Real Estate Transactions Outline

I. Role of Brokers
1) Especially in area of residential real estate transactions, brokers play a
very large part because for the most part, residential and commercial
deals are made by brokers.
2) When they get involved in dealing with them, they are always going to
try to make the deal as quick as they possibly can. Tension between
lawyers and brokers. We are conservative and want to protect clients
rights. Were protective of our roles
3) If you are licensed RE sales person or broker (broker is someone who worked for a
period of time as a RE sales person, who has had experience in doing RE deals, and
opened his own RE business) whether you are either, you have power to recover
brokerage commission when you are PROCURING cause for sale of parcel of RE.
4) 3 prong test for broker to recover commission duly lisenced broker; had K, express or
implied w party to be charged w paying commission; broker was procuring cause of sale
5) No question that broker can have oral K w customer for sale of RE and can recover.
6) When brokers try to get clients to sign binders (it is a contract and a
binding contract when both sides decide) it will bind buyer and seller.
Brokers always want people to sign them because it solidifies the deal.
7) In order for a binder to be a valid contract, must identify parties and 2)
must identify the subject; and 3) must express the consideration
(price).
8) Must go a little beyond that because if there is going to be financing
involved, buyer may insist on a contingency i.e. buyer will need to
get a mortgage loan and in order to get a mortgage loan, he needs to
get it for at least a certain percentage of the price.
9) Banks make loans on basis of appraised market value (not the sales
price). So if the purchase price is much higher, what do you do about
the difference? If buyer cant come up with the difference in cash, hell
want to provide a right in the binder to back out of the deal unless he
can get financing for a certain amount as opposed to a percentage of
the price.
10)
So if buyer cant get X amount of financing, he has the right to
get out of the deal.
11)
Deals w/ brokers are done every day seller calls lawyer and
says we have just signed a deal w/ the buyer to sell the house.
12)
Lawyers should say that binders are subject to a formal contract
to be executed by the parties so it is nothing more than a letter of
intent.
13)
There is an element of good faith. It is implied in execution of the
contract.
14)
So binders can be contracts; can be enforced.
15)
There are different types of contracts w/ brokers. 3 types:

Open listing give you the listing, not exclusive, means that anyone can also sell
the house, seller can hire another broker to assist him in selling the house, no
exlcusive right to recover brokerage commission, you take chances, unless youre
procuring cause of sale but other brokers may be involved. (rare)
exclusive right to sell. - agreement by which broker recovers if
ANYONE sells property including the owner, exclusive right to sell
provides that in the event that I sell your prop I will be entitled to
commission; however if you or anyone else sells your prop I will be
entitled to commission. When representing buyer have to limit
agreement for broker exclusive right to sell, ex 3 months, broker
will ask for 6 months will try to extend it for as long as they can;
reason for this is that the broker who got the initial listing and has
right to sell will dow.e. they have to in order to sell the house wo
losing money already spent making ads to sell the house by some
other broker who sells it and get the commission. That broker has
the exclusive right to sell the house and no other broker is allowed
to list it exclusive right that the broker has to sell the house alone
but even if you sell it to someone else, they still get a commission.
Exclusive right to sell gives an agency commission no matter who
sells it.
Exclusive Agency - seller of prop carves out potential buyers, such that if those
potential buyers agree to purchase the house no commission is earned. Lists people
who are carved out, one of them being the seller being able to sell to one of the folks.
if seller sells the property w/o the broker, no brokerage commission
is paid.
16)
In multiple listing sellings, almost always more than one broker
involved so listing broker who doesnt bring about the sale but is
involved w/ another broker who may have produced the customer,
there is a commission owed and it is shared amongst them. Generally
speaking more than one broker involved in RE transaction multiple
listing service is example. Since brokers have discreet number of
customers that show, commission can be shared.
17)
Allegiance broker owes is to the seller. Seller pays their
commission. And theyre commission is based on a contract doesnt
have to be in writing. If they are licensed brokers in the state of NY,
they do not need a written agreement to act as a broker. A condition to
recovering commission, is you are licensed but dont need written
agreement. You do want one though. Want to express what percentage
you get.
18)
Brokers regulated by NY State in order to get licensed as a real
estate sales person you must be employed by a brokerage in order to
be a broker you need experience as sales person. NY state is the
agency that licenses them. NY Dept. of State regulates brokers
activities. Lisenced by Dept of state, in NY in order to be lisenced to
sell RE have to be a lisenced RE sale person who works w a lisenced
broker to become one u have to take certain courses.
2

No fixed commission upper limit is around 6%. As low as 2% on big

ticket houses. Depend on the broker, depends on the deal. There is no
fixed percentage for broker commission, this is negotiated. No standard!!!
19)
If exclusive right to sell/agency it should be limited in time
dont give broker unlimited exclusive right. Limit it to 3 months or so.
Limit time you are obligated to the broker.
20)
Open listing listing in which the broker only gets paid if that
broker makes a deal. You almost never see it anymore. If broker is the
party that was instrumental in introducing a potential customer to a
property and price was discussed and the potential buyer goes
somewhere else or tries to deal directly with the seller he is still
entitled to a commission.
Ny real prop law (RPL) 443 provision of real prop law that deals w broker right to recover
commission
- In residential transaction theres disclosure document required by brokers to potential
customers, outlines r/s that exists, many buyer think broker represent them, says who
broker represents
- A seller agent doesnt represent intersts of buyer. If buyer agent (broker) retained by
buyer buying house, disclosure agreement will so state important bc broker sometimes
liable for not communicating certain shit to buyer
- Caveat emptor prevails buyer buying property @ his own risk and should perform
diligence

II. Ethical Responsibilities of the Real Estate Lawyer

1) Chances are good that you will represent sellers and buyers.
2) What ends up happening is you will be faced with a conflict of interest.
3) Every firm today has conflict software. Checks whether or not you
are representing anyone in this transaction who might be adverse to
the person who comes into your office.
4) Not uncommon for a person/company to walk into your office, say Id
like you to represent me, Im selling these units, buyers are x y and z.
But, x y and z are your clients. These clients might be willing to waive
the conflict. So you ask them if they are willing to do so.
5) If you disclose the conflict to both sides, and both sides agree to waive
the conflict, then no problem.
6) Certain non-waiveable conflicts if a client comes in and is being sued
by your other client. This is a blatant conflict of interest. Another is
where you are representing someone in a real estate transaction, and
the person on the other side, is someone you once represented and
you have personal knowledge of his affairs. This might give you an
edge you need to walk away from that case.
7) Matter of Dolan discusses conflicts of interest involving former
clients.
8) Why is representing seller and lender in a transaction a conflict of
interest? If you are representing a lender, what is his interest? Seller
3

wants to make deal happen lender is more cautious because hes

more interested in whether the buyer can make the mortgage
payments.

III. The Contract of Sale

1) The NEED for a (executory) contract (pg. 9)
a. Document for transferring real estate is a deed. Lists:
i. Consideration
ii.
Recitation of parties
iii.
Legal description of the property (metes and bounds
description)
b. Allows buyer to conduct due diligence work w/ certainty that the
property is theirs if they choose to proceed.
c. Prevents buyer from backing out.
d. Each party wants the other to be committed to proceed
as long as all conditions precedent are met.
e. Contract will:
i. Disclose certain info to the parties;
ii.
List the conditions precedent;
iii.
Allocate risk;
iv.
Spell out the obligations of the parties; and
v. Provide remedies
2) Buyers Perspective (pg. 11)
a. Wants seller to represent certain facts about the property in the
contract.
b. If seller misrepresents the condition of the property, buyer can
enforce his rights under the contract, which may include: 1) the
right not to close; and 2) the right to seek contract damages.
c. Will use the contract as a way of allocating risk to others and
away from itself.
3) Sellers Perspective (pg. 12)
a. Goal is to convey the property, get paid, and retain little or no
liability. Limit exposure to future claims.
b. Also, to avoid making any contractual representations that may
later lead to liability for misrepresentation.
4) Statute of Frauds (pg. 12)
a. Applies to sales of real estate.
b. Contract should:
i. Identify the parties
ii.
The property
iii.
State the buyer is agreeing to buy and the seller is
agreeing to sell

iv.

5)

6)

7)

8)

State the price or manner in which the price will be

calculated; and
v. Be signed by the buyer and seller
c. There are circumstances when partial performance will take it
out of the SOF. Partial performance means that one party to
the agreement has substantially changed his position (almost
always the buyer) and the law provides that partial performance
must be referable to the contract. You see this more in rural
areas.
Letter of Intent (pg. 13)
a. Contains essential business terms of the transaction but is
usually non-binding.
b. If it is very carefully drafted, either the letter itself may be
binding, or it may obligate the parties to negotiate the contract
under an obligation of good faith and fair dealing. The letter
should clarify whether the parties intend to be bound.
c. Why have it? Demonstrates seriousness on the part of the
parties.
Parties to the contract (pg. 13)
a. Should be identified as buyer and seller at beginning of the
K. If a party is a business entity, a statement of the type of entity
and the state under whose law it is formed should follow its
name. Its mailing address should follow.
b. Twists with respect to sellers:
i. Almost none. Named party will almost always be the
current titleholder.
c. Twists with respect to buyers:
i. Buyer is an unformed business entity (here, a principal of
the buyer serves as nominee and then assigns its rights
under the K to the entity once it is formed).
ii.
Buyer attempting to assemble big parcel from several
smaller contiguous parcels may use different nominees
for each parcel as a way of maintaining secrecy.
iii.
Buyer may flip a K by locking up the rights to the
property at a favorable price and then immediately
assigning its K rights to a third party w/o ever taking title
to the property.
Recitals (pg. 15)
a. Immediately below paragraph identifying the parties.
b. Sets forth a general statement of the purpose of the K and brief
summary of the K.
c. Good idea to keep them short and make sure substantive
matters are handled in the body of the K instead of the recital.
Definitions (pg. 16)
a. A section including definitions relevant to that K may follow next.

b. Some terms have special meaning, but whenever possible, a

definition should correspond to a words natural meaning.
9) Identity of the Property (pg. 17)
a. Legal description = metes and bounds
b. Includes less obvious elements of the property (subsurface
rights, air rights, and development rights, etc.).
c. Buyer wants to ensure that the K description of the property
covers ALL that the buyer believes it is purchasing.
10)
Agreement to Buy and Sell the Property (pg. 19)
a. Central clause of the K. Make sure it is included.
b. Must be supported by a recital of consideration.
11)
Purchase Price (pg. 19)
a. Must state the price or describe the agreed upon method for
ascertaining the price in the future.
b. Make sure you are not agreeing to agree on a price.
c. This section should state which portion of the price will be
paid:
i. Before the closing
ii.
By the buyer at the closing from its own funds
iii.
By the buyer at the closing w/ funds borrowed from seller
or third party
iv.
By the buyers assumption of existing debt
d. Earnest money (usually 10%) demonstrates seriousness.
e. Due on Sale Clause means when property gets purchased, the
bank gets paid right away.
f. Purchases Subject to Existing Financing (pg. 20)
i. Example: if the property is worth $100k and the parties
agree to leave a $25k mortgage in place, then the buyer
is only paying $75k for the sellers worth of encumbered
property (K should make this clear). Buyer expects to
remove the $25k encumbrance by paying it off
according to its terms, thus clearing the title. When the
debt is paid off, buyer will have paid a total of $100k, but
not all of it directly to the seller.
ii.
Important**: in a subject to transaction, buyer does not
promise it will actually pay the debt. If it doesnt, it may
lose the property to the lender, but it bears no personal
responsibility for the debt and cant be held liable.
iii.
Must determine whether the existing mortgage prohibits
sales subject to.
g. Portion to be Paid by Assumption of Existing Debt (pg. 21)
i. Similar to purchasing subject to existing financing, but
this time the buyer takes responsibility for paying it.
ii.
Lender may be able to prevent buyer from assuming the
debt. Make sure K is clear about what happens in this
situation.
6

12)

h. Portion to be Paid by Amount Borrowed from a Third Party

Lender (pg. 22)
i. Buyer will typically borrow from a third party lender.
ii.
However, buyer may not yet have secured a commitment
for its financing at the time it executes the K of sale. It is
essential that the buyer have the right to withdraw from
the K w/o penalty if it is unable to obtain the financing it
needs.
iii.
K should be very specific about how much tie the buyer
has to obtain financing should not be unlimited.
i. Portion to be Paid by Seller Financing (pg. 22)
i. Means the seller accepts payment of less than the entire
purchase price in cash, with the buyers note and
mortgage making up the difference.
ii.
If parties agree to this, they should indicate in the
Purchase Price section.
iii.
Note: if the portion of the financing that the seller is
providing will be secured by a second mortgage, the
parties must ascertain whether the first mortgage permits
junior financing.
j. Down Payment (pg. 23)
i. Indicates buyer is serious.
ii.
Gives seller confidence buyer has funds.
iii.
Can be used as liquidated damages in the event of a
breach (if the K so provides must be specific)
k. Escrow for Down Payment (pg. 26)
i. If buyer uncomfortable w/ seller holding large sum of his
money, they may put it in an escrow account held by a
third party.
ii.
Escrow agreement should state when the agent may
and must turn the escrowed funds over to one of the
parties and what to do if the agent is unsure which party
is entitled to the funds. Should also state whether
escrowed funds bear interest, which party receives that
interest, and how the funds are to be invested.
iii.
Note: if you open an escrow account for a deposit in
excess of $500k, you should look into spreading that
money throughout different banks because the FDIC only
insures up to $500k in some instances, $250k in most.
Sale or Removal of Personal Property (pg. 27)
a. K needs to address fate of all personal property located at the
site, and should clarify which party will own this property after
the deal closes.
b. Should provide a mechanism for transferring title to this
property, which does not pass by deed.

c. If buyer does not want the personal property, K should state

whether seller is responsible for removing this property and
repairing any damage that results from the removal.
13)
Sellers Representations, Warranties, Covenants, and
Indemnities (pg. 29)
a. Representation statement of current fact
i. Be careful of continuous representations.
ii.
Be careful of as is representations (dont always
insulate seller if he is aware of a dangerous condition,
environmental problem, or another condition that would
prevent the buyer from using the property for its
obviously intended purpose).
b. Warranty statement or promise of future fact
c. Covenant promise of future action
d. Indemnity promise to make other party whole in event a
representation or warranty proves to be untrue or a covenant is
not performed.
14)
Due Organization of the Seller (pg. 33)
a. If seller is an entity, buyer MUST confirm entity has legal
existence.
i. Buyer should insist seller include a representation to
this effect in the K, but should also investigate this for
itself.
ii.
This representation should state the entity is legally
formed in accordance w/ the laws of the state in which
the property is located.
b. Buyer should also make sure seller is in good standing
i. Get a certificate of good standing from relevant state
agency (title company will typically do this).
c. This is very important because of the power of the entity to
convey title.
15)
Authority of the Seller; No Approvals Required; No Violations of
Other Agreements (pg. 34)
a. Buyer should ask the seller, before he signs the K, to represent
that the K has been properly authorized and to covenant that
all steps necessary to closing the transaction will be taken before
the closing date.
b. Sellers ability to convey could be limited:
i. Property could be subject to a right of first refusal, an
option, a restrictive covenant, a noncompetition
agreement, or a consent decree.
ii.
Another party to that document may have the power to
prevent the sale from proceeding.
c. Where consent from third parties is required, parties will agree to
defer obtaining of these consents until after the K is signed.

i.

16)
a.
b.
c.
17)
a.
b.
18)
a.

19)
a.
b.
20)
a.
b.

Seller may represent in the K that it has taken all steps

required under state law and its organizational
documents to authorize the K of sale; may covenant to
obtain all regulatory and other third-party approvals
necessary for the sale; and may agree that its receipt of
these consents will be a condition precedent to the
buyers obligation to close.
Entire Premises (pg. 36)
Seller should represent that the property described in the K
consists of the entire premises necessary for the operation of the
structure or business that is being conveyed.
This clause MUST also address critical ancillary needs of the
property such as parking, easements for access/utility
connections.
Buyer should obtain a survey.
No Options (pg. 37)
Buyer should ask seller to represent that no party holds an
option to purchase the property or has a right of first refusal/first
offer on the property.
Buyer must be aware of all tenants, obtains copies of all
occupancy agreements, including those not recorded, and
reads them.
Conditions of Property and Improvements (pg. 38)
To avoid risk, buyer must learn as much as it can about the
building from the seller and leave itself w/ the right to terminate
the K if it discovers problems during its own due diligence
investigation.
i. Buyer can do this by asking seller to include a
representation in the K of sale addressing the condition of
the property and improvements and utilizing a closing
condition.
Maintenance and Operation of Property Until Closing (pg. 40)
Buyer should request seller agree to operate and maintain
property during the K period in a manner similar to its operation
and maintenance of the property before it signed the K.
Broom Clean condition.
Sellers Title and Permitted Encumbrances (pg. 41)
Buyers should ask seller to represent that it owns
UNENCUMBERED fee simple title to the property or fee simple
title subject only to certain enumerated encumbrances.
However, seller will want to OMIT this representation and
suggest the buyer rely entirely on a closing condition that will
excuse buyers nonperformance if the title fails to meet some
agreed standard.
i. This IS NOT beneficial to the buyer.

i.

21)
a.
b.

c.

22)
a.

23)
a.

b.
c.

He will discover problems earlier if seller reveals

them.
ii.
A sellers breach of representation will allow buyer
to bring a K claim against seller for damages BUT a
sellers failure to meet a closing condition
merely excuses buyers nonperformance at the
closing and entitles buyer to a return of its down
payment.
Schedule of Tenant Leases; Status of Tenant Leases (pg. 42)
Buyer should require seller to represent schedule of tenant
leases included in the K accurately sets forth the current and
future occupancy status of all space in the building.
Schedule should state for each lease:
i. Name of tenant
ii.
Space the lease covers
iii.
Duration of the lease
iv.
Amount of rent tenant must pay
v. Any landlord obligations for tenant improvements
vi.
Any rights tenant has to renew or terminate its lease
vii.
Any rights tenant has to expand or reduce its space
viii.
Whether tenant has option to purchase or right of first
refusal
Buyer should also ask seller to represent that all leases remain
in full force and effect and that there are no defaults and that
there are no known events that will ripen into defaults with the
passage of time, and that there are no other relevant
agreements not listed in the schedule.
Brokerage Commissions (pg. 44)
Buyer needs to be sure seller represents there are no brokerage
commission obligations, or if there are, how much they will
amount to, who will be paying them, and when they will come
due.
Access to the Property (pg. 44)
Buyer needs to be sure there is access to the property from a
public road or from a private right of way. In some cases, there
may not be direct access to public road, and only ingress to
sellers property may be across private property owned by a third
party. If this is the case, then buyer must be certain seller owns
and can convey access to these rights (i.e. an appurtenant
easement).
Buyer should insist seller enter into a WRITTEN agreement
with the servient estate holder before the closing that resolves
any possible disputes.
Sellers representation should clarify the precise location of the
points of entry and also indicate the legal basis that the seller
has for using means of ingress and egress.
10

24)
a.
25)
a.

26)
a.

27)
a.
b.
c.
28)
a.

b.
29)
a.

b.
30)
a.

Utilities (pg. 46)

Buyer needs to confirm that the property is connected to all
necessary utilities and that the buyer will have the legal right to
continue to use all of these connections.
Certificates of Occupancy and Other Permits (pg. 47)
Buyer needs to request that the seller give a representation that
sets forth a list of all required permits. Also, to represent that it
possesses all of these authorizations, that they are transferrable,
and that it will transfer them at closing.
Compliance With Law (pg. 48)
Buyer should ask seller to represent that it is operating the
property in compliance with all applicable laws. Representation
should be broad enough to cover:
i. Statutes
ii.
Ordinances
iii.
Regulations
iv.
Rules of all federal, state, and local authorities w/
jurisdiction over property
Zoning (pg. 49)
Buyer will frequently request seller represent the structure and
present use comply will all zoning laws.
Seller should represent it has received no notice of any zoning
violations and no notice of pending rezoning.
Buyer can request a zoning compliance letter from local zoning
authorities.
Claims and Litigation (pg. 50)
Buyer should request seller disclose all pending litigation (seller
should be willing), threatened litigation (seller should limit to
his knowledge of threatened claims), and potential claims that
have not yet ripened into litigation.
Buyer may ask for indemnification.
Environmental Matters (pg. 51)
Buyer should ask for disclosure of any environmental matters in
the K including a blanket representation that there are no
violations of environmental laws and no materials used or stored
at the property that might lead buyer to incur any costs of this
type.
Buyer, during due-diligence period, will obtain a Phase I
environmental report.
Employment Matters; Service Contracts (pg. 52)
Buyer needs to learn status of property workers (i.e. building
managers, custodial staff, security guards, etc.) and needs to
determine whether it will incur any liabilities to any of these
workers as a result of its acquisition of the property. Should seek
a representation from the seller.

11

b. Buyer also needs to determine extent of service contracts w/

third parties.
31)
Covenants, Servitudes, Easements, and Reciprocal Easements
(pg. 53)
a. Access rights to the property are often governed by the above.
b. Buyers title search of the property will reveal these recorded
documents.
c. At the contract phase however, buyer needs to learn of these
documents and their essential terms. Buyer should request that
seller represent that there are no documents of this type
necessary to the operation of the project as a whole or, if there
are such documents, that seller provide the buyer with copies of
them and represent that there are no others.
32)
Licenses and Franchises (pg. 54)
a. Seller may be operating a property in accordance with a wide
range of contractual relationships that the buyer will want to
continue after acquiring it.
b. Buyer should ask that the seller represent that it is a party to all
agreements necessary to the continued operation of the
business in its current form; also, that these agreements are
transferable and a listing of the steps that the parties must
take to effect this transfer.
33) Insurance (pg. 56)
a. Some states have adopted principle of equitable conversion
by which title is deemed to pass to the buyer in all but the legal
sense when the parties execute the K.
b. Buyer that enjoys equitable title may also bear risk of loss
should any structures on the property be damaged or destroyed
by fire or other casualty.
c. In the event of uninsured casualty, buyer may be required to
close, pay the K price, and accept damages or destroyed
structure. Thus, it is essential that the buyer secure casualty
insurance on the property or require seller to do so on his
behalf.
d. If the parties decide that the seller will bear the risk of loss, or if
they decide that the buyer will bear this risk but that the seller
will continue to insure the property until the closing for the
benefit of the buyer, then the buyer should insist on a
representation and a covenant that address this issue.
34) Casualty (pg. 57)
a. Buyer should request seller represent that there have been no
unrepaired casualty losses at the property as of the K date. If
there have been, the seller will need to list these as exceptions
to this representation.

12

b. Casualty losses between the date of the K and the date of

the closing can be addressed by a covenant or a closing
condition.
35) Condemnation (pg. 58)
a. Seller should represent there are no pending or, to the best of
his knowledge, threatened condemnation actions.
36) Real Property Taxes and Assessments (pg. 59)
a. Seller may be willing to prove a representation that states the
amounts of all real property taxes and assessments, that lists the
amounts for the last several years, and that confirms that all
payments that are currently due have been made.
b. Seller should also represent that there are no pending changes,
or, if there are such changes pending, the status of those
changes.
37) No Prior Mortgages (pg. 60)
a. Buyer needs some assurance there are no mortgages
encumbering the property.
b. Seller should represent there are no mortgages on the property
other than those specifically listed, and should covenant to
satisfy those outstanding mortgages on or before the closing.
i. Seller will not have funds to satisfy existing mortgages
until it receives sale proceeds form the buyer at the
closing, and it will concurrently transmit some of those
funds to its lenders in satisfaction of these mortgages.
38) No Other Liens (pg. 60)
a. Buyer wants seller to deliver marketable title free and clear of
any liens and encumbrances and thus should ask that the seller
represent that there are no other liens on the property.
b. However, parties may agree on a list of permitted exceptions,
i.e. covenants, easements, and servitudes all constitute clouds
on title and that are sufficient to render it unmarketable, but
buyer may be willing to purchase property subject to these
matters in fact he may insist on them.
39) Buyers Representations, Warranties, and Covenants (pg. 61)
a. Obligation is to show up at closing w/ good funds. Little for seller
to investigate.
b. Representations as to the buyers legal existence and its ability
to perform its one obligation: payment.
40) Due Organization of the Buyer (pg. 62)
a. Seller should confirm buyer is a business entity if thats what he
represents himself as.
b. If buying entity is not yet formed, an individual or existing entity
may sign the K as the buyers nominee, with the intention of
assigning the buyers interest to the new entity once that entity
has been formed.
41) Authority of the Buyer (pg. 63)
13

a. Seller should ask buyer to represent that buyer has authorized

the transaction, that no 3rd party approvals are required for buyer
to perform, and that performance of the agreement will not
violate any other agreement to which buyer is a party.
42) Survival of Representations, Warranties, Covenants, and Indemnities;
Relationship to Due Diligence (pg. 64)
a. Merger doctrine holds that contractual promises survive only
until the seller delivers its deed to the buyer. After the closing,
all contractual provisions are said to merge into the deed and be
superseded by it. Typically applied most strictly in cases arising
from title matters.
i. Rationale? buyer already has had an adequate
opportunity to investigate the state of title; raise any
objections; sue for breach of K; and if closing conditions
allow, withdraw from the transaction.
b. By accepting deed, buyer is implicitly agreeing to give up the
benefits of any contractual representations as to the quality of
title and to rely exclusively on any deed warranties for recourse
against the title.
c. Merger doctrine forces buyer to undertake an enormous
amount of due diligence between K and closing.
43) Conditions Precedent to Buyers Obligation to Close (pg. 66)
a. Buyer should seek an appropriate array of closing conditions
that must be met before he is obligated to deliver the purchase
price and accept the deed. If they are not met, buyer will have
the contractual right to terminate the K and receive a refund of
its down payment.
i. First closing condition buyer should request one
that confirms that all representations and warranties are
accurate as of the closing date and not just as of the K
date.
44) Buyers Access During Due Diligence Period (pg. 72)
a. If buyer is to meet its due diligence responsibilities, it will need
access to the property during the K period for itself, its
employees, and its agent. Should get access up until day of
closing. Check for asbestos/mold!
45) Financing (pg. 72)
a. Most buyers need 3rd party financing.
b. Buyer should insist availability of these funds is a condition
precedent to its obligation to close.
c. If it doesnt, and then is unable to borrow the funds in time, it
will forfeit its down payment or be liable for K damages.
d. Should be drafted w/ great specificity: buyer is not obligated to
close unless it obtains a loan from an institutional lender of at
least a minimum stated amount, amortized over no less than a

14

specified minimum term, at an interest rate not in excess of an

agreed amount.
e. Seller needs to make sure buyer takes all steps necessary to
pursue the loan.
46) Authority of the Seller (pg. 75)
a. Buyer should insist seller provide it w/ a good standing
certificate; proof the seller may legally transact business in the
state where the property is; a corporate/partnership
authorization fro the seller entity; an incumbency certificate
listing parties who are authorized to sign on its behalf; and
confirmation that the seller performance does not require any
third-party approvals and does not violate any other agreements
to which the seller is a party.
47) Condition of Property and Improvements (pg. 76)
a. Buyer should seek representation from the seller that addresses
condition of property as of the K date and also a closing condition
that all representations remain true and accurate as of the
closing date.
b. If seller is unwilling to do this, it may allow buyer to make that
judgment for itself by covenanting that it will provide the buyer
w/ reasonable access to the property.
48) Delivery of the Deed (pg. 78)
a. Closing condition should clarify type of deed seller must deliver:
i. General Warranty (no encumbrances at all)
ii.
Special Warranty (seller himself hasnt encumbered
property)
iii.
Quitclaim (no warranties at all)
49) TITLE INSURANCE POLICY (pg. 79)
a. Most buyers want additional comfort provided by an owners
policy of title insurance. Should insist that its receipt of a title
policy be a condition precedent to its obligation to close.
b. Closing condition should state amount of title insurance that
must be available to the buyer and say who is paying for it
(usually buyer). Also should state the form of policy (usually ALTA
Owners Form).
c. Schedule B of the ALTA form is where the insurer lists each of
the title encumbrances it discovers during its title search. These
are exceptions to coverage which means the insurer is
disclosing them to the parties before the closing and WILL NOT
pay any claim that arise from them.
d. Common exceptions include: sellers mortgage, restrictive
covenants, and utility easements.
50) Affidavit to Title Company (pg. 82)
a. Used to resolve issues surrounding mechanics liens on the
property that the insurer would have no other way of knowing
about.
15

b. Title insurer may be amendable to omitting this exception if it

receives some form of assurance (an affidavit) that all mechanics
have been paid in full.
51) Survey (pg. 83)
a. Only way to convert a written legal description of the property (a
metes and bounds description) into a more useful depiction of
the land is to have the property surveyed.
b. Buyer should insist survey be prepared by a licensed surveyor;
that it meet the minimum standard detail requirements for
ALTA/ACSM Land Title Surveys; and that it be certified to the
seller, buyer, buyers lender, title company, and the title
companys agent.
52) Appraisal (pg. 84)
a. Buyer should seek a closing condition that allows it to terminate
the K if the K price exceeds the appraised value he receives from
his independent appraiser.
b. Unfortunately for the seller, lender will nearly always include an
appraisal condition in its loan commitment to the buyer as a way
of confirming that it is not lending more than a certain
percentage of the actual value of the property.
53) Assignment of Sellers Interest in Leases (pg. 85)
a. Buyer will want a formal assignment of the sellers interest in
existing tenant leases; seller will want buyer to assume its
obligations under these leases.
54) Tenant Estoppels (pg. 85)
a. Between K and closing, buyer may want to have tenants verify
the information the seller has provided buyer and can do so by
demanding that the seller obtain estoppel letters from tenants
whose lease require them to provide these letters.
b. This letter is signed by tenant and confirms accuracy of certain
factual info and equitably estops tenant from later denying
accuracy of any statements contained within it as buyer has
relied on it.
55) Notice to Tenants (pg. 86)
a. Buyer should insist that seller prepare notice to the tenants
advising them of the sale of the property and instructing them to
begin paying their rent to their new LL. Should insist this be a
condition precedent to closing.
56) Delivery of Security Deposits (pg. 87)
a. Buyer must be sure seller turns over all of these deposits to the
buyer at the closing.
57) Opinion of Sellers Counsel (pg. 88)
a. Buyer may want additional confirmation that sellers legal house
is in order.
b. But, by issuing this letter, sellers counsel is putting its own
credibility on the line. Very dangerous for counsel and his firm.
16

58) Assignment of Sellers Interest in All Other Property and Agreements

(pg. 91)
a. Real estate transactions often include property other than real
estate (personal property) and may be succeeding sellers rights
under a variety of different contracts.
b. Buyer should make sure that K conditions the buyers obligation
to perform on the sellers transfer of this property and these
rights.
59) Foreign Investment in Real Property Tax Act (FIRPTA) (pg. 92)
a. Keeps foreign sellers from avoiding paying their taxes on any
gains they enjoy by requiring that a portion of the sale proceeds
be withheld if seller is a foreign entity or if any of its principals
are foreign nationals.
b. Buyer can avoid this withholding obligation and nay liability for
failing to meet it if he receives an affidavit form the seller in
which the seller confirms that it is not a foreign entity subject to
withholding. This should be a closing condition.
60) Permits, Certificates, Plans, Warranties, and Keys (pg. 92)
a. Buyer should make sure all of these things are delivered by
seller.
61) Conditions precedent to sellers obligation to close (pg. 93)
a. 1) Buyers ability to pay the purchase price; and 2) buyers legal
authority to enter into the transaction.
62) Payment of Purchase Price (pg. 93)
a. Closing conditions section should state clearly that the sellers
obligation to convey title to the buyer is conditioned on the
buyers payment of the purchase price in the manner set forth in
the K.
63) Continuing Accuracy of Buyers Representations and Warranties (pg.
94)
a. Seller needs to have the ability to withdraw from the K if the
accuracy of an essential representation has changed, and it
accomplishes this result by seeking a closing condition that all of
buyers representations remain true and accurate as of date of
the closing.
64) Authority of the buyer (pg. 95)
a. Seller needs to confirm buyer is properly organized and may
transact business under state law; that the buyer is internally
authorized to contract to acquire the property; and that the
transaction does not violate any other agreements to which the
buyer is a party or require the approval of any third parties.
65) Opinion of Buyers Counsel (pg. 96)
a. Seller will occasionally request opinion from buyers lawyer
confirming the accuracy of certain legal representations buyer
has made, particularly w/ regard to entity formation, existence,
and authorization.
17

66) Waiver of Closing Condition (pg. 96)

a. If K does not address waivers of closing conditions, it will
probably be the case that either party can waive conditions that
run to its benefit at the closing. Good idea to state it in the K
anyway.
67) Closing Date, Time, Location, and Mechanics (pg. 99)
a. K should specify these things.
68) Defaults and Remedies (pg. 100)
a. K must state clearly what acts and omissions constitute defaults
and what the remedies are.
b. Note: failure to meet a closing condition excuses
nonperformance by the other party but WILL NOT constitute a
breach of K unless the matter that the closing condition
addresses also is covered by one of the representations.
69) Nonrecourse (pg. 102)
a. Either party may ask that other partys remedies be limited in
amount or confined to certain specified property.
b. In the case of the seller, parties may decide to limit liability to
the sellers interest in the property.
c. In the case of the buyer, parties may agree that liability is
limited to the down payment, a specified larger amount of
money, or an alternative asset of sufficient value.
70) Transfer Taxes, Gains Taxes, Sales Taxes (pg. 103)
a. Buyer is party most likely to pay these taxes.
b. If seller is selling property at a price that exceeds the sellers
basis, jurisdiction may impose a tax on the sellers gain on the
property. Seller should be responsible for this.
c. Both parties need to consider extent to which their K will lead to
conveyance of personal property (which may be subject to sales
tax real property is not).
d. Typically buyer will indemnify the other against any costs and
expenses that other party incurs arising from a subsequent sales
tax levy.
71) Apportionments and Adjustments (pg. 104)
a. When property changes hands, there is a need to apportion any
charges and income attributable to the property during the
month or year in which the closing occurs. Real estate taxes are
a great example.
b. Buyer will ultimately pay these taxes and should be sure the
seller reimburses buyer for the proportion of these taxes
attributable to the time during which the seller still owned the
property.
72) Brokerage Commissions (pg. 107)
a. Each party should state in the K the name of the broker it
retained and should covenant that it will pay all commissions and
fees it owes to its own broker.
18

b. Buyer should request seller indemnify it against any costs or

expenses it incurs arising from sellers failure to pay any
amounts due. Seller should do the same.
c. Parties should specify in the K that this agreement will survive
the closing.

IV. Post-Contract Due Diligence

1) What is due diligence? (pg. 131)
a. Thorough investigation of the property.
b. His first tool in his due diligence arsenal is a K drafted in a way
that forces seller disclosures.
2) Contract Remedies for Problems Unearthed During Due Diligence
Period (pg. 133)
a. Buyers legal position is strongest if it negotiated for an
expansive list of seller obligations.
b. Sellers breach may allow buyer to obtain damages, compel
specific performance, or seek other remedies provided in the K.
c. If buyer has not insisted on a survival clause, its rights under
some or all of the sellers representations will merge into the K at
the closing, and its ability to exercise its contractual remedies
may vanish.
3) Allocating Responsibility for Due Diligence Matters (pg. 134)
a. Lawyer title commitment and survey. Also to advise buyer as
to what types of due diligence review might or should be
undertaken.
b. Buyer appraisals, physical inspections, or environmental
reports.
4) Title and Survey Matters (pg. 134)
a. Important for buyer to investigate sellers title to the property.
b. Buyer must ensure seller actually owns property.
c. Buyers lawyer identify title problems; order a commitment
to insure title from a title company; and a survey form a licensed
surveyor. Must decide if there are any title problems that need to
be resolved before closing and must initiate process of resolving
them. At the closing, must determine whether any of these title
problems remain unresolved, must advise client whether and
how to proceed, and must ensure that the title insurance policy
and survey are in acceptable final form.
5) The Title Commitment (pg. 136)
a. Buyer wants a policy of insurance issued by a licensed,
reputable, and creditworthy title insurance company that states
the condition of title and insures new owner that this statement
is accurate.

19

b. Title insurance company will issue policy of title insurance at

closing, however, buyer will demand a commitment to insure
from the company for his lawyer to review before the closing.
c. Title commitment should be a written commitment on the part of
the insurer that it will provide title insurance to the buyer on
stated terms it will list conditions that must be met before the
insurer is required to issue its policy.
i. SCHEDULE A should:
1. Specify effective date of the commitment/name of
current titleholder.
2. Name of party that will be insured at the closing.
3. Identify insured property including any easements
or other property interests buyer will be acquiring
from seller.
4. Type of ownership interest.
5. Amount of insurance title company is agreeing to
provide.
ii. SCHEDULE B should:
1. Set forth list of specific exceptions and exclusions to
coverage, reflecting liens, encumbrances, and other
matters that the title company discovered during the
course of its search of title. Insurer is telling buyer it
will not insure buyer against any title problems that
arise as a result of these matters.
2. Usually starts off by listing several standard
exceptions, i.e.: rights of parties who occupy
premises under unrecorded agreements; rights of
parties under unrecorded easements; matters that
can be discovered only by an accurate survey or
physical inspection of the premises; mechanics liens;
real property taxes; and mineral rights.
6) The Form Title Insurance Policy (pg. 140)
a. ALTA 2006 Owners Party
i. First two pages state exactly what is being insured and
refer the reader to exclusions from coverage, exceptions
from coverage, and conditions that appear later in the
document. Covers insured against loss or damage
sustained or incurred by reason of ten enumerated types of
title problems including:
1. Title being vested in someone other than the party
listed in the policy.
2. Defects, liens, or encumbrances.
3. Unmarketability of title.
4. Lack of access to property.
5. Violations of certain land use laws.
6. Certain bankruptcy claims.
20

7. Any defects arising between policy date and the date

on which the deed is recorded.
ii. Also confirm the insurers obligation to pay costs of
defending any claim, including attorneys fees and
expenses.
iii. Next section lists five exclusions from coverage:
1. Land use laws and other exercise of the
governmental police power except to the extent
there is a public record of any violation.
2. Rights of eminent domain, unless public record.
3. Defects that insured has created or agreed to, or
knows of even though they are not matters of record.
4. Certain bankruptcy claims.
5. Real estate tax liens attaching between policy date
and date on which the deed is recorded.
7) Real Property Taxes and Assessments (pg. 142)
a. Buyers chief concern is that all real property taxes have been
paid through the most recent payment due date and that taxes
accruing for the current payment period are prorated between
seller and the buyer at the closing.
b. If past years taxes have not been paid, searcher will list the
years and amounts as a special exception in Schedule B of the
commitment. Seller should be required to pay these overdue
taxes unless parties incorporated them into the purchase price.
8) Covenants, Servitudes, Easements, and Reciprocal Easements (pg.
145)
a. Appear in schedule B.
b. Company will discover and disclose them and insure against
some of the negative effects of these documents in certain
cases.
9) Existing Mortgages (pg. 148)
a. Title commitment should disclose all unsatisfied mortgages
and deeds of trust of record. Will exclude from coverage any
mortgages that the buyer executes in connection with its
acquisition of the property, whether they are in favor of the
seller or a third-party lender.
10) Tenant Leases and Parties in Possession (pg. 149)
a. If a lease or memo of a lease has been recorded, it should appear
in schedule B.
b. Title insurers know other parties may be in possession under
unrecorded leases or other unrecorded arrangements or may
even occupy w/o authorization and are thus reluctant to insure
that only occupants of property are the parties whose interests
were revealed by the title search. Therefore, the title policy may
include a more general exception for parties in possession of
premises under unrecorded leases.
21

i. Buyer wants title company to omit this exception. Title

company will want some additional comfort and can get it
in two ways:
1. Buyer or title company can physically inspect
property on its own.
2. Title company can ask seller to provide it w/ an
affidavit and indemnity. It should also indemnify the
insurer against any loss that it suffers as a result of
any inaccuracy in the affidavit.
ii. To the extent that the sellers affidavit and indemnity
contains inaccurate or incomplete information that causes
insurer to omit a specific exception that it otherwise would
have included, the insurer will have recourse against the
seller. Meanwhile, buyer can recover directly from the
insurer.
11) Mechanics Liens (pg. 152)
a. Title searcher should discover them and list them on Schedule
B.
b. To the extent that any lien arises from a disputed matter, seller
should provide alternative security to the mechanic, commonly in
the form of a bond, or the buyer should insist that an amount
sufficient to satisfy the lien be held in escrow after the closing
until the dispute is resolved.
c. Title companies typically provide an exception for unrecorded
mechanics liens, thereby placing the problem squarely back in
the buyers lap.
d. An affidavit from the seller forces the seller either to disclose
existence of any unpaid mechanics or to state affirmatively that
there are no unpaid parties entitled to file a mechanics lien.
12) Air Rights and Development Rights; Mineral Rights (pg. 157)
a. Should be addressed in title commitment.
b. New owner of property can develop air rights subject to
applicable laws (i.e. zoning restrictions on height).
c. If he builds less than he is allowed to, he may be allowed to
transfer unused development rights.
d. Title commitment should clearly describe and insure these rights.
e. If mineral rights are important, make sure title commitment and
policy adequately describes and insures these subsurface rights.
13) Permitted Encumbrances (pg. 158)
a. Seller may have disclosed certain title encumbrances to buyer
in advance, and buyer may be happy to accept them, i.e. buyer
wont object when he is purchasing subject to existing financing
or is assuming that financing.
b. Seller knows title searcher will discover these matters and
should disclose them to buyer in advance and address them in
K. Why?
22

i. Mere existence of these title encumbrances is enough to

render title unmarketable in some cases.
ii. K typically will provide that buyer need not close unless it
receives a title insurance policy free of Schedule B
encumbrances. If seller fails to disclose these matters and
lists them as exceptions to this requirement, buyer again
will have right to terminate K w/o penalty and may be able
to recover K damages.
iii. Many encumbrances actually increase value of property.
14) Title Endorsements (pg. 159)
a. ALTA form doesnt cover all risks.
b. Title companies offer endorsements to their polices that provide
additional coverage.
15) Zoning/Subdivision Laws (pg. 160)
a. Buyers lawyer needs to confirm local zoning laws permit the
use that buyer intends to make of the property. Also needs to
familiarize himself w/ historic preservation laws, environmental
restrictions, etc.
b. If buyers planned use will not comply w/ existing law, lawyer
needs to ascertain whether a variance, special use permit, or a
rezoning of the parcel is likely to be available.
c. Title companies may issue a zoning endorsement which states
that the insurer has examined the applicable zoning and has
determined that the property is located in a stated zone, w/o any
assurance that this zone permits the buyers planned use.
16) Coinsurance and Reinsurance (pg. 162)
a. On extremely large deals, buyer may be concerned title
company will be unable to satisfy a claim under the policy.
Buyers of expensive properties may prefer to divide title
insurance up among two or more companies, thus reducing risk
of nonpayment of a valid claim.
i. Companies facilitate this process by coinsuring or
reinsuring title among themselves. One company serves
as lead insurer and then finds other companies to share in
the risk.
ii. If lead company coinsures, it sets up numerous fractional
policies for the insured party and retains only a part of the
liability for itself.
iii. If lead company reinsures, it serves as lead insurer for
the entire amount but purchases insurance from other
companies to cover portions of the risk.
17) Survey (pg. 163)
a. Buyer should order a survey of property (prepared by surveyor
licensed by the state) and review it as part of his due diligence.
b. Survey should be signed and set forth standard by which it was
conducted (typically ALTA standard).
23

c. Should also contain a statement confirming that the buyer, its

lender, title insurer, major tenants, and other interested parties
may rely on the surveys accuracy.
d. Lawyer should confirm boundaries of surveyed land conform
to legal description in last recorded deed; confirm all physical
structures and all significant natural features shown on the
survey; locate all known easements; confirm all rights-of-way do
not interfere w/ buyers current uses or planned future uses of
the property.
18) Access to Property (pg. 166)
a. Buyers lawyer must confirm that access to the property is
both available and adequate for buyers intended purposes.
b. Sometimes, only access to the property may be by right-of-way
over the property of another. If this is the case, get this
easement in writing and recorded.
19) Utilities (pg. 167)
a. Buyer will want survey to show the easement an the title policy
to insure it.
20) Lease Reviews and Estoppel (pg. 168)
a. Buyers need to verify that the property is capable of producing
the income that the buyer expects.
b. This is typically rent. Buyer will need to review every lease
affecting the property.
21) Obtaining Tenant Leases (pg. 169)
a. Buyer must obtain exact copies of the leases themselves
including all exhibits.
b. Buyer should receive a covenant from seller that he will deliver
ALL leases. This covenant should be accompanied by a closing
condition that allows buyer to refuse to close if it has not
received a complete and accurate set of these documents in
advance of the closing.
c. Buyer must remember, and need to remind the sellers, that
lease amendments and renewals may appear in informal
correspondence.
22) Reviewing Tenant Leases (pg. 170)
a. Buyers counsel must review legal terms and business terms of
each lease. Helpful to prepare a standard lease review summary
form that sets forth major terms of each lease in a way that is
easy for the client and lawyer to use. Should set out:
i. Name of tenant
ii. Location of premises
iii. Uses permitted and prohibited
iv. Duration of lease, including renewal or extension options
v. Rental rate
vi. Any obligation of LL to provide allowances for renovation in
the future.
24

vii. Any rights to expand or contract the amount of space that

the tenant will occupy.
viii. Any rights to terminate lease or purchase the property.
ix. Restrictions on assignment and subletting.
x. Amount and type of any security deposit.
xi. Anything else unusual.
23) Permitted Uses; Radius Restrictions; Covenants of Continuous
Operation (pg. 172)
a. Commercial leases typically limit uses for which tenant may
occupy the space. Can be general, i.e. office purposes or retail
use, or very specific.
b. Larger tenants often negotiate for restrictions on use to which
other space in the project or other nearby space may be put, i.e.
a supermarket saying dont put another supermarket nearby.
LLs anxious to sign desirable tenants may have no objections to
these exclusive clauses or radius restrictions.
c. Buyer needs to be aware of these things in the leases. Need to
verify seller is not in violation of any of these clauses otherwise
new owner may find itself facing litigation and/or possibility of
vacant space. Also, so the buyer, who is the new owner, does
not violate them as well.
24) Duration of Leases (pg. 174)
a. Buyer needs to confirm the duration of the leases that highquality tenants are locked in for, as well as the duration of leases
for tenants it wishes to get rid of.
25) Renewal Options (pg. 174)
a. Benefit the tenant.
b. Buyer must be aware of any outstanding renewal options he
cant lease space that is subject to an option until the holder of
the option allows the deadline for exercising it to expire.
26) Expansion Options (pg. 175)
a. Can be major problem particularly in office leases. Expansion
options may be held by different tenants and may overlap, and
buyer may find the seller made inconsistent promises to two o
more tenants.
27) Termination Options (pg. 176)
a. Some tenants may have bargained for right to terminate their
leases early.
b. Buyer needs to be sure it is not assuming a particular tenant will
remain in place and pay rent if that tenant may terminate its
lease.
28) Purchase Options; Rights of First Refusal; Rights of First Offer (pg. 176)
a. Seller may have granted one of its tenants option to purchase. If
tenant holds this option, buyer must be aware of it.

25

b. An option of this type caps buyers potential gain fro the property
w/o limiting its loss and also makes property more difficult to
finance.
c. Right of first refusal allows the holder of the right to match
any offer to purchase the property that the owner receives from
a third party.
i. These are undesirable form the buyers perspective.
Delay future sales of the property. Also discourages third
parties from making offers.
d. Right of first offer means owner must allow tenant to make
first offer on property before he puts it on the market. If owner
rejects tenants offer, he cannot accept a lower price from a third
party. Buyer may thus worry that, as the future owner of the
property, if it rejects the tenants offer, its flexibility in
negotiating w/ other prospective buyers will be limited.
29) Assignment and Sub-letting Rights (pg. 178)
a. Buyer will want to know whether it has control over selection of
all occupants of the property. This LL control can be undercut by
existing tenants if they have unrestricted right to sublet their
space or assign their leases to third parties.
b. Typically the LL may permit subletting and assignment only with
its consent, which it will agree in advance not to withhold
unreasonably.
c. LLs dont want to compete with their tenants.
30) Security Deposits (pg. 180)
a. Once property changes hands, buyer, rather than the seller, is
entitled to enjoy the benefits of the security deposit. Seller
should transfer all security deposits to the buyer at the closing.
31) Guarantees (pg. 181)
a. LLs sometimes demand that a third party guarantee
performance of a tenants leasehold obligations.
b. Buyers counsel needs to determine whether any lease
guarantees exist and needs to confirm that the guarantee will
benefit he new owner after the seller transfers the property.
32) Leasehold Financing (pg. 183)
a. Tenants interests in leases are mortgageable if LL agrees it will
send copies of all default notices to the lender; will afford the
lender an adequate grace period during which it may cure any
tenant defaults; and will accept the lender, any foreclosure sale
purchaser, or any assignee of either of these parties as a
substitute tenant.
i. Tenant may plan to spend a large sum to improve or
renovate its space; it may decide to borrow some portion
of this amount and give its lender a mortgage or deed of
trust on its leasehold interest. If tenant fails to pay amount

26

it owes, lender can foreclose on its borrowers interest and

step into the shoes of the tenant.
33) Tenant Estoppels (pg. 184)
a. Buyer can confirm terms of any LL-tenant relationships by
checking w/ the tenant. Usually takes the form of a tenant
estoppel letter.
b. Letter will usually ask tenant to confirm:
i. Identity of leased premises
ii. Duration of the lease including exercised/unexercised
renewals and extensions
iii. Rental rate
iv. Amount of any security deposit
v. Whether lease has been modified or amended
vi. That tenant has not assigned lease or sublet any space
vii. That neither party is in breach of its leasehold obligations
viii. That tenant has not prepaid any rent
ix. That LL has either made or paid for all improvements to
the space for which he is responsible under the lease.
c. Prudent buyers will attach a copy of the lease and have tenant
confirm the attached document is true and complete.
d. Tenant is estopped from later denying accuracy of the
letter.
34) Subordination, Non-disturbance, and Attornment Agreements (pg.
187)
a. A party subordinates its interest when it agrees to demote
the priority to which it is otherwise entitled under the states
recording statute.
i. Ex. If a tenant executes a lease and takes possession of its
space and the LL then executes a mortgage that its lender
records, the lease enjoys priority and would survive a
foreclosure of the mortgage. If the tenant were to
subordinate its lease prior to foreclosure, the parties would
be reversing the original priority of the documents and the
mortgage would become senior to the lease. If the lender
were to foreclose properly after this subordination, the
tenants lease would terminate automatically. Without a
subordination agreement, tenants lease enjoys priority.
b. A non-disturbance agreement is an agreement by which a
mortgage lender promises, on behalf of itself and any foreclosure
sale purchaser, that it will NOT DISTURB the possession of a
tenant whose interest otherwise might be terminated by a
foreclosure of the mortgage.
i. Ex. In the preceding example, if the tenants subordination
agreement is accompanied by a non-disturbance
agreement form the mortgagee, the lease that has just
been subordinated to the mortgage would not technically
27

survive the foreclosure, but the new owner of the property

would have to recognize the original tenant on the same
terms as those contained in the original lease.
c. Tenant is free to leave under a non-disturbance agreement.
d. Lenders balance the one-sidedness of a nondisturbance
agreement by insisting in advance that the tenant attorn to the
lender or its successor, or recognize that party as its new LL.
Combined effect of a nondisturbance and attornement
agreement is to create a new lease between the original tenant
and the foreclosure sale purchaser.
e. Parties to an SNDA agreement must make sure that this
agreement either is recorded or is contained in an unrecorded
document of which a subsequent party will be deemed to have
constructive notice.
35) Condition of Property and improvements (pg. 190)
a. Buyers counsel must remind her client to retain persons who
are competent to investigate these matters during the due
diligence period.
36) Suitability for Intended Use (pg. 191)
a. Buyer needs to hire people to confirm land/buildings are suitable
for intended use.
37) Responsibility for Ordering Inspections (pg. 191)
a. Up to the buyer to do this.
38) Suitability for Construction (pg. 192)
a. Buyer needs to confirm land itself is suitable for the project the
buyer has in mind. Probably entails hiring soil experts,
geologists, or structural engineers w/ expertise to determine
whether subsurface is appropriate for buyers intended use.
39) Availability of Necessary Permits (pg. 192)
a. Even if buyer plans to continue the sellers use of the property,
buyer is likely to need to acquire or update an array of permits
and certificates.
40) Environmental Matters (pg. 193)
a. Buyers lawyer must be particularly careful to confirm that the
buyers intended use of the property will comply w/ all federal,
state, and local environmental laws.
41) Assignability of Contracts and Licenses to Buyer (pg. 194)
a. If 3rd party authorization is required, buyer must be sure that
seller initiates and completes the process of obtaining those
consents.
42) Corporate, Partnership, and Limited Liability Entity Matters (pg. 194)
a. When dealing w/ a business entity, the other party must verify
that this entity has legal existence, and has taken the steps
necessary to perform under the K in accordance w/ law.
43) Due Organization of the Parties (pg. 195)

28

a. If one party is a corporation, partnership, or a limited liability

entity, other party needs to confirm it was duly formed and
validly exists in accordance w/ the law of a particular state; that
it is in good standing in that state; and that it is qualified to do
business in the state in which the property is located.
b. Buyer can confirm legal existence/good standing by obtaining a
certificate of good standing from the state in which the seller
is organized.
c. Each party can confirm the legal existence of the other party by
asking that the other partys lawyer provide a confirmatory legal
opinion.
44) Authority of Parties (pg. 195)
a. Each party needs to confirm the other has taken every step
necessary to authorize the transaction in accordance w/ its own
internal documents and the laws of the state under which it has
been formed.
b. If one party is a corporation, the other will ask for a corporate
resolution authorizing the transaction.
c. If one party is a partnership and claims that no such document
exists, the other would be wise to ask for a copy of the
partnership agreement and an authorization signed by all of the
general partners.
d. Each entity should also deliver an incumbency certificate that
lists all the officers or partners who are authorized to sign on
behalf of the entity.
e. With respect to last minute changes, the resolution should clarify
which persons have the authority to make these changes w/o
returning for an expanded authorization.
45) Opinions of Counsel (pg. 197)
a. Each party can request an opinion of the other partys counsel to
verify that the other party exists legally and has taken all
necessary entity actions. This is dangerous for counsels because
the counsels/firms reputation is on the line.
46) Financing Matters (pg. 197)
a. Buyer MUST use due diligence period to obtain commitments for
the financing it will need to complete the transaction. If financing
is available, buyer can close, but if it is unavailable, buyer must
be sure to exercise its contractual right to terminate the K w/o
loss of its down payment in strict accordance /w the terms of the
pertinent closing condition.
b. If buyer learns it will not be able to obtain the funding it needs,
it must be certain to comply w/ any deadlines and notice
requirements contained in the closing condition.
c. Until the deadline, buyer should energetically pursue its
financing.

29

V. The Loan Commitment

1) Need for a Loan Commitment (pg. 203)
a. Buyers perspective: acquisition and lending transaction are
contingent upon each other, which means buyer must enter into
two different agreements that provide it w/ some flexibility in the
event that something goes wrong.
b. Most common way of buyer protecting itself is by singing a K
of sale that contains a financing condition.
i. Closing condition should say precisely what type of
commitment buyer must receive before it is obligated to
close.
c. Buyer must make all efforts to meet this financing condition
during due diligence period.
d. If it does, it can close. If it is unable to satisfy the financing
condition, it can exercise its contractual right to terminate the
sales K w/o penalty and w/o forfeiting its earnest money deposit.
e. Buyer will want to make sure that if it decides to close, lender
will make acquisition funds available at closing.
f. LENDER wants to know it will be compensated if it sets funds
aside for the buyers use (may have passed up other lending
opportunities or may itself be borrowing funds from another
source, and does not wish to lose funds as a result of sellers
unexpected withdrawal from the transaction).
2) Similarities v. Differences w/ K of Sale (pg. 205)
a. Role of the seller in the sales K parallels role of the borrower in
the loan commitment:
i. Each requesting money from its contract counterpart.
ii. Each offering to provide an interest in real estate in
consideration for that money.
b. Role of buyer in the sales K is analogous to the role of the
lender in the loan commitment:
i. Chief role is to provide a significant amount of money.
ii. Most credible threat is to refuse to produce that money a
threat that becomes nearly meaningless after the closing.
c. DIFFERENCES:
i. Sales transaction ends the relationship between seller and
the land and also the relationship between seller and
buyer.
ii. Loan transaction/loan documents create an ongoing
relationship between borrower and the lender.
3) Lenders Perspective (pg. 207)
a. Lender should review transaction carefully before deciding
whether to extend the loan; should agree to a loan commitment
that provides it with necessary information about the transaction
and the property and that allocates risk in an acceptable way;
30

should perform all necessary due diligence; and should accept

loan documents at the closing that will fairly govern its ongoing
relationship with the borrower.
b. In a loan transaction, the lender is typically in a far stronger
position than the borrower. Most of this bargaining clout simply
reflects the fact that the lender will be in the position of greater
risk once it extends the loan.
4) Borrowers Perspective (pg. 208)
a. Once borrower signs the K of sale, the buyer will be anxious to
secure satisfactory financing and will probably spend the next
several weeks scrambling to find an acceptable loan and to turn
over to prospective lenders whatever information they request.
5) Terms of the Loan Commitment (pg. 209)
a. Must be in writing and set forth essential terms.
b. Identify the parties and property and state it contains lenders
agreement to lend on the terms specified in the commitment.
c. Must state principal amount of the loan, interest rate, and
repayment terms.
d. Needs to clarify that the real property that the borrower is
acquiring will also serve as security for the repayment of the
loan.
e. Will contain representations and warranties often paralleling
those found in a K of sale.
f. Have closing conditions that parallel those found in a K of sale.
g. Also address closing mechanics.
6) Tenant Leases; Lease Priorities (pg. 211)
a. Lender must confirm that creditworthy, rent-paying tenants are
in possession of space and that they are obligated to pay rent
well into the future.
b. Lender is just as concerned that the buyer succeed in operating
the project but also is worried about what happens to the
property if the buyer fails to meet its obligations. If the project is
unsuccessful, the lender will have to exercise its pre-foreclosure
remedies and then may have to foreclose on the property.
c. Lender is specifically interested in learning the relative
priorities of its own mortgage and the various tenants leases
under the states recording statute. These priorities will
determine whether the leases will survive or be terminated if
there is a foreclosure. Lender is definitely concerned about
presence of any subordination agreements.
d. Leases, mortgage, and any SNDA agreements will establish initial
priorities.
e. Counsel to the lender will not be able to figure out the relative
priorities of these leases and mortgages before undertaking a
due diligence review of the documents and becoming familiar
with the states recording statute and foreclosure procedures.
31

Meanwhile, the parties will wish to execute a loan commitment

before the lender has completed this due diligence investigation.
The loan commitment therefore must contain closing conditions
that allow the lender to review the relevant documents after the
commitment is signed and address any problems it discovers.
7) Environmental Matters (pg. 213)
a. Lender anticipates that it will neither operate nor own the
property unless something goes very wrong with the borrower.
CERCLA provides a statutory exemption from liability for secured
parties, and the lender will want to be certain that both parties
act in a way that allows the lender to retain this valuable
insulation from liability.
b. If the LENDER becomes the owner (via foreclosures) IT IS
NO LONGER INSULATED.
c. Lender should demand in the loan commitment that the
borrower demonstrate that the property is free of hazardous
substances as of the closing date.
d. Lender should also insist in the loan commitment that the buyer
covenant to continue to operate the property in a manner that
will not lead to future environmental liability.
e. Lender may also want the loan commitment and the operative
documents to provide additional assurances that the borrower
will operate in compliance w/ all environmental laws and will not
subject the lender to liability for cleanup costs.
8) Insurance (pg. 214)
a. If uninsured or underinsured improvements were to be destroyed
or significantly damaged by fire or other casualty, the borrower
would be more likely to default on the loan, the lender then
might be forced to foreclose on property that is worth far less
than the outstanding principal, and both parties could suffer
substantial losses.
b. Lenders risk is usually is greater than the borrowers for the
simple reason that the lender often has provided 80 to 90
percent of the funds for the purchase of the property. If the
building burns down and the project is not adequately insured,
the lender will probably lose more money than the borrower.
c. Lenders insurance concerns will be particularly acute if the
project is not successful or if the loan is nonrecourse. If the
project struggles, the value of the property is likely to drop, and
the borrowers equity may soon be even lower than it was when
the loan closed.
d. If the loan is nonrecourse, lender has agreed from the outset
that, subject only to any carve outs from the nonrecourse
provision, it will look solely to the property for satisfaction of any
unpaid debt and will not seek recovery from the borrower or any
of its principals.
32

e. Lender must receive adequate evidence that the borrower has

insured the property in sufficient amounts w/ reliable companies
as of the closing date. It addresses this concern in the loan
commitment, which should contain a covenant and a closing
condition to this effect.
f. Lender must be certain that the insurer is aware of the lenders
interest in the property and that the coverage will not be voided
by any act of the borrower.
g. Lender should also verify that after a casualty loss, the insurer is
obligated to pay the insurance proceeds to the lender alone or to
the borrower and the lender jointly, and may not pay them to the
borrower alone.
h. Lender will want to be sure that the borrower obtains adequate
amounts of liability insurance, so that deaths, injuries, or other
damage at the site will not lead to a huge judgment against the
borrower.
i. Typically, if the borrower does not maintain liability insurance it
is considered a default. Most lenders will require you to
produce an insurance certificate annually to make sure you
remain covered.
j. Capital Replacement Account money to owner to repair his
damaged property.
k. Note: at the closing you never get the full insurance policy. You
will get binders. But, a good lawyer will get a certificate of
insurance which is an unconditional obligation to insure.
9) Assignability of Contracts and Licenses (pg. 217)
a. Lender will have a great interest in the borrowers ability to
maintain good working relationships w/ tenants, employees, and
other parties, because the lender I more likely to be repaid if the
borrowers project is successful.
b. Lender should ask for a representation that lists and describes
all the major contractual relationships, licenses, and other
agreements to which the borrower will be a party.
c. Lender should also seek closing conditions in the loan
commitment that state that the lender must be reasonably
satisfied w/ major contracts, that the borrower has the power to
assign these Ks, and that the borrower will assign its interest in
these Ks to the lender as additional security for the borrowers
performance of its loan obligations.
10) Real Property Taxes and Assessments (pg. 218)
a. Lender must be certain that all real property taxes and
assessments that become due before the closing are paid by the
seller and that the borrower will continue to make these
payments after the closing.
b. Lender may worry that if cash is tight, borrower will fail to pay
its real estate taxes.
33

c. Real property tax liens are ALWAYS prior to mortgage loans, even
if the mortgage was recorded before the taxes accrued, and the
borrow that fails to pay its taxes makes the lenders security that
much less valuable.
i. Why? public policy: tax revenue is used to run the
schools.
d. Just as lender may insist on an escrow for payment of insurance
premiums, it also may demand an escrow for payment of real
property taxes and assessments.
e. Lenders will typically insist that as these taxes get paid, the
buyer provide them with notice of payment/copy of the bill.
11) Prior Mortgages (pg. 219)
a. If lender is making a junior loan, it will have some obvious
concerns about all senior debt. It will want to know the status of
this senior debt as of the closing, including the outstanding
principal, the interest rate, and the due date. Junior lender will
also want assurances that there are no defaults on any senior
debt.
b. To reduce risk, junior lender is likely to condition the funding of
its loan on receipt of agreements from all senior lenders that
they will provide it with notice of any defaults on their loans and
w/ the opportunity to cure those defaults. They will typically start
making payments on those defaults to preclude foreclosure.
c. From junior lenders point of view, it is essential that the loan
commitment contain a closing condition mandating that all
holders of senior debt protect the junior lender in this way.
12) Appraisal (pg. 220)
a. Lender may insist that an independent appraiser place a value
on the property and that this appraised value equal or exceed
the K price.
b. If the lender has agreed to lend an amount that is close to the
max that its internal loan-to-value guidelines or applicable
lending regulations allow, then the appraisal must confirm the
accuracy of the sale price set forth in the K of sale.
c. Loan commitment should specify the appraisal method.
d. Loan commitment will usually provide lender w/ the right to
terminate commitment w/o penalty or to reduce the principal
amount pro rata if the appraiser determines that the value of the
property is too low.
13) Creditworthiness Matters (pg. 221)
a. Before lender enters into the loan commitment, it will assess the
borrowers professional experience, financial condition, and
borrowing history and will examine the property itself, as a
means of deciding whether the borrower merits a loan in the
amount it has requested.

34

b. Loan commitment should contain representations from the

borrower as to these issues.
c. Creditworthiness of the borrower is the most important thing to a
lender.
i. Banks dont want to be in the real estate business
ii. They just want to collect heir interest on the mortgage
iii. Because of this, many banks will insist on a loan guarantee
14) Loan Guarantees and Other Forms of Credit Enhancement (pg. 222)
a. Every lender is concerned that the real estate will prove not to
be adequate security should the borrower fail to meet its loan
obligations.
b. A form of additional security is the personal guarantee.
c. Guarantees may cover all or only part of the debt, they may last
for the entire term of the loan or may expire after a fixed period
of time, they may terminate or spring into existence upon the
occurrence of a stated event, and they may guarantee the
lenders recovery following any type of default or after only
specifically listed defaults. The lender may prefer some other
form of credit enhancement, such as a letter of credit.
15) Opinion of Borrowers Counsel (pg. 223)
a. Loan commitment will condition the lenders obligation to
close the loan on its receipt of a satisfactory legal opinion from
borrowers counsel.
b. Lender will want the borrowers counsel to confirm that the
borrower is properly organized and licensed to do business, that
it has authorized the transaction in accordance w/ all applicable
laws and governing documents, that the transaction does not
violate any third-party agreements, and that the individuals who
will be executing the documents have the authority to do so.
c. Law firm delivering the opinion is responsible for any
misstatements contained in the letter. Firms never want to opine
to anything or any document that they havent seen. Dont go
beyond those documents that youve seen. Dont do an
independent investigation.
16) Non-recourse Provision (pg. 223)
a. Commercial borrowers often seek nonrecourse loans, in which
the lender agrees that it will look only to the mortgaged property
for satisfaction of the debt and will not seek a deficiency
judgment against the borrower or any of its principals.
b. If loan is to be nonrecourse, borrower must be certain that this
provision appears in the loan commitment.
c. Why would a buyer be able to get a non-recourse loan?
i. Lender willing to run the risk
ii. He has an expensive property
iii. Low loan value to property value ratio
d. Note: exceptions (CARVEOUTS) to non-recourse loans (pg. 407)
35

i. As provided by the Guarantee, with respect to the

Guarantors
ii. Borrowers failure to pay real estate taxes or assessments
against the Property, to the extent proceeds are available
iii. Borrowers failure to insure the Property as required by the
Loan Documents
iv. Rent or other income from the Property received after a
default under the Loan Documents and which is not applied
to the Loan or to the expenses of operating or maintaining
the Property
v. Conversion, diversion, misapplication, or misappropriation
of security deposits, reserve accounts, insurance proceeds,
or condemnation awards in connection w/ the Property
vi. Waste
vii. Amounts due under the Environmental Indemnity
viii. Fraud or intentional misrepresentation
17) Loan Commitment Fee (pg. 224)
a. The interest that the lender charges serves as consideration for
the borrowers use of the borrowed funds, but the lender also is
likely to charge an additional fee as compensation for the
transaction costs of initially extending credit and documenting
the deal.
b. This compensation typically takes the form of a loan commitment
fee, and this fee can be substantial.
18) Loan Expenses (pg. 225)
a. Borrower will also have to pay most of the lenders other
expenses associated with the loan. Prominent among these is the
lenders cost for outside counsel, including out-of-pocket costs
and ravel expenses.
b. The parties should be clear in the loan commitment as to
precisely which costs the borrower must bear and when they
must be paid.

VI. Post-Loan Commitment Due Diligence

1) Due Diligence & the Loan Commitment (pg. 227)
a. After parties have executed the commitment, the lender will
obtain additional info during the due diligence to help them
decide whether all conditions precedent have been satisfied,
thereby requiring the lender to provide the funds to the borrower
at the closing.
2) Loan Commitment Remedies for Problems Unearthed During Due
Diligence (pg. 229)
a. Lenders pre-closing(post commitment) remedies fall into two
categories:
36

i. If borrower breaches a representation, warranty, or

covenant contained in the loan commitment, then the
commitment will provide the lender w/ contractual
remedies.
ii. If borrower fails to meet a closing condition contained in
the commitment, then the lender has the right to refrain
from funding the loan w/o incurring any liability.
3) Title & Survey Matters (pg. 230)
a. Lender wants to be absolutely satisfied that the borrower owns
good, marketable, and unencumbered title to the property.
b. Also, lender recognizes that it might someday have to operate,
foreclose on, or even acquire the property and thus must review
title and survey issues w/ the eyes of a potential future owner.
c. Borrower wants an acceptable survey, deed, and owners policy
of title insurance. Lender wants all of this plus valid and
enforceable mortgage documents and title insurance on the
mortgage.
4) Mechanics Liens (pg. 233)
a. Lender will be concerned about right of mechanics to place liens
on property for work for which they were not paid.
b. If a construction project has already commenced before the
mortgage is recorded, then a lien recorded after the mortgage
will, in most states, relate back to a date before the recording
date of the mortgage.
c. Lender has no conclusive method of determining whether there
are any unpaid mechanics lender should be able to persuade
title insurer to remove the mechanics lien exception from
Schedule B of its title insurance policy on the basis of an affidavit
and indemnity from the seller to the insurer.
d. Mechanics liens are a particular concern in a construction loan,
in which the lender may be disbursing funds in numerous
installments over a period of months or years.
i. Construction loan is a short-term loan used to develop the
property. 100% of the loan is not laid out right away but
rather it is distributed in installments over time.
ii. During this time, if there is a dispute, it is very likely a
mechanics lien will be filed.
e. You can bond a mechanics lien so that in the event the dispute
gets resolved in a way that the contractor recovers money, he
knows that there is money available to him.
5) Lease Review (pg. 234)
a. Lender will want to review leases w/ care to satisfy itself that he
project will be successful.
b. Every provision of an existing tenants lease will probably be
deemed senior to the lenders mortgage under state recording
laws unless the lease contains subordination language.
37

6) Renewal, Expansion, and Termination Options (pg. 235)

a. Tenant leases often provide tenant w/ options to renew or extend
the term of the lease, to expand the amount of space that the
tenant is occupying, or to terminate the lease before the stated
expiration date. Thus lenders should look for these clauses.
b. If the lender is banking on the income stream from a particular
lease but the tenant has the right to terminate that lease, then
the lender must adjust its analysis of the property.
7) Purchase Options and Rights of First Refusal (pg. 237)
a. Purchase option tenant that exercises its purchase option
needs only to pay the stated purchase price to the lender. If the
principal amount of the loan exceeds the option price, the lender
may be left holding an unsecured note from the borrower for the
excess.
b. First Refusal could affect borrowers ability to sell the
property later and might also impair the ease with which the
lender can foreclose. A clause of this type could also affect the
lender should it ever become the owner of the property and later
seek to sell it.
8) Landlords Construction Obligations (pg. 237)
a. Lender needs to determine whether the landlord under that lease
is responsible for undertaking construction within the space or
reimbursing the tenant for all or some of its own construction
costs.
9) Tenant Estoppels (pg. 238)
a. Lender will want comfort of knowing each tenant is occupying
space and paying rent w/o any claims against its landlord.
b. Each letter should verify that the lease has not been amended or
modified.
c. Should state whether LL is in breach of its obligations under the
lease, thereby alerting the lender to any claims the seller may be
facing and that the buyer may inherit.
d. Tenant should confirm in the estoppel letter that it has not
prepaid any rent other than the next months rent.
e. Letter should also disclose any obligation on the part of the LL to
provide or pay for tenant improvements.
f. Note: tenants lease must provide that the tenant must supply an
estoppel certificate when reasonably requested.
10) Subordination, Nondisturbance, and Attornment Agreements (pg. 239)
a. Once lawyer has reviewed any SNDA provisions, his next task is
to figure out what the relative priorities of all leases and
mortgages are. Initial answer is determined by reference to the
states recording laws, which should describe how a subsequent
party can obtain priority over a party with a prior interest.

38

b. After the lenders lawyer establishes these initial priorities, he

next must determine the extent to which the leases and SNDAs
rearrange these priorities.
c. With Nondisturbance agreements lender agrees that even if
property is foreclosed, he wont disturb tenants right to possess
the property.
d. With Attornment in the event of foreclosure, tenant agrees to
attorn to that person as if they are the original landlord.
e. Most lenders will say to the borrowers, if you want us to make
this loan, get all of your tenants to sign subordination
agreements.
f. How does owner get tenant to sign subordination agreement?
negotiations/concessions.
11) Environmental Matters (pg. 241)
a. Lenders are worried that if they become LL, they could be
responsible for any environmental issues that arise.
b. Primary role for lenders counsel during post-commitment due
diligence stage is to make sure that his client has received any
environmental reports to which he is entitled and to work w/ the
client in reviewing these reports.
12) Insurance (pg. 241)
a. Must review the insurance coverage that the borrower plans to
provide and to confirm that this coverage will be satisfactory.
b. Loan commitment should have specified the types and amounts
of coverage that the borrower is required to obtain.
c. Lenders lawyer must confer w/ his client and verify that the
insurance companies are acceptable, that the amount and scope
of the coverage meet the loan commitments requirements, that
the policy forms are adequate, and that the insurance will be
effective as of the closing date.
d. Lawyer should advise lender that matters relating to insurance
should be carefully reviewed by the lender itself or the lenders
insurance agents and advisers.
13) Prior Mortgages (pg. 243)
a. Lawyer for lender must review all senior mortgages and all
related loan documents and determine whether the security that
its own client is to receive will be acceptable in light of the terms
of these prior documents.
b. At a minimum, junior lenders lawyer will want to confirm certain
facts about the senior debt, such as the amount of principal
outstanding, the interest rate, the term, and the fact that there
are no defaults.
c. Lawyer for lender should request a pay off letter to find out the
amount necessary to pay off the mortgage and the per diem
interest rate.
14) Appraisal (pg. 244)
39

a. Paid for by the borrower.

b. Lender orders and reviews the appraisal during due diligence
period.
c. Lender should be satisfied appraiser prepared appraisal properly
and that the amount of the appraisal is at least equal to the
amount that the lender used when making its credit decision.
d. If the amount comes in lower than the parties anticipated, then
the lender must decide whether applicable regulations permit it
to extend the loan anyway and whether it wishes to do so.
e. If the borrower learns that the appraisal has come in too low,
often it will decide to approach the seller and seek a price
reduction.

VII. Condos and Co-Ops

1) Condominiums in General
a. Involve the sale of interest in real property and are equivalent to
single-family homes.
b. All attributes of ownership apply to the ale of condo units.
c. In addition, you also get a share of the common elements, i.e.,
the land, building surface, roof, etc.
d. A declaration creates the condominium regime.
i. Created by a sponsor who is typically the developer of
real property who decided to build a condominium.
e. Condos are usually more marketable.
2) Co-Ops in General
a. When you buy stock in a co-op, you purchase equity. What you
pay depends on what equity they have in the deal. You are
buying shares in a corporation. You dont get an interest in real
estate. You get a proprietary lease that says you can live there as
long as you are an owner of stock.
b. Price you pay for co-op stock is based on market value and
mortgage on the building.
c. With respect to real estate taxes, the assessment on co-ops is
done as if it was a conventional rental property. Then, the real
estate taxes are apportioned to the owners.
i. Co-ops are single units for tax purposes.
ii. Typically there is one mortgage loan on the entire building.
1. Note: this is almost never the case for condos.
d. Purchasers in a co-op have significant discretion. They can turn
down an applicant for any reason.
i. Note: condos usually dont require people to be approved
(though possibly when an original buyer is looking to lease
his condo to another).

40

e. Co-Ops are often all cash buildings. The boards dont want
anyone living in the co-op that could potentially default on a
loan. If they did, and the lender foreclosed, they could potentially
sell it to someone the co-op board might not have approved to
live there under normal circumstances.
f. Interest rates usually higher in co-ops
g. Owner of a unit in a co-op can deduct a pro-rata share of taxes
and pro-rata share of interest.
h. Note: 80% of co-op itself (sq. footage) must be used for
residential purposes in order to deduct. Cant exceed 10%
commercial use.
3) Purchase and Sale of Co-ops/Condos
a. Highly regulated
b. When purchasing stock, an offering plan HAS to be filed with the
state.
c. Why offering plans?
i. Public sale of the security.
ii. Note: in condo sales, it is a sale of the unit.
4) Conversion Scenario
a. For example: owner is cashing out and selling the units in his
former rental apartment.
b. What does the sponsor want to do? Until a majority of the
units are sold, he will be a member of the board until such time
as a certain % of the sales of that unit take place.
c. Typical exchange:
i. Owner goes to attorney and says I have a building and I
want to convert it to a condominium. How do I do it?
ii. Attorney says: How much would they sell for?
iii. Owner: 4-500k.
iv. Attorney: We should get an appraisal.
v. Owner: Any other professionals we should hire?
vi. Attorney: Yes. Seek out an active broker in the area who
will help.
5) Preliminary Offering Plan
a. Its a red herring. It goes to the Attorney General to approve. In
the meantime, you can not sell the units, BUT you can take
deposits (refundable) after you have checked with the AGs
office.
b. As an attorney, you must advise your client (the owner) that if
theyve had any issues with the law, they need to disclose it to
the AGs office. Anyone with an interest in the real estate NEEDS
to be disclosed to the AGs office.
6) Homeowners Association
a. Hybrid entity that usually exists in cases where there is a group
of units that look like single family homes but there are also
41

usually things like clubhouses or roads that need to maintained;

anything that goes into maintaining the community must be
shared by the community.
b. The owners must maintain their units themselves.
7) Offering Plan
a. Ensure you read all of it, but pay special attention to schedule A
as well as the bylaws (what you can and cant do).
8) Internal Revenue Code 216 very important if you are buying shares
in a co-op. Relates to the deduction of taxes, interest, and business
depreciation by cooperative housing corporation tenant-stockholder.
a. See attached document from Westlaw if specifics are required.
9) NY Real Property Law, Sec. 339i
a. Each unit shall have a common interest as expressed in the
declaration.
b. Common interest appurtenant to each unit as expressed in the
declaration shall have a permanent character and shall not be
altered w/o the consent of all unit owners affected, expressed in
an amended declaration.
c. Common elements shall remain undivided and no right shall exist
to partition or divide any thereof, except as otherwise provided in
this article.
d. Each unit owner may use the common elements in accordance
w/ the purpose for which they are intended, w/o hindering the
exercise of or encroaching upon the rights of the other unit
owners, but this subsection shall not be deemed to prevent some
unit or units from enjoying substantially exclusive advantages in
a part or parts of the common elements as expressed in the
declaration or by-laws.
e. Unit owners shall have an irrevocable right, to be exercised by
the board of managers, to have access to each unit from time to
time during reasonable hours to the extent necessary for the
operation of the property, or for making emergency repairs
therein necessary to prevent damage to the common elements
or to another unit or units, and the by-laws may contain
reasonable rules and regulations for the administration of this
provision as the privacy of units and protection of them and their
contents from burglary, theft or larceny requires.
10) Board of Managers of Marbury Club Condo v. Marbury Corners
a. Facts sponsor of condo development project found out that
real estate taxes on the condos were going to be so high that
they would make the condos unmarketable. Sponsor has the
condo board enter into a loan agreement with them that they
would pay him back over 40 years plus interest. This was done so
as to reduce the sales price of the condos so as to reduce the
real estate taxes.

42

b. Held loan was invalid because it violated RPL 339-jj which

only permits a condo board to borrow for major and minor
maintenance, repairs, additions, improvements, replacements,
working capital, bad debts and unpaid common expenses,
deprecation, obsolescence and similar purposes.
c. 339-jj also created two sources of legal authority for borrowing
on behalf of condos: 1) document based authority (i.e. authority
created in declaration or the by-laws of the condo); or 2)
statutory authority (i.e. in 339-jj itself).
d. Purpose of 339-jj: protect condo unit owners from unscrupulous
sponsors by ensuring that they have a say in the condos
borrowing by requiring that the authority of the condo board to
borrow be set forth in the Declaration or By-Laws and if it is not
authorized in either the Declaration or By-Laws, by requiring that
any such borrowing be delayed for five years, and that it be
approved by a majority of the unit owners.
e. Cited for whether contract should be enforced if it is against
public policy.

VIII. Loan Documents/Transactions

1) Document Prep (pg. 247)
a. Lender does not actually fund loan until the closing and will NOT
do so unless borrower executes and delivers acceptable loan
documents.
b. Parties are more likely to sign a loan commitment that does not
establish the precise language of the operative loan documents,
deferring those negotiations until later.
2) Note (pg. 249)
a. Note is document that evidences debt. A note w/o a mortgage
creates a valid-if unsecured-debt, while a mortgage w/o a note is
meaningless. Its an IOU.
b. Must state name of borrower, principle, maturity date, frequency
of payment, whether repaid at fixed or adjustable interest rate,
what events constitute defaults, and list remedies.
c. Lenders want notes to be negotiable.
d. If loan is nonrecourse, note must say to what extent lender may
hold borrower personally liable.
3) Mortgage (pg. 250)
a. Lender wants security borrower will keep promise to pay laid out
in note.
b. Lender is willing to extend a loan only because it knows funds
will be used to purchase or refinance an asset w/ a value that
exceeds the amount of the loan and the lender will have access
to that asset if the borrower fails to repay.
43

4)

5)

6)

7)

c. Mortgage is a security interest in real estate. Borrower

mortgages the property to the lender as security for repayment
of debt. Lender records mortgage.
d. Mortgage priorities are governed by state recording laws, and the
lender assures its place in line by recording the document
promptly.
Similarities/Differences with Loan Commitment (pg. 252)
a. Loan commitment executory agreement in which lender
promises to lend funds to borrower if borrower meets certain
criteria. It is an agreement under which each party must perform
in the future. Nothing in the loan commitment gives lender any
legal interest in the borrowers real estate.
b. Mortgage operative real estate document. By executing and
delivering it, borrower grants lender a legal interest in real
estate. Lender holds a security interest. Document of
conveyance.
Granting Clause (pg. 252)
a. Clause that affects the mortgagors transfer of an interest in the
real estate to the mortgagee.
b. Note: lenders mortgage interest is a temporary interest that
persists only until the debt and all other loan obligations have
been satisfied.
Due on Transfer (pg. 253)
a. Lender concerned: 1) that borrower may transfer property to a
successor owner that lacks skills and abilities of the borrower;
and 2) being suck w/ a long-term loan at a rate that has turned
out to be well below market rate.
b. Can address these concerns by having parties agree that the
loan becomes due in the event borrower conveys property to
another.
c. A due on transfer clause allows the lender to terminate the
loan upon conveyance of property if it finds new owner
unacceptable and allows lender to increase the interest rate if
the state rate seems too low at time of transfer.
i. There is a duty of good faith and fair dealing on the
lender.
Prepayment (pg. 255)
a. If borrower borrows funds at the stated rate and the prevailing
rate then drops, it will want to be able to refinance at a lower
rate and use the proceeds of the refinancing to pay off the
original loan.
b. Lender may charge borrower a fee to prepay the loan
sometimes called a prepayment penalty/prepayment fee.
c. Parties sometimes agree to fairly complex prepayment fees (i.e.,
no prepayment allowed during year 1, 5% of principle during
year 2, 3% during year 3, 1 % during year 4, and 0% thereafter).
44

d. Note: if the mortgage is silent as to prepayment, loan cannot be

prepaid.
e. At common law, prepayment was not allwed.
8) Limitations on Junior Financing (pg. 257)
a. Jr. lenders will typically refuse to lend unless all senior lenders
agree to provide them w/ notice of any defaults on the senior
debt and a reasonable opportunity to cure those defaults.
Junior lender will be willing to cure because a default on the
senior debt may lead to a foreclosure of its subordinate interest.
b. Sr. lenders will be concerned that junior lenders mortgages are
likely to contain same remedies as the first mortgage, and a
junior lenders exercise of those remedies may work to the
detriment of the senior lender.
i. Ex. Senior lender has little or no control over the junior
lenders timing of any foreclosure sale. Jr. lender may have
less patience w/ any defaults and may choose to foreclose
at a time that the senior lender views as inopportune.
Thus, senior lenders may insist that junior lenders be
prohibited from foreclosing for as long as the senior
mortgage remains in place though, this effectively
eliminates the possibility of junior financing.
c. Sr. lenders may also be concerned about the borrower who seeks
junior financing. May believe that the owner that is forced to
seek a second loan is the early stages of distress.
9) Cross-default (pg. 260)
a. Why would lender care whether borrower defaults on its
obligations to another lender while remaining current on all its
obligations to that lender?
i. If lender cant meet its other obligations, this suggests
impending financial problems.
ii. Lender does not want to see borrowers other creditors
begin to exercise their most useful remedies at a time
when lenders own right to do so has not been triggered.
b. Thus, lender should insist that mortgage contain a crossdefault provision where a default by the borrower on any of its
loans from other lenders also constitutes a default under the
lenders loan.
10) Maintaining Property (pg. 261)
a. Lender wants borrower to maintain mortgaged property is
lenders primary security and it needs to know if the borrower
defaults on its obligation to repay, the property will be worth
more than the amount of debt that is then outstanding.
Loan doc should say what maintain means.
11) Events of Default (pg. 262)

45

a. Lender must specify exactly what remedies are if borrower fails

to meet any of its obligations under the note and mortgage.
Lender must:
i. State when borrowers failure to satisfy some obligation
(possibly minor default) rises to the level of an Event of
Default, thereby allowing the lender to use its arsenal of
remedies.
ii. Must specify those remedies.
b. Borrower will ask lender to prove it w/ notice of default and
reasonable opportunity to cure. However, intentional and
incurable defaults should instantly rise to the level of an Event of
Default, because borrower knew that it was violating the
document and now cannot remedy that breach.
c. Borrower always has a right of redemption. This is the right to
cure the default right up to the point where the property gets
sold. NOTE: This is not a right to reinstate the loan; its a
right to pay off the loan in full
12) Pre-foreclosure Remedies (pg. 264)
a. Before deciding to foreclose, lender may seek the appointment of
a receiver, may make use of its rights under the assignment of
leases and rents, may seek to take possession of the property
itself, or may choose to cure the default itself.
b. A receiver is a third party appointed by the court to operate the
property in the borrowers stead.
c. If the receiver is successful, may never need to foreclose. If not,
it is still an option.
13) Foreclosure (pg. 266)
a. Two options to ratchet up the lenders response to a default: 1)
suit on the note; 2) foreclosure
b. Lender must remember to accelerate the debt in accordance
w/ the terms of the note. If it fails to do so, it can only recover
the amounts that are due as of the time of the suit or the
foreclosure and will probably be unable to recover those amounts
that have not yet come due. Once he accelerates, the entire
principal amount of the note becomes due immediately.
c. A suit on a note has the benefit of being quicker in many states.
Problem w/ remedy however, unless borrower has substantial
liquid assets beyond the real estate.
i. BUT, a suit on the note is NOT an option if the note is nonrecourse or legislation precludes it.
ii. A suit on note may be inevitable if property is worth less
than the debt, because the lender will have to sue the
borrower personally for the deficiency.
d. If foreclosure proceeds properly, property will be sold at auction,
and the proceeds will be distributed to the lienholders in order of
their recording priority and then to the borrower.
46

14) Non-Recourse Provision (pg. 268)

a. W/o this provision, party that signs note is personally liable for
repaying entire debt.
b. If lender has agreed to a nonrecourse loan, borrower needs to be
sure that both the note and the mortgage include appropriate
exculpatory language.
c. In a full recourse loan, borrower has every incentive to manage
the property with care, even if the project is not doing well,
because the borrower knows that any decrease in the value of
the property will lead to a lower foreclosure sale price and a
larger deficiency. That incentive vanishes with a nonrecourse
provision.
d. Thus, if lender agrees to nonrecourse loan, it must be sure to
word this provision in a more restrictive way, to give the
borrower an incentive to maintain the value of the property even
if things go badly.
i. Lender does this by including carveouts to the
nonrecourse language (full list on page 407(d)). They
expressly describe certain types of default for which the
otherwise nonrecourse borrower will remain personal
liable.
ii. Carveouts should ensure borrower continues to manage
property w/ care and does not commit certain acts that
reduce the value of the security.
iii. Ex. Borrowers waste and failure to maintain the property;
and borrowers liability for nonpayment of real estate
taxes.
15) Releases and Partial Releases (pg. 270)
a. Borrower may ask lender to agree in advance that it will release
all or part of the property from the lien of the mortgage if the
borrower satisfies certain conditions.
16) Escrows for Payment of Taxes and Insurance (pg. 272)
a. Lender may require in the loan documents that the borrower pay
the lender one-twelfth of the annual real property taxes and
insurance premiums each month. Lender will hold these amounts
in escrow and pay the bills when due. Thus, lender will know that
the bills have actually been paid on time and will also have early
warning of any nascent financial problems that the borrower
faces.
17) Usury (pg. 273)
a. In event loan rate ever exceeds the legal limit, loan rate will
automatically be reduced to maximum amount permissible under
state law.
18) Bankruptcy (pg. 273)
a. Chapter 7 provides for liquidation of debtor.
b. Chapter 11 seeks to provide for reorganization of debtor.
47

c. Under Chapter 11, lenders loan might or might not survive the
bankruptcy proceedings.
d. Borrower benefits from automatic stay provision all
foreclosures, whether pending or merely contemplated, are put
on hold until the court lifts the stay. Federal filing stops the state
foreclosure process in its tracks.
e. Easier for a lender to have a stay lifted under Chapter 7 than
under Chapter 11 but stay will delay lenders exercise of its
foreclosure remedies under either Chapter.
f. Under Chapter 11, lender that is unable to have the stay lifted
will have to participate in the process of approving the
reorganization plan.
g. At a minimum, the lenders lawyer must be sure that any
bankruptcy filing constitutes an Event of Default, thereby
allowing the lender at least a chance to employ its full arsenal of
remedies (for example: accelerate loan/seek foreclosure).
19) Deeds of Trust (pg. 275)
a. Mortgage is a two party document. Deed of trust is a three party
document.
20) Assignment of Leases and Rents (pg. 276)
a. If mortgaged property produces rental income, lender should
receive an assignment of leases and rents from the borrower.
b. Assignment allows lender, rather than the borrower, to receive all
tenant rents directly from the tenants upon the borrowers
default.
c. Upon default, lender can activate its remedies under the
assignment of leases and rents by sending written notice to the
tenants instructing them to begin paying rent to the lender
rather than to the borrower.
d. This is a powerful pre-foreclosure remedy. The lender takes
control of some or all of the cash flow form the property and
thereby ensure that it receives the money to which it is entitled.
i. Some drawbacks: money that lender receives is money
that the borrower might otherwise have used for
maintenance of the property; also might not address other
problems for example if the default resulted from the
tenant having trouble courting new tenants.
21) Security Agreements and Financing Statements (pg. 278)
a. Lender often requires borrower provide it w/ a security interest in
borrowers personal property. This is especially important when
the property is a hotel.
b. Creditor acquires interest in personal property by having debtor
pledge a security interest in the personal property of the creditor.
This pledge is accomplished by debtors execution of a simple
security agreement, which is analogous to the real property
mortgage.
48

c. Fixtures fall into the gray area between real and personal
property. These are personal property that become permanently
affixed to real estate.
22) Guarantees (pg. 280)
a. Lenders sometimes insist on receiving personal guarantees as
additional security for the repayment of the loan.
b. Lender is more likely to demand a guarantee if it is worried about
the adequacy of its other security. If the property is highly risky
or if the borrowers financial status suggests that it is unlikely to
be able to satisfy a personal judgment, then the lender may
refuse to lend w/o receiving additional comfort of a 3rd party
guarantee.
23) Participation Agreements (pg. 281)
a. Lenders sometimes sell participation interests in their mortgage
loans, particularly if the principal is large.
b. Lead lender usually retains original note, administers the loan,
collects funds from borrower and distributes funds to the
participants, and enforces any remedies if that becomes
necessary.
24) Seller-Financing (pg. 282)
a. Sellers occasionally serve as lenders. If so, parties will probably
incorporate the terms of the loan into the K of sale, rather than
executing a separate loan commitment.
b. If buyer is putting sufficient cash into the deal, the seller will say
okay I will participate in the transaction. Ill take a second
mortgage position behind your mortgage. Ill give you a
mortgage for a short period of time at an interest rate that will
be profitable to me. REMEMBER, seller is not CUTTING THE
PRICE or handing them say $300k in cash the borrower gives
you a promissory note promising to pay you out the money over
time that you would have received form them at the closing.
c. If there is default, make sure you (seller) are protected and that
your mortgage instrument gives you right to foreclose if the
buyer defaults on the First mortgage loan. Seller/lender will want
right to default the buyer if the buyer doesnt pay first mortgage
and will want to be notified by the lender of first mortgage in
event of a default.
25) Assumption of existing financing (pg. 283)
a. Allows buyer to enjoy benefits of the original interest rateeven
if rates have increased since the loan was extendedand all the
other terms of the original loan.
b. Buyer and seller must confirm that the sellers loan documents
permit the buyer to assume existing financing. Might need to
obtain lenders consent.
c. Lender may be perfectly happy to permit buyer to assume the
loan. If prevailing rates have not changed or if the loan is an
49

adjustable rate loan, there will be no significant economic

consequences to the sale. His decision becomes a credit
decision.
26) Acquisition Subject to Existing Financing
a. Instead of assuming existing financing, buyer may purchase
subject to existing financing.
i. Difference between the two is that the buyer that assumes
becomes liable for repayment of the debt, but the buyer
that purchases subject to existing financing does not.
ii. A non-assuming buyer cannot be called on to pay the
outstanding principal, but the mortgage remains as a valid
encumbrance on the buyers title. If buyer fails to make the
required payments to the original lender, lender can
exercise all its mortgage remediesincluding foreclosure
but cannot recover any deficiency from the buyer.
b. Buyer would prefer to purchase subject to, rather than assuming.
Buyer enjoys all the interest rate benefits and all the transaction
cost savings of an assumption but ends up in a position much
like that of a nonrecourse borrower.
c. Seller would prefer the buyer assume the mortgage. Even though
seller will remain liable in either case, the seller is less likely to
be called on to pay if the buyer assumes.
d. Lender would also prefer the buyer assume the mortgage
because an assumption provides the lender w/ one extra
responsible party in the event of a default.
e. Purchasing subject to existing financing is fine providing that the
mortgage that exists on the property does not require it to be
paid off in the event of a sale (i.e. a due on sales clause that
says mortgage must be satisfied before the sale).
f. If you have a sale of property in Greenvale NY for 1mm and 500k
worth of indebtedness on the property. How do you have to come
up with if you have to buy subject to existing mortgage? 500k in
cash. If its a 2mm deal and there is 500K in existing debt and an
additional 500k worth of financing coming into the deal how
does he get structured. Youll need to come up with 1mm cash.
How do we get new bank to do it: 1) existing mortgage that says
you dont need to pay off the mortgage due on sale; and 2) get
existing lender to subordinate his position to new money coming
in.
27) Subordinate Lending (pg. 286)
a. Buyer may be assuming existing financing or may be acquiring
the property subject to existing financing, and then may borrow
additional funds from a junior lender. Or, the seller may be
providing some of the financing itself and becoming a second
mortgage lender.
50

b. Jr. lender will enter into a loan commitment w/ the borrower, will
perform due diligence, and insist on satisfactory documents.
c. Jr. lender should take steps necessary to ensure that it will
receive notice of any defaults on senior debt along w/ an
adequate opportunity to cure those defaults. It does not want
senior lender foreclosing, and potentially wiping out its own
junior mortgage without at least having the opportunity to decide
whether it wishes to cure the default to protect its own interest.
d. Jr. lender should also seek a cross-default provision, under which
a default on any other debt constitutes a default on its own. This
allows junior lender to being exercising its remedies even if the
borrower has otherwise managed to remain current on its
obligations to the junior lender.
e. Why would a bank ever be willing to subordinate its interest? if
interest rate is higher than market also they might feel there is
sufficient equity in the deal to permit the deal to go forward and
still keep them in a relatively well secured deal.

IX. Preparing for the Closing

1) Need for a Closing (pg. 291)
a. Seller conveys legal title to the buyer only by executing and
delivering a deed, and the buyer can convey a mortgage to the
lender only by executing and delivering a mortgage. Closing is
where this occurs.
b. Closing also underscores legal significance of what is occurring.
c. Also ensures all closing conditions are met concurrently.
d. Deliver deed, convey title, enter into mortgage transaction w/
lender all occur simultaneously at the closing.
2) Closing Checklist (pg. 292)
a. Closing conditions make up the bulk of the closing checklist.
Many of the conditions involve the delivery of closing documents,
and the inclusion of each of these items on the closing checklist
will remind the lawyer to make sure the document is drafted,
negotiated, completed, and ready for execution by the closing.
b. Some items will involve payment of funds. Most obvious are
payment of the purchase price by the buyer and the advancing
of the loan proceeds by the lender.
3) Deed (pg. 295)
a. Central document in entire transaction.
b. General Warranty warrants against defects in title arising
during or prior to the sellers period of ownership.
c. Special Warranty similar to a general warranty deed, but
seller takes responsibility only for title problems arising during its
period of ownership.

51

d. Quitclaim includes no warranties and merely conveys to

buyer whatever title the seller has, if any.
e. Buyer and seller should confirm legal description is correct.
Should match description found in the deed that conveyed title
to seller, the K of sale, and the title commitment. Legal
descriptions in survey, mortgage, and the assignment of leases
and rents also will need to match exactly.
f. If parties have agreed buyer will take title subject to certain
permitted encumbrances, then the deed customarily lists these
exceptions specifically.
g. If the seller has disclosed existence of these title encumbrances
to the buyer and the buyer has agreed to these encumbrances,
then these exceptions are ordinarily enumerated in the deed and
thereby removed from the scope of the sellers deed warranties.
4) Corporate, Partnership, and Limited Liability Entity Documents; Power
of Attorney (pg. 297)
a. Corporation, partnership, or limited liability entity must meet
certain legal formalities and establish that the individual signing
on its behalf has the authority to do so.
b. Each party must confirm that all other parties with which it is
dealing are properly formed in some jurisdiction and legally
authorized to conduct business in the state in which the property
is located.
c. Each of these entities must next authorize its own role in the
transaction and must verify that its counterparts have done the
same.
d. Board of directors must pass a resolution authorizing the
transaction and designating those persons who are permitted to
sign documents on its behalf. Resolution should also clarify
degree to which each person who will attend the closing
possesses corporate authority to modify documents, just in case
the terms of the deal should continue to evolve until the last
minute.
e. One issue that occasionally arises is the method of participation
of an individual who will be unable to attend the closing and
execute the necessary documents in person. A preferable means
of addressing this issue is to have the individual execute a power
of attorney, authorizing someone else to modify and execute
documents on his behalf at the closing.
f. Power of attorney should clearly state how much latitude the
attorney-in-fact has w/ respect to modifying documents so that
there is no dispute at the closing if the documents must be
changed.
5) Bill of Sale (pg. 300)

52

a. Deed conveys real property but NOT personal property, and the
seller will also need to execute a bill of sale to convey most types
of personal property.
b. Bill of sale is in essence a deed to the personal property. Should
contain a list of all the personal property the seller is conveying.
6) Title Insurance (pg. 301)
a. Main concern for buyer and lender is to make sure that someone
has addressed each of the outstanding problems disclosed in the
title commitment. Buyer and lender will not proceed to close until
each of them receives either an acceptable and irrevocable
commitment from the title company or an actual policy of title
insurance on acceptable terms.
b. Primary focus of each of these parties will be the list of title
exceptions that appears in Schedule B of the commitment. Only
exceptions remaining on Schedule B should be these that the
parties agreed in advance would remainsuch as mortgages to
be assumed by the buyer or acceptable reciprocal easement
agreementsor any newly discovered matters that the buyer
and lender deem to be acceptable.
7) Payoff Letters and Satisfaction of Existing Mortgages (pg. 303)
a. In many transactions, the buyer plans to obtain new financing of
its own and does not want the existing financing to survive the
closing.
b. The existing mortgage will appear on Schedule B of the title
commitment, but no one should be surprised to find this
financing listed as an exception, and the seller will plan to pay
this loan off at the closing out of the sale proceeds.
c. The events necessary to remove the lien and transfer title to the
buyer must all happen simultaneously, and until they do, the
mortgage remains unsatisfied of record and continues to appear
as an exception in the title commitment.
d. Payoff letter is a letter from the existing lender that states the
amount the lender must receive before it will return the sellers
note and execute and deliver a recordable satisfaction of
mortgage.
e. If the title company is comfortable with the payoff letter and with
the identity of the existing lender, it may be willing to insure over
the existing mortgage on the basis of the payoff letter once it
knows that the funds necessary to satisfy the mortgage have
been delivered.
f. Once the parties receive the mortgage satisfaction, they should
record it promptly.
8) Opinions of Counsel (pg. 305)
a. Many law firms have strict internal review procedures for issuing
legal opinions because of the enormous liability that can result
from delivering an erroneous opinion.
53

b. In recent years, the real estate industry has developed standard

form opinions, and lawyers have become more willing to provide
and accept opinions that conform to these so-called Accords.
9) Method of Payment (pg. 306)
a. Parties need to establish in advance the precise amount of the
funds to be delivered at the closing so the buyer can be sure that
the check or wire transfer is for the correct amount.
b. K of sale should have indicated the acceptable method of
payment of the purchase price.
10)
Insurance Coverage (pg. 307)
a. Buyer should insistand the lender will insistthat all required
insurance b in effect as of the closing date.
11)
Employment Agreements, Service Contracts, Licenses, and Other
Agreements (pg. 308)
a. Buyer may wish to succeed to the sellers rights under
employment agreements, service Ks, franchise agreements, and
licenses, and may wish to continue the sellers use of intellectual
property rights and visual artists rights, which may require
consent of a third party.
b. At the close, buyer and lender must have confirmed that all
required consents are in place and that all of these rights can be
transferred at the closing.
12)
Permits, Certificates, Warranties, Plans, and Keys (pg. 309)
a. Parties will need to effect the transfer of these things at closing.
b. At closing, seller should turn over the plans for any structures on
the property.
c. Seller should also turn over all keys, key cards, entry codes, and
other related passwords.
13)
Utility Readings (pg. 310)
a. Parties need to request that the appropriate utility companies
read their meters at approximately the time of the sale.
b. If the buyer is taking over the sellers account, a reading of the
meter just before the closing will allow the parties to apportion
the cost of service for the month that includes the closing.
c. If the buyer is establishing a new account, a reading of the meter
just before the closing will allow the utility to terminate the
sellers account and charge each party only for its own use.
14)
Calculating Cost Apportionments and Adjustments (pg. 310)
a. K should list items (real property taxes, ground rent, fees,
principal and interest on any mortgage that will survive the
closing, tenant rent, etc.) that will be apportioned and adjusted
at closing, along w/ the agreed method of making these
calculations.
b. Lawyers need to make sure they obtain all the info they need to
make each of these calculations shortly before the closing. They
will need to know amount due for period that includes the closing
54

date, the length of the billing period, and whether the seller has
made the payment in advance or the buyer will have to make the
payment in arrears.
15)
Calculating Fees, Commissions, Taxes, and Other Closing Costs
(pg. 311)
a. Many of the service providers who participate in the transaction
will insist on being paid at closing.
b. Each lawyer must make sure to include every required payment
on his or her clients internal closing checklist and on the closing
statement.
c. Title insurer is normally paid at the closing.
d. Real estate brokerage commissions will also be paid at closing.
e. Similarly, mortgage brokers will demand payment at the closing.
f. Some or all of the lawyers may insist on being paid at the
closing.
g. Parties themselves may be entitled to payment.
h. Closing of title and lending of funds often lead to a variety of
taxes, fees, and other charges imposed by government. Nature
of these charges, amounts of the fees, and the identity of the
person responsible for paying them may vary substantially from
place to place, but the parties must make sure that all necessary
amounts are accounted for at the closing.
16)
Notices (pg. 314)
a. Someone needs to send official notices to a variety of affect
parties, including tenants and if buyer is succeeding to the
sellers rights under any employment agreements, service Ks, or
franchise agreements, seller must send notices to the other
parties of these contracts.
b. Notices should be included on the closing checklist.
17)
The Walkthrough (pg. 314)
a. Buyer and lender should perform a final inspection of the
property as close to the closing date as possible (the
walkthrough) in order to: 1) ensure seller has made all repairs
that it is supposed to make; and 2) make sure no new problems
have arisen since the parties last examined the premises.
b. If seller does not have time to resolve all items that still need to
be resolved as of the walkthough buyer has two options by
which he can charge the seller: 1) buyer can agree to make these
repairs and can receive credit against the purchase price for the
estimated cost; and 2) seller can agree contractually that it will
make these repairs after the closing.
c. NOTE: remember K of sale may merge into the deed at the
closing, so the buyer and lender will want to be sure that the
sellers obligation to make these repairs survives in some cases
they will achieve this goal by entering into a separate agreement

55

18)

before the closing, often referred to as a post-closing

agreement.
The Closing Statement (pg. 316)
a. Parties should prepare a closing statement that lists all of the
amounts that are to be paid at closing and the party to whom
each of these payments will be made.
b. Statement should also list all payments that have been made
prior to the closing.
c. Helps the parties calculate a single net amount that must change
hands at the closing, rather than passing numerous checks back
and forth to account for various minor closing adjustments and
apportionments.

X. The Closing
1) Table, or NY Style Closing (pg. 319)
a. Usually gather around a conference room at the office of the title
company or one of the lawyers.
b. Each party sends a representative authorized to execute
documents on that partys behalf, and other service providers,
such as title company reps and lawyers, perform their
designated roles.
c. Table closing allows all unmet closing conditions to be satisfied
simultaneously:
i. Buyer will not want to tender purchase price to the seller
until the sellers current lender delivers either a
satisfaction of current mortgage or a payoff letter stating
exactly how much money seller must repay before the
current lender will deliver this satisfaction.
ii. Buyers lender does not want to tender the loan proceeds
to the buyer until it is confident that the mortgage the
buyer is delivering in return will be the only mortgage on
the property.
iii. Seller does not want to execute and deliver the deed until
the buyer delivers a certified check or wires the funds.
2) Escrow Closing (pg. 320)
a. In an escrow closing, the parties select an escrow agent or
closing agent and entrust the documents and the funds to this
agent.
b. Escrow agent may be the title company, the lawyer for one of the
parties, or a representative of the escrow company.
c. If everyone performs as they are supposed to, escrow agreement
or instruction letter will authorize escrow agent to release all
documents and funds to specified parties.
d. Escrow closing allows the parties to effect the transaction w/o the
need to assemble everyone in the same room at the same time.
56

3) Title Insurance (pg. 323)

a. Buyer and lender should not leave the closing w/o each receiving
either an acceptable policy of title insurance or an acceptable
and irrevocable title commitment conditioned only on
performance of matters entirely within the insured partys
control.
b. If the title commitment is in acceptable form and the only
condition that the buyer still must meet to obtain the final policy
is payment of the premium, it can pay the premium at the
closing or it can leave the closing w/o paying, as long as it
remembers to meet this condition before the commitment
expires.
c. Lawyers for buyer and lender also need to confirm that the final
commitment and the final policy include all necessary
endorsements and that the insurer has correctly calculated the
cost for title insurance.
4) Execution and Acknowledgement of Documents (pg. 324)
a. One of principal activities that the parties undertake at the
closing is the execution of documents.
b. Operative documents are generally valid when they are executed
and delivered, but the deed, mortgage, assignment of leases and
rents, subordination agreements, memoranda of leases, and
satisfactions of existing mortgages must all be recorded in the
recording office of the county or counties in which the property is
located.
c. Any document that is to be recorded must be acknowledged
before a notary public who is properly licensed in the state in
which the party executes the document.
d. Lawyer should make sure that the notary public affixes any
necessary stamps or seals to the document if state law requires
more than just the signature of the notary. Lawyer must also be
certain that the notary actually witnesses the execution of the
document.
e. If the acknowledgement is incomplete or inadequate as to form,
it may be invalid and therefore may be deemed unrecorded
under state law.
5) Multiple Copies (pg. 324)
a. Each party to the document should receive an original that has
been signed by all parties, and the lawyers for these parties
often want originals for their own files.
b. Any document to be recorded or filed w/ a public official must be
an original, and the title company may wish to receive originals
as well.
c. TWO IMPORTANT EXCEPTIONS:
i. Should be only one original of each check or certified check
to be delivered at closing.
57

ii. Borrower should NEVER sign more than one original note,
and this unique original note should be delivered to the
lender.
6) Delivery and Distribution of Funds (pg. 328)
a. Any party that is entitled to be paid at the closing, and in
particular the seller, will probably insist on receiving its funds at
the closing.
b. Wiring money has numerous benefits but be prepared in case
something goes wrong.

XI. Mock Closing

1) After the K of sale has been signed:

a. Calendar in important dates
b. Make your due diligence and closing checklist
2) Seller should be working to clear title exceptions leading up to the
closing. Want to give good title, that all affairs are in order (liens,
judgments), and that the mortgage is satisfied.
a. Note: if a judgment is docketed against you, that judgment
becomes a lien against any property you own in the county in
which you own property where the lien was filed.
3) Critical components of the purchasers role are to secure loan
documents, opinion letter, and review title. Wants to make sure the
legal description of the property in Schedule A is correct. You do this by
ordering a survey.
4) By law, you are required to provide marketable title unless you agree
otherwise in the K.
a. Hypo: Some Covenants and restrictions that come up from back
in the day. One youll see is you cant use the property as a
tannery. They show up all the time. Technically its a defect in
title. If K says seller is only obligated to sell if he can produce
marketable title, does buyer have a defense when seller says if
you dont close Im keeping deposit he might have defense if K
obligates seller to deliver marketable title. Think, if you were
representing the buyer what would you say to them about the
tannery that came up in the C & R? Also comes up with building
multi-family house restrictions. Can you reject title, even if title
insurance company gives them insurance that property will not
be disturbed as long as it remains a single family dwelling?
5) Seller will try to give such title as any title company will insure (aka
insurable title). Most dealings today only require seller to deliver
insurable title.
6) Marketable title v. Insurable Title?
a. When a title is marketable it means that the title to a particular
piece of property is clear and free from defects. As such, it can
be marketed for sale w/o additional effort by the seller or
potential buyer.
58

b. In contrast, an insurable title does, or may have a known defect

or defects in title. However, with an insurable title, a title
insurance company has agreed in advance to provide insurance
against the defects ever affecting the ownership or value of the
property.
7) Remember UCC filing required for personal property (fixture) filing.
8) Free Premium cannot be discounted.
9) Market Value Rider all title insurance covers price the day you
close if you get the market value rider the maximum amount of
coverage will be the fair market value and not the price the day you
close.
10)
NY State mortgage tax is a seller obligation.
11)
NY State mansion tax is a purchaser obligation (1% if purchase
price is > $1mm).
12)
Remember when drafting opinion letters, do not make an inquiry.
13)
If a mechanics lien is filed against the seller after the deed has
been delivered (post closing), is the new owner obligated to pay?
No, if the deed you received contains a statement to the effect that the
seller warrants that title 13 of the NYS lien law will control. Section 13
of lien law provides for circumstances just like this. Buyer gives money
to seller when he buys the house. Section 13 says the money provided
to seller at time of transfer is held as a trust for benefit of people
asserting liens under the lien law. Money will be held with respect to
any liens that may arise. Make sure deed has that provision. Virtually
all deeds contain this provision.
14)
Bargain and Sale Deed w/ covenants seller is warranting
title and saying no liens and/or encumbrances
15)
Bargain and Sale Deed w/o covenants just warranting
title.

XII. Post-Closing Matters

1) Recordation of Documents (pg. 331)
a. Parties first order of business after the closing should be to see
that all documents that must be recorded are delivered to the
county recording office. In most cases, the title insurance
company or escrow agent will assume responsibility for
performing this task.
b. If for some reason the title insurer does not take responsibility for
recording the documents, buyer must take care that the deed is
recorded, and the lender must be sure that all of its security
documents are recorded or filed in the proper places.
2) Distribution of Documents (pg. 332)
a. Lawyers must ensure all remaining documents are distributed to
the proper parties.

59

b. Lenders lawyer must be sure that the lender receives the

original note lender should also receive originals of the
mortgage, the assignment of leases and rents, all UCC financing
statements, all other documents to which it is a party, and any
other documents it might need in the event of disputes or
litigation.
c. Additionally, the lender should receive copies of any other
documents that may be relevant to its role in the transaction.
d. Buyers lawyer should make sure that the buyer receives an
original deed, a copy of the note, originals of all the loan
documents, originals of any other documents to which it is a
party, originals of any other documents that it could need later if
disputes or litigation arise, and copies of any other relevant
documents.
3) Following Up (pg. 333)
a. Usually some loose ends after a closing.
b. For example, seller may have to resolve a dispute w/ a tenant
and modify the terms of an easement for utility lines, and the
escrow agent may be holding a portion of the purchase price in
escrow to ensure that the seller will perform these obligations.
4) Organizing the File (pg. 334)
a. One or more of the lawyers should probably take on the
responsibility for organizing a more formal closing binder after
the deal has closed.
b. Closing checklist can serve as a useful tool for organizing the
closing binder, which will serve as a useful resource after the
closing.

XIII. Review Class Notes

Contract of sale

A way of allocating risk.

From buyers point of view: he is looking to buy the property and is
looking to get that which he has bargained for.
Seller: looking to sell his property with the minimum amount of
representations so that after the deal closes, he doesnt have to hear
from the buyer anymore.
Attorney for seller is trying to represent the seller such that his
representations end at closing of title.
Attorney for buyer is trying to get as many representations as possible.
Anything you want to survive closing must be provided for, otherwise it
mergers into the deed.
Statute of Frauds provides that Ks for sale of real estate must be
in writing. Circumstances when partial performance will take it out of
60

the SOF. Partial performance means that one party to the agreement
has substantially changed his position (almost always the buyer) and
the law provides the partial performance must be referable to the
contract. You see this more in rural areas, i.e. farmers.
We know Ks that are for the sale of real estate can include a lot of
terms relevant or relating to the financing that ultimately will be
obtained to allow the purchase of the property. If K is going to be
subject to obtaining financing, K should be very specific about that
and specific about how much time the buyer has to obtain that
financing. Should not be for an unlimited time.
In some cases there is existing financing and that the K of sale will be
subject to the existing financings so that buyer takes title subject to
existing financing. That is fine providing that the mortgage that is
existing on the property does not require it to be paid off in the event
of a sale (many mortgages have due on sales clauses that say
mortgage must be satisfied before sale). 43:01
If you have a sale of property in Greenvale NY for 1mm and 500k worth
of indebtedness on the property. How do you have to come up with if
you have to buy subject to existing mortgage? 500k in cash. If its a
2mm deal and there is 500K in existing debt and an additional 500k
worth of financing coming into the deal how does he get structured.
Youll need to come up with 1mm cash. How do we get new bank to do
it: 1) existing mortgage that says you dont need to pay off the
mortgage due on sale; and 2) get existing lender to subordinate his
position to new money coming in.
Why would bank be willing to subordinate its interest? if interest rate
is higher than market they might feel there is sufficient equity in the
deal to permit the deal to go forward and still keep them in a relatively
well secured deal.
As an attorney, you are going to be asked to assist in structuring deals.
You need to know your clients rights w/ respect to existing obligations
on property that you are taking over. You will only know whether lender
is willing to cooperate is by contacting them. 49:36
Problem that exists today is that nobody knows where these loans are
any more. They are being packaged and securitized and sold off to
different individuals.
In structuring a deal, from time to time sellers will take back purchase
money mortgages seller becomes lender. If buyer is putting sufficient
cash into the deal, the seller will say okay I will participate in the
transaction. Ill take a second mortgage position behind your
mortgage. Ill give you a mortgage for a short period of time at an
interest rate that will be profitable to me. REMEMBER you are not
cutting the price or handing them say $300k in cash borrower gives
you a promissory note promising to pay you out money over time you
would have received from them. If there is default, make sure you are
61

protected and that your mortgage instrument gives you right to

foreclose if the buyer defaults on the FIRST mortgage loan. Want right
to default the buyer if the buyer doesnt pay first mortgage and you
want right to be notified of lender of first mortgage in the event of a
default. All lenders will give that to you because they want to be
certain to be paid. You will pay first lender out if buyer defaults
because you want to keep the property and dont want your mortgage
extinguished.
Mortgages today provide that the borrower escrow money for taxes.
They pay 1/12th of taxes each month and the bank literally pays the
taxes. This way bank assures
What about liens? they proceed everything can take out the
lender. Why? Real estate tax revenue is required to run the schools.
1:04
Lender is supposed to issue a satisfaction of mortgage if it is to be paid
off at closing.
Deposits on contracts almost always held in escrow. Sometimes when
its not but rare. At certain checkpoints sometimes, portions of deposit
are released.
Be careful w/ deposits when you are representing a seller because of
the limits of insurance that exist. Its about 500k in insurance. If you are
over there, you want to spread it out to different banks. Apportion the
risk because in the end you will be criticized if you deposit with a bank
that goes bad and your client is only entitled to 500k.
Customary at closing for sellers to execute bill of sale of personal
property that is voered at the transaction because fixtures dont
necessarily transfer at the sale. Personal property is conveyed by a bill
of sale. Not by the deed.
Make sure parties agree what goes with the house/building. Put it in
the contract!
You want to provide that the seller maintains the property between
date of contract and date of closing.
Make certain when property is conveyed, your client is not going to get
a wreck. Want it to be in broom-clean condition. Thats the word of
art.
Buyer wants as much info about state of house as they can seller
wants to give as little information as possible.
Some covenants and restrictions that come up that back in the day,
before zoning ordinances, people had industrial uses next to houses
so they used to by C & R what they now do by zoning. One youll see is
you cant use the property as a tannery. They show up all the time.
Technically its a defect in title. If K says seller is only obligated to sell if
he can produce marketable title, does buyer have a defense when
seller says if you dont close Im keeping deposit he might have

62

defense if K obligates seller to deliver marketable title. Think, if you

were representing the buyer what would you say to them about the
tannery that came up in the C & R? Also comes up with building multifamily house restrictions. Can you reject title, even if title insurance
company gives them insurance that property will not be disturbed as
long as it remains a single family dwelling?
Most deals today get done that only require seller to deliver insurable
title such title as a title insurance company licensed to do business in
the state of NY will agree to insure. So if you get affirmative insurance
at time of closing or before that as long as it maintains character of
single-family dwelling. BUT IF ITS MARKETABLE TITLE, you might have a
defense.
Remember, dont think in terms of absolutes think in terms of
arguments.
Insurable title v. marketable title what are those rights?
Tenants Leases
Need for recognizing priorities in event of default
Buyer who is buying that property is taking property subject to
those leases.
What about lenders rights?
Who has priority in the event of default? If no subordination
agreement, then its the tenants. People in possession w/o this
agreements have an interesting position theyll say why should I
sign a subordination agreement when I have a lease that has
another 5 years to run? what will happen is the buyer will have to
deal w/ that tenant. Lender will want to be first in line in the case of
default.
Think about priority of claims when you represent people who are
borrowing money.
If you represent a lender in a first mortgage position, you are in
good shape except for tax liens (which do take precedence over
your mortgage). If there is a default by the borrower, who does the
borrower have to give notice to? everyone whose rights he seeks
to extinguish. If there is a first mortgage on the property, the lender
is going to give notice to the owner, the tenants on the property,
and everyone who might have a subordinate interest to him (second
mortgage financing for example). Does he have to give notice to
holder of a tax lien? No.
Rights of owner of the property continue to exist even after a
default in payment of loan. If loan is significantly less than equity
owner has in the property, owner has a right to receive the excess
proceeds of a foreclosure sale.
In a commercial setting, if there are tenants in possession paying
rent to the owner, typically in a default setting where owner has

63

defaulted in payment of his mortgage what does owner do with

expense to paying expenses of the property? He tends to do
nothing he tries to grab whatever rentals he can. Since lender
always has an interest in the rentals (lender will insist on further
collateral including interest in rents). They go into court and ask for
appointment of a receiver (court appointed person who represents
the court in a proceedingusually a lawyer). Receiver steps in to
the shoes of the owner and manages the property at the benefit of
the lender. Receiver starts collecting those rents in name of owner
and starts paying out the expenses to people owed.
Typically at foreclosure sales, first bid will come from lender. He will
bid amount outstanding on the debt.
Referee court appointed to sell the property.

Last thing seller wants to do is hear from buyer again

Make sure any representations and warranties disappear at closing.

What does careful buyer do to make sure they are true as of the date
of closing? Go there on the day of closing to make sure it is
condition you bargained for.
Make sure you tell your client that these representations and
warranties are good until the date of closing. YOU go there and make
sure everything is in order. Because, when you get a deed, thats it.
Its now your problem.
Make certain your K of sale gives you right to have access until day of
closing. You want to be able to inspect it. Why check it out? So many
reasons. Notably asbestos.
Another problem is mold.
When buying or selling commercial property w/ leases make sure
someone READS those leases make sure tenants dont have right
to purchase property/right to renew lease on any particular
terms/right to expand his space to another space.

Harold on Loan Documents

Loan commitments
Clauses in particular loans
What is important to know is that any loan that is securitized that is
not a personal loan, gives the lender rights which would be different if
it was unsecured and those rights extend to bankruptcy proceedings.
That is a superior claim to an unsecured claim.
What do you want to make sure certain in a mortgage loan or any loan
transaction is that the commitment for the loan and the actual loan
document which is the operative document are the same. Make
certain whatever obligations the borrower has in the commitment are

64

the same as the loan documents very often they are not. So you
have to read them both.
Remedies/Default

Borrower always has a right of redemption right to cure the default

right up to the point where the property gets sold. Important right. Not
right to reinstate the loan, its the right to pay off the loan in
full.
In most cases there is an acceleration provision in the document that
says once you defaulted, the lender at his option can accelerate the
indebtedness. NO RIGHT TO REINSTATE THE LOAN!!
Note: tenants in possession remain in possession until they are evicted
by a court order. As the owner of property, you cant change the locks.
You need to start the judicial process. Also owner of property has duty
to mitigate damages.

Condos & Co-ops

Builders of units in condos will obtain loan to build that condo when
you are selling condominiums, what are you selling? You are selling real
property. Each unit is the same as a single-family house.
When you are buying a co-op, you are buying shares in a corporation
you get stock you DONT get an interest in real estate. You are
getting a proprietary lease that says you can live there as long as you
are an owner of stock.
Owner of cooperative stock who wants to borrow money to buy that
coop is in a different position than the person looking to buying a unit
in a condo.
Lender is not in subordinate position when dealing w/ condos. Most of
time w/ co-ops, lender is in inferior position usually already a
mortgage in place. Cost of carrying the loan is passed on to the co-op
owners (maintenance fees).
Interest rates that will be paid for borrowers buying condos is much
lower than what you would pay on cooperative loans because the
lender is in a subordinate position so the interests rates are higher.
Benefits of operating as a condominium is that the units are more
marketable.
Law w/ regard to co-operative board approvals is harsh against unit
owners. Does not have to be any reasonableness associated with
denying a tenant.
If default on co-op, bank gets the security. They dont want that
situation, so co-ops will often say you cant borrow money from bank to
pay for your co-op unit. They want to maintain their aura of exclusivity.

65

What about tenant leasing unit to someone else? whether you can
depends on bylaws of the condo or co-op. Many condos will provide
that if you want to lease it, you need approval of the condo board.
Price you pay for co-op stock is based on market value and mortgage
on the building.

Lis Pendens

If I enter into a K w/ you to sell my house, and you as the buyer are
ready willing and able to close and I as the seller am in a difficult
position what do I do? I have to sue you for specific performance
but youve entered into a K with someone else.
To prevent that from happening, law permits buyer to follow a notice of
pendency that puts the world on notice that you have an interest in
property. It is very important right.
Exists in mortgage foreclosure proceedings. Lets the world know thats
happening. Also boundary disputes.
Any claim where a party insists they have a claim in real property.

Mechanics Lien 40:30

People are constantly having disputes with contractors.

If you owe one of them money and dont pay, the first thing they are
going to do is file a lien.
What happens post closing and mechanics lien gets filed? The
contractor goes to new owner and says by the way the person you
bought the property from owes me 100k pay me. Are you obligated
to pay? No IF the deed you received contains a statement to the
effect that the seller warrants that title 13 of the NYS lien law will
control. Section 13 of lien law provides for circumstances just like this.
Buyer gives money to seller when he buys the house. Section 13 says
the money provided to seller at time of transfer is held as a trust for
benefit of people asserting liens under the lien law. Money will be held
with respect to any liens that may arise. Make sure deed has that
provision. Virtually all deeds contain this provision.

Priorities

Federal income tax liens do not have priority over a mortgage. First
mortgage has priority over federal income tax lien.

66

Judgment creditors? If I have a judgment docketed against you, that

judgment becomes a lien against any property you own in the county
in which you own property. The priority of that judgment? Its going
to depend on when its docketed. Wont take priority over any thing that
preceded it.
Just need to know that the party who files a mechanic lien has certain
rights w/ respect to real estate. This gives him priority except in case
where title has actually passed and work was done on property by
former owner, and if his deed contains the requisite language of
section 13.

Notarization

Only docs that have to be notarized are those filed in county courts.
Things like contracts dont need to be. Filing a contract because of
Contract vendees have a lien? Yes. Lien which is insurable.
Do people have to have lawyers represent them when executing
documents? No.
Dont have to be a lawyer to represent you in signing of a binder.

Random Stuff

Do binders need to be prepared by licensed real estate brokers? Yes

to get commission. But not necessarily prepared.
Its enforceable if its expressed properly in the document and parties
agree.
For judgments to become liens on property they have to be docketed
in the county in which the property is located.
Varying types of deeds.
Quitclaim deeds are deeds in which the seller is only selling whatever
rights he has. Makes no representations/warranties. Will a title
insurance insure a quitclaim deed? Yes.
If seller executes a warranty deed in which he warrants title and there
is a defect and the title insurance company will defend the title but will
have a claim against the seller because of his warranty.
If seller executes a bargain and sale deed w/ covenants against
grantors acts, title insurance company can go after seller if something
is wrong. If w/o covenants, title insurance cant go after seller.
Rights of tenants can be modified by agreement so that if a lender is a
new lender on property and tenants dont have subordination
agreements, subordination agreements can be executed that would
give lenders priority.

67

SOF controls sale of property because K of sale of real estate must be

in writing but that is not so of licensed real estate brokers they
dont require a writing.
The right that a title insurance company has to recover against a seller
is a right of subrogation. If the seller has an affirmative obligation or
has undertaken an obligation to guarantee the title by executing a full
warranty deed, and something gets screwed up, title insurance
company is subrogated to the rights of the buyer who they have paid,
and then they can go after the seller.
Must you always provide in a K that a closing must take place, time is
of the essence, in order to have time is of the essence control? Most
Ks dont provide for time is of the essence because parties dont like
to be so exact. Thus, they usually provide that closing will occur on or
about a certain date. If buyer cant close by that date, seller will send
them a letter saying if you dont close by (30 days from then) time is
of the essence.
In the event you dont close, time being of the essence, we will take
your deposit. Doesnt have to be in the contract!
Suppose a K of sale results in a closing of title on Dec. 1. But there is a
gap between the closing and the date the deed is recorded and during
that gap period, a judgment is entered and docketed against the seller.
What date controls? Date of recordation or date of the conveyance of
title? Date of conveyance. Even if the deed is not recorded
immediately, the deed takes precedence over the judgment.
When does title pass in a real estate transaction, the deed is delivered
to the buyer. Remember deed has to be delivered. Title is conveyed as
soon as it is delivered.

68