Whitman Legal Solutions, LLC

This article about real estate closings is the fifth in a series of articles about the Anatomy of a Real Estate Transaction. In previous articles, I compared a real estate transaction to the sonata-allegro form used in many classical sonatas, concerti, and symphonies.

In previous articles in this series, I compared the exposition to the Pre-Contract part of a real estate transaction, when the parties agree upon the framework of their relationship and terms of the transaction. The development section is like the Due Diligence Inspection Period (Due Diligence period) when the buyer inspects the real estate to determine if it meets the buyer’s needs.

The last article talked about the Closing Preparation Period when the buyer firms up its financing and the parties agree on the closing documents and make sure that the property’s title is reading for closing. The Closing Preparation Period is like the recapitulation, the last section of a composition before the ending or finale. The recapitulation recalls themes from earlier sections and moves toward equilibrium, usually ending the composition with a perfect cadence. A perfect cadence, which moves from the dominant to tonic (the home key), is comforting and creates a sense of finality to the Western ear.

Like a final cadence, a real estate closing usually is the time when the parties’ concerns are reconciled. At closing, the property changes ownership. A closing usually brings a feeling of finality to a real estate transaction.

Closing Conditions or Contingencies

The real estate purchase contract (Contract) will determine when and where the closing occurs. Many Contracts also include conditions or contingencies (Contingencies), which must occur before the closing. Contingencies usually run to the buyer’s favor. This means that, depending upon the Contract terms, the Contingencies give the buyer the right to decide whether to waive the Contingency, cancel the transaction, or delay the closing until the Contingency is satisfied. Only rarely does a Contract allow a seller to cancel or delay a closing due to failure of a Contingency.

Many home purchase Contracts have no Contingencies. The most common Contingencies in home purchase Contracts include buyer obtaining financing and buyer selling the buyer’s current home. Most commercial real estate Contracts have Contingencies falling into three categories: property Contingencies, title Contingencies, and financing Contingencies.

Financing Contingencies are not as common in commercial real estate transactions as they are in home purchases. When there are financing Contingencies, they usually specify the minimum principal amount and maximum interest rate of the anticipated mortgage loan.

Closing Mechanics

Thirty years ago, closings involved buyer, seller, their attorneys, and the title agent meeting in a conference room and signing documents. Then, the buyer would deliver the check, and the seller would deliver the keys to the buyer. House closings still sometimes work like this.

Twenty-first century commercial real estate closings are different. The closing and sometimes even the entire transaction, occur without the buyer and seller ever setting foot in the same room.

The parties exchange documents via email, document share site (Dropbox or SharePoint, for instance), or a secure portal. Documents, such as the deed and mortgage, which must be recorded are signed, notarized, and sent via a traceable overnight delivery service to the escrow agent. The buyer’s payment is sent via wire transfer. Key delivery might be handled by the real estate agent or property manager at the property site.

This type of closing requires the parties to plan in advance. All documents must be sent before the closing date, so they are in the escrow agent’s hands at the closing. Therefore, many commercial real estate transactions have a “soft closing” the day before the actual closing. At the soft closing, the escrow agent will collect all documents and confirm that all documentation necessary for the closing is in escrow. By having a soft closing, the parties still have time to provide additional documents before the closing.

Seller Deliverables

In a house sale, the seller usually signs a deed and hands over the keys, garage door openers, and passcodes to alarm or other home devices. Sellers also should give the buyer the username and password for online access to installed smart home devices staying with the home, such as thermostats, lighting, and smoke detectors.

In commercial real estate transactions, sellers usually have more deliverables. Seller deliverables in a commercial transaction can be divided into conveyance and possession items and financial items.

Conveyance and Possession Items.

A deed is a conveyance documents that transfers title to real estate. However, in most commercial real estate transactions, the Contract nearly always involves the sale of more than real estate. The conveyance documents include:

Deed to convey ownership in the real estate. The type of deed depends upon the Contract. Most commonly, the seller provides a special warranty deed.

Bill of Sale to convey ownership in tangible personal property. Most commercial real estate transactions also include the sale of personal property. An apartment building sale might include refrigerators, fitness center equipment, and picnic and pool furnishings. For an office building, there might be lobby furnishings and cleaning equipment.

Trade Name/DBA/Trademark Filing Transfer. If the office building uses a trade name or DBA to operate the real estate and the buyer intends to continue using that name, the seller should provide documents transferring the rights to that name for filing with the appropriate government office.

Domain Name, Social Media Account, and Phone Number Transfers. If the buyer intends to keep using the same website and social media accounts or the same phone number, the seller will need to arrange for transfer of its rights. Telephone companies usually require that the seller sign a consent on a specified form for the telephone number to be transferred to the buyer. Transferring a domain name can be more complicated than transferring a phone number. Transferring a domain name requires that the seller authorize an ICANN standardized form of authorization. Sellers also should provide documentation required to transfer any social media accounts relating to the property.

Vehicle Title. Some real estate may depend upon a vehicle to service the property’s needs or to provide amenities to residents. For instance, a large apartment community might have a pickup truck to haul maintenance equipment and supplies. If there is a vehicle, title usually can only be transferred if the seller signs the original title over to the buyer. If there is a lien on the vehicle, then the lender usually must either release the lien or agree to the transfer of title.

Keys, Passwords, and Other Access Information Like a house sale, the commercial real estate seller should give the keys, fobs, garage door openers, passcodes, PINs, lock combinations, and usernames to smart real estate devices to the buyer at the closing. Depending upon the property, this might include a Wi-Fi password, codes for keypad access, and computer login information.

Financial Items.

Most of the time, a commercial real estate seller will have leases and service contracts. Those require special treatment for a smooth ownership transition

Assignment and Assumption of Leases. If there are tenant leases, the seller and buyer should sign an assignment and assumption of leases to transfer the rights under the leases at closing.

Assignment and Assumption of Contracts. Most service contracts will not transfer automatically to the buyer at closing. If the buyer wants to assume any assignable contracts, the parties should sign an assignment and assumption of leases, in which the buyer obligates itself under and gets the benefits of the contracts. Some service contracts also will require that the vendor sign a consent to the assignment.

Letter to Tenants. Many tenants will not pay rent to the buyer until the seller provides official notice that there is a new owner. Ideally, the seller and buyer will agree on a joint letter that both informs the tenant of the sale and tells the tenant where to send rent payments after closing.

Security Deposits. If the property has tenants, the buyer will have to refund security deposits to the tenants when they move out. The seller should provide a credit to the buyer for the security deposits at closing.

Seller Certificates and Affidavits. The title company will require that the seller sign several affidavits and certificates. The seller must provide its formation documents (such as a certificate of formation and operating agreement for a limited liability company) and evidence that the individuals signing documents are authorized to do so. Seller will need to sign a FIRPTA certification stating it is not a foreign person and to provide a Form 1099-S for federal tax reporting. The title company also may require seller affidavits to issue the title insurance policy. Frequently, the seller also must sign state-specific documents relating to transfer taxes or state income tax withholding.

Buyer Deliverables

The buyer’s primary deliverable to seller in all real estate transactions is the cash purchase price. Since most buyers use a mortgage loan to finance their purchases, the buyer will need to sign and deliver loan documents to the lender.

Commercial real estate buyers also may need to sign some of the seller’s deliverables, including the assignment and assumption of leases, assignment and assumption of contracts, and letter to tenants. Sometimes, the buyer also must sign state-specific documents, particularly those related to transfer taxes.

Closing Finality

For most music compositions that last perfect cadence marks the end of the relationship between the performer and the audience. After the final cadence, they will go their separate ways. For most home purchases, the closing likewise ends the relationship between the buyer and seller.

In a commercial real estate transaction, the closing ends the parties’ daily relationship, but frequently lingering obligations prevent them from going their separate ways. A future article in this series will discuss the parties’ relationship during the Post-Closing Period after the closing.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.