Real Estate ClosingsLangdon Owen
June 5, 2008 — 1,550 views
The closing is where the transaction all comes together. If the agreements have been drafted properly and the parties have followed through, there should not be many unpleasant surprises at closing, because expectations and requirements will have been specified and taken care of ahead of time. Thus, the most important things for closing should have been taken care of well in advance of the closing, and the closing should consist almost entirely of signatures, smiles, and champagne–but this is, unfortunately, not always how things turn out. Let’s see what can be done to increase the odds of a smooth closing.
1. Documentation. The main documents which will specify how the closing will occur include the purchase agreement, the loan agreement, and the escrow instructions. The terms important for structuring the closing should be included in these documents. This includes conditions to closing, documents to use at closing, and the events to occur at closing. Specificity up-front avoids disputes or negotiations at closing. Beware of the “simple” release, assignment, bill of sale, consent, etc., to be delivered at closing, the terms of which have not been seen and agreed to well in advance.
a. Purchase Agreement. The purchase agreement will generally specify such matters as:
– what lien releases will be needed (see also the preliminary title report).
– any conditions precedent to the transaction closing and the documents needed to evidence the meeting of the conditions.
– what form of deed will be used; to whom the deed will be delivered.
– what other documents containing substantive provisions will be used (the forms of these are best attached as exhibits).
– the amounts to be paid and when they are to be paid (earnest money, other deposits, price).
– the procedure for prorations of taxes, utilities, rents, operating expenses, etc.
– the form of title insurance and endorsements to be used and the responsibility to pay for these items.
– the allocation of closing costs and recording fees.
– the time limits within which the closing must (if at all) occur.
– where the closing will be held and the role of the title company in the closing.
b. Loan Agreement. The mortgage lender’s loan agreement or loan commitment letter will generally specify such things as:
– the conditions precedent to be met before a loan advance will be made and the sort of documents needed to demonstrate meeting the conditions (lien releases, organizational consents and approvals, governmental approvals, survey, environmental reports, estoppel certificates, agreement with key tenants, insurance policies, etc.).
– the form of note and trust deed or other substantive instruments to be used (they are best attached as exhibits).
– the loan fees and costs to be paid at closing.
– the form of lender’s title policy and endorsements to be used.
– personal property collateral (pledges or assignments of contracts, cash items, equipment and furniture, etc.) and guarantees (forms best attached as exhibits).
– recording of loan participations.
c. Escrow Instructions. The escrow instructions or agreement generally provides for:
– holding the earnest money deposit (if any).
– time for receipt of other funds and of documents to be provided (deeds, notes, trust deeds, consents, lien releases, certifications, etc.).
– any amounts to be disbursed prior to closing (earnest money disbursements on failure to close, payments of liens, payment of costs and expenses and escrow fees).
– amounts to be held after closing to cover claims, repairs, etc.
– how notice is given to establish conditions for distributions; how funds held are to be invested; who is entitled to the income; how adverse claims are to be handled; and so on.
– the preparation of closing statements.
– recording or filing (and order of recording or filing) and delivery of instruments (trust deed recording, prior lien release recording, UCC financing statement filings, etc.), and distribution of funds and issuance of title insurance.
– payments of costs, distributions to seller (or exchange facilitator, specific creditors, etc.), payment to realtors, receipt and disbursement of loan proceeds, etc.
– method of payment (checks, cashiers checks, wire transfer, etc.).
– general duties of and protections for escrow agent, notices to parties, etc.
2. Checklist. All the various documents describing conditions to closing or events at closing should be reviewed ahead of time and a checklist for closing prepared and kept up to date. The checklist can be in more than one document, but the checklist documents should among them contain all important information leading to the closing, including:
– Is there a list of contact persons for all participants (parties, lawyers, bankers, title company officers, surveyors, realtors, appraisers, governmental officials, etc.)–does it contain all needed phone numbers, e-mail addresses, fax numbers, street addresses, identification numbers (where appropriate), and similar information, including who represents or is associated with whom.
– Is there a master list of what documents exist and what other documents will be needed at the time of closing in order to meet each condition or requirement–who will update the master list as matters proceed and circulate revised copies to parties and advisors.
– Who is responsible for preparing each document not yet finished–who will follow up to see that documents are prepared on time, circulated, and approved–what are the key issues to be resolved.
– Are special closing documents needed (e.g., incumbency certificates, certifications that conditions have been met, FIRPTA affidavits, etc.).
– Are other items needed for closing not discussed in the agreements, such as tax withholding certifications, identification number certifications, etc., as required by law–who will prepare and follow up.
– Who is to sign and deliver each document, which documents require a notary–how many signed original counterparts of each document will be needed–how may copies of each signed document will be needed–are fax or e-mail (pdf) signatures acceptable.
– To whom is each document to be delivered and when (at closing, after recording or filing, etc.).
– Will documents be executed at closing or will they be executed ahead of time and deposited in escrow (can more be done ahead of time).
– Where are funds coming from, and where, when, and in what form are they to arrive–who will track the status and delivery of funds in transit–is there a list of bank contacts and account and transit information (the participants to receive sensitive account information should be limited).
– Will closing be by correspondence (deposit in escrow pursuant to escrow instructions) or by in-person meeting.
– Where and when will an in-person closing be held–at a title company, the office of a lawyer, the office of a party–is a notary available–are facilities available for last-minute changes, copies.
– How long will closing take (hours or days)–is there a final time set for conclusion.
– Who will attend (parties, lawyers, realtors, lenders, title company officers, etc.); do any participants need to travel a considerable distance– will travel time (to or from) limit the time for closing or the order of events.
– What will be the order and timing of events at closing as required by the agreements.
– Have all documents been reviewed and approved by the parties and counsel, and have all necessary corporate or other organizational approvals been obtained–who is confirming these things.
– Are legal opinions needed, and if so, have the forms of them been approved in advance.
– Who will control original documents prior to and at closing–what happens to them if the deal fails at the closing.
– Who is responsible for recording or filing each official document–is there a specified order for filing or recording.
– Is a formal closing memorandum to be used (the checklist, or parts of it, may be modified to become such a memo)–will it require signatures of some or all parties or other participants.
– Are fund transfer instructions complete–are fund receipts needed and executed or electronically confirmed.
– How will postclosing deliveries be made (mail, courier, etc.)–are addresses current.
– Who will prepare the closing transcript of documents–how will it be bound (as a book, three-ring binder, etc.)–who will pay for it– when will it be completed.
– Who is arranging any postclosing festivities or souvenirs–what is planned for these.
3. Some Special Problems. Now let’s turn to some of the problems which can arise.
a. Simultaneous Delivery. It is generally understood that at closing, unless otherwise specified, nothing is delivered until everything is delivered, so that all occurrences are deemed simultaneous. However, sometimes this will vary so that one portion will conclude before another portion commences. For example, the first position loan will close and be recorded before the second position is recorded, etc.
– It is sometimes best to have an agreement (often in the escrow instructions) about simultaneous or serial delivery.
– What happens if the closing fails? There may be an escrow agent with instructions as to whom documents or funds are to be returned (generally to the person depositing the document or funds), but this is not always the case. Parties who dispute matters at the last minute have been known to physically fight for possession of the executed documents on the closing table. Sometimes parties agree that the closing concludes and deliveries are made only on execution of a final closing memorandum, but this may be cumbersome if there are a great many parties or if the closing will take considerable time, so electronic or telephonic confirmation may be appropriate in some situations.
b. Foreign Participants or Long-distancing Closings. If foreign parties are involved, special planning and procedures may be needed.
– There will likely be a need to meet U. S. homeland security rules, tax rules, and other such matters.
– Also, time differences may make electronic transfers on the day of closing difficult (too narrow a time slot available) or impossible (next-day funding may be necessary), and the parties should take these matters into account in establishing closing procedures.
– A delay during closing (e.g., a late flight for a signatory or a last-minute adjustment to the deal) may shift funding, and this may require corresponding changes to numerous documents. This can occur with domestic closings, too, but is exacerbated in closings involving persons from other countries. A difference of a day, or even hours, can mean large sums are affected for interest, currency value adjustments, etc.
– There may be one or more chains of corresponding financial institutions involved in transfers of funds, confirmations of letters of credit, and so on. These should be identified in advance and taken into account in planning the closing.
– Foreign participants should have good local counsel, but if they do not, major problems or delays can arise from misunderstandings.
c. Last-minute Adjustments. Parties in hurry may not have fully nailed the deal down before closing. There may be contingencies to be met or confirmed, regulatory or third-party approvals to be obtained, and so on. These can cause significant delays at closing or important shifts in the deal which may need to be accommodated, or in some cases, may kill the deal altogether. For example, some matters are interest rate sensitive and a shift in market rates just before, or during, closing may give a party the right to walk from the transaction or may require significant readjustments. If possible, everything should be nailed down firmly by prior agreement, without further rate adjustments, etc., for a sufficient time to get the closing done without change after change.
d. Trustworthiness of Participants. One of the most significant matters is the trustworthiness of the participants in the closing. People lacking honesty are not always avoidable in a transaction; other times participants just won’t know how much to trust someone. If parties and counsel do not feel comfortable with the other participants, matters go slowly and drag on until exhaustion and beyond. However, where participants have a sufficient level of trust in each other, things go much more smoothly and quickly.
– Participants may not know much about each other, but their counsel may have done numerous deals together and have faith in each other’s professionalism and integrity. For example, documents can be executed and left on the table by a participant needing to catch an airplane with confidence that if the deal craters the document will not be wrongly used but will be returned, and that no changes to any significant matter will occur without that participant being contacted. This is generally required by professional codes of ethics and by court rulings on fraud, but with a great deal at stake, some greater comfort than a code of professional responsibility or a case in a court reporter volume is desirable; nothing, but nothing, beats a longstanding reputation for integrity.
– This integrity should be reinforced at every step in the negotiation of the deal. For example, any changes in drafts should be pointed out (marked copies are best), all parties should be notified immediately of significant developments, commitments to follow up should be met or problems communicated, and negotiated items should be drafted in good faith to meet their apparent intent so that although fine points may need further discussion on review of the draft, it is clear that an attempt was made to get the items right.
– However, some parties still feel that they are not doing their job (or are in fear of malpractice claims), unless they take ever possible precaution, even though they have no lack of confidence in the other participants; this is the costly legacy of those who have acted badly in the past. In any event, if a complicated deal is being closed, these sorts of concerns can sometimes be identified in advance and accommodated or planned for so that marathon closings, where exhaustion can lead to errors, can be avoided.
e. Promissory Notes and Negotiable Instruments. Never have more than one original promissory note executed, unless the deal involves notes, each of which is to be enforceable in full. A subsequent holder of a note executed in duplicate may well be able to enforce it, even though the party executing the duplicates only intended but one obligation; that party will pay twice and be very unhappy about it. The same point applies to checks, drafts, and other negotiable financial instruments. Mark copies of notes and negotiable financial instruments with the word “COPY.” It is best to put this right across the signature so that no one will mistake a copy for an original; a red rubber stamp works well for this purpose.
f. Closing People. A good transactional paralegal or title company closing officer is a very valuable person for assuring a smooth and efficient closing. Treat these people well. Do not allow other participants to abuse them when something goes wrong. Anyone with experience knows that something will almost always go wrong somewhere to some extent, despite all best efforts, but some participants lack experience, are under great emotional pressure, are exhausted , are rude, or any or all of the above. Take the heat yourself and spare the paralegal or closing officer. Certainly never let them be blamed, even by unspoken implication, for your own mistake or oversight. Give these key people the professional respect they deserve; don’t forget to thank them when they do a good job. Perhaps your next closing will go even better, or perhaps next time you will be reminded of something that saves your rear end; people remember those who appreciate their talents and never forget those who abuse them. More importantly, it’s the right thing to do.
g. Third-party Legal Opinions. If third-party legal opinions (i.e., from counsel for one party for the benefit of another party) are to be provided at closing, these need to be negotiated well in advance of the closing. For example, clients may be willing to agree to overreaching provisions insisted upon by other parties with superior bargaining strength, and the parties, unless relatively sophisticated, may not understand why counsel is reluctant to give an opinion that such provisions will actually be enforced as written. Such clients may be upset with their own lawyers for delays caused in negotiating limitations on opinions at the last minute, even though it was the client who at the last minute agreed to have its lawyer provide a closing opinion without confirming with counsel that the opinion was appropriate. Inappropriate opinion requests need to be eliminated, or the deal needs to be terminated, or counsel needs to withdraw, very early in the process. Otherwise, counsel could be accused of killing a deal after it has built substantial momentum (lawyers have been held liable to their clients for last-minute refusals).
– All parties need to have counsel who will not ask for opinions they would not want to be asked for themselves, who understand the meaning and effect of opinions, which generally are short-hand conclusions leaving much unsaid, who understand which opinions provide important protections at a cost not excessive for the transaction and which are wasteful, and who understand the customary practice in the jurisdiction concerning opinions.
– On a substantive level, absent compelling circumstances and narrow issues, legal opinions concerning title to real or personal property or lien priority should generally not be requested; rather, as to real estate titles, the buyer or lender should obtain title insurance where it is available.
– Other matters as to which opinions normally should not be requested (generally absent compelling circumstances) include: foreign qualification in all required jurisdictions, the need for a lender to qualify to do business, comprehensive (as opposed to narrow and specifically requested matters) legal or contractual compliance, land use and environmental matters, negative factual assurances (except in some securities offering transactions), fraudulent transfer, substantive nonconsolidation, litigation outcome (almost never appropriate), etc. See “Real Estate Opinion Letter Guidelines,” 38 Real Prop. Prob & Tr. J. 241 (Summer 2003) (report of the American College of Real Estate Lawyers Attorneys’ Opinion Committee and the American Bar Association Section of Real Property, Probate and Trust Law Committee on Legal Opinions in Real Estate Transactions) and Robert A. Thompson, “New Real Estate Opinion Letter Guidelines,” Probate & Property, p. 54 (Nov.- Dec. 2002).
– Also, determining factual matters is generally beyond the ken of lawyers, and it is not appropriate, nor cost effective, to ask lawyers to do so. Attorneys certainly cannot, however, base opinions on assumed “facts” which are known to be unreliable.