Presentation for Japanese Business Persons: DOING BUSINESS IN CALIFORNIA Real Estate Transactions Part 2 – Basic Elements of Real Estate Sale and Purchase Presented by: Noriyuki Shimoda Admitted in Japan and California Squire Sanders (US) LLP Phone: 415-393-9894 Email: noriyuki.shimoda@squiresanders.com February 15, and March 21, 2012 Palo Alto Office 36 Offices in 17 Countries
Introduction •Three major areas of real estate transactions Office Lease – Seminar Part 1 Sale and Purchase – Seminar Part 2 Deed of Trust/Mortgage Financings – Seminar Part 3 2
Basic Vocabulary • A Fee, A Fee Simple • Real Property (Land, Building, and Fixtures) • Personal Property (Tangible or Intangible) • Improvements • Escrow, Escrow Agent • Escrow Instructions • Preliminary Title Report • Title Policy, Title Insurance Policy • Survey, Surveyor • ALTA (American Land Title Association) Form • CLTA (California Land Title Association) Form 3
Basic Vocabulary (cont) • Phase 1 • Easement • Grant Deed • Quitclaim Deed • Deed of Trust • Recording, Recording Office • Bill of Sale • Estoppel Certificate • FIRPTA • Form 593C • 1031 Exchange 4
Typical Process • Identification of Property • Preliminary Due Diligence • Negotiation and Execution of Letter of Intent • Negotiation and Execution of Definitive Purchase and Sale Agreement • Opening of Escrow • Payment of Deposit • Due Diligence • Closing 5
Negotiation and Execution of Letter of Intent • Seller and Buyer negotiate for and agree on basic terms and conditions of the sale and purchase agreement in Letter of Intent which is usually non-binding. • Typical Provisions of Letter of Intent Identification of Property Purchase Price Deposit Amount Period of Due Diligence Escrow Broker Closing 6
Negotiation and Execution of Purchase and Sale Agreement • Seller and Buyer negotiate for and agree on the definitive and binding sale and purchase agreement. • Major Provisions of Purchase Agreement Purchase Price Escrow Deposit Escrow Conditions to the Closing Method and Period of Due Diligence Deliveries at Closing 7
Negotiation and Execution of Purchase and Sale Agreement • Major Provisions of Purchase Agreement (cont.) Costs and Expenses Prorations Representations and Warranties Damage and Destruction Brokers Assignment Miscellaneous Exhibits 8
Opening of Escrow and Payment of Deposit • Opening of Escrow • Escrow Agent Title company often acts as escrow agent Role of escrow agent • Payment of Deposit 9
Due Diligence • Property Condition • Title Matters (Preparation and review of preliminary title report, recorded documents and ALTA survey) • Environmental Conditions Phase I Investigation and Report Possible Phase II Investigation and Report • Financing 10
Closing • Seller’s Action • Buyer’s Action • Escrow Agent’s Action 11
Closing – Seller’s Action • Delivery of Documents to Escrow Holder Grant Deed (signed and notarized) Bill of Sale General Assignment Lease Assignment Estoppel Certificates FIRPTA Certificate Withholding Certificate Form 593-C Proof of Authority Board Resolution – Certificate of Good Standing – Approved Closing Statement 12
Closing – Buyer’s Action • Delivery of Money and Documents to Escrow Holder Funds (Purchase Price and Costs) Counterpart of General Assignment Counterpart of Lease Assignment Proof of Authority Approved Closing Statement 13
Closing – Escrow Agent’s Action • Required Actions Recording of Grant Deed (and any other documents that are to be recorded) Disbursement of Funds Issuance of Title Insurance Policy to Buyer Disbursement of Documents to Buyer Disbursement of Documents to Seller (FIRPTA Holdback) 14
Typical Documents • Letter of Intent • Purchase and Sale Agreement and Joint Escrow Agreement • Grant Deed • Bill of Sale • General Assignment • FIRPTA Certificate • Form 593-C 15
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Seller’s Due Diligence Document Deliveries Agreement may not specifically require document deliveries Try to limit the Seller’s delivery obligation to a list of specific documents that have been or will be delivered by the Seller If the Buyer insists upon obligation to deliver all documents of a particular type (e.g., all surveys, environmental reports, geotechnical reports, etc.), limit the obligation to documents that are “within the Seller’s possession or reasonable control” 16
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Scope of Due Diligence Investigation Require the Buyer to give the Seller written notice prior to entry and allow the Seller to be present Prohibit test borings and other invasive investigations without the Seller’s consent Require the Buyer to repair any damage caused by its investigations 17
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Indemnity/Insurance Require the Buyer to maintain commercial liability insurance and name the Seller as additional insured Include a provision for the Buyer to indemnify the Seller against losses, claims and costs arising from the performance of the Buyer’s investigations 18
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Buyer’s Termination Right “Free look” is customary It is customary to allow the Buyer to terminate for any reason at its sole discretion Upon termination, the Buyer should receive its deposit, less one-half of all title and escrow charges 19
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Due Diligence Reports Include a provision requiring the Buyer to deliver to the Seller copies of its appraisals, studies and other due diligence reports if requested by the Seller Provide that the Buyer’s deposit will not be returned until the Buyer delivers copies of documents to the Seller with officer’s certification 20
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Seller’s Representations and Warranties/As-Is. Scope of Representations and Warranties To the extent possible, limit representations and – warranties to “Seller’s knowledge.” Include narrow definition of “Seller’s knowledge” Carve out the information disclosed to, or – discovered by, the Buyer Do not give real property title representation – Do not give representation as to physical – condition of the property. OK to give narrow hazardous materials and – compliance with laws representations 21
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Seller’s Representations and Warranties/As-Is (Cont’d) Pre-closing Breach of Representations/Warranties. Include “Seller favorable” mechanism for – representations and warranties that are found to be incorrect prior to closing Survival of Representations/Warranties Try to avoid survival – Customary survival period is 1 year – If survive, attempt to establish a liability cap – As-Is Clause Include broad “As-Is” provision – Include Civil Code Section 1542 release – 22
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Pre-Closing Remedies Seller’s remedy The customary pre-closing remedy for the – Buyer’s default is termination of the agreement and recovery of liquidated damages Buyer’s remedy Attempt to limit the Buyer’s pre-closing remedy – for the Seller’s default to termination of the agreement, a return of its deposit and reimbursement of its reasonable out-of-pocket expenses up to a cap Expressly exclude all other remedies, including – specific performance 23
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Tenant estoppel certificates Attempt to limit the Seller’s obligation to “commercially reasonable efforts” to obtain tenant estoppel certificates If the Buyer insists upon a specified percentage to be obtained, try for a low percentage (e.g., 70% of rentable area) and allow the Seller to substitute a “Seller’s Certificate” for a tenant estoppel certificate that cannot be obtained 24
Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective • Assignment The Buyer should only be permitted to assign to its affiliates Require advanced notice of assignment (e.g., 10 business days prior to closing date) in order to allow the Seller time to revise, execute and deliver closing documents 25
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