This brief article provides some tips for an associate who is working on closing a real estate transaction. Part I provides an overview of an associate's responsibilities in closing any type of transaction. Part II addresses the specifics of closing a real estate transaction.
- Macro-Level Fundamentals
- Understand Your Role
At the outset, you should meet with the partner-in-charge to ascertain your role in the transaction. Will the partner be the point person for all client interaction? Will you be permitted to communicate with the client and the opposing attorneys? Will you be expected to draft all closing documents or just some? You should try to take on as much responsibility as possible because it will provide more learning opportunities. More than likely, there will be additional levels of review for any documents that you prepare during the transaction. Nonetheless, you should review the documents as if no one else will.
- Understand the Deal Terms
Pay particular attention to the terms and structure of the deal. In a real estate transaction, basic macro-level issues include:
- Who is my client (buyer or seller)?
- Where is the property?
- What is the intended use of the property?
- Is the property properly zoned for the intended use?
- What are my client's goals?
- What is the time frame to close the transaction?
Gathering answers to these questions, whether from the partner-in-charge or the client, will improve your ability to negotiate and manage the closing.
- Take Ownership of the Deal
To the extent permitted by the partner-in-change, take ownership of the deal. This means that you should not always wait to be directed by the partner-in-charge. You should review the overall structure of the transaction, draft a closing checklist that sets forth the operative documents in the deal, establish which parties will be responsible for drafting the documents, and set timelines to move the deal forward in an efficient manner. Identify time-sensitive issues and potential deal roadblocks, and then work to resolve them expeditiously. In short, scrutinize every aspect of the deal and your work product.
- Micro-Level Fundamentals
- Goals of the Parties
- In a real estate deal, the buyer's goals are generally
- Strong representations and warranties from seller regarding the condition of the property
- Reps and warranties that survive the date of the closing
- Minimal deposit
- A detailed list of conditions to close (delivery of clean title, obtaining financing), which if not resolved prior to closing, will permit the buyer not to close
- Clean title
- The seller's goals are generally
- As is, where is sale
- No representations and warranties regarding the condition of the property (or, at a minimum, limited to the seller's actual knowledge)
- A brief inspection period so that the property is not out of commerce for too long
- Limited conditions to close, and strict restrictions on the ability of the buyer to back out of deal
- Term Sheet
The term sheet is a short document that is signed by the parties to the transaction and sets forth the agreed-upon business terms, including the purchase price, the property, and a time frame for the execution of a purchase agreement. The clients typically negotiate and finalize the term sheet before it reaches the attorneys. From that point forward, the attorneys are charged with drafting and negotiating the purchase agreement and closing documents. One of your primary responsibilities will be to ensure that the closing documents reflect the business terms precisely.
- Purchase Agreement
The purchase agreement is the binding contract between the buyer and the seller, pursuant to which the buyer agrees to buy the seller's property for a price, subject to certain conditions that must be met prior to closing (i.e. environmental testing and inspection of the property, title search, financing). The purchase agreement also provides a roadmap for the closing as it describes the applicable inspection-related deadlines, the closing deadline, and the required documents and other deliveries to be made at closing.
- Title Work and Inspection Period
Before the deal can close, the buyer will have a period of time to inspect the property. Depending on the nature of the property and the intended use, this can include a physical inspection and environmental testing. The buyer should also retain a reputable title company to conduct a title search to ensure that the seller has title to the property, to identify any liens or encumbrances that need to be cancelled prior to closing, and to issue an owner's policy of title insurance after closing.
Another major condition to closing is the buyer's ability to obtain financing. If you represent the buyer, it is important to negotiate this as a condition to close, particularly given the current lending climate.
The closing is the formal point of the transfer of title to the property and the exchange of the purchase price. Before the closing, you should prepare a checklist that details each document required to be signed, and each party responsible for signing. You should also carefully consider how the funds are to be exchanged. Typically, the closing attorney is responsible for drafting a settlement statement that documents the flow of funds for the transaction. The settlement statement shows the purchase price of the property, the fees incurred in connection with the closing (i.e. survey, title, attorney's fees), and the manner in which these funds will be disbursed (whether by wire transfer or by check). Ensure that all parties understand and agree to the terms of the settlement statement.
The closing should be done in an orderly fashion, with one document being executed at one time. You should check off your closing checklist after each document is fully executed. You should consider how many originals of the executed documents to obtain, particularly if you are responsible for recording the closing documents. Once all documents have been executed and all conditions to close have been satisfied, the funds should be disbursed pursuant to the settlement statement.
- Post-Closing Matters
While the closing marks the culmination of the deal for the buyer and the seller, it is not the culmination for the attorneys. Promptly after closing, the real estate documents (deed, mortgage, UCC financing statement) will need to be recorded. The closing attorney must also ensure that the owner's policy of title insurance is promptly issued. Additionally, closing binders that contain all closing documents should be prepared, and the binders should be delivered to each party.
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About the Author
Mr. Serio is an associate with Fishman Haygood Phelps Walmsley Willis & Swanson, L.L.P., where he is a member of the Corporate Section. His primary practice areas are commercial real estate, corporate transactions, mergers and acquisitions, and commercial finance.
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