Real Estate Law Blog

Electronic Transactions

A decade ago, documenting a real estate transaction (purchase or loan) involved exchanging document drafts and hand-written markups via Federal Express or U.S. mail. When the documents were finalized, a final Fed Ex package, with multiple identical originals of each transaction document, was sent for signature, and the executed documents were then returned to lender's counsel or the title company.

That process has been considerably abbreviated in the last few years. Now drafts, and comments on those drafts, are circulated via email. Frequently it happens that before the transaction documents are finalized, one or both parties request signature pages -- often to accommodate signators' travel or vacation schedules. It has become routine for separate, freestanding signature pages (with no documents attached) to be circulated to multiple parties via email, signed in various locations, and sent to an escrow agent or one party's legal counsel, to be attached to the final versions of the documents at or before closing.

This approach has the attraction of efficiency and speed. Necessary signatures can be obtained at a time and place that's convenient for the the signer, and transactions need not be delayed because of key individuals' schedules.

There are, however, risks inherent in signing documents before they are finalized and fully agreed to. A party can be bound to a contract (or a version of a contract) different from what that party expected and intended to be bound to. This can happen in any number of ways. First, the Uniform Electronic Transactions Act, adopted in Texas and many other states, provides for parties to conduct transactions electronically, specifying that "a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation." Thus, if the parties agreed (expressly or by course of action) to conduct a transaction electronically -- e.g., via email -- a contract can be formed based on the email exchange itself.

An "inadvertent" contract also can be formed when a party's signature page, whether delivered via email or by hard copy, is attached to a different version than the one the party thought it was "signing." Such an event certainly can happen if an unscrupulous person changes the contract before attaching the other party's signature page, but is more likely (I hope) to occur through misunderstanding or mistake. For instance, the wrong version of a contract might be attached to an email and approved by the signing party, or a signing party might fail to carefully read the "final" version circulated by email before releasing the signature page and therefore not be aware that changes were made.

Email is a convenient and, in these fast-paced times, necessary mechanism for conducting transactions, but parties must take care not to let the ease and informality of email communication lead to unintended consequences. Consider the following:

• When a draft is circulated via email but is not necessarily intended to be final and binding, the transmitting email should say so explicitly. E.g., when I circulate pre-final drafts I typically include something along the following lines in the transmittal: "Attached for your review and comment is a preliminary draft [or "revised draft"] of the following documents. Please NOTE that in the interest of expediting review I am sending this simultaneously to all parties. It therefore comes to you without benefit of my client's prior review and remains subject in all respects to my client's review and approval." You might want to go a step further and state that the attached is circulated for review purposes only and no party is bound to its terms without express written agreement.
• Emails transmitting document drafts, comments, signature pages, etc., should be drafted with the same care and precision that would be given to hard-copy correspondence, and should be read carefully and thoroughly by the recipients before responses are sent or action taken.
• If signature pages are circulated before the documents are finalized, they should be sent to the holding party (e.g., escrow agent or a party's attorney) with explicit instructions that they are not to be deemed "delivered" until the applicable documents are finalized and approved, and are not to be attached to any documents without express written authorization.
• When the documents are finalized, the person controlling the drafting should circulate a clean (i.e., not redlined) copy of the final version to all parties, identifying it as the final execution version, and request authorization to attach signature pages. (E.g., "Attached for your review is a clean copy of the final version of X document. Also attached is a redline, comparing this version to the previous version you reviewed and showing all changes made. If you find the attached to be in order, please respond with your authorization to attach your [or "your client's"] signature pages to the attached clean version.")
• The responding attorney or party should review the clean and redline versions to confirm correctness, and email the clean version back to the drafter with authorization. (E.g., "You are hereby authorized to attach X's signature pages to the attached version of Y document.")
• Once authorization has been received, the person holding the signature pages should assemble the documents, with all signature pages, and circulate a .pdf copy to all parties for final review and approval.

I'd be interested to hear what practices others use to ensure that transactions get documented correctly when using email technology to get the deal done.

Important Insurance Information

Company risk managers who are responsible for their companies' insurance policies should beware of the risk that subsidiaries might not be covered if the policy definition of "Insured" is not carefully drafted. One of my colleagues, David White, who practices insurance law, discussed this issue in some detail in his blog posting titled "Policy Covering 'Any Subsidiary Corporation' Does Not Cover LLC's."   

Welcome to the Real Estate Law Blog

 

This post is a shortened version of the very first message I posted when I started this blog a few months ago. As I reviewed the posts I've published since then, I thought this was worth saying again -- an invitation to a conversation. That's what I hope this blog can become. New posts follow this one.

 

As a lawyer, my goal is to help clients accomplish their business objectives.  In the past, that has meant closing transactions – acquisitions or sales, loans, leases.  Today it more often means helping clients navigate the environment in the most effective and efficient way possible while minimizing losses arising from deals gone bad.

 

We at Thompson & Knight are working hard to help address our clients’ concerns and provide assistance and information on the issues that are arising daily in our clients’ business dealings.  As part of that service, I hope with this blog to open a dialogue among professionals working in the commercial real estate trenches.  As I (and guest bloggers) add new postings, your comments are invited, as are your questions.  If you would like to see a topic addressed here, please feel free to email me at laura.mcclellan@tklaw.com. If you want to discuss an issue you're facing in one of your deals, pick up the phone. I'm happy to help, and I'm just a phone call away.

Perfecting a Security Interest in a Deposit Account

This issue has come up several times recently for different clients, so it seemed worth discussing. Under the Uniform Commercial Code (the "UCC"), a security interest in a deposit account may be perfected only by control (with very limited exceptions). The UCC defines "deposit account" as "a demand, time, savings, passbook, or similar account maintained with a bank." Filing a financing statement will not work to perfect a security interest in a deposit account. (NOTE that bank accounts that are evidenced by an instrument, such as certain certificates of deposit, are not deposit accounts, but rather are "instruments" under the UCC, for which perfection is achieved by filing.)

Control of a deposit account is established in one of three ways: 

• The secured party is the bank at which the account is maintained. This results in automatic perfection; no other notice or agreement is necessary, since the interested world is presumed to know that the bank that holds an account has the right to assert a claim against it.
• A written control agreement is entered into among the debtor, the secured party, and the bank that holds the account (the "bank"). Under the control agreement, the bank agrees that it will "comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor." Such an agreement will be sufficient to establish the secured party's control even if the bank's agreement is subject to specified conditions, such as the requirement that the instructions be accompanied by a certification of debtor default, but not the requirement of debtor's consent.
• The secured party becomes the bank's customer (defined as "a person having an account with a bank or for whom a bank has agreed to collect items . . ."). This would give the secured party the right to withdraw funds from, or close, the account.

The official commentary on Section 9.104 of the UCC notes that the debtor's ability to access funds in the deposit account does not mean, in and of itself, that the secured party has not established "control" for purposes of the UCC. The security agreement that establishes the security interest in the account should be carefully drafted to specify when and under what circumstances the debtor will have access to the funds.

Weekly Roundup

Bankruptcy Court Denies Use of Cash Collateral

On June 29, the bankruptcy court judge in In re Four Bucks, LLC found in favor of a lender who objected to the debtor's proposed use of rents from an apartment complex as cash collateral. The lender argued that the rents had been absolutely assigned to it as collateral for a loan made prior to the debtor's bankruptcy. Analyzing existing caselaw about rent assignments and the language of the relevant loan documents, the Court found that "the Lender and Debtor intended to create and did create an absolute assignment of the rents collected from the Property." The judge's opinion went on to say that "[w]hile Debtor did have a revocable license to collect rents for the benefit of the Lender, that license was revoced prior to the Petition Date as a result of Debtor's default. Debtor did not have any interest in the rents from the Property prior to the Petition Date. Therefore, no interest in the rents passed to Debtor's estate and Debtor cannot properly use the rents as cash collateral." This judge's ruling, which provides some helpful hints to lenders in documenting their loans, is contrary to the ruling in the General Growth Properties bankruptcy, where the court allowed the debtor entities to use income generated by their shopping malls as cash collateral. Without seeing the loan documents involved in the GGP case, it's hard to know where the Fort Worth judge would have come down.

SBA to Offer Refinancing of Commercial Real Estate

According to a recent news story, the U.S. Small Business Administration has recently expanded its 504 lending program to include certain refinances of commercial real estate. More info available on the SBA's website at tinyurl.com/yukpux.

REITs Gearing Up to Acquire Real Estate Debt

The Wall Street Journal reported on Friday that several big-name financiers are forming and promoting REITs that are targeting commercial mortgage debt. The jury is out on whether investors will buy in to the REITs' objectives, but the WSJ notes that "the clobbered real-estate prices . . . are impossible for some investors to resist."

Guest Blog: Are Distressed Malls Worth Saving?

Today's post comes from (and contains the analysis and opinions of) guest blogger Scott Hounsel, J.D., AICP. Scott can be contacted at scott@scotthounsel.com or by phone at 214.536.3421. 

According to the Urban Land Institute, “The shopping mall is the quintessential American contribution to the world’s consumer culture… [b]ut the conditions that led to the creation of shopping malls and sustained them for decades are changing rapidly.”   The International Council of Shopping Centers says that currently there are 1,500 malls in the U.S.  Due to economic and demographic changes, many older shopping malls are dead (see www.deadmalls.com) and the survival of distressed malls has become an increasingly public question, as the original developer has departed with its anticipated profit and the deteriorating site is unattractive to re-developers without public financial assistance.  A source in a recent Wall Street Journal article said that there are 84 dead malls in the U.S., with more casualties expected during the current recession.  General Growth Properties, owner of 200 malls, filed for bankruptcy in April 2009, although it claimed that its mall business would be unaffected.

Arguing that certain financial institutions were “too big to fail,” many commentators feel that the federal government acted appropriately in providing astronomical amounts of assistance to those institutions. Generally speaking, no one in the real estate community considers any development project too big to fail, but the credit crunch has increased the pressure on all levels of government to step in and assist distressed real estate, not because the owner/developer deserves help, but because certain real estate projects (including some malls) provide positive externalities (social/cultural/economic) to the greater urban area that many feel must be preserved. Shopping malls, unlike big box centers, can serve a social functional beyond mere economic consumption; this is an attractive feature in a healthy mall, but can become a negative feature contributing to a death spiral for a distressed property.

Public assistance for distressed real estate usually is a local decision, and a very contentious one politically at a time when many localities are cash-strapped. Thus, for example, while General Motors is given the unique opportunity to reinvent itself (albeit through bankruptcy), the City of Detroit, heavily impacted by many of the same economic issues that have plagued GM, is 30% vacant; some areas of the city have almost returned to a natural state. A full description of the shrinking of Detroit is provided in a recent on-line article at The Map Scroll. This process is unlikely to be reversed, whatever happens with the U.S. auto industry.

Closer to my home, I have been intrigued by the reinvention discussion surrounding the Southwest Center Mall in southern Dallas. Formerly known as Red Bird Mall, this large shopping mall, built in 1975, has suffered from the construction of newer commercial developments that successfully targeted population growth from suburban cities further south and west. Economic Darwinists would have an easy case that this mall should go “the way of Detroit,” as the mall cannot survive on its own despite its three major anchor tenants (two anchors have left for greener suburban pastures) and the fact that the population in the immediate area has remained constant (unlike Detroit). Yet the City of Dallas, in part due to political concerns generated over the distressed mall, brought in a research team from the Urban Land Institute to see if absolute failure could be prevented.

After a week of study, the ULI report (as presented to City staff in June 2009) gives a dire prognosis: the situation is so bad that only the City can take the first steps to save it. The ULI report gives no recommendation for the best possible re-use for the “mostly-dead” mall; any community planning process to determine a particular re-use strategy would be viable only after the City of Dallas steps in to buy the empty anchor sites (mixed ownership of the land has been a contributing factor to the decline of Southwest Center Mall). The ULI recommendation can be summarized in three steps: (1) City assembles the vacant tracts of land, (2) City engages local community as part of writing the redevelopment plan, and (3) City recruits a developer to build according to the plan. The idea that the City should literally buy into the mall (an estimated $4 million for the two empty anchors) comes at a time when the City is facing its biggest budget deficit in ten years. Although hardly a conventional plan for the redevelopment of distressed property, the suggestion that the City of Dallas has to be the first to put up new money is what bailout politics are all about in 2009.

Unfortunately, cities increasingly are on the frontline to help “preserve” distressed real estate when its decline threatens the health of the larger urban community. As for Dallas and Southwest Center Mall, some soul searching and perhaps some investigation into other deteriorating malls around the country are needed before the City opens its checkbook.