Closing Documents for Sale and Purchase of Commercial Real Estate

The definitive agreement for the sale and purchase of commercial real estate should identify all documents which the parties will be expected to execute and exchange at the closing.  These documents typically include:

  • A deed;
  • An affidavit of title;
  • An assignment of any sub-lease or operating leases;
  • A bill of sale for any personal property that is being conveyed with the land;
  • A certificate of non-foreign status; and
  • An estoppel letter or certificate from any tenant on the property to the effect that it will abide by the terms of the existing lease.

In addition, documents from third parties may be required including the title insurance policy and a surveyor’s certificate.

The most important of the closing documents is the deed and the purchaser will normally demand that the seller deliver a general warranty deed that not only conveys all of the grantor’s interests in the property, but also includes extensive warranties regarding the absence of defects in the transferred title and covenants from the grantor with respect to certain actions that the grantor will take in the future in the event that title is defective or title-related problems (e.g., mortgage claims, tax liens, title claims, judgments, or mechanic’s liens) arise after the closing of the transaction.  A general warranty deed include several traditional forms of covenants of title: covenants of seisin and right to convey, which include the seller’s representation that he/she has and can validly claim title and possession of the property; covenant against encumbrances, which includes the seller’s representation that there are no encumbrances on the property that have not been disclosed to the purchaser; covenants of warranty and quiet enjoyment, which include the seller’s agreement to protect the purchaser against claims made by others after the closing that they have superior title to the property; and covenant of further assurances, which includes the seller’s undertaking to do whatever else may be necessary after the closing to ensure that valid title to the property is passed to the purchaser.  State laws vary as to recognition and enforceability of various covenants.  In order to avoid misunderstandings the general warranty deed should include an exhibit that describes all of the encumbrances and exceptions that the grantor wishes to exclude from the otherwise broad coverage of the deed. The deed will be registered with the appropriate governmental authority and thus become part of the public record of the chain of title with respect to the property.

The surveyor’s certificate, sometimes referred to as a surveyor’s real property report, is actually an important part of the due diligence investigation.  In general, the certificate is required by a prospective purchaser of real property as a source of reliable information on the location of buildings relative to the property lines, registered easements that may restrict future development of the property, and encroachments that may become a liability to the purchaser.  For their part, a seller may commission a survey of the property to obtain a plan and report that clearly illustrates the marketability of the property.  Counsel uses a survey report to assist in verifying the current state of the title and financial institutions will use the report to verify that there are no encroachments that may affect the marketability of the property offered for security.  Issues relating to a survey report include which party will bear the expense of creating such a report and whether or not a current report will be required as a condition to closing the transaction.  Due diligence with respect to a report includes checking to see that the surveyor is properly licensed with the applicable governmental authorities.

The content in this post has been adapted from material that will appear in Business Counsel Update (March 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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