Real Property & Environmental Law Alert : New Jersey, New York, Pennsylvania & Delaware Lawyers & Attorneys for Real Estate Development & Environmental Law

The feasibility review focuses on the ability of the property to function in a manner that will effectively and efficiently serve the Buyer’s needs now and in the future. Attention should be paid, at a minimum, to:

• Access to roadways
• Sufficiency and location of utilities
• Available building area

An environmental review of the property is also essential with a Phase I analysis and, where indicated, a Phase II study being conducted by a reputable consultant.

An understanding of the zoning regulations affecting the property is critical, as those restrictions dictate how the property can be used and developed. Included in the documents that the Buyer should review are:

• The municipal zoning code and map
• The local zoning file for the property
• Prior approvals for the property

The Buyer can also request a zoning compliance letter from the municipality, although the willingness to issue those letters and the level of detail contained in them varies depending on the municipality.

A study of the structural fitness of existing buildings on the property and/or geotechnical studies may also be warranted, depending on the nature of the transaction and the Buyer’s plans for the site.

Other property related items that a Buyer should consider reviewing during the due diligence period include:

• Leases (including subleases, if any) and rent rolls
• Brokerage agreements
• Casualty insurance policies
• Environmental insurance policies
• Service contracts that do not terminate as of closing
• Prior engineering and feasibility studies or reports prepared by the Seller
• Governmental permits and licenses
• Notices of violations
• Third party licenses

Like a used car, every property is unique, with its own individual history, nicks and scratches. There is no “one-size fits all” formula or approach to performing the due diligence on a property. Reps and warranties, title review and property investigation give a buyer the tools to determine whether the property is one which it should acquire. The thoughtful use of those tools is the key to a successful due diligence investigation and deciding whether to drive that car off the lot or look for a different one.

Alfred R. Fuscaldo is a Director in the Gibbons Real Property and Environmental Department.

When drafting the title provision in the Agreement, consider the following:

• Buyer should require that Seller provide “good and marketable title.”
• Marketable title is “one that is free from liens and encumbrances and ‘which a reasonable purchaser, well informed as to the facts and their legal bearings, willing and ready to perform his contract, would, in the exercise of that prudence which businessmen ordinarily bring to bear upon such transactions, be willing to accept and ought to accept.’” Barter v. Palmerton Area School District, 18 Pa Super 16, 20 (1990).
• Buyer should never agree to take title “subject to encumbrances and other matters of record” because there will invariably be something recorded against the property, and until the Buyer obtains a title commitment, reads the exceptions and reviews those exceptions against the survey, the Buyer will not understand how those encumbrances impact the property or the Buyer’s intended use.
• As a compromise, Buyer could agree to take title subject to encumbrances of record which do not materially adversely affect the Buyer’s intended use of the property.

What title documents should a Buyer review? All of them.

• Review the vesting deed.
• Review the title exceptions in the commitment, both on Schedule B-1 and Schedule B-2.
• Understand what information Buyer will need to provide to the title company in order for it to insure title.
• Read ALL of the title back-up documents.
• Understand how the recorded encumbrances will affect the permitted use and development of the property.
• Buyer should send a title objection letter requiring the Seller to cure title issues to the extent curable.

A complete review of title cannot occur without also reviewing a current survey of the property.

• ALWAYS get a survey.
• The survey will allow you to confirm that the title exceptions do (or don’t) encumber the property.
• The survey will locate the encumbrances on the property.
• The survey will show encroachments onto both the property and the adjoining properties.
• A new survey is always preferable, but sometimes having the surveyor recertify a recent survey which he prepared will be sufficient.
• • The survey should contain a certification from the surveyor in favor of the Buyer, title company and Buyer’s lender, permitting them to rely on the accuracy of the survey. This certification will permit the title company to remove the standard survey exception from the policy.
• Surveys could be a long lead time item so set the length of the Agreement’s due diligence period accordingly.

There are a multitude of issues to consider when it comes to title review, and this post only scratches the surface. Above all, it is imperative to remember that the title history of each property, like the history of every car, is unique. Careful attention must be paid during title review to ensure that the Buyer is not getting a clunker when he thinks he is buying a coupe.

The last post in this series will deal with the actual property investigation.

Alfred R. Fuscaldo is a Director in the Gibbons Real Property and Environmental Department.

I will address each of those areas over the course of three postings, beginning with this one.

The negotiation of the representations and warranties during the preparation of the Agreement of Sale is essentially the first form of due diligence for the Buyer. Think of it as a kind of discovery. It allows the Buyer to flag issues before the execution of the Agreement.

Here are just a few things to consider as you negotiate the reps and warranties for the Buyer:

• The reps and warranties that Buyer requests from Seller should be as expansive as possible. The Seller’s refusal to provide certain reps, or its inability to give certain reps without qualification, help the Buyer learn more about the property (and whether it wants to continue to pursue the Agreement).
• In PA, reps and warranties will merge into the Deed at closing unless the parties agree that they will survive for a specific period of time after closing. This is known as the “Doctrine of Merger.” It is common for a Buyer to seek a survival period of 6 months to a year at a minimum.
• The Buyer will often require that the Seller execute a Restatement of Representations and Warranties at Closing that also restates the survival period as additional guard against the Doctrine of Merger.
• A Seller will look to limit the scope of its representations by qualifying them as to “Knowledge,” with “Knowledge” being defined as the “actual knowledge, without investigation or inquiry, of [a specific person or persons]”. This helps to prevent the Seller from being imputed to have the knowledge of all of its employees, and also avoids Seller having to expend funds to perform an investigation as to its representations.

The negotiation of the Seller’s representations and warranties is a fantastic (and relatively inexpensive) way for the Buyer to identify issues with the property and to drill down on those items before committing to move forward with the transaction and to perform more in depth and costly analyses. Buyer’s counsel should take full advantage of this opportunity on behalf of their client.

Alfred R. Fuscaldo is a Director in the Gibbons Real Property and Environmental Department.