A Right of First Refusal (ROFR) is the right to match an offer to purchase a seller’s property. ROFRs can be found in different types of documents relating to both real and personal property. Often, they are contained in leases, giving the tenant a ROFR to purchase the leasehold property. They are also used in shareholder, partnership and operating agreements giving “partners” the ROFR to purchase each other’s interest in the entity.

ROFRs often have a chilling effect on a seller’s ability to sell property, particularly real estate. Potential buyers won’t put forth much time, effort or due diligence in looking at a property knowing that an offer could be matched and the property sold to the holder of the ROFR. If a property is very desirable, a potential buyer might have to overpay in order to discourage the ROFR holder from exercising.

Generally, ROFRs require that the holders close on the same terms as set forth in the offer. Therefore, if a seller receives an all cash, no-contingency deal, the holder would have to close without financing and with no contingencies. Sometimes this will also work to the potential buyer’s advantage. While the price might be attractive to the ROFR holder, the terms of the offer might make it difficult, if not impossible for the ROFR holder to close.

Usually, the event that triggers the ROFR is a “bona fide, 3rd party offer” duly accepted by the seller. What constitutes a bona fide 3rd party offer? The easy, legal answer is an offer made by an unrelated 3rd party purchaser who purchases the property for valuable consideration that is inducement for the entering into a contract without fraud or deception.

I recently had a tenant ask me to analyze a situation relating to a ROFR. The tenant had completed its 10 year initial lease term and the 1st year of its 5 year renewal term. There were 4 years remaining on the lease. The landlord had received an unsolicited offer to sell the building from an unrelated 3rd party. Though the landlord had not intended to sell, landlord was inclined to accept and forwarded the offer on to tenant with a note saying that landlord would pass on the offer if tenant would agree to purchase the property at the end of the lease term for a price that was $200,000 less than the current offer.

Needless to say, the tenant was confused. To make it more confusing, the offer was full of contingencies. The first major contingency was that the buyer had to get 3 adjacent properties under contract and then simultaneously close with this property. So, the contract was intended to be a property assemblage and this was the 1st of 4 parcels that the buyer had made an offer on. The other major contingency was re-zoning and site plan of the assembled property. However, the contract did not describe the intended use or the required approvals. My primary question was whether we even had a bona fide contract that triggered the ROFR.

The biggest problem was that tenant’s ROFR required that tenant respond in 15 days and close within 45 days thereafter. Given that the buyer’s contingencies had not yet been satisfied and that there was no possible way that they could be satisfied before tenant would be obligated to exercise the ROFR and then close, the contract was not yet ripe and therefore, not a bona fide contract for which tenant’s ROFR had been triggered. Until the buyer satisfied or waived the contingencies, the buyer had not obligation to close and therefore, the buyer was not a bona fide purchaser.

Further, landlord’s action in advising the tenant that it would reject the offer and enter into a different purchase agreement with tenant indicated that landlord had not accepted the contract and was using it as a method to force tenant to purchase the property using the ROFR. Landlord wanted the best of both worlds – 4 more years of cash flow via rent, and a guaranteed buy out at the end of the term. Landlord could not get either of these through the contingent offer but had to accept the offer when tenant rejected the offer and put landlord on notice that the offer was not bona fide. This could come down to a shoving match if and when the proposed buyer satisfies its contingencies and attempts to close.

Lesson learned? Make sure you understand the triggering event of the ROFR before signing a lease whether you are the landlord or the tenant. Any ambiguity in an offer can be exploited and delay the exit strategy for one side or the other.

I recently came across a blog post on Honestbuilding.com that was so true, it was funny and made me laugh. 6 Absurd Things CRE Teams Say About Approvals and How to Address Them describes excuses we have all heard about why applications and the documents that go with them are delayed. These excuses are also used when you’re waiting for any documents, whether its signed contracts, draft loan documents or due diligence packages.

Let’s stick with development approvals for this post. Luckily, most of the development teams I work with are prompt and professional. We meet regularly, if not in person, by conference call or e-mail. One person, usually the land planner, keeps us on task and assures that we have what we need on time and deadlines aren’t missed. We are all accountable to each other. However, when the team is spread out around the state or the country for a project that is not local, we come across these kinds of problems from time to time.  The person who is most harmed by this is the client, the developer, as deadlines are missed. When a purchase agreement is contingent upon obtaining approvals and there is an outside date to obtain the approvals, it is often difficult to obtain the extension due to someone failing to submit a document because an administrative assistant was unavailable to send the Fed Ex.

But I want to focus this post on some of the strange, sometimes outrageous requests that the municipalities place on the development team in order to obtain the approvals. We generally spend a great deal of time reviewing ordinances and code requirements before submitting an application for approval. We will have met with planning and zoning staff to get thoughts and ideas as to what is likely to be approved and what the requirements will be so that our applications will be as close to perfect as possible and that the review staff won’t be surprised when they see the application. And, when possible, we meet with elected officials to assure that there will be support at the board level when the time comes. Nevertheless, when applications are submitted, the comments, generally technical requirements, are often laughable.

For example, one application we are working on came back with comments reminding us that the Owners & Encumbrance Report (the title report submitted with the application) must include the names of the current owner and all mortgagees. I scratched my head because if the O&E didn’t do that already, then what did it do? The same report noted that our plan showed the storage/janitor’s closet but that it did not show a mop sink. We’re asked to confirm, following application review, that we aren’t seeking variances, when the application does not ask for variances.

The point here is that in reviewing development applications, most municipalities have set processes and checklists.  There are boxes to check and even if it should be apparent that the boxes have been checked when the application is submitted, it is our job, as the representatives of the developer, to make sure that the staff receiving the application understands that all of the boxes have been properly checked off and all requirements satisfied. If a request seems silly, we have to grin and bear it. Fix the problem and move on to the next one!

There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

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        Title Insurance is an important part of every real estate transaction. The insuring of title to real property consists of two distinct steps:  1) the issuance of a preliminary report that describes title conditions, which will serve to limit the title insurance if issued (the “Commitment”); and 2) the final title insurance policy that may have all or some of the limitations to coverage spelled out in the preliminary title report.  The Commitment is really a contract to issue title insurance at a future date when the terms of the Commitment are complied with.

        The Commitment is an essential document in a real estate transaction.  Therefore, mastering the Commitment is an essential part of a successful real estate transaction.  Most real estate contracts specifically require one party to pay for and obtain a Commitment and an owner’s policy.  In the alternative, the real estate contract may call for the seller to provide the buyer either:  (1) evidence that the seller is the titleholder of record; or (2) evidence of the condition of title, along with a specific number of days for the seller to perfect title to the property.  The title evidence that is usually requested to meet this requirement in such a real estate contract is a Commitment.  In either case, failure to provide a Commitment could result in a default under the terms of the real estate contract.

        Schedule B-1 of the Commitment should be your checklist for closing. This Section lists all the requirements that must be satisfied before the policy will be issued.  The purpose of the requirements is to assure that title will properly vest, without exception, other than as set forth on Schedule B-2, in the proposed insured.  Everything is spelled out clearly in Schedule B-1.  All of the documents that you will need and the steps that you have to take to assure clear title are there for you in black in white.  You can simply make a copy of B-1 or add it to your over all checklist.  But until you have all of the items on B-1, you can’t close.

          Schedule B-2 contains the items that will not be covered by the final title policy to be issued.  It contains both the standard exceptions and the specific exceptions to title.  The specific exceptions are the matters that have been found after examination to affect the property and will not be covered when the policy is finally issued.  It is important to always carefully review the commitment and all of the exceptions.  Just because the commitment contains a list of exceptions does not mean that they all apply or are actually exceptions.  If you are representing a buyer or a lender, it is your job to make sure that title is accurate and beneficial to your client and that none of the proposed exceptions will interfere with your client’s proposed use of the property.  If any exception does not actually affect the property, request that the seller and underwriter delete it.  If the exception adversely affects the proposed use of the property, you need to figure out how to delete or revise the exception.  The art of title is negotiation.

         My favorite part of a real estate transaction is negotiating the title commitment. There are at least three people to negotiate a commitment with: the agent, the examiner and the underwriter. If you are the agent, obviously, you aren’t going to negotiate with yourself.  Your interest in negotiating the commitment is going to differ depending whether you represent the borrower or the lender.  But the seller, who has no insurable interest, often gets involved in negotiating commitments because when the title objection letter comes from the buyer, sometimes the best way for the seller to address an objection is to negotiate with the underwriter to change a requirement or delete an improper exception.

        When I receive a new commitment, I review the requirements and exceptions carefully. I review the underlying documents to understand why the examiner included them on the commitment.  I analyze what is going to need to be done to satisfy each of the requirements and make sure that the properties and people and entities set forth in the requirements are the same as those involved in my transaction or are properly related to my transaction.  If the connection is not obvious, I flag the requirement.  As to the exceptions, I read each one and make sure that none would adversely affect the property or the buyer’s intended use, or, if I represent the lender, would violate any term of the loan documents.  And, I make sure that the exceptions actually apply to the property and haven’t otherwise expired.

        After this review, I often have 2 lists, one is a list which I put in a title objection letter to the seller. But the other is a list which I discuss with my examiner, if I am the agent, or with the agent, if I am not.  This list will consist of issues that should be resolved by the title company as opposed to the seller, including satisfaction or deletion of inappropriate requirements and deletion of misplaced exceptions.  The caveat here is that the examiner is just a scrivener.  So if the issue is one where you can show that a document like a partial release was missed in examination, or a mis-spelled name appears, the issues can be quickly resolved.  But anything more complicated requires an underwriter’s attention.  As issues are resolved, Schedules B-1 and B-2 are revised and the Commitment updated.  And finally, at closing, documents are presented, executed, recorded, and the remaining requirements satisfied so that the final policies may be issued.

        The work that goes into insuring title to property prior to closing can be the easiest part of a closing or the most difficult part of a closing. Sometimes one issue can delay a closing for a many weeks.  It is important to take these issues seriously and to work with your attorney and underwriter to resolve all issues.

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