Focus on legal issues: Getting ready to sell a property

Real Estate Issues, Summer 2001 by Howe, Edwin Jr

INSIDER'S PERSPECTIVE

Some years ago, one of the institutional real estate clients of my law firm in New York City promoted the executive who had been dealing with us for some years and put a new man in that position. One of the first things the new arrival told me was: "I am here, inter alia, to prove that legal services are a commodity." I responded that I considered it my responsibility to prove to him that they are not. You will sense that I eventually made my point (else I would not be starting the column with this anecdote).

Though the lawyer on the "sell" side of a real estate transaction has less occasion to exercise informed judgment and to make sound analyses and decisions than the buyer's counsel, the seller's lawyer is no more a "commodity" than his counterpart on the "buy" side. More often than not-even in that deceptively simple-appearing legal horror of horrors, the residential sale-- there are problems that must be resolved, often with thoughtful, creative solutions, and the seller's lawyer is normally an important member of the team that produces the solution.

Having said the foregoing, my firm has, over the years, worked up a checklist of items to consider before marketing a property. With thanks to the firm's partners for authorizing me to do so, I have adapted that checklist for publication in this column. Please remember, however, that having the checklist does not entitle you to consider your lawyer a commodity-far from it. Rather, the idea is for you and your counsel to be as knowledgeable as possible about the property before you go to market and to have dealt with (or at least prepared for) any obstacles that do not emanate solely from the minds of the team on the other side.

First & Foremost

Determine whether there are any outstanding rights of first refusal, option or the like. Thirty years ago or thereabouts, it was very common for a purchaser to extend a right of first refusal, first offer, etc., to his seller as a simple courtesy. These days, the original seller or his successors are as likely as not to use such a right against you as a weapon that has to be bought out. Even in more recent years these rights have been granted because they were part of the price you or your client had to pay to get the property. They are a serious threat to a property's marketability and price; in one recent case a client was given an estimate by his broker of a 15-30 percent discount from what would otherwise be the market price. So try to settle these matters before you go to market, unless the right is a so-called deal-in-hand right of first refusal held by a person who just says No, in which case you're simply stuck.

I have dealt with the first subject at some length, because it is of such vital importance (and perhaps because it has been the source of substantial damage to the author's stomach lining in recent years). The exposition of the other points will be in far more summary fashion.

Alternatives to Sale

* Don't rush into a sale without considering other marketing or quasi-marketing strategies, such as redevelopment, refinancing, sale of air rights, etc. In this connection, if sale is not your only alternative but things are a little tight for you and the market is soft, think carefully through what you can do to hold on to the property until market conditions improve. Of course, you need to consider rights of first refusal here, too. They may be an obstacle - or your alternative may be the way around the obstacle.

Brokerage Agreements

* Look for existing brokerage agreements that might cover the sale, and don't say a word about selling to any other broker or "intermediary" until you're certain that you are free to do so.

Tenant Matters

* Leases: Locate, analyze, and catalogue all leases and ancillary agreements, including tenant correspondence that may be of a contractual nature. Prepare rent roll with a summary of major lease terms. Write it in English, not code or jargon, so that the lawyers' paralegals (or secretaries) on both sides of the deal can efficiently follow and check them against the leases.

* Security Deposits: List them and note any interest obligations. Determine what can be done with deposits in letter-of-credit form (e.g., assignable?).

* Review possibility of tenant or landlord defaults and of curative action underway or indicated.

* Build-Outs: Review and list status of same, whether undertaken by landlord or tenant, and any landlord obligations to perform or reimburse. (Some sellers prefer to include this in the rent roll.) Review and list outstanding construction contracts.

* Determine status of, and schedule, any free rent not burned off. (Again, some make this part of the rent roll.)

* Estoppel Certificates: If mortgage is not due on sale, determine form required by mortgage and check against tenants' lease obligations. (Some would put this off until seller knows buyer is not going to refinance.) In any event, determine what form you would want to get in the buyer's shoes and see how this matches up with tenants' obligations. Work out a preliminary strategy for dealing with any discrepancies.