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

The new law is a significant revision to Title 46 in many ways including the addition of three new chapters, chapters 26A, 26B, and 26C, replacing and repealing certain sections, and the legislature’s attempt to simplify the statutes by “combining overlapping provisions and deleting unnecessary ones,” simplifying language and reassembling numerous sections. Some of the material, substantive revisions as highlighted in the NJLRC’s comments include (but are not limited to):

TITLE 46, CHAPTER 26A, RECORDING:

• Definition added: “Document” includes both: (1) Paper documents, and (2) Electronic documents, documents created, communicated or stored by electronic means.
• Definition added: A document is “recorded” if (1) The document or its image has been placed in the permanent records of the recording office, and (2) The document has been indexed as provided by this chapter. Prior to this revision, the statutes did not state directly what is meant by “recording” and the NJLRC notes that cases were not consistent as to when a document is recorded.
• Documents that may be recorded: The portions regarding the recording of instruments concerning personal property have been deleted since as the NJLRC notes, “Liens against personalty, other than personalty that is or will be fixtures, are recorded by filing a UCC form with the division of Commercial Recording.”
• Prerequisites for recording: The opening language has been changed to facilitate the electronic filing of documents such that the recording office need not receive an original document to record and an image will suffice if certain requirements are met.
• Form of documents and maps; cover sheet or electronic synopsis: The section preserves the ability to file paper documents but also allows for acceptance of electronic documents. Authority is given to the Division of Archives and Records Management to establish statewide form requirements for electronic recording. The form requirements for maps are also now included in this section.
• Duty to record; recording officer's books, methods: This section states requirements for recording standards and methods including the requirement that the method produces a clear, accurate and permanent image of a document and a method that allows the document to be found by the indexes maintained. References to other books for different kinds of documents required by Title 46 or other law have been deleted, with the NJLRC noting that this revision allows for a single set of books and indexes for newly-recorded documents. The revision also permits unique identifying numbers to be used in addition to book and page numbers. Time limits for recording or rejection of a document by recording officers are also added.
• Sequence of recording: This section is new in that it allows the person submitting two or more documents at the same time to determine the order in which they are recorded rather than having the recorder record according to the priority of their dates.
• Documents filed as provided by other statutes: This section provides that documents that are now “filed” pursuant to other laws be recorded and indexed with recorded documents using the same methods. The NJLRC notes that this change will not only simplify the recording office processes, it will allow a single search to disclose all county-filed or county-recorded documents that affect real estate.
• Notices of settlement: This section clarifies that one notice of settlement can be recorded for a conveyance and a mortgage and the form of the notice has been slightly simplified. The timeframe for effectiveness for the notice is changed from 45 days to 60 days from the date of recording and the effective period may be extended for one period of 60 days by recording an additional notice of settlement before the expiration or discharge of the notice of settlement.
• Effect of recording: The revision requires that documents have to actually be recorded to give notice. The new definition of “recording,” as noted above, requires that a document be indexed and placed in the permanent records of the recording office. In addition, the revision does not require that a document be duly acknowledged or proved and certified to have the effect of notice. The section that limits the notice effect to documents on record for six years despite defects in acknowledgement, proof or certificates has been removed. As long as a document is recorded, notice is effective. The revision goes further to state that a deed or other conveyance of an interest in real estate shall be of no effect without notice. The NJLRC notes that the section “embodies one of the basic principles underlying the recording statutes, that an unrecorded document is ineffective against later claimants who have no notice of it…If a party makes a conveyance in a form that does not permit it to be recorded, then a subsequent bona fide purchaser, mortgagee or creditor who could not learn of the conveyance from the land records is not bound by the conveyance absent notice of it at the time he acquired the interest for value or docketed the judgment. This principle is in accord with the statute of frauds, 25:1-11, which makes unwritten conveyances enforceable as conveyances only in some cases where possession is transferred. Transfer of possession frequently is notice to prospective purchasers or mortgagees.

TITLE 46, CHAPTER 26B, MAPS:

The substance of most of the sections pertaining to maps remains unchanged. Some sections have been reworded or rearranged. In the section entitled “Filing and indexing of maps, fee,” references to the way that maps are stored and the format of a map and its copies have been deleted, and, the new law seems to aim to allow for technological advances in map filing. 

TITLE 46, CHAPTER 26C, GENERAL AND TRANSITIONAL:

Regulations: This section states that the Division in consultation with the County Clerks and Registers of Deeds shall adopt regulations to establish format and technical requirements for recorded documents to foster state-wide uniformity in title recordation and otherwise to implement the new law. Regulations shall be adopted within 12 months after the effective date of the new law.

Uniform Electronic Transactions Act (UETA) superseded: This section states that to the extent that the new law conflicts with Sections 17 and 18 of the UETA, the new law supersedes. The new law modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act but does not modify, limit, or supersede Section 101(c) of that act or authorize electronic delivery of any of the notices described in Section 103(b) of that act. 

Review of Document Filing and Recording Fees: Within 2 years of the effective date of the new law, the Division and the Department shall adopt rules and regulations requiring county clerks and registers of deeds and mortgages to report the number of documents recorded or filed and all document filing and recording fees that are collected by their offices, categorized by document type, to the Division and to the Department. The goal of the rules and regulations will be to develop and implement a standard form and procedure for county clerks and registers of deeds and mortgages to utilize so as to report on the foregoing in a clear and concise manner. Within 3 years of the effective date of the new law, the Division and the Department will issue an interim report on same and within 4 years, a final report. The report will specify an average state-wide fee for the filing or recording of each type of document and may contain recommendations of the division and the department to the Legislature for the establishment of standard per document filing and recording fees. 5 years after the date of adoption of the new law, the Legislature shall consider the establishment of standard per document filing or recording fees.

In summary, the new law better accommodates the recording of electronic alternatives to paper documents and will guide the development of uniform recording procedures as we progress from a technological standpoint. It will be interesting to watch how the law relating to title recordation in New Jersey evolves in our rapidly changing information age. As many county clerks and lawyers have already discovered, there will come a day when electronic recordings and filings will be mandatory because of the potentially prohibitive expense of maintaining two systems, one for paper and one for electronic alternatives. The current legislation moves our system one step closer to a world in which all of our documents will be filed and recorded electronically. As with all regime changes, advantages and disadvantages will result. For now, Happy E-recording.

Nicole E. Taplin is an Associate in the Gibbons Real Property & Environmental Department.

Rather than simply applying the Dunham rule (as the trial court had), under which shale gas would have been excluded from the reservation in the deed and thus conveyed to the grantee, the Superior Court decided that expert testimony was needed before it could make a determination as to exactly what shale gas constituted. Is it a “mineral” under the rule in Dunham and Highland? Is it natural gas under the same rule? Or is it more like coalbed methane, and thus subject to the “whoever owns the rock owns the gas” rule in Hoge? The court thus remanded the case to the trial court, which will hear from the parties’ experts before deciding, for the second time, which rule applies to shale gas. In the meantime, the appellees have appealed to the Pennsylvania Supreme Court.

With the remand and likely appeals, the issues raised by Butler may not be resolved for years. For now, anyone with a stake in the Marcellus Shale or the gas it contains -- or in the Bakken Shale formation in Montana and North Dakota, which also contains natural gas -- should review the relevant documents (deeds, leases, etc.) to determine whether the uncertainty created by Butler affects any of their legal interests.

Paul M. Hauge is an Associate in the Gibbons Real Property & Environmental Department. John H. Klock, a Director in the Gibbons Real Property & Environmental Department, co-authored this post.

New searches will have to be placed on hold until such time as the records become available, which will likely delay closings and may require modification of the contingency periods in purchase and sale agreements. For deals where a title search has already been performed, some title companies may consider allowing closings to proceed with a seller’s affidavit in lieu of a continuation search if the closure is expected to be long-term. These situations likely will be evaluated on an individual case-by-case basis.

Although the County Executive’s press release does not give any indication about the duration of the closure, we have learned that employees were seen packing up their desks at the close of business yesterday as though they would not be returning soon. We have also learned that the County is investigating an alternative site for relocation of official records, including property records, but apparently no site has been identified as of yet, and even when one is identified, moving that large a volume of documents will be a significant undertaking.

Given the uncertainties involved, real estate attorneys should review the contracts for their pending deals to see what contingencies are included and how the inability to conduct searches may impact their clients’ rights under those contracts. For deals currently being negotiated, consideration should be given to how the contingency clauses should be drafted and what the remedy will be if a title search cannot be performed for an extended period of time.

As bad as things are in Orange County, it could be worse. We understand that in upstate Schoharie County, the entire county government complex had several feet of water on the main floor and that all the county's paper records were destroyed. The issue in Orange County appears limited to access to paper records, not damage to them or their destruction.

Howard D. Geneslaw is a Director in the Gibbons Real Property & Environmental Department.

Additionally, due diligence proceeds in most deals without the cooperation or participation of the property owner; indeed, in many instances without the property owner’s knowledge that the loan is being sold. The inability to interview the property owner, its tenants and in some cases access the property itself obviously constrains due diligence significantly. Moreover, due diligence in connection with acquiring distressed debt requires evaluating the performing status of the loan, the likelihood of being able to reach workout terms with the borrower, the status of pending litigation between the lender and borrower and, in general, envisioning a strategy that will enable the loan purchaser to recover its investment in acquiring the loan and realize a substantial profit.

If there is pending litigation, then, in addition to the areas noted below, litigators will need to review the litigation file. Aside from the litigation file, due diligence can be divided generally into several areas:

• The loan documents;
• The loan collateral;
• The borrower and guarantors; and
• The loan status.

In this article we discuss due diligence related to the first two items, the loan documents and the loan collateral.

A. Loan Documents

Obviously, the loan documents must be reviewed. Some of the material considerations include:

1. First and foremost, determine if you have all the documents. Make sure they are complete, properly executed and, if applicable, acknowledged. It is not rare to find missing pages or portions of documents. Are originals available? Does the loan package include all the documents you would expect including the promissory note, mortgage, lease assignments, UCCs, guaranties, environmental indemnification agreement, adequate legal opinion and all loan amendments and modifications?
2. Analyze the quality of the documents. Many, if not most, loan documents contain similar provisions but some are more comprehensive than others. You want to make sure your documents contain all customary terms. Your antenna should be up for unusual terms which may tell you about issues that were of particular concern to the lender when the loan was closed, which may appear in many ways including by way of escrow agreements or the like. What are the events of default, notice and cure periods? What are the due on sale and due on encumbrance provisions? Are the terms clear and unambiguous?
3. Pay particular attention to the business terms. Scrutinize the business terms of the loan, make sure there is no room for alternative interpretations of the terms. Are provisions for late charges and other charges clear and likely to be enforceable? Is the loan full or partial recourse, or non-recourse? Are there guaranties, full or partial, payment or completion? If the loan is non-recourse, are there carve outs? Are they typical? Is there personal recourse if the borrower files bankruptcy? Can the loan can be prepaid and if so, under what circumstances?
4. You are buying debt and regardless of whether your client is paying a fixed price or paying a percentage of the outstanding indebtedness, you need to confirm that the amount the lender has stated to be the outstanding indebtedness is consistent with the loan documents. This is critical because you can be fairly certain that at some point the borrower will scrutinize and be prepared to challenge any calculation of its indebtedness with which it disagrees. Bear in mind that it will be a rare circumstance when you will be able to get a loan estoppel statement from the borrower before you close the loan acquisition, and certainly not if the loan is in litigation or on its way there. You also have to focus on escrows held by the lender and their accounting because the borrower can be expected to do so.
5. Determine if funds remain to be loaned and, if so, how much and the conditions to further funding. If the loan is in default, it is very likely that the loan documents will not require the lender to continue funding although practical realities may impel the lender to do so in order for the real estate to have value or to maintain its value.

B. Loan Collateral

Nothing matters more than making sure, to the greatest extent possible, that the loan is properly collateralized, the collateral is not impaired and the lender owns the loan.

Issues regarding title, survey and lien priority are common to every deal. However, other issues relating to the physical assets vary significantly depending on the nature of the asset, whether raw land, property under development, single or multi-tenanted, condominium, multi-family or other commercial.

1. Review the title insurance policy issued when the loan was made, and any endorsements or subsequent policies if the loan was modified. Make sure the mortgage was insured as a first priority lien (assuming your client is buying a first mortgage). Do not rely solely on title insurance; confirm for yourself that the mortgage and all modifications were properly recorded and that the mortgage constitutes a perfected lien.
2. Confirm that the encumbered real estate covers all the property that should be covered including appurtenant easements that may be critical for the proper operation and functioning of the property (for example, easements for parking on, or crossing, adjacent property) and look to see if all necessary and desirable title endorsements were issued. Also, if applicable, see if a construction loan policy was issued and has an expiration date.
3. Review the survey. See if the survey is for the as-built project. Is the legal description in the mortgage and title policy the same as the legal description in the survey? Does the survey show material encroachments from or onto the encumbered property? Are there access issues? Has the property changed?
4. Check to make sure the amount of the title insurance policy is the same as the maximum loan amount.
5. Order title updates including property searches, tax searches and judgment searches on borrower and guarantors. Determine, as soon as possible, if the property has been transferred, if there are subordinate liens against the borrower or guarantors, and, of course, confirm that the lender hold the loan free and clear.
6. You will probably request the title insurer to issue an ALTA 10.1 endorsement at closing of the loan transfer. This endorsement insures the validity of the loan assignment and the continued priority of the mortgage.
7. Check to see if there a separate assignment of leases and rents, and that it is properly recorded. Have UCCs been properly filed?
8. Review the status of development, building and zoning permits and approvals as reflected by the loan file. The scope of this review may vary widely depending, for example, on whether or not the loan was closed on a fully developed and approved project, or one that was to be built. In any event, has zoning changed so that the project and its use no are no longer conforming?
9. Are there other material development related approvals or agreements, for example, a financial agreement with the municipality exempting the improvements from realty taxes and requiring payment in lieu of taxes? If so, you will want to know the status of the tax exemption, determine if all annual reports have been filed, if there is an audit underway by the municipality, if there are any issues with the municipality. If the project has been developed as a condominium, has it been registered with the Department of Community Affairs, have annual reports been filed, are any enforcement actions pending?
10. Is the property leased? Does the lender have current rent roll information, copies of leases? Does the information on the rent roll match the leases themselves? Are the leases subordinate? Has the lender entered into, or will it be obligated by the loan documents, to enter into non-disturbance agreements with some or all the tenants? Is there evidence of any tenant defaults? Are the tenants open for business?
11. Does the loan file include environmental reports? Were any issues uncovered by the reports? Is there evidence of ISRA compliance, if applicable? Is the property being used in a manner that could raise environmental concerns?
12. Does the file contain evidence that all required insurance policies and certificates have been issued, renewed and remain in full force and effect, for the benefit of the lender? Is the coverage acceptable in scope and dollar amount? Is the insurer acceptable?
13. Have the borrower and, if applicable, guarantors, complied with financial reporting requirements under the loan documents? Are the financial reports in the loan file up to date and is the information in the reports acceptable?
14. Review with a critical eye the property appraisal that the lender received when the loan was made and any updates.
15. The loan file should contain other material information regarding the property such as engineering and physical condition reports, material contracts and agreements.
16. Is there a property manager? Is the management agreement subordinate to the mortgage or otherwise terminable on relatively short notice? Can you evaluate the manager and its capabilities?

In our next article we will discuss due diligence regarding the borrower and any loan guarantors, and the loan status.

* Photo courtesy of Flickr.

Russell B. Bershad is a Director in the Gibbons Real Property & Environmental Department.

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.