- What items need to be on my checklist for drafting real estate transaction documents?
From The Commercial Real Estate Lawyer's Job: A Survival Guide, Chapter 17.
Almost all drafting of legal documents takes place on computers and even certain legal processes can now be handled electronically. Historically, lawyers had documents typed by typewriter, and retyped if there were mistakes, and then hoped they had enough time to get the document filed where it needed to be filed by the time it needed to be filed, such as at a courthouse if for a litigation, or in the land records if for a real estate transaction. Now, with the “luxury” of computers, we can easily type and revise documents and, with the click of a button, make many types of filings electronically. Securities filings can be made with the Securities and Exchange Commission. Entities can be created in certain jurisdictions, such as Delaware, through electronic filings, and an original signature by the person forming the entity is no longer needed.
Though we have the “luxury” of easily drafting and revising documents, this does not mean the process is faster. Before computers and word processing, parties drafting a document might have lived with a less than perfect document rather than take the time to retype an entire document and send a revised draft out by mail (prior to faxing and e-mailing), especially if the parties were comfortable that whatever was imperfect was not material to the business deal trying to be reached. Since it is now easy to cut and paste and change provisions in a document, documents can take longer to finish as each party takes time to try to make each word perfect. Clients, however, do not always want the perfect document. Transactional clients are generally interested in making a deal and may determine that the extra time required to iron out certain imperfections in a document is not worth the expense of not completing the transaction at an earlier time. That being said, you should still try to find time to quietly sit and read the documents you are working on to make sure there are as few imperfections, inconsistencies, and mistakes as possible because, despite what clients might think, little imperfections, inconsistencies, and mistakes can lead to big lawsuits and liability if a problem arises between the parties.
Because of the ability to send documents electronically almost instantaneously to recipients, clients will put pressure on you to do so the minute you finish typing the last word in the document. Just because you can send documents immediately does not mean you should. Of course, there are instances of true emergencies where sending out a document immediately is better than if you stop, print it out, and read it before sending it to anyone, but those situations are not very common. For most documents, you should take time to review your work product before sending it to your client, to a third party, such as opposing counsel, or, if you work in a large law firm, before you show it to a more senior lawyer. Taking extra time to get a document right, or closer to right, is much better than more quickly sending something out that is incorrect or that disadvantages your client.
The following is a list of tips to keep in mind when drafting the types of documents typically used in real estate transactions and which can be applied to many other types of documents you will be asked to draft, whether real estate related or otherwise.
· Who Drafts First? Determine who is responsible for drafting the documents needed for your transaction. In purchase and sale and ground lease transactions, the buyer/lessee often prepares the first draft, however, if one party is more sophisticated than the other, it is becoming more common for the more sophisticated party’s counsel to prepare the first draft, regardless of which side of the transaction they are on, since the more sophisticated party has more resources (i.e., more money and more lawyers) and doing so may speed up the negotiation process. In equity financing transactions, it is usually the counsel for the party with the most financial resources who prepares the draft. In lease transactions, the landlord will usually prepare the first draft; however, some of the larger retail tenant chains will want to start with their form. For any of these transactions, if one of the parties has recently been involved in a similar transaction, the parties may agree to start from the documents used in the similar transaction regardless of who prepared it. If your client can afford to incur the expense, it is usually preferable to prepare the first draft of the documents. In financing transactions, the lender’s counsel almost always prepares the first drafts of documents. Each lender has its own forms from which it prefers to begin negotiations.
· Understand the Deal. You should review the letter of intent or term sheet to figure out what the terms of the transaction are and whether you understand the transaction. You may also want to discuss with your client whether there are any other terms your client wants to include in the transaction documents. The letter of intent or term sheet will not contain all of the terms for the deal so you will need additional input from your client. Also, there are certain terms, such as representations and warranties, for which your client will rely on you to draft. If there are terms you do not understand, either ask your supervising lawyer or insert a placeholder in your draft. It is very rare that the first draft of a document will be the one that is signed. Everyone expects there to be multiple drafts of a document so leaving placeholders in initial drafts is not unusual. If you are required to insert language that you are unsure about, always insert language that favors your client.
· Accessing the Document. Insert your file name or document identification number, if your law firm has the software to create these numbers, in the footer of the document and save your document to your firm’s network server or other public area available to others working at your firm. Saving your document where it can be publicly accessed and including a file name in the footer will enable others to access your document easily if the need arises. In larger law firms, searching for a document without a file name or number will be very difficult and may require looking through thousands or hundreds of thousands of documents. In smaller law firms without document management systems, the name of each document should include the client name and matter number, the version number of the document, and the date of the draft.
· Introductory Paragraph. The introductory paragraph should include the name of the document, the parties to the document, and the date the document is entered into. Always make sure this information is correct. As described in Chapter 1, it can be very embarrassing to spell your client’s name wrong in the first sentence of a document. If you are unsure of a name, there is no harm in putting brackets around it or adding a footnote asking for confirmation from the parties.
· Recitals. The recitals, which are usually the next few paragraphs after the introductory paragraph, only need to generally describe the purpose of the document. You do not need a lot of detail since you have the body of the agreement to set forth the parties’ obligations. Not all lawyers like to use recitals and instead will begin right away with the body of the agreement, though having a separate recital section is more traditional.
· Consideration. Every agreement should set forth each party’s consideration so that the agreement will be binding on both parties. Most agreements contain a clause similar to the following between the recitals and the operative sections of the agreement:
NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement and other good and valuable consideration in hand paid, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties do hereby agree as follows:
Even a general statement like the preceding is sufficient to serve as evidence of consideration.
· Defined Terms. Almost all legal documents include defined terms, which are terms or phrases given a specific definition for purposes of the particular document in which they are being used. For example, a lease may require the tenant to covenant that it cause the leased space “to comply with all Governmental Requirements.” To avoid future disputes over whether the tenant should be complying with a particular requirement, the parties should agree during the lease negotiation on the definition of “Governmental Requirement.” For example:
“Governmental Requirement” means building, zoning, subdivision, traffic, parking, land use, environmental, occupancy, health, accessibility for disabled and other applicable laws, statutes, codes, ordinances, rules, regulations, requirements, standards, and decrees, of any federal or state governmental or quasi-governmental authority or agency pertaining (i) to any or all of the Leased Premises, (ii) to the use and operation of the Leased Premises, or (iii) to the subject matter described in the paragraph in which the term is used if the context of the sentence establishes this term is being used in connection with a different subject than those described in clauses (i) or (ii).
You will notice that embedded within this definition is the defined term, “Leased Premises.” You would next have to look at the definition of “Lease Premises” to make sure the definition is correct. Defined terms are capitalized throughout a document but, in many cases, the same word will appear lowercased because it is meant to have its common definition. For example, “Agreement” is commonly used in legal documents to mean the document in which the term is used but that same document may also use the word “agreement” to refer to other agreements. When you are drafting, you will need to be sure that where a defined term is used, you intended to use such defined term. Conversely, you will need to make sure that you do not use defined terms that have not been defined. During the course of negotiations, defined terms may be introduced and then removed and it is possible that in revising the document, uses of a defined term no longer defined will remain. As part of the drafting process, you should use your word processing program’s search feature to look for defined terms you have deleted to make sure you have removed all uses of the word.
Defined terms are sometimes all listed in a definitions section at the beginning or end of a document. The definitions section will either define the term or cross-reference the section of the document where the term is defined. Alternatively, defined terms can be defined within the body of the document where they are first used. Regardless, the common practice is to underline and/or bold the defined term where it is first used so that it is easy for the reader to find.
· Proofread. Proofread. Proofread. Proofreading cannot be stressed enough. As discussed in Chapter 1, you should always take time to proofread your documents. When proofreading, as much time should be spent on reading the definitions section and the miscellaneous section as is spent on reviewing the provisions setting forth the parties’ obligations. Do not rely on your word-processing program’s spell-checking program as the only method of proofreading. There are many mistakes that spell-checking programs will not pick up and many legal terms of art that these programs will try to fix even if you have spelled them correctly. The best way to catch mistakes is to read the document. Remember, the longer you have been working on a document, the greater the likelihood that you will not catch typos while drafting because your eyes begin to see what you think the document is supposed to say instead of what it actually says. Try to make time to quietly sit and read your document from cover to cover but, in the event that you do not have time to do so, be sure to, at a minimum, check the following, none of which will be picked up by a spelling- or grammar-checking program:
· Names of Parties. As previously discussed, it can be extremely embarrassing, and potentially disastrous in UCC financing statements, to spell the name of your client incorrectly, so make sure you check the names of the parties, including the precise names of entities (using a comma in a name or including periods between the “L,” “L,” and “C”).
· Dollar Amounts. During negotiations, various dollar amounts, such as the purchase price for a property or the amount of a loan, may change so you want to make sure your documents reflect the correct amounts. In many documents, amounts are identified with words and numerals so it is easy to change one but not the other during the course of a negotiation. Make sure that you change both the numerals and the words identifying dollar amounts so as to avoid any future confusion.
· Time Periods. Time periods, like dollar amounts, are often described with words and numerals so you should proofread to make sure that the words and numerals are consistent. You should also make sure you have correctly used “business days” and “days,” where applicable. Since “business days” do not include weekends or holidays, a period of “business days” will always be longer than the same number of “days.” Often, there are certain periods of time that the parties intend to be measured in “days” and certain periods of time the parties intend to be measured in “business days” so you should make sure your document is correct.
· Article, Paragraph, and Section Numbers. Whether or not you use automatic numbering for your articles, paragraphs, or sections, you should proofread your draft to make sure the numbering is correct. Inevitably, as documents are revised, the parties will paste in paragraphs and sections from other documents and either manually number these provisions or not number them at all. Also, pasting in text from other documents can sometimes result in the numbering in your document being changed to a different convention.
· Cross-References. Check all cross-references in your document to make sure they are correct. It is very easy for cross-references to become incorrect as a document is drafted and sections are added, deleted, or moved. An incorrect cross-reference seems like a small mistake but the consequences could be great depending on what the cross-reference was intended to do. You will need to check that the cross-referenced section actually exists and that it says what you think it should say. If you are not using an automatic cross-referencing feature in your word processing program, you should underline all cross-references so that they are easy to spot when finalizing the document (you can also shade or highlight the cross-references but then you will need to remember to undo such shading or highlighting when finalizing the document).
· Defined Terms. As discussed earlier in this chapter, remember to search electronically for defined terms to make sure you have removed those that are no longer used. If you are drafting more than one related document, you should try to make sure your use of defined terms is consistent throughout the documents.
· Reversed Parties. You should make sure that you have not reversed the use of descriptive terms for the parties, such as “buyer” and “seller,” “lessor” and “lessee,” and “borrower” and “lender.” Reversing any one of these terms may change a party’s obligations (or lack thereof) from what the parties actually intended. This mistake is made frequently, even by experienced lawyers. Consider using the parties’ actual names when drafting and, once the drafting is finished, you can replace the actual names with the correct descriptive or defined term by using the find and replace feature of your word-processing program.
· Consistency. You should be consistent in the use of terms within documents and among all transaction documents. When using lists of terms, make sure you always use the same terms. For instance, if you refer to “Purchaser, its officers, directors, agents, and employees” in one place in an agreement, you should not refer to “Purchaser, its directors, employees, and consultants” in another place unless you mean for the list to be different.
· All Capital Letters. Many legal documents include certain sections in all capital letters to highlight them for the reader. It is debatable whether this convention works since it can be harder to read the sections drafted this way (though certain jurisdictions may require that certain language in a contract be in all capital letters). As part of your proofreading process, you should pay attention to these sections because spell-checking programs do not always catch the mistakes in the sections drafted in all capital letters.
· Signature Blocks. You should always check the signature blocks to a document to confirm they are correct. Signature blocks can sometimes be complicated and intricate, containing entities with very similar names but for subtle differences. It is a good idea to create a separate document with just the signature blocks you need for a transaction and send it to the parties to review. Once you confirm that the signature blocks are correct in this separate document, everyone working on the transaction can copy and paste signature blocks from the same place. If there are more than a few signature blocks, it might make sense to attach all of the signature blocks to the closing checklist. Following are samples of signature blocks often seen for real estate developers and equity investors.
PROPERTY OWNER, L.L.C., a Delaware limited liability company
By: Property Owner Manager, a Delaware corporation, its Managing Member
Name: Mon E. Bags
Title: Managing Member
MULTI-MILLION DOLLAR EQUITY INVESTOR, L.P., a Maryland limited partnership
By: Multi-Million Dollar General Partner, L.L.C., a Maryland limited liability company, its General Partner
By: Managing Member—General Partner, L.L.C., a Delaware limited liability company, its Managing Member
By: Sole Member, Inc., a Delaware corporation, its Managing Member
Name: Seymour Cash
· If your word-processing program has the ability to create new versions of a document, you should do so every time you receive comments from a different party. This way, you will always be able to show what you changed.
· If you work in a firm with other lawyers, you will probably be able to obtain samples of documents from prior transactions that are similar to the documents you need to draft for your transaction and that could serve as a starting point for you. Before picking a sample to serve as the starting point for your draft, consider whether the agreement is biased toward one side or the other and which side you are currently representing. You should try to obtain a few samples so that you can see what the different positions may be and to get a feeling for the scope of potential issues that may arise in your transaction. Do not try to review more than a few samples because you may easily get bogged down in comparing all of the samples instead of drafting the document you are supposed to be working on. If you are working on a deal involving a public company, you can use the Securities and Exchange Commission’s EDGAR database to find other comparable contracts. In using any forms, you should still take time to read the form. Do not assume that everything in the form is correct, and make sure you understand everything in the form. If a client asks you about a provision in your document, he or she will not appreciate hearing that you do not know what it means or why it is needed but that you used it because it was in a form.
· Miscellaneous Section. If you are using a sample document from another transaction, whether or not it was created by your firm or an opposing party’s firm, read through the miscellaneous section of the agreement. When a document is close to being finalized and the parties need to add language, the language will sometimes be added to the miscellaneous section rather than the parties taking time to try to fit it into a more appropriate place in the document. Therefore, you may find provisions in the miscellaneous section that are irrelevant or inapplicable to your transaction or that should be moved to a more appropriate place in the document. You will also find provisions in the miscellaneous section dealing with jurisdiction. If you are using a document from a transaction that took place in a jurisdiction different from the one in which your current transaction is taking place, you will need to revise these references. Often notice provisions are included in the miscellaneous section. You will need to make sure the notice provisions contain the correct names and addresses and methods for delivery of notice.
· “DRAFT.” Until you are producing the version of the document that will be signed, it is a good idea to include the word “DRAFT” in bold capital letters along with the date of the draft, at the top right corner of the first page of the document. This protects you from any claim that your draft agreement was an offer the recipient accepted and provides a method for you to track your drafts.
· Redlining/Blacklining. A “redlined” and “blacklined” draft both refer to a draft of a document that shows the changes made to a prior draft. When sending out a revised draft of a document by e-mail, it is common to also include a blackline/redline showing all of the changes from the prior draft. This way, everyone can focus on the changes made rather than reading the entire document and trying to figure out what has been changed.
· There are several ways to produce a draft showing your changes. Your word-processing program may have a feature that allows you to see your changes as you draft (commonly called “track changes”). This is a helpful feature to use while drafting because it allows you to easily reverse your revisions should you decide you do not want to make a change. Generally, sending a client a draft showing your revisions within the draft is fine, but it is not always advisable to send this type of document to opposing parties. The recipient may be able to use the editing features on his or her word-processing program to see not merely the changes you made but also prior revisions and internal notes to yourself and the client that you previously deleted. The preferred method for showing opposing parties changes in a document is to use a program such as Deltaview® or CompareRite®. These programs will compare two drafts of a document and create a new document showing the differences. Since these programs create a new document, opposing parties will not be able to see any previously deleted internal notes or comments.