36 Offices in 17 Countries
DOING BUSINESS IN CALIFORNIAReal Estate Transactions
Part 2 – Basic Elements of Real Estate Sale and Purchase
Presented by:Noriyuki ShimodaAdmitted in Japan and CaliforniaSquire Sanders (US) LLPPhone: 415-393-9894Email: [email protected]
February 15, and March 21, 2012Palo Alto Office
Presentation for Japanese Business Persons:
2
Introduction
•Three major areas of real estate transactions
Office Lease – Seminar Part 1
Sale and Purchase – Seminar Part 2
Deed of Trust/Mortgage Financings – Seminar
Part 3
3
Basic Vocabulary
• A Fee, A Fee Simple• Real Property (Land, Building, and Fixtures)• Personal Property (Tangible or Intangible)• Improvements• Escrow, Escrow Agent• Escrow Instructions• Preliminary Title Report• Title Policy, Title Insurance Policy• Survey, Surveyor• ALTA (American Land Title Association) Form• CLTA (California Land Title Association) Form
4
Basic Vocabulary (cont)
• Phase 1• Easement• Grant Deed• Quitclaim Deed• Deed of Trust• Recording, Recording Office• Bill of Sale• Estoppel Certificate• FIRPTA• Form 593C• 1031 Exchange
5
Typical Process
• Identification of Property
• Preliminary Due Diligence
• Negotiation and Execution of Letter of Intent
• Negotiation and Execution of Definitive
Purchase and Sale Agreement
• Opening of Escrow
• Payment of Deposit
• Due Diligence
• Closing
6
Negotiation and Execution of Letter of Intent
• Seller and Buyer negotiate for and agree onbasic terms and conditions of the sale andpurchase agreement in Letter of Intent whichis usually non-binding.
• Typical Provisions of Letter of Intent
Identification of Property
Purchase Price
Deposit Amount
Period of Due Diligence
Escrow
Broker
Closing
7
Negotiation and Execution ofPurchase and Sale Agreement
• Seller and Buyer negotiate for and agree on
the definitive and binding sale and purchase
agreement.
• Major Provisions of Purchase Agreement
Purchase Price
Escrow Deposit
Escrow
Conditions to the Closing
Method and Period of Due Diligence
Deliveries at Closing
8
Negotiation and Execution ofPurchase and Sale Agreement
• Major Provisions of Purchase Agreement
(cont.)
Costs and Expenses
Prorations
Representations and Warranties
Damage and Destruction
Brokers
Assignment
Miscellaneous
Exhibits
9
Opening of Escrow and Payment of Deposit
• Opening of Escrow
• Escrow Agent
Title company often acts as escrow agent
Role of escrow agent
• Payment of Deposit
10
Due Diligence
• Property Condition
• Title Matters (Preparation and review of
preliminary title report, recorded documents
and ALTA survey)
• Environmental Conditions
Phase I Investigation and Report
Possible Phase II Investigation and Report
• Financing
12
Closing – Seller’s Action
• Delivery of Documents to Escrow Holder Grant Deed (signed and notarized) Bill of Sale General Assignment Lease Assignment Estoppel Certificates FIRPTA Certificate Withholding Certificate Form 593-C Proof of Authority
– Board Resolution– Certificate of Good Standing
Approved Closing Statement
13
Closing – Buyer’s Action
• Delivery of Money and Documents to Escrow
Holder
Funds (Purchase Price and Costs)
Counterpart of General Assignment
Counterpart of Lease Assignment
Proof of Authority
Approved Closing Statement
14
Closing – Escrow Agent’s Action
• Required Actions
Recording of Grant Deed (and any other documents
that are to be recorded)
Disbursement of Funds
Issuance of Title Insurance Policy to Buyer
Disbursement of Documents to Buyer
Disbursement of Documents to Seller
(FIRPTA Holdback)
15
Typical Documents
• Letter of Intent
• Purchase and Sale Agreement and Joint
Escrow Agreement
• Grant Deed
• Bill of Sale
• General Assignment
• FIRPTA Certificate
• Form 593-C
16
• Seller’s Due Diligence Document Deliveries
Agreement may not specifically require
document deliveries
Try to limit the Seller’s delivery obligation to
a list of specific documents that have been
or will be delivered by the Seller
If the Buyer insists upon obligation to
deliver all documents of a particular type
(e.g., all surveys, environmental reports,
geotechnical reports, etc.), limit the
obligation to documents that are “within the
Seller’s possession or reasonable control”
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
17
• Scope of Due Diligence Investigation
Require the Buyer to give the Seller written
notice prior to entry and allow the Seller to
be present
Prohibit test borings and other invasive
investigations without the Seller’s consent
Require the Buyer to repair any damage
caused by its investigations
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
18
• Indemnity/Insurance
Require the Buyer to maintain commercial
liability insurance and name the Seller as
additional insured
Include a provision for the Buyer to
indemnify the Seller against losses, claims
and costs arising from the performance of
the Buyer’s investigations
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
19
• Buyer’s Termination Right
“Free look” is customary
It is customary to allow the Buyer to
terminate for any reason at its sole
discretion
Upon termination, the Buyer should receive
its deposit, less one-half of all title and
escrow charges
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
20
• Due Diligence Reports
Include a provision requiring the Buyer to
deliver to the Seller copies of its appraisals,
studies and other due diligence reports if
requested by the Seller
Provide that the Buyer’s deposit will not be
returned until the Buyer delivers copies of
documents to the Seller with officer’s
certification
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
21
• Seller’s Representations and Warranties/As-Is.
Scope of Representations and Warranties
– To the extent possible, limit representations andwarranties to “Seller’s knowledge.” Includenarrow definition of “Seller’s knowledge”
– Carve out the information disclosed to, ordiscovered by, the Buyer
– Do not give real property title representation
– Do not give representation as to physicalcondition of the property.
– OK to give narrow hazardous materials andcompliance with laws representations
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
22
• Seller’s Representations and Warranties/As-Is (Cont’d)
Pre-closing Breach of Representations/Warranties.
– Include “Seller favorable” mechanism forrepresentations and warranties that are found tobe incorrect prior to closing
Survival of Representations/Warranties
– Try to avoid survival
– Customary survival period is 1 year
– If survive, attempt to establish a liability cap
As-Is Clause
– Include broad “As-Is” provision
– Include Civil Code Section 1542 release
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
23
• Pre-Closing Remedies
Seller’s remedy
– The customary pre-closing remedy for theBuyer’s default is termination of the agreementand recovery of liquidated damages
Buyer’s remedy
– Attempt to limit the Buyer’s pre-closing remedyfor the Seller’s default to termination of theagreement, a return of its deposit andreimbursement of its reasonable out-of-pocketexpenses up to a cap
– Expressly exclude all other remedies, includingspecific performance
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
24
• Tenant estoppel certificates
Attempt to limit the Seller’s obligation to
“commercially reasonable efforts” to obtain
tenant estoppel certificates
If the Buyer insists upon a specified
percentage to be obtained, try for a low
percentage (e.g., 70% of rentable area) and
allow the Seller to substitute a “Seller’s
Certificate” for a tenant estoppel certificate
that cannot be obtained
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
25
• Assignment
The Buyer should only be permitted to
assign to its affiliates
Require advanced notice of assignment
(e.g., 10 business days prior to closing
date) in order to allow the Seller time to
revise, execute and deliver closing
documents
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
26
• Confidentiality Agreement
Require the Buyer to keep information
concerning the Property confidential until
the closing
Incorporate by reference any confidentiality
agreement that may have been executed
prior to the Purchase Agreement
Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective
27
Preliminary Title Report
• Buyers protect themselves against defects in
title through title insurance.
• A title company issues an insurance policy that
insures Buyer against damages or expenses
arising from a defect to title that exists as of
the date of the insurance policy.
• The title company investigates public records
to determine the state of the title to the
Property, and exempts from coverage any
defects that it finds.
• These defects are listed in the Preliminary Title
Report.
28
Curing Title Defects
• The Buyer examines the exceptions in the
PTR, and if they are acceptable, agrees to
close the transaction with those exceptions.
• If new exceptions arise and the Seller does not
cure them, the Buyer has the right to terminate
the agreement.
30
Grant Deed
•A legal document that transfers title to real
property.
•Once the grant deed is signed by the Seller and
delivered to the Buyer, the Buyer is owner of the
Property described in the grant deed.
•An unrecorded grant deed is effective only as to
the parties to the grant deed and third parties
who have notice of it.
•A recorded grant deed imparts constructive
notice and is effective against everyone.
32
General Assignment
•A legal document that assigns to the Buyer all
assets of the seller related to the real property
that are not real property or personal property:
Agreements
Warranties, permits, trade names, trademarks
33
Lease Assignment
•A legal document that assigns to the Buyer all of
seller’s rights in leases of tenants of the real
property.
34
FIRPTA
• The Foreign Investment in Real Property Tax Act of
1980 (FIRPTA) applies to a foreign person’s sale or
other disposition of real property located in the United
States.
• A “foreign person” includes a nonresident alien
individual and a foreign corporation. A U.S. subsidiary
of a foreign corporation is not a “foreign person.”
• A foreign person’s gain or loss from the sale of U.S. real
property is treated as income effectively connected with
a U.S. trade or business subject to U.S. federal income
tax on a net basis at graduated tax rates.
• As a means of collecting U.S. federal income tax owed
by a foreign seller of U.S. real property, the Buyer is
required to withhold 10% of the purchase price and to
remit such withheld amount to the IRS.
35
FIRPTA
• A foreign Seller can seek to reduce the 10% withholding
tax to an amount equal to the foreign Seller’s actual U.S.
federal income on the gain from the sale of U.S. real
property by filing an application for and obtaining a
reduced withholding certificate from the IRS.
• A foreign Seller of U.S. real property must file a U.S.
federal income tax return to report the gain or loss from
the transaction.
• A U.S. Seller can avoid the 10% withholding tax by
furnishing the buyer with a FIRPTA certificate that
certifies the non-foreign status of the Seller.
36
Form 593-CCA REAL ESTATE WITHHOLDING
•Under CA law, the gain or loss from the sale of real
property located in CA is subject to CA income tax.
•As a means of collecting CA income tax owed by the Seller
of CA real property, the Buyer is required to withhold 3-
1/3% of the purchase price and to remit such withheld
amount to the CA FTB, unless the Seller can establish that
an exemption from the withholding tax is available.
37
Form 593-CCA REAL ESTATE WITHHOLDING
•An exemption is available for, among other things, (i) a
Seller that is a CA corporation, (ii) a Seller that is a foreign
corporation qualified to transact business in CA, (iii) a
Seller that is a corporation maintaining a permanent office
in CA staffed by permanent employees after the sale, and
(iv) a Seller that incurs a loss or zero gain from the sale.
•A Seller claiming an exemption must furnish the Buyer with
a Form 593-C certifying that the Seller qualifies for an
available exemption.
•A Seller of CA real property must generally file a CA
income tax return to report the gain or loss from the
transaction.
38
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