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Real Estate Transactions and Finance
University of North Carolina School of Law
Oliver, Samuel T. "Ted"

Real Estate Finance

Ted Oliver

Fall 2014


Real Estate Transaction, in practice, is usually governed by a commitment letter that the parties have tailored to the particular transaction.

In commercial real estate – Since, commercial sellers and purchasers are equally sophisticated, the contract is supreme, however, if there is no contract then general rules of contracts and property apply.

PP Issue: “the freedom of contract principle has been eroded somewhat by the regulatory impact of the public law on the real estate transaction and emerging judicial trend toward striking down bargains that are either unconscionable or offensive to PP”

Stages of a Commercial Real Estate Cycle.

Approach an institutional lender for a post-construction loan commitment (Secure Permanent Loan Commitment).

If the permanent loan (Post-construction loan) is approved ­­à the developer obtains a short term interest only construction loan form an interim lender on the strength of the PL ‘s commitment. (Secure Construction loan) **Once the construction is completed the PL “takes out” the CL.

Once the project is completed and the prop begins to make rental income à the loan is funded. The Lender (“L”) receives a promissory note for loan indebtedness and a mortgage as security of the borrower’s performance of the loan obligation. ***The purpose of the note, mortgage and other docs is to implement the terms and conditions of the commitment letter.

After the project is completed and it produces positive cash flow through occupancy leases à the developer may decided to “translate some of the equity into cash or capital by: (1) refinancing, or (2) second mortgage.

If there is a default à foreclosure and related remedies are available to the PL and workouts and bankruptcy.

Wraparound Mortgages Discussion

a. Introduction

i. A wrap-around mortgage is a form of secondary financing in which a seller extends to a purchaser a junior mortgage which wraps around and exists in addition to one or more superior mortgages. Under a wrap, a seller accepts a promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.

ii. The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee. Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.

iii. Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:

1. The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he “carries back” from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage, plus a negotiated amount less than or up to the sales price minus the down payment and closing costs. The buyer pays the seller, who then continues to pay the first mortgage with the proceeds of the second. Once the second mortgage is satisfied, the seller is out, but this is rarely the case.

2. Typically, the seller also charges a “middle” on the first mortgage. For example, one has a first mortgage at 6% and sell the whole property with a rate of 8% on a wraparound mortgage. He/she make a 2% middle on the first mortgage amount, using other people’s money to make money. So, it is in the best interests of a seller to keep the wrap, rather than allow the buyer to assume the first mortgage.

iv. As title is actually transferred from seller to buyer, most wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.

v. A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance is due upon sale or transfer of ownership.

b. Handout example

c. Williams v. Powell, (1994)—

d. Due-on-sale clause


Marketable Title – Expressed in virtually every contract of sale is a promise by the seller to deliver title (marketable title) that is free of all legal encumbrances except those that are agreeable to the reasonable purchaser.

Title Search – the purchaser’s attorney will examine the status of the seller’s title based on a title search conducted between the date of the K and the closing date.




Overview of Contracts for Sale and the Conveyancing Process

Drafting of a Contract of Sale: (p17)

Typically, initial K of sale is drafted by seller, broker, banker, or title company involved in transaction and then submitted to either or both parties for acceptance.

Theory & Mechanics of Land Acquisition & Transfer: (p17-18)

1. Relationships: Seller = grantor of deed. Purchaser = grantee to whom deed is granted upon purchase.

2. Contract of Sale: Contract of sale is promise by seller to deliver title (“marketable title”) that is free of all legal encumbrances except those that are agreeable to the reasonable purchaser. See Professor’s comment.

3. Interim period btw execution of K and closing date: For ordinary contract of sale, interim period is about 2 months. For installment land contract, e.g., Crutchley, infra, seller agrees to finance purchase price and retains legal title as security until all installment payments are made; hence, in duration the contract period will resemble term of mortgage loan. (See Ch. 3D)

4. Role of Attorney: To protect interests of client during all stages of RET. As buyer’s atty: Review K information, e.g., price & payment details, legal background, and legal consequences of transaction. Examine status of seller’s title based on title search conducted by a title insurance company, an abstract company, or the purchaser’s atty.

5. Role of Broker: Usually, brokers are more concerned about “making a deal” and collecting commission. See discussion infra.

6. Title search:

a. Process à Title searcher will inspect copies of relevant deeds and other docs that are recorded in either the Registry of Deeds or Registry of Probate office.

b. Issues à Looking to find whether there are recorded encumbrances (e.g., easements, liens, restrictive covenants, leases) adversely affecting value of property. See discussion re Schedule B infra.

7. Closing: Transaction will close on stipulated date, provided there are no exceptions to marketable title or if exceptions are resolved to satisfaction of purchaser prior to closing date. See discussion re Schedule B infra.

8. Conveyance of title: At time of closing, seller will convey title by means of deed to purchaser, and purchaser will deliver balance of agreed-on purchase price.

9. Termination of rights under K of sale, unless fraud: [Re-phrase:] Absent language to contrary, upon acceptance of deed, purchaser’s rights under contract of sale terminate and “merge” with the deed so that purchaser’s sole recourse against seller (except for fraud) will depend on the covenants, if any, contained in the deed.

10. General warranty deed, protections & limitations: Purchaser may bargain for highest degree of protection obtainable by a grantee. General warranty deeds contain standard covenants.

a. Covenants are title protections in the form of promises to indemnify purchaser. There are 3 types of standard covenants:

i. Covenant of seisin

ii. Covenant against encumbrances

iii. Covenant of warranty

11. Limitation: These title protections are worthless when seller becomes insolvent.

12. Advisable to obtain additional title protection:

a. Title Insurance: A prudent purchaser will obtain additional title protection in the form of title insurance, which is backed by the considerable net worth of the company that issues the policy.

b. Reliance on Attorney’s opinion: Purchasers may also rely on an attorney’s opinion as to the status of the title, backed only by the attorney’s professional liability insurance and personal assets.


Applicable rule of law in commercial RET: (p18)

– Freedom of contract reigns supreme

– General rules of law apply only in absence of an agreement to contrary:

§ Since transactional rights and responsibilities are invariably set forth in writing, and parties may negotiate these rights and responsibilities, parties may also negotiate to override general rules of law, including, property and contracts law rules. [Shorten it.]

– Ex.: During executory phase of a contract of sale:

§ Under contract law: In minority of jurisdictions, seller bears risk of any casualty loss (e.g., fire) btw date on which contract is executed and closing date.

§ Under equitable conversion: Risk of casualty loss is borne by purchaser as “equitable” owner.

§ Under the Uniform Vendor and Purchaser Risk Act: Some states have adopted this statute, which imposes risk of loss on party in possession.


§ However, none of these rules apply when the contract expressly provides otherwise.

Contract for sale – Examined through drafting approaches: (p19)

Interpretation of language in contracts vary depending on the approach and legal theory utilized by the court reviewing it. Ex.: Potential treatment of earnest money deposit as an invalid penalty rather than as enforceable liquidated damages. (Discussed infra.)

The Real Estate Broker’s Role in Sale Transactions (p19):

– Pitfalls for sellers when unrepresented in their dealings w/ RE brokers, prior to locating a purchaser.

– Role of seller’s attorney: Should ensure that brokerage agreement is consistent w/ seller’s expectations as to when commission is earned.

When Does a Real Estate Broker Earn His Commission? (pp. 19-22)

1. Ready, Able, And Willing: Broker earns his commission when he produces a ready, able, and willing customer on the terms given to him by his principal. Broker may recover commission fee even w/o a writing for his hiring, and even if the transaction was not consummated. See hypos (pp.19-20) – (1) where fee is recovered; (2) where fee is not recovered.

2. Conditional Hiring: Seller may engage a broker on the condition that a commission would be payable only if title actually closes. See Hypo, p. 21. Describe it?

Applicable Rules [sub-divide btw recovered & non-recovered commission]:

i. While a broker’s commission can be contingent upon the consummation of the transaction, the seller cannot take advantage of conditions that he himself created to make performance impossible and thereby deprive the broker of his commission.

ii. No commission can be recovered where the brokerage agreement stated that no commission would be paid in case of a failure to close for any reason whatsoever.

iii. But even when brokerage agreement stated provision, the broker may recover where closing did not take place due to bad faith or fraudulent action of the seller.

iv. If the contract stated that commissions would not be paid if there was a failure to close for any reason whatsoever except willful default, if the seller released the buyer from the commitment prior to closing, there was no willful default.

v. Minority view, including NJ: Broker’s engagement is not satisfied until title actually closes – unless failure to close is attributable to the principal – even without a specific provision to that effect in the brokerage agreement.

The Purchaser’s Liability (Rule for broker’s protection):

Where purchaser rejects the deal capriciously and title does not close, the broker has an action against the purchaser for the loss of commission on the theory of an implied obligation by the purchaser to complete the transaction. Ellsworth Dobbs v. Johnson (N.J. 1967).

Exclusive Arrangements (p22)

Exclusive right to sell (80% in Georgia)—even if the seller locate a buyer the broker still get his commission

Exclusive agency agreement—if the seller locate a buyer the broker will not get his commission

Open listing—if someone other than the broker procure a buyer, the broker will not get the commission (usually shared though)

Crutchley v. First Trust & Savings Bank (p23)

[Involving installment agrmt w/ nonrecourse clause; failure to document agrmt w/ broker; unauthorized practice of law]]

Facts: Fishel (∆),real estate agents, rep’d the Crutchleys (¶s) in the sale of property worth over $1 million thru an installment agmt containing a nonrecourse clause. When buyers defaulted on the K, ¶ regained possession thru forfeiture proceedings. However, b/c of bad market conditions, ¶ recovered only about $576,000 after liquidation. ¶s sued ∆’s estate (rep’d by Bank) seeking to recover damages.

¶s contend: (1) ∆ misadvised them re legal significance of nonrecourse clause; and (2) violated ethical code against unauthorized practice of law by failing to recommend ¶ seek legal counsel.

Law: Both theories of negligence & breach of contract applied.

Hold: There was negligence and breach of contract where ∆ breach duty under agmt by: (1) giving inadequate and incorrect explanation of nonrecourse clause; (2) failing to recommend ¶ obtain legal counsel; and (3) discouraging ¶s from seeking legal counsel. Applying Iowa’s comparative [negligence] fault stat

itions costs are leveraged w/ mortgage financing. Usually earnest money deposit is substantial. So it’s essential that purchaser’s atty include contingency clause for financing the purchase price so as not to lose the earnest money deposit in the event that financing cannot be procured from seller or a 3rd party lender.

Drafting a RE Sale Contract

– Problems to Address-

Who’s the buyer? Usually is filled in as “x-company or assignee.” However, seller should negotiate to have contract indicate explicitly whether seller would allow buyer to assign its rights and obligations to another party in the future. Con à Otherwise, seller may lose buyer’s credit on the transaction.

Who’s the seller? K should specify that holder of title is seller so that buyer can have action for damages if seller doesn’t own or can’t convey title.

What’s the property? Parties should ensure that legal description of prop is accurate. (See later sections.)

Covenants, conditions, and restrictions of record: Buyer is disadvantaged when issues encumbering the land are not addressed. Buyer can demand to know and examine these restrictions. But where time doesn’t allow, may obligate buyer to take prop subject to restrictions “not violated by present improvements and uses of prop or by purchaser’s intended use of prop.”

Damages I, title defects: Parties should draft K so as to protect against unexpected title defects or exceptions that cannot be waived. Ex.: Parties should know who bears risk of bldg burning down prior to closing.

Damages II, earnest money: Parties should draft remedies of damages and specific performance in event either buyer or seller defaults. Usually, seller would want to keep the earnest money as liquidated damages.

Damages III, broker’s commission: G’rally, arrangements re commissions are not part of sale contract, but part of seller’s agrmt w/ broker, known as listing agreement. And so, whatever is stated in sale K may not bind the broker. A way to fix this is having broker sign the sale K also, which should contain lang as to broker’s rights to commission.

When & where is the closing? Leaving time/place as “to be specified later” is an unenforceable agrmt causing confusion. Also may create an unenforceable K when a party is arguing that the other has defaulted.

Overview on Baldassare v. Butler: Illustrates why developers purchasing raw land often demand a contingency clause that enables them to withdraw from K if they are unable to procure certain development approvals from the relevant governmental authorities.

Baldasarre v. Butler (p35):

Facts: Butler (∆ atty) represented both Baldassare’s estate (¶ seller) and DiFrancesco (∆ purchaser) during negotiating state of real estate transaction. Butler had represented ¶ and DiFrancesco in other real estate matters in the past. DiFrancesco, a local real estate developer and brother of Butler’s law partner, offered to purchase ¶’s prop & sought Butler’s representation. Butler disclosed to ¶ the potential conflict of interest of the dual representation, and ¶ signed a consent thru a “conflict of interest” letter. Agmt btw ¶ and DiFrancesco was subject to DiFrancesco obtaining approval for subdivision of the land. This contingency was waivable. While DiFrancesco’s appl before zoning board was pending, the land had increased in value considerably. Butler represented DiFrancesco on a deal to assign the land at a substantially higher price to a construction company once the deal w/ ¶ closed. Butler never mentioned such deal to ¶.

Hold: Butler violated standards of professional ethics in representing both seller & purchaser in negotiating the terms of a contract of sale.

Rat: Although dual representation at closing may be possible, such representation in negotiating stage is inherently fraught w/ conflict, incapable of cure thru execution of “conflict of interest” letter. Further, Butler’s conduct constituted fraud, imputable to DiFrancesco.

Legal fraud consisted of 5 elements:

(1) a material representation by defendant of a presently existing or past fact;

(2) knowledge or belief by defendant of its falsity;

(3) knowledge that plaintiff rely upon it;

(4) reasonable reliance by plaintiff; and

(5) resulting damage to plaintiff. Even where there was no affirmative representation of a fact, silence in the face of an obligation to disclose may be fraud, since suppression of truth when it should be disclosed is equivalent to an expression of falsehood. Rescission is an available remedy in an action for equitable fraud.

Dual Representation of Seller & Purchasers:

Generally, rules of professional conduct permit attys to rep multiple parties if lawyer believes the representation will not adversely affect exercise of professional judgment as to interests of each client and clients consent after full disclosure of potential conflicts. à Baldassare illustrates that consent is not always effective to shield he lawyer from liability. COMMENT: CAN NEVER BE DONE DURING THE NEGOTIATION PROCESS OF THE TERMS OF THE CONTRACT.


Requirement for notice of assignment

Right to consent to assignment (but must retain mutuality of contract of objective criteria (credit score; excess of profit sharing)—termination for subjective reasons).

Business Advice Revisited: