Attention to details will lead to a successful closing
You’ve found the perfect commercial property for your business expansion. You’ve done all the necessary due diligence, from obtaining a title commitment and survey to performing inspections. You’ve secured financing. All lingering issues have been resolved and the negotiations have concluded successfully.
So that means you’re ready to close, which should be smooth sailing after all this work, right?
But a successful closing requires almost as much focus and attention to details as all the planning and preparation that got you to this point.
To ensure a seamless conclusion to the transactions, you should:
Create a checklist. This list should include all requirements identified by the title insurance company to issue a policy. For example, these may include securing authorizing resolutions and mortgage discharges, producing items identified in the purchase and sale agreement as contingencies to your obligation to close the transaction, and assembling financing documents, the deed and all other documents required to transfer the property to you.
Address title exceptions. You and the seller will need to address any remaining title “exceptions” of concern, such as restrictive covenants, easements, boundary encroachments and others.
Do these matters truly affect the property? Does the survey show that the utility easement is actually located outside the property boundary? Will the title company insure over the exception?
You will also want to obtain all appropriate title insurance endorsements.
Consider issues associated with tax-exempt property. Be sure to determine whether the property is subject to special tax benefits, which will require special considerations. For example, special approval is required to transfer “qualified agricultural property.”
A change in use is subject to an existing exemption from uncapping under Michigan's General Property Tax Act and will result in an uncapping of the property tax and the imposition of a recapture tax.
Assign leases and contracts. If you are acquiring property that is improved, there is a good chance that it is currently leased. You will need an assignment and assumption agreement to assume the benefits of the lease.
This is also true for any third-party service contracts of particular importance to your business.
Prepare the closing documents. It’s best to work out in advance with the title company just who’s responsible for preparing the deed and other conveyance documents — the deed being of particular importance. Many law firms prefer to handle this step to ensure the documents contain appropriate protective language for clients, whether they are the buyer or the seller.
Properly prepared documents will ensure that the buyer takes the property with all beneficial interests they are entitled to — and that the property is only subject to restrictions provided for in the purchase contract. Knowledgeable counsel can also help you consider appropriate transfer tax and uncapping exemptions.
Prepare escrow instructions and obtain a closing protection letter. Often called simply the escrow instruction letter, it identifies for the title company the documents required to close the transaction and the conditions upon which the deed may be released to the buyer and the funds released to the seller. As a buyer, if a title agent is involved, you will want a closing protection letter issued by the underwriter in which the underwriter agrees to indemnify you for certain kinds of misconduct by the closing agent.
Kelly Clum-Matthysse is an attorney at Warner Norcross & Judd LLP who concentrates her practice in real estate law with a focus on commercial real estate sales and acquisitions and leasing. She can be reached at firstname.lastname@example.org.