- Sellers, Protect Your Assets, But Get the Deal Done
- April 5, 2010 | Author: Eleanor Chote Jewart
- Law Firm: Brown McCarroll, L.L.P. - Austin Office
The economic crisis is driving some sellers to take desperate actions, but a seller’s zeal to get a deal done should not outweigh the protection of its assets prior to closing. When evaluating real estate deals, sellers should carefully consider the terms they negotiate in letters of intent and confidentiality provisions or agreements.
Letters of Intent
Transactions are moving more slowly than they were a year or two ago. The letter of intent (LOI) can be a useful tool for buyers and sellers to solidify business terms, see if the deal makes sense for both parties, and protect the seller from unexpected and/or unnecessary costs. Many buyers and sellers sign letters of intent without their lawyers, unintentionally giving away points they could have negotiated. While in reality LOIs are legally nonbinding, it is difficult to re-negotiate a point previously accepted in the LOI. All of the points below may not be included in the LOI, but sellers should at least consider them so they do not lose the ability to negotiate for an important term later in the contract stage.
Seller’s Remedies. In a purchase agreement, a seller’s remedy for a buyer’s default is typically receipt of the earnest money and/or specific performance. At a minimum, the seller should obtain enough earnest money to cover costs if the buyer walks away. However, there are situations in which the seller is willing to accept specific performance only, in lieu of earnest money. In exchange, the seller had the right to enforce specific performance against the buyer and its parent company. In this case, the seller can require that another party with income guarantee the buyer’s obligations. Another option is to include the principal of the buying entity as a guarantor of the buyer’s obligations, assuming the principal has assets.
Regardless of whether the seller receives earnest money or not, the seller should consider the type of purchase when drafting specific performance provisions. For example, if the deal calls for multiple closings over time, sellers should ensure that if the first closing doesn’t occur, they can accelerate the other closings. In doing so, sellers can enforce specific performance as to the whole of the property, not just the property that wasn’t closed at the first missed closing. Get the Deal Done
Assignment. Sellers need to know the party with whom they are contracting. The remedies discussed above are worth very little if the buyer either can’t pay or can’t perform. While it is acceptable to allow a buyer to assign the contract to a newly created entity owned and controlled by the original buyer, a seller should not accept a contract with language identifying the buyer as “Mr. Smith and/or assigns” with no further limitations. Sellers should require that the original, known principal of buyer, or the original individual buyer, hold at least a 50 percent voting and financial interest in the assignee, and the original buyer should not be released from liability without the seller’s consent.
Title Policy & Survey. The seller typically pays for the buyer’s basic premium of title insurance, but not the mortgagee’s policy or any endorsements or deletions on the policy. Even in this pro-buyer market, these standard cost splits remain the same. However, which party pays for the survey is negotiable. It saves money to use an existing survey and request that it be updated by the same surveyor who performed the original work, if possible. Sellers should be sure to obtain an estimate for the update or new survey before committing to pay for it. This is an area, too, where a seller can easily share costs: the seller can pay for the survey up to a set amount, and the buyer can be responsible for the remainder of the costs. Typically, the buyer pays the full cost up front, and the seller gives a credit to the buyer at closing, if closing occurs.
Estoppels. Sellers should confirm that (i) the substantive terms of the estoppels and (ii) the time periods within which they must be delivered to the buyer, are feasible based on the obligations of tenants under the actual leases. Also, sellers should limit the number of estoppels they are required to provide. Buyers typically are interested in the major tenants and/or some percentage of total tenants. Any reduction in the number of estoppels will reduce the seller’s work, and eliminate one of the buyer’s closing conditions. Sellers do not want to allow one missing estoppel to end the transaction. Also, be aware that the requested estoppel language may not match with the tenants’ requirements under their leases. Large tenants write their own estoppels, and small tenants may also have unfavorable lease language that the seller has forgotten about.
Basic Buyer “Outs.” Before finalizing the LOI or contract for sale, sellers should review the various contingencies and options for the buyer to terminate. Title and survey objections in commercial transactions tend to be very buyer-friendly. That is, buyers have broad leeway to object and terminate. Sellers should end the termination right on or before the end of the feasibility period to ensure that the buyer does not have a flexible option for termination after the end of its feasibility period. Similarly, sellers who have owned property for many years - or who own property that has had construction work - should obtain a title commitment, or a nothing further certificate from the date of their title policy, prior to obtaining an offer and entering into a contract. That way, if the seller has any title issues that a buyer is likely to object to that may take some time to clear, the seller can begin working on them in advance.
Binding Provisions. The LOI is not binding generally. However, sellers will want to provide that any exclusivity provisions, indemnification provisions, expiration provisions and confidentiality provisions are binding on buyers.
Cautious sellers will require that buyers sign a confidentiality agreement before sellers hand over due diligence materials. In today’s electronic marketplace, information can be shared quickly and revealed to a wide audience with only a few key strokes. The following are key provisions for sellers to keep in mind with regard to confidentiality agreements.
Information Covered. Sellers should be sure that the description of what is confidential information covers previously provided information (even if the seller does not think there is any), all information a broker or other seller representative may have given to the buyer, and all forms of information, whether electronic or physical. In addition, there may be times when the seller desires to keep the actual fact itself that the parties are in discussion confidential. All of these situations and information types should be specified in the agreement. Also, a seller should clarify in the agreement that the seller remains the owner of all confidential information and derivative works.
Buyer’s Agents. A buyer may share the seller’s confidential information with attorneys, accountants, brokers, potential equity partners, or others. Consequently, the agreement should bind those third parties working for the buyer who receive the seller’s information to the same standards of confidentiality as the buyer. To that end, a seller should require all of the buyer’s agents to sign confidentiality agreements in favor of the seller prior to receiving any of the seller’s information.
Return of Seller’s Files. The confidentiality agreement should include a termination date for the review and a requirement that the buyer either return to seller or destroy all of the confidential information upon termination of negotiations between the parties that do not result in a purchase contract. If the seller is not requiring that all files be returned, it should require written notification from the buyer that files (including electronic files) were destroyed or deleted. The seller should consider using a website that does not permit other parties to print or copy information, but to access it on a “read-only” basis. This limits its exposure significantly. The seller should also provide that the buyer remain bound by the terms of the agreement after return or destruction of the confidential materials.
Injunction against Buyer. A crucial tool for the seller is the right to stop the buyer or the buyer’s representatives from revealing the information if they are not following the terms of the agreement or otherwise reveal, or threaten to reveal, the confidential information. The seller may need to move quickly and exercise equitable remedies such as a temporary injunction to prohibit the buyer or its representatives from revealing information. In addition, the seller should provide that it does not have to post a bond or other security while seeking an injunction and that its equitable remedies are not an exclusive remedy.
Despite the tough economy, deals are getting done. As sellers negotiate in this buyers’ market, consider using the details discussed above for letters of intent, contracts and confidentiality agreements. Sellers that follow these points should save money in the end.