There is an old saying, if God had designed a horse by committee, he would have got a camel. Sometimes, too many people get involved in a project and something that should be simple becomes overly complicated. I have often raised this over the years when serving on non-profit boards and the board is asked to review and approve a contract. So many times, a room full of the community’s brightest business leaders and lawyers will scrutinize a simple document, line by line, and suggest changes after the board’s counsel, executive director and chairman, or all 3, have already carefully reviewed and negotiated the entire agreement. An agreement by committee, I always argued, was a camel.

I was reminded again of the agreement by committee recently as I negotiated the purchase of property from a religious organization. In this case, the organization’s board could not decide what it wanted to do. The organization was represented by 3 or 4 highly qualified brokers and a pro-bono attorney (who did not have a real estate background). So, it became obvious that we were dealing with 2 committees in negotiating the contract: 1) the organization’s board, and 2) the broker/attorney advisers.

We had no direct contact with the board. All communication initially went through one of the brokers. But, communication came back from any one of the brokers and the signals were different. It was difficult to know exactly what the seller wanted. Consequently, negotiations eventually broke off. I thought that there was a price gap. My client thought that the disconnect was something else.

A few months later, the original broker asked me to resubmit the last letter of intent we had provided and confirm the purchase price. I did so. The broker then asked me to confirm a few other terms which were specified in the LOI. I finally told him that the LOI was clear, but perhaps we should present a contract and spell out all the terms to clarify. Instead, we had a conference call with all the brokers. This was the first time I was able to speak to all of them. They explained how they were all “volunteering” to help this organization and how they would appreciate my help in getting the deal done. I said that the best way we could get this done would be to move on to a contract and stop talking about a theoretical deal. They agreed and I finally was able to prepare and send a contract.

However, they were silent for a few weeks. I think that they had a few calls, maybe even meetings with my client as the client told me that the board was concerned about having to vacate the property on short notice since closing was tied to approvals. We weren’t exactly sure, but it would be good to actually talk to someone about this as we could easily work it out. But, the brokers needed to talk to the board and come up with a solution. I wasn’t sure who was going to come up with this solution, but if they asked me, I could do it in a second. The brokers’ solution was for all of us to meet at the property. A meeting was scheduled and then re-scheduled 3 times until it was finally cancelled. No reason for the meeting or the cancellation was ever provided. Finally, the broker emailed me to tell me that they were solving a problem and it would involve my client signing some sort of note at closing.

Remember, each person on this broker committee is well respected and highly qualified. But for some reason, they got brain freeze here and missed the obvious solution. Perhaps they got so confused by their client, the board, in trying to address the issue, that they created a camel. Regardless, after all the delay, I offered a simple, short paragraph to the contract, and buyer agreed to enter into a post-closing occupancy agreement allowing the seller to occupy the property for up to 120 days after closing. Suddenly, we had a horse again.

Working with others to prepare a contract absolutely can be done. Two heads are better than one. But, if you try to do it as a committee where no one takes responsibility or the lead, it isn’t going to happen. Nothing against camels, but they have no place in your documents.

Letters of Intent are often a good place to start negotiations for all types of transactions. I’ve written about this before (see post HERE). They can be very helpful in setting the parties’ expectations and helping to draft the contract.  They work well as checklists for the essential points to be discussed.  However, LOIs should never be considered to be the final contract document, nor should they be considered to be binding on the parties as they do not contain all of the essential terms of the contract.

Most LOIs contain language making it absolutely clear that the LOI is non-binding and is merely an expression or outline of the parties’ interest in entering into a more formal, binding agreement. Until such an agreement is executed, the parties have no formal obligation to each other except perhaps, confidentiality and exclusivity for a specific period of time.

When an LOI gets too specific and a contract is not ever signed, disputes can and do arise. One or both parties might look to the LOI to “enforce” some right or a provision.  But, because the LOI is not binding, there is nothing to enforce.

This situation recently came across my desk. The client signed a LOI to sell the stock of his business nearly 6 months ago.  There were at least 5 occasions in the LOI stating that the LOI was not binding on the parties.  The LOI provided that the parties would “promptly” negotiate and execute a Share Purchase Agreement containing the economic terms in the LOI and regular and customary terms for similar transactions.  It provided that the Share Purchase Agreement would contain a 90 day due diligence period.  And, the LOI stated that if the Buyer “waived Due Diligence” and the Seller thereafter “failed to close,” Seller would reimburse Buyer’s due diligence costs up to $150,000.

Prior to and after the execution of the LOI, the Buyer conducted extensive due diligence on Seller’s company. Negotiations for the SPA began in earnest but were difficult for many reasons.  Both sides felt that the other side changed the business terms.  At the end of about 4 1/2 months, the Buyer agreed to “waive Due Diligence” by amendment to the LOI, yet Seller continued to provide financial records of the company that Buyer requested.  About 2 1/2 weeks later, Buyer broker off negotiations and made demand for reimbursement of its due diligence expenses, the entire $150,000.

Seller retained me to address the due diligence reimbursement issue. What were Seller’s rights?  Seller’s obligation to reimburse the expenses arose under the LOI.  But, the LOI, by its terms was not binding.  Of course, the Buyer could easily argue that this was one of those provisions, like confidentiality, that is binding.  However, Seller’s obligation to reimburse had 2 conditions precedent:  1) Buyer waive Due Diligence and 2) Seller fails to close.

Buyer argued that it had waived due diligence per the 2nd Amendment to LOI. I’m not sure that it did because the parties never entered a contract.  The LOI said that the contract would have a 90-day due diligence period.  Did Buyer waive that provision of the LOI or was it the provisions of the LOI allowing it to conduct due diligence prior to signing the contract?

But, assuming, for argument’s sake, that Buyer did waive due diligence, the 2nd condition precedent was not satisfied. Seller could not have failed to close because Seller had no obligation to close.  There was no binding contract.  No one agreed to anything – not the price, not the terms, not the closing date – nothing.  Therefore, Seller had no obligation to reimburse Buyer.

LOIs can be great. But if you never get to contract, all you have is a piece of paper and no rights.  My client, in this case, looks like it will lose this deal, but it will not have an obligation to pay Buyer.  This is a good result.  The Buyer, who was the more sophisticated party in this transaction and a bit of a bully, blew it.  They should have pushed for the contract ASAP so the due diligence clock would start.  Their strategy, whatever it was, backfired.

That’s what the broker said to me a few weeks ago as I was negotiating the final points with the other attorney on a purchase money note for a small business deal. The broker wasn’t involved in the conversation.  It was a simple e-mail exchange between the other attorney and me.  At some point, the broker was copied in.  My final comment was a small one.  The attorney didn’t object.  But it offended the broker as it might cost his client, the buyer, a whopping $150 at some point in the future.  It was a technical point that the buyer had to pay, but, because the contract was silent, the broker was adamant.  “Are you really going to blow the deal over this” he e-mailed me, with multiple question marks and exclamation points.

Why is it that the smallest deals cause the most grief? And, why is it that this type of thing always happens when clients don’t think to hire an attorney until after the contract is signed and closing is imminent?  In this asset sale, the client called just 10 days before closing.  Given the timing and the size of the deal, I probably should have referred her out to someone else.  But, that’s a conversation for another day – I took the case.  Reviewing the contract, it was clear that this seller should have called before ever signing.  The broker did her no favors.  It was too late to renegotiate the deal.  I just had to make sure that she wasn’t taken advantage of any further.  Thanks to Hurricane Irma, the closing was delayed about a week.  Until this moment during the process to get to closing, there were no glitches.

Negotiations should not ever be construed by one side or the other as a ploy to blow a deal. Parties to a transaction should be free to seek out the best deal possible and to look for language in every document that best suits them.  When a request is made by one side, the other side should be free to accept, reject or counter propose.  Negotiation is give and take.  There is compromise and ultimately there comes a point when both sides have to make a decision.

When the broker asked me if I was trying to blow the deal, it would have been easy to tell him off. I could have easily thrown his comment back in his face and made the point that he was the one who was killing the deal.  But that would have served no purpose.  Litigators like to quote the old adage, “when the facts support you, argue the facts, when the law supports you, argue the law and if neither supports you, distract.”  I think that’s what this broker was trying to do – distract from the point as he had no argument to make.  I had the better argument and taking the high road would get the desired result while making it clear to both the buyer and seller who was hurting the deal.  By explaining to the broker that negotiating and requesting that provisions and language be inserted in a closing document is part of the closing process, I did not accept the premise of his comments.  I then offered to allow the buyer to pay the potential liability up front at a small discount as a debit/credit on the closing statement rather than as part of the note on the maturity date when the liability would be determined.  Clearly, I was willing to compromise and not kill the deal.  The broker quickly backed off and accepted my original change and I never heard from him again.

Interestingly, the buyer’s attorney, who had not objected to my request initially, disappeared during this rapid exchange of e-mails. I wondered why he hadn’t simply told the broker that my position was correct, or not unreasonable and that there was no reason to worry and that I was not out to kill the deal.  Did the attorney think he missed something and now was thinking he needed to save face?

Bullying in negotiations, which this broker clearly attempted to do, will get you no where. If you are bullied, don’t back down.  It only means that the other side is grasping at straws and is in a weaker position.  Use it to your advantage.

Back in the 90’s, there was a commercial where a famous actor, I can’t remember who, was pitching a product. His opening line was “I’m not a doctor, but I play one on TV”.  This was supposed to give him some credibility about the medicine he was endorsing.  In my line of work as an attorney, I often feel like some of the people I come across in a transaction live by the same credo – “I am not an attorney, but I play one in this transaction”.  Whether intentionally or unintentionally, the different players in a real estate deal find ways to play the role of attorney, going so far as to draw legal conclusions that can be harmful to the client.  The worst part is that sometimes, when I try to correct the offender, my efforts are not well received.  Two recent examples.

I represented a couple purchasing property in the Florida Keys. They had signed the contract prior to forwarding it to me to handle the closing.  The property is on the Gulf so it is rather pricey.  Both brokers were involved in the preparation of the contract, which was a FAR/BAR form.  The parties had agreed that the Buyer would pay all of the Seller’s closing costs.  One of the brokers had made a handwritten change that simply said “real estate taxes” under the list of Seller expenses.  The contract was signed electronically via Docusign.  Nobody changed the tax proration paragraph.  When we prepared the closing statement, we put all of the Seller expenses except the broker commission on the Buyer’s side and we prorated the taxes.  The Seller’s broker objected, claiming that the Buyer was to pay real estate taxes.  I did not read the contract that way, because in Florida, 2017 taxes aren’t due, and there were no back taxes due, notwithstanding the handwritten change.  Further, the taxes were to be prorated and no changes were made to the proration paragraph.  I checked with my client and he said he was unaware that he was to cover the Seller’s share of the 2017 taxes.  No one had explained that to him.

The Brokers insisted that the changes to the contract were correct when a simple change, deletion of the proration paragraph would have done the job. The Brokers, both experienced, were very upset that my client was changing the deal and that I was giving him the power to do so.  But the fact was, at best, the Brokers created an ambiguity in the contract because they did not consider all of the terms in the contract and attempted to modify the pre-printed terms and took a short cut.  In essence, they played attorney, and did not do so very well.

On another deal, a client purchased a large tract of land in Orlando last year. The property was legally described as 5 separate lots.  As part of the development of the property, we re-platted and legally described it as 2 separate lots.  During this process, the client entered into a contract to sell a portion of the smaller of the son to be platted lots.  The closing occurred days after the plat was recorded.  We knew at the time that this might cause some confusion down the road for those searching the deed and therefore, we used both the old legal description and the new platted legal description when we recorded the deed.

Recently, we learned that the Orange County property appraiser had listed nearly two thirds of the overall property as owned by the buyer of the property the client sold. This was an obvious mistake.  So, after a couple phone calls, the inquiry made its way to the chief mapper in Orange County.  He revisited the deed and concluded that our deed was not correct and “directed” us to record a corrective deed.  This is a legal conclusion that the mapper is not qualified to make.  But before I called back, I circled back with my title underwriter and surveyor just to make sure that I hadn’t missed anything.  I didn’t.  While this matter has not yet been resolved, I had to advise the mapper that if he could not agree with our surveyor, we would not accept his conclusions nor would we act on his directive.  Therefore, we would only deal with the property appraiser’s general counsel.

I could probably write pages of stories like this. Clients can be the worst offenders.  Sometimes, the best strategy is to grin and bear it.  But, the line in the sand is that no decision can hurt your client or your client’s cause.  And then, please listen to your lawyer.  We don’t just play one on TV!

Many real estate and lease transactions begin with a letter of intent (LOI). An LOI is supposed to be a non-binding expression of interest between a buyer and seller of real estate or a landlord and tenant.  In a perfect world, the LOI should outline, in as much detail as possible, the salient business terms of the proposed transaction.  These would include the parties, purchase price or rent, closing date or lease term, contingencies, due diligence period, financial accommodations such as tenant improvement and who is responsible for closing and other expenses.  However, LOIs often are bare bones and leave many business points to be negotiated with the final contract or lease.  In these cases, what was the purpose of the LOI in the first place?

Sometimes, clients and brokers ask my input on preparation of LOIs. When they do, I try to make them as detailed as possible to that when I prepare the contract or lease later, I don’t have to re-negotiate.  More often, I am given a signed LOI and asked to prepare the contract or lease or worse, negotiate someone else’s document.  These LOIs regularly have missing or incomplete essential terms or ambiguities.  Therefore, we have issues that will have to be negotiated at the contract stage that the client and perhaps the broker intended to have put to rest with the execution of the LOI.

Another pitfall to LOIs is a negotiating strategy some people like to use. When I include a term in a draft of a document that the other side might not like, a common response is “that wasn’t in the LOI”.  These “strict constructionists” can’t honestly believe that a non-binding LOI acts as list of exclusive terms of the deal.  Similarly, if a client wants to modify or even tweak a term, the obstructionist won’t allow it because “that’s what the LOI says”.  People get too hung up on the 4 corners of the LOI, they ignore the provision that says it is non-binding or they just don’t want to make a deal.  Circumstances change between the LOI stage and the final contract.  The parties have had an opportunity to do a bit more due diligence, to talk with their partners, attorneys, bankers and other experts.  They have a more complete understanding of what needs to go in the final, binding deal.  The LOI is designed only to be a road map.  If one party gets too stuck on every word in the LOI, the deal will not get signed.

LOIs can be valuable tools, but only if they are drafted with the appropriate detail and only if the parties understand that until the contract is signed, nothing is final. If they are used otherwise, they can be costly and an obstruction to completing potentially valuable deals.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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