Real estate law is multi-faceted. When real property owners purchase, manage and sell their property, legal advice is often helpful, and sometimes imperative.
Real estate owners and prospective owners may benefit from advice and assistance in any one or more of the following realms, among others: identifying the best manner in which to hold title; determining whether or not to form a business entity, such as an Limited Liability Company (LLC) to own the property; evaluating what terms should be included in a purchase/sale or lease agreement; agreeing among co-owners optimal details as to the way the co-owned property will be managed, refinanced, inherited and/or sold, etc.; properly documenting a real estate loan transaction; and attempting to resolve disputes among co-owners or between a buyer and seller.
Real Estate Titling *
When purchasing property, prospective buyers must decide on the manner in which they wish to hold title. Customarily, standard residential purchase/sale agreements contain a warning that the manner in which title is held has serious legal and tax consequences. Nevertheless, many people take this decision casually and with an insufficient understanding of the implications.
The choice people make should be based on legal and tax advice that takes into account their particular circumstances and goals. Often, the optimal way to hold title is in a Revocable Living Trust, which is, of course, only possible if an owner has a Revocable Living Trust established (see Estate Planning practice area).
For real estate held for business or investment (rather than strictly for personal use), it is often beneficial to form an LLC and transfer title of the property into the LLC (see LLC Formation section immediately below).
* See brochure on pros & cons of alternative methods of holding title to real estate.
Limited Liability Company (LLC) Formation
Many real estate investors prefer to form a business entity, such as a Limited Liability Company (LLC), to own any real estate they hold for business or investment.
The primary reason for its popularity is that, if an LLC is formed, capitalized and operated properly (i.e. appropriate legal formalities are observed), the owner members of the LLC are legally entitled to a significant limitation of liability. Their other investment assets and personal assets (e.g. home and bank/securities accounts) are shielded from potential liabilities that may arise out of the ownership and management of the real property in the LLC.
Some people contend that holding title in an LLC is unnecessary if the real property owner has adequate insurance coverage. Such reasoning should be carefully examined. Maintaining insurance policies and riders that afford a commercially reasonable scope of coverage and limits, in addition to carrying an appropriate umbrella policy, is vitally important. Nevertheless, one hundred percent (100%) coverage is impossible since every insurance policy has conditions, exclusions and limitations.
Fortunately, forming an LLC and obtaining related legal advice and assistance requires only a modest investment of time and money (attorneys’ fees and costs). Tax and legal aspects should not be taken lightly, however, before an investor chooses to form an LLC. These include, but are not limited to, understanding the property tax consequences, if any; learning about the risks of transferring title into an LLC when the property is encumbered by a mortgage; and receiving detailed instructions about how to operate the LLC in the manner that is required to be entitled to limited liability.
Purchase/Sale Transactions (Residential & Commercial)
Often times, purchase/sale transactions are facilitated by competent real estate brokerage professionals; standard forms are used; the deal has no substantial complexity; no significant problems arise; and everything goes smoothly through the close of escrow. But, whenever this is not the case, prudent buyers and sellers retain legal counsel.
Real estate legal representation may include, but is not limited to, the following aspects:
- deal structuring and analysis;
- drafting and/or reviewing documents before they are signed and/or submitted to the other party(ies);
- negotiating key terms of the transaction;
- reviewing closing documents;
- providing advice about “internal” aspects of the transaction, such as property tax issues; existing liens and encumbrances; distribution of the sale proceeds; facilitation of a 1031 tax-deferred exchange.
As with purchase/sale transactions, many are straightforward and proceed without the need for legal counsel. Yet again, when issues arise about which the party(ies) are unsure or uncomfortable, it’s wise to obtain legal assistance.
Even though many terms of a lease may seem to be “boilerplate” and inconsequential, owners and tenants have rights, obligations and risks that should be reasonably covered by the lease agreement and understood by the parties. In particular, analysis of the language governing the following matters, among other key lease terms and potential alternatives, can be critical: term of the lease; term of options, if any; conditions as to exercising an option; common area charges payable in addition to rent; subletting and assignment provisions; insurance requirements; maintenance obligations of each party; what acts or omissions by a tenant constitute a tenant default and what are the owner’s applicable remedies; and the damage/destruction contingencies.
Joint Ownership (aka T.I.C or Equity Share) Agreements
Owning a property with one or more other people is common – whether by purchasing an investment property with a business partner, friend or relative; inheriting a fractional interest with other loved ones; receiving an interest by gift; or otherwise. Sometimes the goals of the various co-owners are well aligned, but sometimes they are not.
Often, at the date the property is acquired, there are no conflicts or anticipated problems. But, despite best intentions, things change and eventually the co-owners and/or successor owners (e.g. people who purchase or inherit fractional interests of an original co-owner) will likely face disagreements about the management and/or disposition of the property. After months or years pass, the memories of the co-owners inevitably become fuzzy, at best, about the details to which they agreed (if they were ever discussed and agreed upon at all). Such disagreements not only interfere with cooperation and harmony among the co-owners, but they can be very harmful to important relationships between the parties and sometimes lead to very expensive, disruptive and damaging litigation.
While there is no “silver bullet” that enable co-owners to avoid property-related disputes, a joint ownership agreement can provide invaluable assistance by identifying, before any problems or disputes arise, key aspects of ownership. These include: who will be the manager(s); what the role of the manager and his/her compensation will be; who will be responsible for paying what percentages for property-related expenses, such as mortgage, insurance, property taxes, maintenance and utilities; what owners will have what occupancy rights, if any; how discretionary capital improvements will be handled; when the property will be refinanced and/or sold; and what, if any, buy/sell provisions will apply when a co-owner wants to sell or dies.
Disputes between buyers and sellers are common. The best way to prevent them is for each party to: have good representation by an experienced and diligent realtor; prepare and have the parties sign a thorough and clear contract containing all significant terms of the deal; encourage the seller to be fulfill his duties of disclosure (for residential deals – all issues affecting the property that are “material”); and encourage the buyer to have applicable professionals conduct property inspections and perform substantial due diligence.
Regardless of how careful one might be during the offer/acceptance and escrow stages, people are human and may disagree about any number of things. When such disagreements arise, it is helpful to engage legal counsel to explore efficient ways to resolve the disagreement. Of course, attempting to intervene and reach resolution at an early stage is usually the best approach. Whether by informal requests/demands, mediation, arbitration or litigation, having a knowledgeable and seasoned real estate attorney involved can save a great deal of aggravation and expense.
Promissory Notes & Deeds of Trust
In the course of most real estate transactions, a loan is obtained by the buyer to finance the purchase. If, as with most deals, the loan is an institutional one, it is important for the buyer to be well informed about the terms of the loan agreement and related documents. If questions or concerns arise, it can be helpful to hire an attorney to review and explain the loan terms and required paperwork.
In particular, legal counsel should be employed in any real estate loan transaction involving an individual lender (not a bank or other institution). Usually, such individuals are unaware of applicable law and do not know how to protect themselves in advance of a potential default by the buyer/borrower. Regardless of whether the lender and borrower are relatives or good friends, it is very important that the parties properly document the terms of the loan. This is often accomplished by drafting a comprehensive promissory note and Deed of Trust (legal document that secures the loan by a property), and recording the Deed of Trust at the close of escrow.
Obtaining relevant tax advice from a CPA or other tax professional is also important. Generally, it’s highly recommended for a party to a real estate loan transaction to obtain applicable legal and tax advice before entering into any agreement. Sometimes, the terms of a transaction can be structured in a more protective or beneficial manner. Similarly, sometimes the contemplated deal is sufficiently risky or problematic that one or both parties may be better advised to avoid the transaction entirely.