The Top Ten Points To Watch For In Commercial Real Estate Contracts: Point #3 – What’s the property and how good is its title?


What’s the property and how good is its title?

Today’s topic can be reduced to a very simple question: as a real estate purchaser/investor, how do I get all of the property I’m paying for, with no unpleasant investment surprises?  The question from the seller’s side of the table is similar – how do I make sure that I can re-invest all of my sale proceeds, secure in the knowledge that I will never hear complaints from the buyer about the nature or extent of the property purchased.

In practice, we find that more problems result from mistakes or carelessness than from the mythical “bad boy” seller who tries to palm off bad assets on an unsuspecting buyer (although such sellers do exist).  The process actually centers around three important points:

  1. What’s the correct legal description for the real property?
  2. What assurances exist that the seller owns the property and that when the closing is over the buyer will own it as described?
  3. What other types of property must accompany the real property to confer all of the benefits of the planned investment?  Related to this is the question of how these assets are described, transferred, and the title guaranteed.

Florida courts have followed a fairly lenient rule regarding the enforceability of legal descriptions in deeds, leases, and other real estate contracts.  Generally, a legal description is sufficient if either the deed description itself or a reference to the property in the deed is such that a court is able to identify the property to the exclusion of all other property. [1]   This in turn depends upon whether a competent land surveyor, on the basis of the description, can point with assurance to a parcel of land as the one intended to be transferred by the deed or other instrument.  If a surveyor couldn’t do this, then the instrument based on the description is void.

Florida’s lenient rule is cold comfort, however, to a lawyer or surveyor who’s trying to explain why a legal description isn’t clear on its face.  Asking a court to interpret a legal description is a last-ditch alternative when the situation has already evolved into a disaster.  Careful lawyers and surveyors try to draft descriptions so clearly that they don’t require interpretation.

Preparing clear descriptions requires proper attention to two important fundamentals: (a) the legal description in the deed that is already in the chain of title (known as the “vesting deed”), and (b) the on-the-ground monuments and previous maps of survey that created the vesting deed legal description.

Previous surveys of the property and the recorded descriptions upon which they are based are especially important because, as Florida courts have repeatedly held, the first map of survey that is prepared in relation to monuments set in the ground by the first surveyor is presumed to be correct.  Every subsequent surveyor must then “retrace the footsteps” of the original surveyor in any new survey of or including the same property, and can’t deviate from the on-the-ground boundaries, except in unusual circumstances. [2]

These rules are increasingly broken in an electronic age in which computers can generate legal descriptions and sketches of the described parcel almost instantly.  However, computerized sketches and descriptions are not surveys until they are properly laid out and depicted on the ground, the measurements are compared to monuments and markers already in existence from previous surveys, and the description is certified, signed, and sealed by a licensed professional Florida land surveyor.

Finally, the surveyed legal description must be carefully proofed and re-proofed against the legal description contained in the vesting deed.  One of the most importance functions of the real estate lawyer in any transaction is to be sure that the legal description is free from any reasonable doubt and used consistently throughout the closing documents for a transaction.

Florida lawyers, just as those in most other jurisdictions, rely upon title insurance to guarantee ownership of the real property in their clients or lenders to their clients.  A valid legal description is fundamental to the enforceability of a title insurance policy, since the policy simply confirms and guarantees to its insured the intent of the parties concerning the identification of the land conveyed, subject to the conditions, exceptions and exclusions from coverage contained in the policy.  Thus, the legal description appearing in the policy must be proofed and re-proofed against the survey and the vesting deed.  This procedure virtually always reveals errors in the one or more of the descriptions.

Finally, in a commercial sales transaction, don’t neglect the issue of included personal property – whether tangible or intangible.  The complication in this case is that different classes of assets require different descriptions and raises different issues concerning title to each asset and whether it is subject to liens or encumbrances.

Tangible business assets, such as machinery and equipment, are usually described specifically and (if available) by serial number.  A “bill of sale” is used to transfer such assets at closing, since a deed to real estate transfers title to fixtures, but not personal property located on the real estate.  Title insurance doesn’t cover personal property, so the buyer must rely instead on a search of the Florida Secured Transaction Registry (for financing statements under the Florida Uniform Commercial Code), coupled with warranties and representations of good title and ownership from the seller contained in the bill of sale and purchase contract.

Assets with title certificates (such as motor vehicles in Florida) can only be transferred by endorsement and re-registration of Seller’s title certificate through the Florida Department of Motor Vehicles.  The state of title to such assets is more certain, since any lien against the titled motor vehicle must be endorsed on the title certificate as registered with the State of Florida in order to be valid.

The most difficult and elusive of all personal property assets to transfer belong to the intangible class: contract rights (such as leases), warranties (such as construction warranties and bonds), and governmental permits, licenses and approvals (i.e., rights under development agreements, special zoning approvals, alcoholic beverage licenses, and similar assets).  A buyer or its counsel must carefully the read the documents creating such rights, since acquiring the asset usually requires the approval of the private party or issuing governmental agency that is a party to such underlying documents.

Further, acquiring the rights usually means assuming the obligations of the seller, so the buyer must ask whether the contract or permit obligations, if any, are current in payment and otherwise free from default.

Alcoholic beverage permits are a good example of a hybrid form of intangible personal property asset, since they consist of both a permit from the State of Florida and a county or municipal alcohol beverage zoning (also known as a “wet zoning”) – and both the license and the zoning must be consistent and free from violations in order for the license to be marketable.  Title to virtually all types of intangible personal property is transferred by assignment or bill of sale, and title insurance doesn’t cover the state of ownership to or encumbrances affecting such assets.

In short, legal descriptions and titles to real and personal property assets are complex subjects requiring experienced and knowledgeable counsel that must sweat the details of the transaction from start to finish.

[1] Bajrangi v. Magnethel Enterprises, Inc., 589 So.2d 416 (Fla. 5th DCA 1991)  Cases exist in which appellate courts have upheld deeds in which grantors used references to the recording information of previous deeds, and even street addresses.  Verbal proof of what the parties intended may even be allowed to clarify the parties intent, so long as the instrument itself shows that the parties were contemplating a particular piece of property -rather than an unspecified piece of property, alternative properties, or property to be obtained later

[2] C.Y. Tyson v. B. Edwards, 433 So. 2d 549 (Fla. 5th DCA 1983);  Akin V. Godwin, 49 So. 2d 604 (Fla. 1951).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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