Real Estate Transactions Outline

Real Estate Transactions
Professor Gorman  – Fall 2016
 
Market choices based on self-interested economic benefit (market factors)
Accounting profit – covering cost of transaction (short-term consideration)
Economic profit – accounting profit vs. return that could have been earned from alternative transaction of comparable risk (long-term consideration)
Role of lawyer:
Structures/documents transaction (documents, strategies, coordinates 3rd parties)
Must delegate tasks to be able to juggle client
Manages/organizes time (order, interest priorities, measures time value of money quick sale price for property vs. FMV)
Be aware of deadline triggers throughout transaction to be sure not to jeopardize client rights (ex: attorney approval rider)
Risk manager (identify, reduce and shift risk)
Weigh return  (captured value) against client’s level of risk aversion
Argue for provisions in contract to get home inspection (usually buyer responsibility)/allow safe harbor zone to back out of contract/reduce purchase price to account for risk vs. buying as-is   
Types of Costs
Transaction Costs: Costs associated with undertaking exchange (collecting information, negotiating, cooperating and regulatory compliance)
Out-of-Pocket Costs: Actual expenses incurred in doing a project (POC cost = paid outside closing)
Sunk Costs: Costs that cannot be recovered when a party abandons a course of action. 
Opportunity Cost: Market choices one gives up to pursue selected choice
Transactional Misbehavior:  Party to a transaction tries to change the dynamics of the deal after the deal has been struck.
Modify risk allocation based on own rate of return
Rent-seeking behavior – law treated as commodity to invest in (ex: investing for zoning changes); extract value from favorable laws and regulations
Market Risk Categories
Temporal Risk: Time value of money (PV worth more today than tomorrow from inflation; benefits of having assurance); risks usually due to incomplete knowledge or information
Historical Risk: inability to be certain about historical information upon which particular business judgments rely in calculating the desirability of a current transaction (ex. credit history)
Present Risk: information relied on to establish the presence or absence of specific conditions that would affect the property or the transaction (ex: housing code violations)
Future risk: not being able to predict future (inflation, interest rates, employment rates)
Transactional Risk
Investor/Ownership/Entrepreneurial Risk: liability for things affecting property (contract liability; risk of depreciation)
Marketplace Risks: general market factors that affect profitability; not property-specific (risk of inflation)
Affects liquidity (how quickly investment can be exchanged for other things)
Credit Risks: ability/willingness to pay lender back; occurs whenever payment and performance are not simultaneous
Transfer risk: risk of error in process of making/documenting transaction (ex: mistake in document preparation, risk that promise/warranty may be untrue)
 
Marsh v. Wallace
Facts: Marshes claim lawyer breached fiduciary duty of loyalty to them by undertaking to represent them in transaction with Wallace when lawyer had conflicts of interest (personal financial interest to recover overdue legal fees from Wallace which would result from closing the transaction + had long-time relationship with Wallace whose interests were adverse to Marshes).
Holding: Lawyer violated fiduciary duty by failing to disclose potential for conflict of interest in representing both parties and not getting informed consent.
Key takeaway:
Each lawyer owes duty of care + duty of loyalty/fidelity to clients which includes disclosing conflicts of interests
Includes fiduciary duty of confidentiality, candor and disclosure (including duty to inform clients of matters of reasonable importance to representation)
Conflict of interest = substantial risk that lawyer’s representation would be materially/adversely affected by lawyer’s own interests or lawyer’s duties to another person
Here, lawyer adequately informed clients of his financial interest in transaction (adequately disclosed, included debt owed to him in closing contract) but did not get informed consent from both parties about dual representation
Real estate closings are unusual because closing attorney undertakes responsibilities to both parties in transaction (vs. each party being zealously represented by own counsel)
But lawyer owes duty of loyalty to his own client
Lawyer here did not have clear understanding of who he represented; undertook to represent both sides to close transaction without disclosing potential conflict of interest or getting informed consent to his representation = violated fiduciary duty
Lawyer had affirmative duty to explain all implications of pros/cons and risk of representing both parties and getting knowing/informed consent
Attorney should have written out conflict waiver and had both