HARP – On This. . .

Month: April 2018

  • Your Real Estate Contract – Two Points to Consider

    Two Things You Need to Know

    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.

    As my readers know, I often represent real estate investors. When I draft a real estate contract I strive to make each provision absolutely clear in its meaning, and try to have it serve as a workable road map to closing.  Occasionally a client will draft a real estate contract on its own (or have a broker draft it), and sign it without my review or input. The client will then send it to me “to close the transaction“.  Though I counsel clients that this can be a remarkably risky practice, some clients . . . being clients . . .  do as they wish and ignore my advice. Such is life.

    When faced with closing a transaction governed by a real estate contract I did not have a hand in preparing, I do my best.  It is usually not a complete disaster, but there are often misunderstandings because of provisions that are not entirely clear.

    real estate agent Delivering sample homes to customers

    There are also situations where a provision in a real estate contract may be legally sufficient, but the seller and/or its attorney simply don’t understand the actual meaning of the provision.  With a clearer provision the misunderstanding could be avoided, but the legal ramifications of certain provisions still are what they are, rather that what some imagine them to be. The following are two examples I have run into in the last week that I believe deserve comment and explanation:

    NO MORTGAGE CONTINGENCY:     Contrary to the understanding by some Seller’s attorneys and their clients, the fact that a real estate contract does not include a mortgage contingency – and may even expressly state that the transaction is not contingent upon the Buyer obtaining a mortgage – does not mean that the Buyer is not obtaining a loan and using mortgage financing.  It simply means that the Buyer’s obligation to proceed to closing under the real estate contract is not contingent upon the Buyer obtaining a mortgage loan.

    Many investor Buyers have strong relationships with their lender. They know what their lender requires, and know that the property they are acquiring will qualify as collateral for a mortgage loan from their lender. Consequently, they do not make obtaining a mortgage a contingency to closing in the real estate contract. Be that as it may, the Buyer may still obtain a mortgage loan, and may fund the property purchase using loan proceeds.

    This is the practical equivalent to the situation where a real estate contract does contain a mortgage contingency, but the contingency has been satisfied because the Buyer has been approved for a mortgage loan. At that point the contingency expires and the contract is no longer subject to a mortgage contingency. The Buyer will still be closing using its lender and the proceeds of its mortgage loan. Probably no one disputes that.

    Likewise, in a real estate contract where there is no mortgage contingency from the beginning, the absence of a mortgage contingency does not, without more, imply at all that there will be no mortgage lender.  If the parties intend to provide that a contract is to be a cash transaction with no lender, that should be expressly provided in the real estate contract. Otherwise, the mere absence of a mortgage contingency does not mean there will be no lender – it simply means the Buyer is taking the legal and financial risk that a mortgage will be obtained.

    2.   AN “AS IS” CLAUSE DOES NOT MEAN NO INSPECTION:  As with the absence of a mortgage contingency clause, as discussed in point 1 above, there seems to be some confusion about what an “AS IS” provision in a real estate contract means.

    It has recently been suggested to me by Seller’s counsel that since the Buyer is purchasing property in “AS IS” condition that there is no need for the Buyer to have an inspection period with the right to inspect the condition of the property. To the contrary, where a Buyer has agreed to acquire property in AS IS condition, it is absolutely vital for the Buyer to have an opportunity to inspect the property, with the right to terminate the transaction if the condition of the property is materially worse than the Buyer expected. The AS IS provision in a real estate contract simply means that the Buyer does not expect the Seller to make any repairs to the property, or expect the Seller to provide closing credits for defective conditions in the property, and that the Buyer will not come back to the Buyer after closing seeking recourse for undisclosed defects.

    Having a provision in an real estate contract providing for an inspection period during which the Buyer can thoroughly inspect the property and terminate the contract within that period if the property is physically deficient is not at all inconsistent with a provision that the Buyer is agreeing to acquire the property in AS IS condition.  The need to inspect is a matter of due diligence for the Buyer. If the Buyer inspects the property (or fails to inspect the property) and does not  exercise its right to terminate within the inspection period provided in the real estate contract, then the Buyer is bound to close regardless of the condition of the property – with the possible exception of additional damage occurring to the property after the contract date, or at least after expiration of the inspection period.

    These are simple points, but they are misunderstood more frequently than one would hope or expect. To avoid needless misunderstandings, careful and meticulous drafting is a solution.  But still . . . this is not rocket science.

    Thanks for listening. . .

    Kymn

  • COMMERCIAL REAL ESTATE BOOT CAMP

    NEW – COMMERCIAL REAL ESTATE BOOT CAMP- April 24, 2018- presented by the Illinois Institute for Continuing Legal Education

    I’m pleased to tell you about a terrific CLE program I’ll be speaking at and moderating: the IICLE® Commercial Real Estate Boot Camp, which will be held on Tuesday, April 24, 2018, at the One North Wacker Conference Center (UBS TOWER) in Chicago .  A SPRINGFIELD SIMULCAST and LIVE WEBCAST will also be available.

    portrait of new business owners by empty office window

    This program is a “boot camp” for commercial real estate transactions, intended as intensive, fast-paced, basic training. The goal is to provide practical knowledge fundamental to everyday commercial real estate transactions practice, including basic forms. This course is designed for (i) lawyers with one to seven years of experience handling commercial real estate transactions; and (ii) lawyers at any level of experience seeking to learn the fundamentals of everyday commercial real estate transactions.

    In this program you will learn about (a) client intake and engagement letters; (b) drafting/reviewing a letter of intent to purchase; (c) drafting the purchase and sale agreement; (d) obtaining and reviewing a suitable ALTA survey; (e) commercial title insurance with typically required commercial endorsements; (f) three common types of escrows; (g) types of deeds typical to commercial real estate transactions; (h) required governmental notices; (i) due diligence in preparing for closing; (j) documenting party authority; (k) the basic opinion of borrowers’ counsel; and (l) common closing issues.

    You can view the full e-brochure here: PROGRAM BROCHURE

    Check out the full agenda (the program provides 6 hours of CLE, including 1 hour of Professional Responsibility) and register now at http://www.iicle.com/crebc18 or call IICLE® at 800-252-8062.

    As you may know, there is a shortage of commercial real estate attorneys with mid-level experience. Not because attorneys are not interested, but because during the commercial real estate crash that began with the collapse of Lehman Bros. on September 15, 2008, and the following Great Recession with its lingering effects on the commercial real estate market until just the past two or three years, there were few commercial real estate transactions upon which new attorneys could gain experience. Times have changed. Commercial real estate practice is booming. We need more attorneys who actually know what they’re doing. This Commercial Real Estate Boot Camp is a great start!

    R. Kymn Harp
    Robbins, Salomon & Patt, Ltd.

    I hope to see you on April 24th!

  • EXERCISING REAL ESTATE OPTIONS

    WHEN EXERCISING REAL ESTATE OPTIONS – Strict Compliance is Your Only Option

    Options affecting real estate are commonly found in two circumstances: options to purchase real estate and options to extend the term of a lease. A recent decision by the Illinois Appellate Court filed February 28, 2018 in the case of  Michigan Wacker Associates, LLC v. Casdan, 2018 IL App (1st) 171222 concerns an option to extend the term of a lease, but its reasoning is instructive for real estate options generally. Strict compliance is required.

    The Option to Extend Lease

    In Casdan, the lease had an initial term ending December 31, 2011, but provided for two additional options to extend the lease, stating as follows:

    “Tenant shall have the option to extend the term of this Lease for two additional five (5) year periods . . . the First Extension Option (expiring December 31, 2016) . . . and the Second Extension Option, (expiring December 31, 2021). The option to renew shall be exercised with respect to the entire Demised Premises only and shall be exerciseable by Tenant delivering the Extension Notice to Landlord, in the case of the First Extension Option, on or prior to January 1, 2011, and in the case of the Second Extension Option, on or prior to January 1, 2016, in all cases, time being of the essence.”

    Required Notice

    The lease also contained a provision governing notices that provided, in part, that “Except as otherwise expressly provided in this Lease, any . . . notices . . . or other communications given or required to be given under this Lease . . . shall be deemed sufficiently given or rendered only if in writing . . . sent by registered or certified mail (return receipt requested) addressed to the Landlord at Landlord’s address set forth in this Lease . . .; or to such other address as . . . Landlord . . . may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 27.”

    The lease also provided that landlord could waive strict performance of a lease term only by executing a written instrument to that effect and, even then, the waiver of one breach would not result in the waiver of subsequent breaches.

    Imprecise Exercise

    real estate agent make offer for couple selects housing options

    On November 9, 2010, the tenant, through its attorney, sent a written extension notice to extend the lease term for the First Extension Option via Federal Express rather than via registered mail or certified mail as provided under the express terms of the lease. Landlord did not dispute the notice and treated the notice as having effectively extended the term of the lease to December 31, 2016.

    Subsequently, the tenant claims to have effectively exercised the Second Extension Option to extend the term to December 31, 2021. On August 16, 2012, tenant, again through its attorney, emailed landlord raising matters tenant “would like to discuss”, and included the following statement: “We are now in the first of two (2) five (5) year options. Tenant would like to exercise the second option now, so we don’t have to do this again as soon. . .”

    There were additional proposals and suggestions in the email that create issues concerning the definiteness of the purported exercise of the Second Extension Option, but for purposes of the court’s ruling in Casdan, it is unnecessary to address that concern.

    Claim That Landlord Received Actual Notice

    Tenant’s position was that through various conversations and emails occurring prior to January 1, 2016, landlord received actual notice of tenant’s exercise of the Second Extension Option. Before and after January 1, 2016, tenant made clear to landlord that tenant wanted to remain in the Demised Premises, make various leasehold improvements, and renew the lease. Further, because the landlord had accepted notice of exercise of the First Extension Option by means other than as strictly provided under the terms of the lease, landlord could not insist upon strict adherence to the terms of the lease for exercise of the Second Extension Option.

    The Trial Court Ruled in Tenant’s Favor

    Following a hearing, the trial court entered summary judgment in tenant’s favor, finding that the August 16, 2012 email was a clear and unambiguous exercise of the Second Extension Option.

    The Appellate Court Reversed

    On appeal, the trial court’s summary judgment ruling was reviewed de novo, with the appellate court noting that “we review the court’s judgment, not its reasoning,” and reversed the trial court’s judgment in favor of tenant.

    The Appellate Court’s Reasoning

    In explaining its decision, the Casdan court stated as follows (omissions from text are not noted):

    Our supreme court’s seminal decision in Dikeman v. Sunday Creek Coal Co., 184 Ill. 546 (1900), remains the leading authority on option matters. The contractually mandated time for performance is generally an essential term of a contract. Unless that term is waived, an option is lost due to untimeliness. Discussing the nature of the option before it, Dikeman stated “[the] agreement was purely a privilege given to the lessee without any corresponding right or privilege of the lessor, and the only stipulation was that the right should be exercised at a certain time.” Id. at 551.

    Since Dikeman, courts have generally required strict compliance with options. See T.C.T. Building Partnership v. Tandy Corp. 323 Ill. App. 3d, 114, 115, 119-120 (2001) (treating the method for exercising an option as a condition precedent requiring strict compliance). Strict compliance is dictated not only by precedent, but by the needs of commercial transactions and fairness. Options to cancel or extend commercial leases are invaluable to a lessee, and a lessor generally does not receive consideration for the lessor’s agreement to be bound by an exercise of the option. Thus, a lessor may insist on a writing to further certainty as the lessor foregoes other opportunities to lease the space.

    Consequently, actual or oral notice is insufficient to exercise an option where a party has failed to provide timely notice. Furthermore, cases finding actual notice to be sufficient outside the options context have no bearing on notice in option cases.

    In addition, tenant does not dispute that it failed to strictly comply with the method of notice prescribed by the lease. Instead, tenant argues that actual notice is a sufficient substitute for the lease requirements and landlord waived strict compliance with the requisite method of notice.

    Dikeman and its progeny clearly defeat tenant’s assertion that actual notice is sufficient.

    See Casdan, 2018 IL App (1st) 171222, ¶¶ 33-37.

    Key Lesson Learned . . .

    One of the key lessons to be learned from Michigan Wacker Associates, LLC v. Casdan is that exercising an option – any option – is not a casual undertaking. Strict compliance with the method of exercise specified in the option instrument is essential. It must be specific, certain, and unconditional. It must also be timely, and the method of notice of exercise must strictly adhere to the notice requirements of the option instrument. Even actual notice of an attempted exercise of an option will not suffice if strict compliance with the method of exercise is not observed.

    Thanks for listening . . .

    Kymn