’s better to use language stating that a party can recover attorney's fees and costs if it engages a lawyer to "enforce its rights and succeeds in doing so, either fully or partially."

Purchase and Sale Agreements — Residential and Commercial

One sensitive area in purchase and sale agreements is the termination of the agreement following due diligence investigations. If a buyer misses the deadline by even a single day to give written notice of termination, they could be forced to proceed with the purchase or, at the very least, be liable to pay the full purchase price to the seller.

To prevent this, ensure that the notice of termination is given precisely in accordance with the contract’s provisions regarding written notice, and that the notice is given on time.

The phrase "as is" in purchase and sale agreements can also create ambiguity. If the sale is intended to be "as is, where is," it’s essential to include all required language under state law. Simply using the phrase "as is, where is" is usually insufficient.

Additionally, "as is" language typically covers physical issues but often excludes matters related to the title, which need to be addressed separately. Ensure that the agreement includes specific language regarding the waiver of any "warranty of title." Most states allow for such a waiver, but often do not permit a waiver for problems caused by the seller’s own actions. Therefore, include state-approved language that explicitly waives any warranty of title.

Condominiums

Condominium associations have various documents that govern their management. When drafting these documents, consider the following key points:

• Review the financials, operating budget, reserves, and capital expenditure budget of the condominium association.
• Determine if there are any assessments for capital items and ensure you know the monthly condominium association payment.
• Review any prohibitions in the condominium documents, such as bans on commercial use, short-term rentals (like VRBO or Airbnb), and long-term leases.
• Verify whether the condominium association has the right to approve tenants.

Residential Real Estate

In residential real estate transactions, not clearly specifying who the closing attorney represents—whether the buyer or the seller—can cause issues. In some states, it may not be legal for the attorney to represent both parties. It’s generally advantageous for both the buyer and seller to have their own attorneys review the transaction from their perspectives. Therefore, ensure you obtain a written statement specifying who the closing attorney represents.

Although it’s not legally required for a buyer to conduct a residential survey, the information obtained from a survey, which typically costs a few hundred dollars, is invaluable.

A residential survey can reveal if any improvements on the buyer’s property encroach on a neighbor’s property, or vice versa. It can also identify any servitudes, such as overhead utility lines, and clearly delineate the boundary between the buyer’s property and the right of way of adjacent streets.

For all but the least expensive purchases, ensure that a survey is issued to the buyer and the buyer’s title insurance company. Then, make sure that the "survey exception" in the title insurance policy is removed.

Leases

When describing leased premises, ensure that the description includes any ancillary rights or property interests outside the main premises, such as parking rights, storage space, and access to alleys and passageways.

Conclusion

The key takeaway for anyone drafting real estate documents is to anticipate ambiguities and loopholes that could arise from the future actions of the parties involved. It’s important to craft clear, unambiguous language that addresses potential issues proactively. Consider the business situation at hand, think about possible future problems, and provide language in the document that addresses these problems before they arise.

For questions or comments write to writers@bostonbrandmedia.com‍

Source: Reuters‍