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OUTLINE and TABLE OF CONTENTS

Page

A. DUE DILIGENCE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. Termination Rights-Is This an Enforceable "Free Option"? . . . . . . . . . . . . . . . . . 12. Seller's Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Seller Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164. Buyer's Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175. The "Negation of Representations" and the "AS IS" Clause . . . . . . . . . . . . . . . . 196. Contracts and other Due Diligence Items (i.e., Licenses and Permits) . . . . . . . . 217. Leases and Tenancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258. Title and Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279. Miscellaneous Due Diligence Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2810. Satisfaction of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

B. OPERATIONAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341. Insurance; Maintenance; Casualty; Condemnation; Change of Condition . . . . . 342. Ongoing Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353. Contracts and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

C. CLOSING ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371. Prorations And Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372. The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383. Default Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

CHECKLIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

REAL ESTATE CONTRACTS FROM EXECUTION TO CLOSING

By: Michael G. O'FlahertyStinson, Mag and Fizzell, P.C.1201 Walnut StreetKansas City, MO 64106Telephone: (816) 691-3180Facsimile: (816) 691-3495e-mail: moflaherty@stinson.com

Copyright 1999 by Michael G. O'Flaherty. All rights reserved.

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INTRODUCTION AND ACKNOWLEDGMENTS

This portion of the program discusses the interim period between contract signing andclosing. For discussion purposes, we will distinguish among "Due Diligence" issues,"Operational" issues and "Closing" issues. Sample contract provisions are set forth in the text,and a checklist is attached.

The sample contract provisions in this document, as well as the checklist, are intended tobe used for discussion and illustration purposes only and are not intended to be used as forms ortemplates for drafting contracts.

Mr. O'Flaherty gratefully acknowledges the assistance of Todd LaSala, an associate in theKansas City, Missouri office of Stinson, Mag and Fizzell, P.C., and Rebecca Stroder, a secondyear law student at the University of Missouri at Kansas City, in the preparation of thesematerials.

A. DUE DILIGENCE ISSUES

1. Termination Rights-Is This an Enforceable "Free Option"?

Contracts typically give the buyer a "due diligence" period in which to make various inspections and examinations. For example:

Due Diligence Period. Buyer shall have until midnighton_____,1999 (the "Due Diligence Period") within which toperform its due diligence. Anything herein to the contrarynotwithstanding, Buyer shall have the right to terminate theAgreement if

ALTERNATE 1

Buyer shall determine that the Property, or any partthereof, (i) contains or is subject to or is likely to contain orbe subject to an environmental risk which, in Buyer's soleand absolute judgment, is unacceptable to Buyer, whethersaid risk could arise from conditions present or likely to bepresent in or on the Property or any other property in thevicinity of the Property, (ii) the location of theimprovements on the adjacent park property owned by theCity is unacceptable to Buyer, or (iii) there are mattersrelating to the elevators or the structural, mechanical,

1See Mattei v. Hopper, 330 P.2d 625 (Cal. 1958); Ledford v. Wheeler, 620 P.2d 903(Okla. Ct. App. 1979); Western Hills v. Pfau, 508 P.2d 201 (Or. 1973); Horizon Corp. v.Westcor, Inc., 688 P.2d 1021 (Ariz. Ct. App. 1984); Davis v. Sonat, 951 F. Supp. 186 (D.Okla. 1995); Loma Linda Univ. v. District-Realty Title Ins. Corp., 443 F.2d 773 (D.C. Cir.1971). See also, John E. Blyth, What You Should Know About "Subject to the Approval ofmy Attorney" Clauses, 12 no. 3 Prac. Real. Est. Law. 81, 86 (1996) (and cases cited therein).

2See supra, n. 1. See also Milton R. Friedman, Friedman on Contracts andConveyances of Real Property Sec. 1.5 (6th ed. 1998).

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electrical or heating and air conditioning which areunacceptable to Buyer.

ALTERNATE 2

Buyer shall determine that the Property is otherwiseunacceptable to Buyer.

ALTERNATE 3

Buyer, in its sole and absolute discretion, shall determinenot to proceed.

The right of termination may be exercised by delivering to SellerBuyer's written notice of its intent to terminate on or before _____,1999, whereupon the Title Company shall deliver the Deposit tothe Seller and neither party shall thereafter have any further rightsor obligations under this Agreement. Copies of all reportsreceived by Buyer pertaining to the condition of the Property shallbe delivered to Seller and shall be kept confidential by Buyer.

The present day buyer wants to control the property for as long as possible, for as little aspossible, and with the unfettered right to terminate any time prior to closing. It may think thatAlternate 1 accomplishes this. However, that may not be the case. The common law may imposea duty of reasonableness and good faith,1 and any termination may well be required to relate tothe specific subject matter outlined in the contract as grounds for termination.2

Alternate 2 grants the right to the buyer to terminate if "the Property is otherwiseunacceptable to Buyer." Here also, case law strongly suggests that courts will impose upon the

3 See Mattei, 330 P.2d at 628.

4See generally Loma Linda Univ., 443 F.2d at 775; Ledford, 620 P.2d at 906.

5See id.

6See PMC, Inc., v. Porthole Yachts, Ltd., 76 Cal. Rptr. 2d 832 (Cal. Ct. App. 1998). Kansas courts have held that "discretion" gives the freedom to act according to one's ownjudgment, and that a good faith standard will not be implied to limit that freedom. See Reedy v.Reedy, 264 P.2d 913 (Kan. 1953).

7See generally, Restatement (Second) of Contracts § 77 cmt. a (1981). There may beexceptions for failure to satisfy basic conditions.

8See id.

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buyer a duty of good faith in exercising its termination rights.3 This means that the buyer canonly terminate for genuine dissatisfaction with the property itself. So, for example, if the buyerterminates because it could not find adequate financing, a court would find that the buyerviolated the terms of the agreement by terminating for a reason other than one the contractallows.4 Unless the buyer terminates because of genuine dissatisfaction with the property, it willbe in breach of the contract.5

Alternate 3, by interjecting "sole discretion", may negate any notion that the terminationmust be in good faith.6 However, the probabilities are that the buyer has not tied up the property. Because of this clause, the contract may not be enforceable for want of mutuality. To overcomethis possibility, the buyer might consider working in some type of consideration. In fact, sellersshould think about requiring a "break up" fee as compensation for the time and expense involved,not to mention taking the property off the market. However, this "break up" fee must be non-refundable.7 If a buyer can get its money back when it exercises its right to terminate at will, thecontract is unenforceable, because the seller is left with nothing but an illusory promise inexchange for its obligation to sell.8

Given all of this, it is surprising that true option contracts, with some actualconsideration, are not more widely used. The suspicion is that options have a bad connotation asfar as sellers are concerned.

2. Seller's Representations

Representations of Seller. Seller represents to Buyer that:

ALTERNATE 1

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(i) the execution and delivery by Seller of, and Seller'sperformance under, this Agreement are within Seller's powers andthe person executing this Agreement on behalf of Seller has theauthority to do so.

(ii) Seller is not a "foreign person" within the meaningof Section 1445 of the Internal Revenue Code of 1986 (i.e.Seller is not a non-resident alien, foreign corporation,foreign partnership, foreign trust or foreign estate as thoseterms are defined in the Internal Revenue Code andregulations promulgated thereunder).

(iii) This Agreement constitutes the legal, valid andbinding obligation of Seller, enforceable in accordancewith its terms, subject to laws generally applicable tocreditor's rights. Performance of this Agreement will notresult in any breach of, or constitute any default under, anyagreement or other instrument to which Seller is a party orby which Seller might be bound.

ALTERNATE 2

(iv) To Seller's knowledge, no "hazardous substance" or"hazardous waste" as such terms are defined and used by federal,state or local laws, regulations, ordinances or other regulatoryprovisions, has been disposed of or otherwise placed and left uponthe Property by Seller, nor has the Property been used by Seller forthe generation, handling, transportation or storage of hazardoussubstances or hazardous wastes.

(v) There are not now in existence, and there will not be, anylease or tenancy or other agreement, written or oral, which affects,or may affect, the possession or occupancy of the Property.

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ALTERNATE 3

Seller's Representations and Agreements.

(a) Seller represents, warrants and covenants with Purchaser asfollows:

I. As to Seller's Organizations, Power and Authority.

(i) Seller is a _________________ that has been duly organizedand is validly existing and in good standing under the laws of theState of ______________ and is qualified to do business and is ingood standing under the laws of the state where the Property islocated.

(ii) Seller has full power and right to enter into and perform itsobligations under this Agreement and the other agreementscontemplated herein to be executed and performed by it, including,without being limited to, conveying the Property as hereinprovided.

(iii) The execution and delivery of this Agreement and theconsummation of the transactions contemplated hereby (1) havebeen duly authorized by all necessary ___________ acts, (2) donot, except as to the transfer of the Permits so identified onSchedule ____ hereto, require any governmental or other consentand (3) will not result in the breach of any agreement, indenture orother instrument to which Seller is a party or is otherwise bound.

(iv) Neither Seller nor the Property is in the hands of a receivernor is an application for a receiver pending. Seller has not madean assignment for the benefit of creditors, nor has Seller filed, orhad filed against it, any petition in bankruptcy.

(v) There is no pending or, to Seller's actual knowledge,threatened litigation, proceeding or investigation (by any person,governmental or quasi-governmental agency or authority orotherwise) which might materially adversely affect the ownership,use, occupancy, value, operation or title of the Property.

(vi) Seller is a "non-foreign person" within the meaning of Section1445 of the United States Internal Revenue Code of 1986, asamended, and the regulations issued thereunder (the "Code"), and

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Seller shall deliver to Purchaser on the Closing Date an affidavitin the form annexed hereto as Exhibit ___.

(vii) Seller is not an "employee benefit plan", as defined inSection 3(3) of the Employee Retirement Income Security Act of1974 ("ERISA"), or a "plan", as defined in Section 4975(e) of theInternal Revenue Code (the "Code"), and the assets of Seller havenot been deemed "plan assets" of one or more such plans forpurposes of Title I of ERISA or Section 4975 of the Code. Inaddition, Seller is not a "governmental plan" within the meaning ofSection 3(32) of ERISA, and no transaction by or with Seller issubject to or in violation of any state statutes applicable toregulation of investments of and fiduciary obligations with respectto governmental plans.

II. As to the Property.

(i) To Seller's actual knowledge Seller has good and indefeasiblefee simple title to the Property subject only to matters of record,matters which would be revealed by a current and accurate surveyand inspection, zoning ordinances and real estate taxes andassessments not yet due and payable. To Seller's actual knowledgeSeller is the sole owner of the Property.

(ii) Seller's title to the Property is not directly derived from anyforeclosure proceeding or any proceeding for the sale of land forthe nonpayment of municipal taxes or assessments or from adversepossession or color of title in any manner which would affect themarketability of its title to the Property.

(iii) The Property is in good working order and repair sufficientfor the use and maintenance of the Property as it is presently usedand maintained and as the use of the Property is contemplated forthe full occupancy of the Improvements.

(iv) All water, sewer, gas, electricity, telephone and other utilitiesrequired for the use, occupancy, operation and maintenance of theImprovements are connected thereto and in service, are adequateto service the current operation of the Property.

(v) To Seller's actual knowledge there are no oil burners,incinerators, furnaces, fuel-burning devices or other sources of air

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pollution at the Property and there is no fuel stored upon theProperty.

(vi) To Seller's actual knowledge, the Property has been duringSeller's ownership and is presently used and operated, incompliance in all material respects with, and, to Seller's actualknowledge, the Property and its use, operation, and condition inno material way have during Seller's ownership violated or violate,and Seller has received no written notice from any governmentalor quasi-governmental agency alleging that the Property hasviolated or is in violation of, (1) any applicable statute, law, code,approval, regulation, rule, ordinance, order, or urban developmentplan or other governmental or quasi-governmental requirement ofany kind whatsoever (including, without being limited to, anybuilding, fire, health, safety, pollution, environmental (including,without being limited to, the Comprehensive EnvironmentalResponse, Compensation, and Liability Act of 1980, as amended(42 U.S.C. Sections 9601, et seq.), the Resource Conservation andRecovery Act, as amended, 42 U.S.C. Section 6901, et seq., anyand all applicable environmental statutes or ordinances of anylocal county, municipal or other governmental authority, and theregulations adopted pursuant thereto or any other similarapplicable federal, state or local law, rule, regulation orordinance), subdivision and zoning statute, law, code, ordinance,rule, regulation, approval or order or urban redevelopment planor other governmental or quasi-governmental requirement)affecting the Property or any part thereof ("Applicable Laws"), (2)any building or occupancy permit, (3) any condition, easement,right-of-way, covenant, agreement or restriction of recordaffecting or otherwise relating to the Property, and (4) theAmericans With Disabilities Act. Without limiting the foregoing,all permits, licenses, and other authorizations required underApplicable Laws for Seller's ownership and operation of theProperty (including, without limitation, for the construction,development, use and condition of the Property) have beenobtained and are in full force and effect, and all conditions andrequirements in those permits, licenses, and authorizations havebeen and are being materially complied with.

(vii) Neither Seller nor any other person or entity has received anywritten notice from any federal, state, county, municipal or othergovernmental department, agency or authority or from any otherperson or entity, concerning, nor does Seller have any actual

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knowledge of the existence of, any material petroleum product orother Hazardous Material discharge or seepage from the Property.

(viii) Seller has no actual knowledge of any federal, state, county,municipal or other governmental plans to change the highway orroad system in the vicinity of the Property so as to restrict orchange access from any such highway or road to the Property.

(ix) To Seller's actual knowledge, there is not pending orthreatened condemnation of all or any part of the Property.

(x) The parking facilities at the Property (the "Parking Facilities")consist of paved lots which are sufficient to comply with allparking commitments under any Leases. Seller has entered into nooperating or other private agreements (written or oral) affectingthe parking facilities at the Property, other than as may be setforth in the Leases or the Contracts.

(xi) Seller has not received any written notice from any insurancecompany or inspection or rating bureau setting forth anyrequirements as a condition to the continuation of any insurancecoverage on or with respect to the Property or the continuationthereof at premium rates existing at present which have not beenremedied or satisfied.

(xii) To Seller's actual knowledge, neither Seller nor the Property,is or was at any time a party to, or the subject of, or threatened by,any litigation, claim, proceeding or investigation arising from anyactual, suspected, or threatened generation, storage, use,treatment, release, or disposal of Hazardous Materials on, at, in,under, or above the Property or arising from the operation of, orviolation or suspected or threatened violation of, any ApplicableLaw (including, without limitation, any Applicable Law pertainingto health, protection of the environmental, natural resources,conservation, wildlife, waste management, Hazardous Materials,or pollution.) To Seller's actual knowledge, there are no grounds,facts, circumstances or other matters which might provide a basisfor any such litigation, claim, proceeding, or investigation.

(xiii) To Seller's actual knowledge, the Property is not subject toany lien or other encumbrance arising from the generation,storage, use, treatment, release, or disposal of HazardousMaterials or from the operation of, or violation or alleged

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violation of, any Applicable Law (including, without limitation,any Applicable Law pertaining to health, protection of theenvironment, natural resources, conservation, wildlife, wastemanagement, Hazardous Materials, or pollution.)

(xiv) To Seller's actual knowledge, there are no asbestoscontaining materials (used in the original construction of theImprovements), underground storage tanks, polychlorinatedbiphenyls, lead based paint or radon (in excess of outdoor airlevels) on the Property or the Improvements.

(xv) Seller has not filed a notice under any environmental lawdisclosing the improper use, storage, disposal or release ofHazardous Materials.

(xvi) To Seller's actual knowledge, no agreements, consent orders,decrees, judgments, license or permit-conditions, or otherdirectives, issued by a governmental department or agency orcourt which relate to the future use of the Property or require anychange in the present use, operations, or condition of the Property.

(xvii) No services, material or work have been supplied to theProperty by or at the instance of Seller for which payment has notbeen (or will not by Closing be) made in full (or contested, withany liens being bonded over) in a timely manner.

(xviii) To Seller's actual knowledge, there are no special or otherassessments for public improvements or otherwise now affectingthe Property nor does Seller know of (1) any pending or threatenedspecial assessments affecting the Property or (2) any contemplatedimprovements affecting the Property. There are no tax abatementsor exemptions affecting the Property.

(xix) Each of the parcels comprising the Property is assessed asone separate tax lot that is separate and distinct from the tax lotallocated to any other contiguous parcel of land.

(xx) The operating statements relating to the Property that havebeen delivered to Purchaser and are described in Schedule ___hereof are true and correct in all material respects.

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The term "Hazardous Material", as used in this Section, shallmean any chemical, waste, byproduct, pollutant, contaminant,compound, product, substance or other material (i) that ishazardous or toxic or (ii) the exposure to, or manufacture,possession, presence, use, generation, storage, transportation,treatment, release, emission, discharge, disposal, abatement,cleanup, removal, remediation or handling of which, is prohibited,controlled or regulated by any Applicable Law pertaining tohealth, protection of the environment, natural resources,conservation, wildlife, waste management, or pollution, including,without limitation, asbestos, polychlorinated byphenyls, andpetroleum (including crude oil or any fraction thereof).

III. As to Leases, Contracts, Permits, Policies, etc.

(i) (1) There are no occupancy rights (written or oral), leases ortenancies presently affecting the Property other than the Leases;(2) Seller has heretofore delivered to Purchaser true and completecopies of each of the Leases; (3) the Leases are at present and onthe Closing Date shall be in full force and effect unless any suchLease shall have expired in accordance with its terms (and notbecause of any termination or other acceleration of the statedexpiration date therefor); (4) Seller is not in default in anymaterial respect under any Lease and knows of no material defaulton the part of any Tenant nor of any material unsatisfied claim,set-off or counterclaim against Seller by any Tenant; (5) each ofthe Leases represents the complete agreement between Seller andthe respective Tenant as to all rights, liabilities and obligations ofSeller and said Tenant in and to the property demised thereunder,and have not been modified or amended, except as set forth onSchedule ____ hereto; (6) except as set forth on Schedule ____hereto, no renewal, extension or expansion option has beengranted to any Tenant; (7) there is no option to purchase, right offirst offer, right of first refusal or other provision granting anyTenant or any other person any right to acquire the Property or toterminate its Lease in the event of a sale of the Property; (8) allTenants are in occupancy of their respective property under theLeases and, except for outstanding change orders and punchlistitems that will be completed by Seller prior to Closing, all workrequired to be performed by any party to any of the Leases hasbeen completed and fully paid for; (9) the information contained inthe rent roll annexed hereto as Schedule ____ and made a part

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hereof is true and complete in all respects; (10) all rents (as shownon Schedule ____) are being paid and are current; (11) except asset forth on Schedule ____, no Tenant is entitled to any free rent,abatement of rent or similar concession; (12) except as shown onSchedule ____, Seller has not accepted any prepaid rent orprepayment of any other sum due under the Leases; (13) thesecurity deposits set forth on Schedule ____ hereto are all thesecurity deposits paid by Tenants under their Leases and notpreviously forfeited; (14) Seller is holding all such securitydeposits; (15) no Tenant has contested any tax, operating cost orother escalation payments or occupancy charges, or any otheramounts payable under its Lease; (16) there has been no reductionof services at the Property that would entitle any Tenant under aLease to a reduction in or refund of rent; and (17) no steps havebeen taken by Seller with respect to any negotiation or appraisal ofrent under any of the Leases, and no such negotiations orappraisals are pending. For purposes of the representations setforth in this Section (i) being made as of the Closing Date, the term"Leases" shall include New Leases.

(ii) Except for commissions to be cashed out at Closing, nobrokerage commission, fee or other compensation is payable (orwill, with the passage of time or occurrence of any event or both,be payable), with respect to the primary term of any Lease. Theredoes not currently exist any exclusive or continuing brokerageagreements as to any of the space covered by the Leases or as toany space in the Property other than with respect to renewals andexpansions, for which Purchaser shall be liable. No actual orpending claims or rights exist or may accrue against Seller orPurchaser for any brokerage commission, fee or othercompensation in respect of all or any portion of the Property thatis subject to a Lease or New Lease other than with respect torenewals and expansions, for which Purchaser shall be liable.

(iii) (1) The Contracts are all of the material contracts andagreements entered into by Seller and presently affecting theProperty; (2) Seller has heretofore delivered to Purchaser true andcomplete copies of each of the Contracts; (3) each of the Contractsis at present, and each of the Contracts to be assumed byPurchaser at Closing shall be, in full force and effect and has notbeen modified or amended, except as indicated on Schedule ____hereof; (4) Seller is not in default of any of its material obligationsunder any of the Contracts and knows of no material default on the

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part of the other parties thereto; and (5) the Contracts representthe complete agreement between Seller and such other parties asto the services to be performed or materials to be providedthereunder and the compensation to be paid for such services ormaterials, as applicable.

(iv) (1) The Permits listed on Schedule ____ hereto are all of thematerial certificates, licenses and permits from governmentalauthorities held by Seller in connection with its ownership, use,occupancy, operation and maintenance of the Property and toSeller's actual knowledge, are all of the certificates, licenses andpermits necessary in connection with its current ownership, use,occupancy, operating and maintenance thereof; (2) except as setforth on Schedule ____, all of the Permits are transferable toPurchaser, subject to the receipt of such governmental and quasi-governmental consents as may be required for such transfer; (3)none of the Permits has been suspended or revoked; and (4) all ofthe Permits are in full force and effect, are fully paid for, andSeller has made, or will make, application for renewals of any ofthe Permits which will expire before the Closing Date.

(v) All insurance policies held by Seller relating to or affecting theProperty are in full force and effect and shall remain in full forceand effect until the Closing. Seller has not received any notice ofdefault or notice terminating or threatening to terminate anyinsurance policies in respect of any period prior the Closing.

(vi) except as set forth in the Schedules hereof, Seller is not aparty to any written or oral agreement of any type pertainingspecifically to the Property or the ownership, use, occupancy,operation or maintenance thereof, including, without being limitedto, any (1) distributor, agency or advertising agreement, (2)agreement with any labor union, (3) continuing agreement forfuture purchases, services or employment, (4) profit sharing,bonus, stock option, welfare, retirement or other employee benefitplan or agreement, (5) lease, as lessee or lessor, of any real orpersonal property, (6) license or franchise agreement, (7)construction or maintenance agreement, (8) agreement with acredit organization or any other person regarding any debt(including, without being limited to, a loan agreement, note,mortgage, deed of trust or other security agreement), (9)agreement pertaining to the management or operation of the

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Property that will not be terminated on or before Closing, or (10)brokerage agreement.

(vii) Seller has no trade names, logotypes, trademarks orcopyrights solely and exclusively used in connection with orapplicable to the Property.

Alternate 4

As used in this Section , the term "to Seller's knowledge" (a) shallmean and apply to the actual knowledge of the officers of Sellerwho are directly engaged in the management and sale andpurchase transaction described herein and not to any otherparties, (b) shall mean the actual knowledge of such officers, itbeing understood and acknowledged that (i) such officers, in manyinstances, are not involved in the day-to-day operations of theProperty and in many instances were not involved in thenegotiation or execution of the leases, management contracts,service contracts, etc. in question and (ii) such officers are notcharged with knowledge of all of the acts and/or omissions of thepredecessors in title to the Property or with knowledge of all of theacts and/or omissions of Seller's agents or employees, and (c) shallnot apply to or be construed to apply to information or materialwhich may be in the possession of Seller generally or incidentally,but which is not actually known to the officers of Seller who aredirectly engaged in the sale and purchase transaction describedherein.

Representations and warranties have become a major area of negotiation. The buyer asksfor as much as it can get, and sometimes gets it, while the seller tries to give as little as possible. A common compromise is an approach where the contract (1) gives the buyer adequate time andrights to inspect, (2) provides for a limited set of representations, many with some kind of"knowledge" qualification, and (3) provides a broadly worded "as is" clause.

Alternate 1 represents a "token" set of representations, Alternate 2 adds environmental, ona "knowledge" basis, and Alternate 3 is an example of the range of representations and warrantiesthat might be used by an institutional buyer of substantial, income producing property.

9See generally Restatement (Second) of Agency §§ 272, 275 (1958); see also F.D.I.C.v. Deloitte & Touche, 834 F. Supp. 1129 (D. Ark. 1992).

10731 S.W.2d 399 (Mo. Ct. App. 1987).

11See Restatement (Second) of Agency § 9 ("a person has notice of a fact if his agenthas knowledge of the fact, reason to know it or should know it, or has been given notificationof it.").

12See Doe v. R.R. Donnelley & Sons Co., 42 F.3d 439 (7th Cir. 1994); see alsoKingsley Associates., Inc. v. Moll PlastiCrafters, Inc., 65 F.3d 498 (6th Cir. 1995).

13United States v. One Parcel of Land, 965 F.2d 311 (7th Cir. 1992).

14Id. at 314.

15See Carl J. Seneker II, Real Estate Opinion Letters, 353 PLI/Real 47 (1990)("It is notclear whether... 'to the best of our knowledge' is intended to be a higher standard of inquiry than'to our knowledge.'").

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The question of imputation needs consideration. Under traditional agency theories, theknowledge of a corporation's officer or agent is imputed to the corporation.9 The Missouri caseof Iota Management Corp. v. Boulevard Investment Company10 held that the knowledge of thehead of maintenance was inputed to the corporate seller, since the matters in question were"within the agent's scope of employment and authority". Other cases have held that if theemployee is obligated to inform a corporation's officers of, for example, hazardous materials onthe premises, that employee's knowledge will be imputed to the corporation regardless of whetherthat employee actually gave such notification.11

A court will usually only impute an agent's knowledge to a corporation if the agentacquired the knowledge in the course of business.12 So, for example, when anemployee/shareholder of a corporation sold drugs on the corporation's property, the corporationwas not charged with that knowledge because the employee did not act within the scope of hisemployment.13 However, the Wisconsin court intimated that had the employee used corporatefunds or put drug money into the corporation's coffers, the corporation might have been chargedwith that knowledge.14 A good practice is for the seller to identify specifically those employeeswhose knowledge can be imputed. Alternate 4 represents an example of this approach. Alternate4 could be made even more limited by specifying the names of the officers in question.

The terms "knowledge", "actual knowledge", and "best of knowledge" are often usedrather loosely. The difference between the various phrases, and their permutations, is not wellsettled.15 Authorities seem to suggest that "to the best of our knowledge" connotes some level of

16Carl J. Seneker II, Real Estate Opinion Letters--"Land Use Matters," 353 PLI/Real 567,575 (1995) ("Reference to the 'best knowledge' . . . probably implies at least some minimal levelof due diligence or independent investigation").

17See id.

18Black's Law Dictionary 873 (6th ed. 1990)("Positive, in contrast to imputed or inferredknowledge of a fact"); See also Friedman, supra, at Sec. 4.8(g).

19James C. Freund, ANATOMY OF A MERGER 247 (1975).

20Id.

21Id.

22Id.

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due diligence or inquiry.16 Sellers often couple "to the best of our knowledge" with a statementthat some investigation has been performed, for example, "to the best of our knowledge afterreasonable inquiry."

By contrast, "to our knowledge" seems to suggest a more passive "snapshot" of what anindividual is aware at the moment the contract is signed.17 This kind of representation is verysimilar to "actual knowledge," a standard under which the seller is responsible only for thatinformation of which it is cognizant at the time it made the representation.18

This uncertainty makes it even more advisable to incorporate language along the lines ofAlternate 4. Such language defines "knowledge" and limits the scope of knowledge to certainpeople within an entity. Sellers can also use this language to indicate whether they have madeany inquiry to substantiate the representations. For example, a seller might define knowledge as"the actual knowledge of A, B, and C within XYZ corporation, after reasonable inquiry andinvestigation." This approach presents a compromise for buyers and sellers. The buyer holds theseller to a higher "reasonable inquiry" standard, while the seller limits the individuals whoseknowledge will be imputed to a few key people.

In some situations, limiting the knowledge of the seller is not appropriate. Buyers shouldnot be afraid to object to a "knowledge caveat" to certain seller's representations.19 The buyermay want to limit which kinds of representations will include a caveat such as "to myknowledge."20 One authority in the area of corporate mergers has suggested that "the only time...[a buyer] should voluntarily accept a knowledge caveat from seller is in a situation where, ifseller does not in fact possess the information, he should not be required to stand behind therepresentation."21 One representation in which a knowledge caveat may be appropriate is therepresentation that no lawsuits or liens are threatened.22 On the other hand, it may not be

23Id.

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appropriate to accept a seller's representation that, to its knowledge, no tenants are in default.23 In the latter situation, a seller should be expected to know with certainty the status of its leases.

Experience suggests two additional observations:

• The seller must conduct internal "due diligence" in order to be in a position tomake the required representations and warranties and to comply with the contractual duties tomake deliveries. It also needs to be aware of any consents that will be needed, such as fromholders of first refusals, tenants or public authorities. This may not be easy. Files may not be inthe best order, and memories can fade. The attorney representing the seller needs to lead theclient through the due diligence process, explain the risks, and probably conduct some type ofinterrogation process. It is usually advisable to do this on more than one occasion.

• The seller needs to avoid clauses that automatically repeat the representations atclosing. Things can change. The appropriate approach is to make the representations effective asof execution, and then make the giving of a certificate as to continued accuracy a closingcondition. The contract can, and probably should, address the obligations of the seller not to dothings that cause any of these to become inaccurate.

3. Seller Deliveries

Buyer acknowledges that Seller has delivered to Buyer suchof the following as are in Seller's possession:

(i) copies of the tenant leases described on Exhibit B (the "Tenant Leases");

(ii) a current rent roll, prepared by the manager of the Property, listing tenant names and monthly rentals;

(iii) copies of management, service, supply or maintenancecontracts affecting the Property which are not cancelable uponthirty (30) days' notice or less as described on Exhibit C (the"Contracts");

(iv) the environmental report (the "Environmental Report")described on Exhibit D attached hereto and made a part hereoffrom the firm (the "Environmental Firm") described on Exhibit D;and

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(v) copies of the special due diligence items (the "Special DueDiligence Items") described on Exhibit E.

It is recognized and agreed by Buyer that (x) Seller states that it hasmade a diligent review of its files, but Seller is not warranting orrepresenting that the items delivered are complete or constitute allof such items in the possession of Seller or any of the officers,contractors, agents, employees, or other representatives of Seller;(y) the items so delivered are provided for information purposesonly, and although Seller has not intentionally changed or alteredany of same, Seller is making no representation or warranty as tothe accuracy or completeness of any such items; and (z) Seller ismaking no representation or warranty as to the use that Buyer maymake of any of the items being delivered.

The range and extent of matters to be delivered will depend on the transaction, and thisexample is rather basic and represents what we have come to call the "intentional rat hole"approach. The seller delivers what it can find, and says that it has not intentionally changedanything or left anything out, but it does not guarantee that what is being delivered is all there isor that it has made a far and wide search. In many cases, this will not suffice, and the buyer willrequire more in terms of representations and warranties as to accuracy and completeness.

4. Buyer's Inspection Rights

Buyer shall have the right, during the Due DiligencePeriod, to inspect, and to cause one or more engineers or otherrepresentatives of Buyer to inspect (and as necessary, to takematerial samples of the Building and the soil surface and thesubsurface soil and water) the Property without interfering withSeller's operation of the Property or any tenant's use of theProperty. Buyer shall make such inspections in good faith andwith due diligence. All inspection fees, appraisal fees, engineeringfees and other expenses of any kind incurred by Buyer relating tothe inspection of the Property will be solely Buyer's expense. Seller shall cooperate with Buyer in all reasonable respects inmaking such inspections. Seller hereby reserves the right to have arepresentative present at the time Buyer conducts any suchinspection of the Property. Buyer shall notify Seller not less thanone (1) business day in advance of making any such inspection. Inmaking any inspection, Buyer will treat, and will cause anyrepresentative of Buyer to treat, all information obtained by Buyerpursuant to the terms of this Agreement as strictly confidential.

24See, e.g., Livaditis v. American Casualty Co., 160 S.E.2d 449 (Ga. Ct. App. 1968).

25See, e.g., Andrews & Knowles Produce Co. v. Currin, 90 S.E.2d 228 (N.C. 1955).

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Buyer agrees that it will make any repairs or restorations to theBuilding and other parts of the Property so that the same are in thesame condition as prior to any actions of Buyer under this Section,and Buyer further agrees to indemnify and hold Seller, its tenants,officers, contractors and employees harmless from any and allinjuries, losses, liens, claims, judgments, liabilities, costs, expensesor damages (including reasonable attorneys' fees and court costs) sustained by or threatened against Seller which result from orarise out of any inspections by Buyer or its authorizedrepresentatives pursuant to this Section. Notwithstanding anyprovision herein to the contrary, the indemnity contained in thepreceding sentence shall survive the termination of this Agreementor the Closing.

The contract will usually give the buyer broad access rights to inspect the property,contact managers and tenants, and check zoning and related matters. This can give rise toimportant issues.

• There can be an impact on tenant leases. First, absent a provision in the lease orexpressed permission, the seller does not have the right to grant to the buyer, or anyoneelse for that matter, entry rights on leased premises.24 Furthermore, if the buyer'sinspection activities disturb a tenant, the seller/landlord can have liability, and thesituation might even escalate to some type of breach of the covenant of quiet enjoymentor trespass.25 To avoid this, the seller should notify all tenants of pending inspections orany other actions by the buyer that might disturb the tenant's business, and it might beadvisable for the seller to have someone accompany the buyer as it inspects the leasedpremises.

26Jennifer L. Machlin & Tomme R. Young, MANAGING ENVIRONMENT AL RISK: REAL

ESTATE AND BUSINESS TRANSACTIONS, §§ 8.04[2][a], 9.03[2][c] (No. 12 1998). Statutes oftenplace reporting responsibilities only on parties that own, operate, or have a substantialrelationship to the property. See id. at § 9.03[2][c]. Statutes that limit reporting obligations inthis way generally do not obligate buyers to report problems discovered during an inspection. Id.However, if the buyer informs the seller of the problem, the seller will likely be obligated toreport the finding. Id.

27Id.

28Id.

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• The buyer's inspections might trigger a reporting obligation, such as in theenvironmental area.26 This can create an obligation on the buyer, and it can causeproblems for the seller as problems are discovered of which the seller was unaware.27

• Real estate purchase contracts often contain a provision that requires the buyer tomaintain the results of all inspections in confidentiality. The buyer should be aware thatsuch a provision may not relieve it of penalties for failing to disclose the presence ofenvironmental contaminants if a statute requires the buyer to make such a report.28 Buyers should at the least make themselves aware of reporting requirements for federalenvironmental laws as well as the environmental laws of the state in which the property islocated.

5. The "Negation of Representations" and the "AS IS" Clause

Buyer acknowledges that Seller has not made, does not make, and specifically negates and disclaims any representations,warranties, promises, covenants, agreements or guaranties of anykind or character whatsoever, whether express or implied, oral orwritten, of, as to, concerning, or with respect to, (i) the value,nature, quality or condition of the Property, including, withoutlimitation, the water, soil and geology, (ii) the suitability of theProperty for any and all activities and uses which may beconducted thereon, (iii) the compliance of or by the Property withany laws, rules, ordinances or regulations of any applicablegovernmental authority or body, (iv) the habitability,merchantability, marketability, profitability or fitness for aparticular purpose of the Property, (v) the suitability of theProperty with regard to what is commonly referred to as the "Year2000" or "Y2K" problem (i.e., the inability of certain computerapplications to recognize correctly and perform date-sensitive

29"Let the buyer beware." Black's Law Dictionary 222 (6th ed. 1990). See Frank J.Wozniak, Annotation, Construction and Effect of Provision in Contract for Sale of Realty bywhich Purchaser Agrees to Take Property "As Is" or in Its Existing Condition, 8 A.L.R.5th312 (1992); see also La Placita Partners v. Northwestern Mut. Life Ins. Co., 766 F. Supp.1454 (D. Ohio 1990); Urman v. South Boston Savings Bank, 674 N.E.2d 1078 (Mass. 1997).

30See 12 A.L.R.5th 630.

31Christy v. Glass, 329 N.W.2d 748, 752 (Mich. 1982).

32Niecko v. Emro Marketing Co., 769 F. Supp. 973 (D. Mich. 1991).

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functions involving certain dates prior to and after December 31,1999), or (vi) any other matter with respect to the Property, andspecifically, that Seller has not made, does not make andspecifically negates and disclaims any representations orwarranties regarding compliance of the Property with anyenvironmental protection, pollution or land use laws, rules,regulations, orders or requirements, including, without limitation,those pertaining to solid waste, as defined by any applicable lawsor regulations, or the disposal or existence, in or on the Property,of any hazardous substances, as defined by any applicable laws orregulations. Buyer shall rely solely on its own investigation of theProperty and not on any information provided or to be provided bySeller, its officers, agents or contractors, such as, but not limitedto, the Environmental Report. Seller shall not be liable or boundin any manner by any verbal or written statements, representationsor information pertaining to the Property or the operation thereof,furnished by any party purporting to act on behalf of Seller.

When confronted with the issue, most courts uphold the "as is" clause and recite the ruleof "caveat emptor."29 However, this will not be the case when the seller fraudulently conceals alatent problem or fails to inform the buyer of its existence.30 This has particular relevance insensitive areas like environmental. While the usual rule in land sales may be "caveat emptor,"particularly when backed by an "as is" clause, courts commonly impose a duty on the seller "[t]odisclose to the purchaser any concealed condition known to him which involves an unreasonabledanger."31 What constitutes an "unreasonable danger" is debatable, but one court has suggestedthat a high concentration of soil contaminants or tainted ground water (when the water is to beused for human consumption) may qualify as "unreasonable danger."32 "[Another] exception isthat a vendor is liable to those outside the land for a dangerous condition on the land after thesale until the purchaser discovers it or should have discovered it. Once the purchaser discovers

33Christy, 329 N.W.2d at 752.

3442 U.S.C. § 9601 et. seq.; See 8 A.L.R.5th 312 § 13; see also M & M Realty Co. v.Eberton Terminal Corp., 977 F. Supp. 683 (D. Pa. 1997).

35See id.

36Todd v. Krolick, 466 N.Y.S.2d 788 (N.Y. App. Div. 1983).

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the defect and has had a reasonable opportunity to take precautions, third parties such assubvendees have no further recourse against the vendor."33

The seller needs to remember that, while an "as is" clause may operate to protect it fromliability to a buyer for environmental matters, it does not relieve the seller of potential liabilityunder the Comprehensive Environmental Response, Clean-up, and Liability Act (CERCLA).34 CERCLA supersedes any contractual "as is" provisions, and consequently, a seller may be liablefor environmental cleanup long after it has transferred property, regardless of anything in a well-drafted contract to the contrary.35 An indemnity from the buyer would afford the seller addedprotection, depending, of course, on the assets of the indemnitor at the time of the claim.

6. Contracts and other Due Diligence Items (i.e., Licenses and Permits)

Commercial real estate typically involve a variety of contracts and agreements, such asbrokerage and management agreements, and those relating to maintenance and other services. There will also be other, what we will term "Due Diligence Items", such as permits, licenses andvarious intangibles. A common approach is for the contract to provide for the delivery of allrelevant documents and information coupled with warranties and representations as to accuracyand completeness. The assignment and transfer of these is then provided for, and the selleralmost always requires the buyer to assume such contracts.

Seller and Buyer shall enter into an agreement substantially in theform attached hereto as Exhibit G whereby Seller shall deliver and assignto Buyer the Contracts and the Special Due Diligence Items and wherebyBuyer shall assume the obligations of the Seller under the Contracts andthe Special Due Diligence Items from and after the Closing Date.

Some observations and comments:

• Although most sellers will require an assumption by the buyer, in the absencethereof the general rule seems to be that unrecorded agreements like these are notbinding on successors.36 There are cases that hold that if the buyer has actualnotice of such a contract and does not exclude it, an assumption will be

37See Conditioner Leasing Corp. v. Sternmor Realty Corp., 256 N.Y.S.2d 974 (N.Y. App.Div. 1965).

38See Conditioner Leasing, 256 N.Y.S.2d at 975.

39See 12 Am.Jur.2d Brokers § 199 (1997); see also Cushman and Wakefield, Inc. v.Progress Corp., N.V., 568 N.Y.S.2d 56 (N.Y. App. Div. 1991).

40See Huber Oil Co. of Louisiana, Inc. v. Save-Time, 422 So.2d 597 (La. 1982); see alsoFriedman, supra, at Sec. 8.11 ("Building service contracts are generally cancellable").

41See United Coin Meter Co. v. Gibson, 311 N.W.2d 442 (Mich. Ct. App. 1981); NassauTerrace Condominium Assoc., Inc. v. Silverstein, 537 N.E.2d 998 (Ill. App. Ct. 1989).

42 See United Coin Meter, 311 N.W.2d at 442.

43See Nassau Terrace, 537 N.E.2d at 1000.

44Nassau Terrace, 537 N.E.2d at 1000.

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presumed.37 Further, an assumption might be assumed if the buyer accepts thebenefits of a contract.38

• Management and brokerage agreements present special problems, and require ahigh level of due diligence, both by the seller and the buyer. Management andleasing brokerage agreements may contain "sale" clauses, often buried in the fineprint, and leasing brokers often have future rights to commissions on renewals andexpansions. Nonetheless, the general rule stated above seems to apply here aswell—absent an assumption, the buyer is not liable.39

• An argument that a contract for service to a property runs with the land usuallyfails, because most such contracts do not involve mutual benefits and burdensbetween two parcels.40 A specific type of contract that is frequently litigated is acontract for laundry equipment to a multi-unit apartment complex.41 Courts differas to whether such contracts constitute licenses42 or leases.43 At least one courthas determined that such a contract is a covenant running with the land, and assuch binds successors.44

• In the area of other Due Diligence items, zoning and land use permits normallyaccompany the property. In complicated projects, transfers may require approval,particularly if development rights are being transferred. These rights ofteninvolve responsibilities, such as street widenings, impact fees and the like, which

45See generally, Alan Wayte, Real Property Acquisition Due Diligence Checklist, R172A.L.I.-A.B.A. 805, 809-10 (9th ed. 1991).

46See Fromer v. Two Hundred Post Associates, 631 A.2d 347 (Conn. Ct. App. 1993)(holding that inland wetlands permit valid despite ownership change); see also Garibaldi v.Zoning Bd. of Appeals, 303 A.2d 743 (Conn. 1972).

47City of Ft. Collins v. Brown Farm Joint Venture, 819 P.2d 1085, 1087 (Colo. 1991).

48Sounhein v. City of San Dimas, 55 Cal.Rptr.2d 290, 293 (Cal. Ct. App. 1996)(citationsomitted).

49See, e.g., Citizens for Safe Waste Mgmt. v. St. Louis County, 810 S.W.2d 635, 642 (Mo.Ct. App. 1991).

50See Bonner v. Upper Makefield Township, 597 A.2d 196, 201 (Pa. Commw. Ct. 1991)

51Wayte, supra n. 45 at 809.

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buyer must address, since it can have responsibility for these obligations.45 Courtsin many jurisdictions have held that zoning and use permits run with the land andbind successors in interest.46 For example, a Colorado court found that adeveloper's promise to develop a street within a subdivision bound anotherdeveloper who subsequently purchased the property.47 A California appellatecourt came to a similar conclusion, noting that "[c]onditions of a conditional usepermit run with the land, once the benefits of the permit have been accepted. Subsequent owners of the land have no greater rights than those of the owner atthe time the conditional use permit was issued."48

• Some counties or cities have ordinances which state that successors will be boundby zoning and use decisions affecting their predecessors.49 It is essential that thebuyer be aware of any zoning or use permits or covenants related to property, andshould investigate whether local ordinances provide for their transferability. Evenin the absence of such provisions, if the permit or covenant regulates the use ofthe land, a court would likely find that it runs with the land, and therefore bindssubsequent purchasers.50 Some permits that a buyer should investigate includeelevator permits, cabaret permits, and certificates of occupancy.51

• Some permits normally do not run with the land, with liquor licenses being aprime example. This entire area is very "local law" specific, and it would be amistake to attempt any type of generalization.

• Buyers may also take advantage of their interest in property to apply for zoningand use permits or variances. Most jurisdictions consider a buyer to have an

52See, e.g., WMM Properties, Inc. v. Cobb County, 339 S.E.2d 252 (Ga. 1986).

5317 U.S.C. § 101 et. seq.

54Id. at § 102.

55Id.

56See Vanessa N. Scaglione, Building Upon the Architectural Works Protection CopyrightAct of 1990, 61 Fordham L. Rev. 193, 197 (1992).

5717 U.S.C. § 120 (1998).

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interest in property significant enough to apply for such permits in anticipation ofpurchase.52 Sellers need input in these matters to protect themselves should thedeal not close.

• Commercial real estate often involves other intangibles. Names, phone numbersand logos are the most common examples and are usually covered by a simpleassignment. However, there may be other and, depending on the situation,potentially much more important issues in such areas as unique building design,sculptural features on the building and artwork, such as murals, in or on thebuilding. In these situations, the architect or artist may still have rights applicableto the artwork. Architectural works, including commercial and residentialbuildings, are now protected under the Architectural Works Copyright Act of1990.53 The design of a qualifying structure may not be reproduced in anotherstructure.54 This means that the building itself cannot be duplicated somewhereelse.55 To qualify as a protected architectural work, a building must be habitableby people, even if temporarily. Obviously houses and offices qualify, butshopping centers, churches, gazebos, and garden pavilions may also beprotected.56 The architect's rights do not, however, include the right to preventothers from making two-dimensional representations of the building, such as inphotographs or paintings, even for commercial use, if the building is "located in orordinarily viewable from a public place."57

• If the building's design incorporates a sculpture or a painting, however, the artist 'srights are different. The sculpture or painting itself may independently beconsidered a work of art, protected under more stringent copyright laws. In such acase, the building owner or tenant does not have the right to make two-dimensional representations of the artwork for commercial use without the artist'sconsent. The buyer needs to check to see if any architectural features or artworkon the building have been registered with the Copyright Office, or if the artist hassold the copyright in the work to someone else.

5817 U.S.C. § 106A (1998).

59Id.

60For a discussion of these issues, see Keith A. Attlesey, The Visual Artists Rights Act of1990: The Art of Preserving Building Owners' Rights, 22 Golden Gate U. L. Rev. 371 (1992);see also Matthew A. Goodin, The Visual Artists Rights Act of 1990: Further Defining the Rightsand Duties of Artists and Real Property Owners, 22 Golden Gate U. L. Rev. 567 (1992).

6117 U.S.C. § 113(d)(1)(A)-(B) (1998). See Attlesey, supra n. 60 at 374.

6217 U.S.C. § 113(d). See also Attlesey, supra n. 60 at 380.

63See Cal. Civ. Code §§ 980-990 (West 1997); Mass. Gen. Laws Ann. ch 231 § 85 (West1998); Nev. Rev. Stat. §§598.970-978 (1998); Pa. Stat. Ann. 73 §§ 2101-2110 (Purdon 1998).

64Cal. Civ. Code § 987(g); Pa. Stat. Ann. 73 § 2102-2108.

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• In addition, the Visual Artists' Rights Act of 1990 ("VARA"),58 protects, duringthe lifetime of the artist, any art that cannot be removed from a building withoutdamaging the artwork. An artist has the right to protect his artwork fromdestruction or mutilation regardless of whether he holds the copyright on the art.59 Even if the building owner owns the copyright to the work, the owner does nothave the right to destroy or alter the artwork as long as the artist is living.60

An artist and a building owner can, however, enter into an agreement during thecommission of artwork in which the artist agrees to the installation of the artwork in such a waythat removing the work would cause it to be destroyed.61 If this is an issue, the buyer should askto see this agreement, or if there is none, should inquire as to the name of the artist and whetherthe artist is still living. If the artist is still alive and has not executed such an agreement, a buyermay be limited as to what uses it may put the property, and may not be able to do anything thatwould alter, mutilate or destroy the artwork. The artist's rights continue even with the sale of theproperty.62

Many states have similar statutes with even more stringent guidelines.63 For example, inCalifornia, Connecticut, Massachusetts, New Mexico, and Pennsylvania, art is protected for fiftyyears after the artist's death.64

7. Leases and Tenancies

Seller and Buyer shall enter into an agreementsubstantially in the form attached hereto as Exhibit F wherebySeller shall deliver and assign to Buyer (i) the existing TenantLeases affecting the Property and (ii) any and all deposits actually

65See Scholey v. Steele, 138 P.2d 733 (Cal. Ct. App. 1943).

66At common law, a security deposit is an item of contract between the original lessor andthe lessee, and therefore the original lessor remains liable for return of the deposit even after ithas sold the demised premises. See PMK Inc. V. Folsom Heights Develop. Co., 692 S.W.2d 395(Mo. Ct. App. 1985). However, if the new owner assumes the duties of the landlord or gets adeduction from the purchase price for the amount of security deposits, the new owner will, asbetween it and the seller, be liable for return of the security deposits; see Moskin v. Goldstein,196 N.W. 415 (Mich. 1923); see also Walter H. Sullivan, Inc. v Johnson, 3 P.2d 72 (Cal. Ct.App. 1931). Some states' statutes require a grantee to be liable for a security deposit, regardlessof whether she received it from the seller. See William S. McDowell, Jr., Pledging LeaseSecurity Deposits, 13 no. 1 Prac. Real Est. Law. 9, 12-13. This is the approach the Restatement(Second) of Property takes. Landlord and Tenant, Sec. 16.1, cmt. 6, illus. 3 (1977). This maynot absolve the original landlord/seller from its basic liability.

67Michael E. Meyer, Operating Expenses and CAM/Hidden Agendas and CorporateGuerilla Warfare Tactics, 424 PLI/Real 171 (1997).

68See id. For a discussion of how operating expenses can be allocated, see Raymond S.Iwamoto, How to Handle Operating Expenses and Gross Up Clauses, 15 no. 1 Prac. Real Est.Law. 67 (1999). See also Michael E. Meyer, Counseling the Client on Operating Expenses andAudit Rights Part I, 15 no. 1 Prac. Real Est. Law. 79 (1999); and Part II, 15 no. 2 Prac. Real Est.Law. 71 (1999).

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paid to Seller under the Tenant Leases, and whereby Buyer shallassume the obligations of the landlord under the Tenant Leasesfrom and after the Closing Date including the obligation toaccount for any security deposits owing under the Tenant Leases.

Clearly, this represents a key due diligence item in transactions involving incomeproducing property. Some points go without saying, such as the need for accuracy andcompleteness of records and files and a clear understanding of status of security deposits. As longas the tenant is in possession, or the buyer otherwise has actual or constructive knowledge of thelease, the buyer takes title subject to the lease and all of its terms.65 Among other things, thismeans that the buyer is obligated to make any required security deposit refunds.66

Operating expenses represents another area of potential future obligations for a buyer.There are firms now that specialize in reviewing past practices to determine if a tenant has beenovercharged on expense contributions,67 and there is the strong probability that the newowner/landlord will be liable to reimburse the tenant for overcharges in expenses or rent.68

69Absent a valid tenant estoppel, the new owner will be bound by any modifications orinterpretations of the lease that the original landlord and the tenant have made. See Carteret v.Variety, 228 A.2d 674 (N.J. 1967); see also Owsley v. Hamner, 227 P.2d 263 (1951). A well-drafted tenant estoppel may reveal discrepancies between the seller's representations regardingleases and tenant statements.

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The review and approval of leases is often a condition to the buyer's obligations. Anothercommon condition is the delivery of satisfactory tenant estoppels,69 with the seller sometimeshaving the option of giving a "Seller Certificate" in cases where the tenant will not deliver anestoppel.

8. Title and Survey

(a) As soon as practicable, and in any event within ten (10) days after theexecution hereof by both Seller and Buyer (the "Effective Date"), Seller shallcause to be delivered to the Buyer, at Seller's expense, a commitment for anOwner's Policy of Title Insurance from the Title Company (the "Commitment"),together with a legible copy of all documents referred to in the Commitment, andthe date that all such items are so delivered shall be referred to herein as the"Title Delivery Date." The Commitment shall contain the agreement of the TitleCompany to insure the fee simple title to the Property and shall set forth the formof the policy, and exceptions to coverage and any conditions to be satisfied. Within ten (10) days after the Title Delivery Date, the Buyer shall have the rightto object in writing to any matters referred to in the Commitment. Any matter notso objected to shall be a "Permitted Exception." Seller shall have the right, butnot the obligation, within fifteen (15) days following the receipt of the writtenexceptions, if any, to attempt to cause the Title Company to remove the objectedto exception, it being agreed, however, that notwithstanding anything to thecontrary contained herein, Seller shall have no obligation to bring any action orproceeding or otherwise to incur any expense whatsoever to eliminate or modifyany of Buyer's title objections. If the Title Company does not agree to remove theobjected to exception within the fifteen (15) day period, Buyer shall have anadditional ten (10) days within which to waive the exception by giving Sellernotice in writing that the Buyer has elected to waive the exception, and any itemso waived shall be a Permitted Exception. If Buyer does not waive the exception,in writing, within the ten (10) day period, this Agreement shall be deemed to beterminated at the end of the said ten (10) day period and the money deposited withthe Title Company shall be returned to Buyer. Without limiting the generality ofthe foregoing, the Tenant Leases, the Contracts and the Special Due DiligenceItems are and shall be deemed to be Permitted Exceptions.

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(b) Buyer shall not be required to object to any mortgage or deed of trust onthe Property which can be removed upon the payment of money. Seller agrees toremove any such mortgage or deed of trust prior to or at Closing and Buyer mayuse the proceeds of the Purchase Price to pay any said mortgage or deed of trust.

Survey. Buyer shall have the right, on or before the 15th day of June, 1999, atits expense, to obtain a current ALTA/ASCAM survey of the Property (the"Survey") prepared by a registered surveyor, and without limiting the generalityof the foregoing, the Survey shall comply with the specifications set forth onSchedule ____hereof. The Survey shall be certified to the Buyer and to the TitleCompany. The Survey shall contain a legal description of the Property sufficientto enable the Title Company to remove its standard survey exception. If Buyerdoes not obtain the Survey by June 15, 1999, then any matters that could or wouldbe shown by a survey shall be Permitted Exceptions. If Buyer does obtain aSurvey by June 15, 1999, but the Title Company refuses to remove its standardexception without reference to any matter shown on the Survey, the Buyer shallhave until June 20, 1999, within which to waive the matters shown on the Survey,and if the Buyer does waive this requirement, then the matters shown on theSurvey shall be Permitted Exceptions. If the Buyer does not waive thisrequirement in writing, then this Agreement shall be deemed to be terminated andthe money deposited with the Title Company shall be returned to Buyer.

A key issue here is what, if anything, the Seller must do in response to Buyer's objections. Under the above approach, Buyer "takes it or leaves it".

An alternate approach is to allow Buyer to "cure" any "monetary" items, and deduct thecost from the purchase price. The Seller needs to be concerned about possible "major hits" likean unexpected judgment or tax lien. The suggested language limits the cure rights to calculablethings like mortgages. An alternate approach is to set an outside dollar limit.

Related to this is the issue of liens that come into existence after signing. Minimally, theSeller should be willing to agree not to affirmatively cause any such liens.

9. Miscellaneous Due Diligence Issues

A. Employees, ERISA, Unions

While a property's management company usually contracts for services for a property,such as grounds keeping, janitorial or security services, sometimes the property owner itself mayhave employees who work at the property. Such employees present more concerns for the sellerthan the buyer, as the seller must decide whether to retain the employees after the property issold, and in what capacity.

70See Wayte, supra n. 45 at 812; see also Friedman, supra n. 2 at Sec. 8.10.

71See, e.g., William Raveis Real Estate, Inc. v. Commissioner of Revenue Serv., 665 A.2d1374 (Conn. Super. Ct. 1995).

72See generally, id.

73See generally, id.

74See, e.g., Mo. Code Regs. Ann. tit. 12, § 10-3.500(3) (1998).

75Uniform Commercial Code Series, Rev. Art. 6, 8 (1993).

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The buyer also needs to give consideration to retaining such employees. If the buyerwants to retain these employees after purchase, it will be responsible for employment relatedissues, such as COBRA, ERISA, and OSHA regulations.70

B. Successor Liability for State Sales, and Withholding Taxes

States such as Missouri and Kansas have statutes requiring the seller of a business topresent to the buyer a statement showing the amount of sales and withholding taxes due, or thatno taxes are due at all. If the seller presents a statement indicating that no taxes are due, thebuyer may usually rely upon it in good faith. If, however, the buyer fails to secure such astatement, it may be liable for any such tax due respecting the business.71 If any tax is due, thebuyer must withhold this amount from the purchase price or face the possibility of liability forthe taxes and any penalties that have accrued.72 This can impact certain real estate transactions,with the issue being whether a business is being sold. For example, if the buyer wants topurchase a gas station, property and business, it needs to focus on these rules respecting statesales and withholding taxes. If any tax is due, the buyer may have to withhold this amount fromthe purchase price or face the possibility of liability for the taxes and any penalties that haveaccrued.73 Each state's statutes are different, but some define "successor" as any person whosucceeds to even a part of the business, or any part of the inventory of goods of a business beingsold.74 It is imperative that buyers understand these laws and rules and the impact on real estatetransactions.

C. Bulk Sales

Bulk sales acts are designed to prevent a "debtor [from]...conceal[ing] or dispos[ing] ofits property with a view to preventing creditors from satisfying their legal claims."75 Bulk sales

7637 Am.Jur.2d Fraudulent Conveyances § 238 (1968) et. seq.

77See id.

78See 37 Am.Jur.2d Fraudulent Conveyances at § 243.

79Raymond J. Werner, F.Y.I: Antitrust Relief Comes to Major Real EstateTransactions, 11-FEB Prob. & Prop. 4, *4, (1997).

80See id.

81See Louis C. Keiler, Some Transactions Exempted From Antitrust ReportingRequirements, 9 No. 6 Com. Leasing L. & Strategy 8 (1996).

82See id.

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acts require a seller to notify creditors of the pending sale of inventory.76 If creditors are notnotified, the buyer may have liability to the creditors.77

For the most part, transfers of real property do not fall into the category outlined in bulksales acts, as they do not involve "goods." However, buyers should investigate their states' bulksales acts to find out exactly what may be considered a bulk sale. If the buyer plans to purchaseany part of the seller's inventory, or even equipment or fixtures, it might wish to notify the seller'screditors of the sale to guard against possible liability.78

D. Hart Scott Rodino

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a, (the"Act"), requires parties to certain major transactions to notify the Federal Trade Commission ofthe transaction. Prior to 1996, the Act affected many real estate transactions,79 since the Act atthat time provided that transactions between entities one of which has assets of $100 million ormore and the other of which has assets of $10 million or more had to be reported to the FTC. 15U.S.C. § 18(a)(2). Also prior to 1996, if the value of the acquired assets, for example, the pieceof real estate being transferred, exceeded $15 million dollars, the need for notification wastriggered. 15 U.S.C. § 18a(c). Prior to 1996, if the transaction met the dollar amount threshold,the notification process could delay the transaction by several weeks,80 and failure to make propernotification could result in heavy penalties for both buyer and seller.81

However, the Act was changed in 1996 to provide exemptions for many real estatetransactions.82

"The new rules exempt acquisitions of eight categories of real property: newfacilities; facilities acquired by the original lessee in a lease financing agreement;

83Id.

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raw land and other unproductive real property; office buildings and residentialproperty; hotels and motels; certain recreational property; certain agriculturalproperty; and rental retail space and warehouses. Transactions related to exemptproperty are also exempt from the requirements."83

As a result, most real estate transactions will be exempt, but buyers and sellers need to beaware of the exemptions in order to determine whether a purchase requires notification. If apurchaser buys not only real property, but also a business interest, and the transaction meets thedollar amount limits, the FTC will likely want notification. Purchases of office buildings,residences, retail rental property, and raw, undeveloped land are usually exempt no matter howgreat the dollar value of the transaction, but again, parties to a contract for the sale of propertyshould check the regulations to determine whether a particular transaction falls under theexemptions to the Act.

E. Required Consents. In many cases, consents will be required from thirdparties to a sale. Examples include (1) lenders, (2) various authorities, such as those relating toliquor and other permits and zoning type development agreements, (3) parties holding firstrefusal and options rights, (3) tenants, and (4) other parties to agreements that establisheasements, covenants and restrictions. Sellers need to be aware of these consent requirementssince the failure to properly address the same can result in liability.

10. Satisfaction of Conditions

8.1 Conditions Precedent to Purchaser's Closing. If any ofthe conditions set forth in this Section 8.1 (the "Purchaser'sConditions Precedent to Closing", or "Purchaser's Conditions")are not fulfilled on the Scheduled Closing Date, then Purchasermay, at its option, as its sole right and remedy, by written noticethereof given to Seller, (a) terminate this Agreement, in whichevent the Down Payment will be immediately returned toPurchaser and both Purchaser and Seller shall be released anddischarged from further duties of performance hereunder, eachwithout liability to the other, or (b) waive all unfulfilledPurchaser's Conditions, or (c) extend the Closing Date to a dateselected by Purchaser, but not later than thirty (30) days from theScheduled Closing Date. If Purchaser extends the Closing Date,and, if the Purchaser's Conditions are not fulfilled on or before theextended Closing Date, then Purchaser may, at its option, bywritten notice thereof given to Seller, do (a) or (b) of the preceding

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sentence of this Section 8.1. The Purchaser's Conditions are thefollowing:

(I) All title and survey conditions, as set forth inSection 9, have been satisfied.

(II) All of the representations and warranties of Sellercontained in Section 2 of this Agreement are trueand complete, and if Purchaser requests, Sellershall, as a further Purchaser's Condition, deliver toPurchaser at Closing a certificate to the effect thatsaid representations and warranties remain, toSeller's knowledge, true and correct.

(IV) The City Council of the City has passed OrdinanceNo. _________ which was introduced and read forthe first time on _________, 1998 and saidOrdinance has taken effect.

8.2 Conditions Precedent to Seller's Closing. If any of theconditions set forth in this Section 8.2 (the "Seller's ConditionsPrecedent to Closing", or "Seller's Conditions") are not fulfilledon the Scheduled Closing Date, then Seller may, at its option, as itssole right and remedy, by written notice thereof given toPurchaser, (a) terminate this Agreement, in which event the DownPayment will be immediately returned to Purchaser and bothPurchaser and Seller shall be released and discharged fromfurther duties of performance hereunder, each without liability tothe other, or (b) waive all unfulfilled Seller's Conditions, or (c)extend the Closing Date to a date selected by Seller, but not laterthan thirty (30) days from the Scheduled Closing Date. If Sellerextends the Closing Date, and, if the Seller's Conditions are notfulfilled on or before the extended Closing Date, then Seller may,at its option, by written notice thereof given to Purchaser, do (a) or(b) of the preceding sentence of this Section 8.2. The Seller'sConditions are the following:

(I) Seller has received from Purchaser a true andcorrect copy of the executed lease agreementbetween Purchaser and the Tenant and in which theTenant agrees that it will lease the Building on itscompletion for a minimum of _____ years, it beingagreed, however, by Seller that Purchaser may

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delete certain provisions from the lease that itdelivers to Seller.

(II) Seller has received the guarantee agreement fromGuarantor described in Section 18.

8.3 Mutual Conditions Precedent to Closing. If any of theconditions set forth in this Section 8.3 (the "Mutual ConditionsPrecedent to Closing", or "Mutual Conditions") are not fulfilled onthe Scheduled Closing Date, then either party may, at its option,extend the Closing Date to a date not later than thirty (30) daysfrom the Scheduled Closing Date. If the Mutual Conditions are notfulfilled on or before the extended Closing Date, if either partyexercises its right to extend pursuant to the first sentence of thisSection 8.3, or the Scheduled Closing Date, if there has been nosuch extension, then either party may, at its option, as its sole rightand remedy, by written notice thereof given to the other, terminatethis Agreement, in which event the Down Payment will beimmediately returned to Purchaser and both Purchaser and Sellershall be released and discharged from further duties ofperformance hereunder, each without liability to the other. TheMutual Conditions are the following:

(I) The City Council of the City has passed suchrevisions to that ordinance of the City number____________, which has been introduced but notpassed, as are reasonably acceptable to Seller andPurchaser so that the boundaries of the project areatherein described include all of the Property, andsaid revised Ordinance No. ____________ hastaken effect;

(II) A lot split under applicable laws and regulationshas been duly and properly granted by the City, andhas taken effect, as respects that part of Tract 14,INDUSTRIAL LAND, that is included in theProperty.

Respecting items (I) and (II) of this Section 8.3, Seller agrees thatSeller will, at its cost, exercise reasonable efforts to secure thesame, and Purchaser agrees, at its cost, to give its full cooperationin such efforts.

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The rule in drafting specific conditions is to be as clear and specific as possible as to thesubstance of the conditions, the time for satisfaction and the consequences of non-satisfaction.

Contracts also commonly have general conditions, such as the continued accuracy ofrepresentations and the performance of material covenants, and in these cases it is particularlyimportant to address the consequences of non-satisfaction. The quoted clause takes the approach,not unusual, that the other party's remedies are limited to termination with no further rights orwaiver the non-satisfied item. That approach may be appropriate in many cases, but it ignores thefact a party's default or misrepresentation may be the cause of a condition not being satisfied.

B. OPERATIONAL ISSUES

1. Insurance; Maintenance; Casualty; Condemnation; Change of Condition

Seller agrees to maintain Seller's current fire and extendedcoverage insurance, if any, on the Property until Closing. Sellershall do ordinary and necessary maintenance, upkeep and repairto the Property through Closing. If prior to Closing, all or anypart of the Property is taken by eminent domain, or if acondemnation proceeding has been or is threatened against theProperty or any part thereof, or if any improvements on theProperty are destroyed or substantially damaged by a casualty, orif there has been any material adverse change in the condition ofthe Property after the Due Diligence Period, Seller shall promptlyprovide written notice to Buyer of any such event. Upon notice ofsuch occurrence, Buyer may reinspect the Property. Within ten(10) days after the giving by Seller of such notice, or if no notice begiven within fifteen (15) days after the occurrence, either Seller orBuyer may terminate this Contract by written notice to the other. Unless this Contract is so terminated, it shall remain in full forceand effect, and Seller shall, at Closing, assign and transfer toBuyer all of Seller's right, title and interest in and to any awardsthat may be made for such taking and any insurance proceedspayable on account of such casualty. If a material change incondition occurs with respect to the Property, Seller shall have theright (but not the duty) to remedy such change prior to Closing,and if Seller is unable or unwilling to do so, Buyer, at its option,may (a) terminate this Contract, or (b) proceed to Closing, takingthe Property in its "as is" condition. The provisions of thisParagraph shall survive Closing or termination of this Contract.

84See 92 C.J.S. Vendor & Purchaser § 171 ("a vendor under contract to convey at afuture date ordinarily is not required, in the absence of agreement, to keep the premises inrepair from ordinary wear and tear....").

85Id.

86See Fisher v. MacDonald, 127 N.E.2d 484 (Mass. 1955).

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If this Contract is terminated pursuant to this Section, the EarnestMoney will be returned to Buyer upon written demand.

Addressing first the issue of on-going maintenance, absent contract provisions, neither thebuyer nor the seller is obligated to make any repairs to the property.84 Obligations respectingmaintenance and repair are usually made express in the contract.85 If a seller makes repairs orimprovements after executing the contract and without the buyer's permission, the sellergenerally is not entitled to reimbursement for such expenditures.86

The above clause attempts to strike a balance between the competing needs of the sellerand buyer. A buyer is examining the property and should not be entitled to have the seller makerepairs that actually improve the property beyond that which the buyer inspected. On the otherhand, the seller should agree to ordinary course type maintenance and repair, at least as tocommon areas. The buyer then has the right to a "final" inspection, and material changes aretreated like a fire giving the buyer the right to terminate unless the seller corrects.

The suggested language also represents a typical "force majeure" clause. In most cases,the termination right is reserved to the buyer. However, the seller should consider reserving asimilar termination right, since the insurance proceeds on the condemnation awards, coupledwith any residual value, might exceed the proposed purchase price for the property.

2. Ongoing Leasing

Seller may continue Seller's efforts to lease space in the Buildingon the Property upon lease terms contained in Seller's standardform lease, and Buyer shall take subject to the new leases (and theterms and provisions thereof) entered into after the date of thisAgreement. Seller agrees not to enter into any leases for less than$______ per square foot or for a time longer than one year. IfSeller desires to enter into a lease for less than $______ persquare foot or for more than one year, Seller shall obtain Buyer'swritten approval, which approval shall not be unreasonablywithheld. No tenant improvements or rent concessions shall begranted by Seller without Buyer's written approval, whichapproval shall not be unreasonably withheld. With respect to

87See generally 92 C.J.S. Vendor & Purchaser § 288 (1955 & 1999 Supp.)

88See, generally id.

89See id.

90See id.

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existing Tenant Leases, Seller shall not (1) accept any prepaymentsof rents, (2) agree to any termination or modification thereof, or(3) accept any surrender or cancellation thereof, without theBuyer's written approval which may be granted or withheld inBuyer's sole discretion.

Under this approach, the seller reserves a very limited right to continue leasing activities. An alternate would be to require consent (reasonable or sole discretion) to any new lease. Prepayments, terminations, surrenders or amendments should require the consent of the buyer, and "sole discretion" seems appropriate, except in unusual circumstances.

This clause does not specifically address remedial actions that may be taken against atenant allegedly in default. In general, any rents due and owing up to the time of the contractbelong to the seller.87 Of course, any rents that accrue after closing are due the buyer.88 Duringthe executory period, if the buyer is in possession, it generally has the right to receive rents andprofits from the property.89 If, as is usually the case, the seller remains in possession, it retainsthe rights to any rents that accrue, and if at closing such rents have not been paid, the buyer isobligated to forward those rents to the seller when they are collected.90

3. Contracts and Employees

The general approach is to maintain the "status quo" through closing. As to those that arein existence, the buyer needs to determine if it desires to retain or terminate.

Usually, the seller is prohibited from making new arrangements without the buyer'sconsent and "sole discretion" is usually the standard.

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C. CLOSING ISSUES

1. Prorations And Adjustments

General real estate taxes for the then current year relating to theProperty shall be prorated as of the Closing Date. If Closing shalloccur before the actual taxes for the then current year are known,the apportionment of taxes shall be upon the basis of taxes for theProperty for the immediately preceding year, provided that, if thetaxes for the current year are thereafter determined to be more orless than the taxes for the preceding year (after any appeal of theassessed valuation thereof is concluded), Seller and Buyerpromptly shall adjust the proration of such taxes and Seller orBuyer, as the case may be, shall pay to the other any amountrequired as a result of such adjustment and this covenant shall notmerge with the deed delivered hereunder but shall survive Closing. All special taxes or assessments actually assessed prior to theClosing Date shall be prorated as set forth above, and thoseassessed after the Closing Date shall be paid by Buyer.

Rents and other charges for or respecting the Property or portionsthereof shall be prorated as of the Closing Date except that noproration shall be made for rents more than thirty (30) daysdelinquent as of the Closing Date (hereinafter called the"Delinquent Rents"). Buyer shall make a good faith effort tocollect all Delinquent Rents for the benefit of Seller and suchcollections shall be remitted to Seller promptly upon receipt byBuyer. Rents collected by Buyer from tenants owing DelinquentRents shall be applied first to current rents owed by such tenantand then to Delinquent Rents. Nothing in this subsection shallrestrict Seller's right to collect Delinquent Rents directly from atenant by any reasonable legal means. The provisions of thissubsection shall survive Closing. Nothing herein shall beconstrued as prohibiting Seller from taking appropriate actionafter Closing to collect Delinquent Rents.

At Closing, Seller shall deliver and assign to Buyer any and allsecurity deposits actually paid to Seller under the Tenant Leasesand Buyer shall assume and be responsible for the obligationsunder the Tenant Leases to account for all such security depositsowing under the Tenant Leases.

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All other income from, and expenses of, the Property, including butnot limited to operating expenses, maintenance charges, servicecharges and salaries of continuing employees (including all fringebenefits), shall be prorated as of the Closing Date. The provisionsof this subsection shall survive Closing.

A few points and observations.

1. Be sure you understand local practices in the area of taxes andassessments. In many jurisdictions, these impositions can be paid in arrears, and the issue iswhether the proration is based on when the liability accrues or when the tax is paid. This can bevery important in new construction situations.

2. It is generally wise to "keep the books open" and to use broad language, tocover items of income or expense that are not known at closing.

3. Security deposits often are a vexing issue, particularly when they havebeen "used" to cover shortfalls. The quoted language is very favorable to the seller.

4. This deals with possible rental delinquencies in a manner very favorable tothe seller, since it allows the seller to take remedial actions against tenants. Clearly, the buyerneeds to consider this, since it could result in the termination of a lease.

2. The Closing

At the Closing, all of the following shall occur, all of which shallbe deemed concurrent conditions:

(i) Seller, at Seller's sole cost and expense, shall deliver orcause to be delivered to Buyer the following:

(1) A Special Warranty Deed fully executed andacknowledged by Seller conveying to Buyer title tothe Property subject only to the PermittedExceptions.

(2) Such evidence of the authority and capacity ofSeller as the Title Company may require.

(3) An Affidavit that Seller is not a "foreign person" asdefined in Section 1445 of the Internal RevenueCode of 1986, as amended.

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(4) The Title Company's standard form of owner'saffidavit stating that there are no unpaid bills forlabor or material furnished to the Property and thatthere are no parties in possession, except as statedon Exhibit B.

(5) The Owner Policy of Title Insurance ("OwnerPolicy") described in Section __ hereof.

(ii) Buyer shall deliver or cause to be delivered to TitleCompany by wire transfer of immediately available fundsan amount equal to the Purchase Price, as adjusted forclosing costs and prorations.

(iii) Any escrow fee charged by the Title Company shall be paidone-half (1/2) by Seller and one-half (1/2) by Buyer. Buyershall pay all transfer charges and fees for the recording ofthe deed. Each party shall be responsible for the paymentof its own attorneys' fees incurred in connection with thetransaction which is the subject to this Agreement.

(iv) Possession of the Property shall be given to Buyer, subjectto the rights of tenants under the Tenant Leases and othermatters shown on Exhibit B and the Permitted Exceptions.

(v) Seller and Buyer shall enter into an agreementsubstantially in the form attached hereto as Exhibit Fwhereby Seller shall deliver and assign to Buyer (i) theexisting Tenant Leases affecting the Property and (ii) anyand all deposits actually paid to Seller under the TenantLeases, and whereby Buyer shall assume the obligations ofthe landlord under the Tenant Leases from and after theClosing Date including the obligation to account for anysecurity deposits owing under the Tenant Leases.

(vi) Seller and Buyer shall enter into an agreementsubstantially in the form attached hereto as Exhibit Gwhereby Seller shall deliver and assign to Buyer theContracts and the Special Due Diligence Items andwhereby Buyer shall assume the obligations of the Sellerunder the Contracts and the Special Due Diligence Itemsfrom and after the Closing Date.

91See Wolff v. Commercial Standard Ins. Co., 345 S.W.2d 565, 568 (Tex. Ct. App. 1961).

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(vii) As to any deposits delivered to Buyer by Seller pursuant tothe preceding subsection (v), Buyer shall deliver to Selleran original and one copy each of written notices signed byBuyer addressed to each tenant under the Tenant Leasesnotifying such tenants of the acquisition of the Property byBuyer in substantially the form attached hereto as ExhibitH, acknowledging that Buyer has received and isresponsible for the security deposit of said tenant,specifying the exact dollar amount of said deposit, andcontaining appropriate instructions relating to the paymentof future rentals and the giving of future notices.

(viii) Seller shall deliver to Buyer all keys to all locks on theProperty within Seller's possession. Seller shall deliver toBuyer all documents, to the extent that such documents arewithin Seller's possession, pertaining to tenants of theProperty, including, but not limited to, all applications,correspondence and credit reports relating to each tenant.

(ix) Seller shall deliver to Buyer all of the executed TenantLeases, to the extent such Tenant Leases are within Seller'spossession.

(x) Buyer and Seller shall deliver to each other suchdocumentary and other evidence as may be reasonablyrequired by them or the Title Company evidencing thestatus and capacity of Buyer or Seller and the authority ofthe person or persons who are executing the variousdocuments on behalf of Buyer or Seller in connection withthis Agreement.

Note the reference to a "special" warranty deed. This is the Missouri/Kansas name for alimited warranty deed where the grantor's warranties are limited to its acts. Use of a general orfull warranty could expose the seller to unnecessary subrogation type liability to the title insurerif a claim develops because of something that antedated seller's acquisition of title.91

3. Default Issues

Remedies. In the event that Seller shall breach any of itsobligations hereunder or shall fail to consummate this Agreementfor any reason, except Purchaser's default or a termination of this

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Agreement by Purchaser or Seller pursuant to a right to do sounder the provisions hereof, Purchaser shall have the right (a) toterminate this Agreement and receive a refund of the EarnestMoney, plus an amount not to exceed $10,000.00 asreimbursement for Purchaser's reasonable legal fees, and Sellershall not be liable to Purchaser for any other damages of any typeor nature, or (b) to pursue the remedy of specific performance. Inthe event that Purchaser shall fail to consummate this Agreementfor any reason, except Seller's default or the termination of thisAgreement by Purchaser or Seller pursuant to a right to do sounder the terms and provisions hereof, then Seller, as its sole andexclusive remedy, may terminate this Agreement and receive theEarnest Money as a reasonable estimate of Seller's loss in theevent of Purchaser's default. Thus, Seller shall accept and retainthe Earnest Money as liquidated damages but not as a penalty. The Earnest Money shall be immediately paid to Seller by the TitleCompany upon receipt of written notice from Seller that Purchaserhas defaulted under this Agreement, and Purchaser agrees to takeall such actions and execute and deliver all such documentsnecessary or appropriate to effect such payment.

No Representations. Except as expressly set forth herein or in anyof the instruments attached as exhibits hereto, Seller makes nowarranties or representations of any kind or character, express orimplied, with respect to the Property, its physical condition,income to be derived therefrom or expenses to be incurred withrespect thereto, or with respect to information or documentspreviously furnished to Purchaser or furnished to Purchaserpursuant to this Agreement, or with respect to Seller's obligationsor any other matter or thing relating to or affecting the same, andthere are no oral agreements, warranties or representationscollateral to or affecting the Property except as may otherwise beexpressly set forth herein. Any suit by Purchaser for any breach bySeller of any representation, warranty or covenant containedherein must be filed on or before two (2) years and one (1) dayafter the Closing Date or shall be forever barred. Notwithstandinganything contained herein to the contrary, this section shallsurvive the Closing or any termination of this Agreement. Nothingcontained herein shall be construed as a limitation on Purchaser'sright to make a claim against its title insurance policy.

Attorneys' Fees and Legal Expenses. Should either party heretoinstitute any action or proceeding in court to enforce any provision

92\RICHARD R. POWELL, 14 POWELL ON REAL PROPERTY, ¶ 882[1][a].

93See id. at ¶ 882[1]-[2].

94Id. at ¶ 882[3].

95 See, POWELL ON REAL ESTATE, § 81A.07[1][d] (Celeste M. Hammond ed., Supp.1999).

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hereof or for damages by reason of any alleged breach of anyprovision of this Agreement or for any other judicial remedy, theprevailing party shall be entitled to receive from the losing partyall reasonable attorneys' fees and all court costs in connectionwith said proceedings.

Survival. Except as expressly set forth herein, none of thecovenants, agreements, representations or warranties set forthherein shall survive Closing.

Under the general common law, either the seller or buyer has the right to specificperformance.92 This remedy assumes an affirmation of the contract by the aggrieved party.93 Bycontrast, the aggrieved party may choose to rescind the contract and seek restitution.94

In most cases, the buyer does not expose itself either to specific performance or damages,but instead, limits itself to liquidated damages.

In the above clause, the seller, likewise, seeks to put a limit on its exposure.

State law will control as to the enforceability of an "attorneys' fees" clause. Assuming it ispermissible, it can be very important.

Under the so-called merger doctrine, contract covenants do not survive closing, unless theparties' intent is otherwise.95 However, most well drawn contracts will address this subject. Theclause quoted above places limitations in terms of both time and amount. In any situation wherethere is a limitation on survival, the parties need to focus of those specific agreements that shouldsurvive or should transcend any limitations. Examples of this would be certain representations,such as those in the environmental area or in the area of brokers' commissions, and certainagreements, such as those relating to any "true up" of prorations.

Commercial property will invariably involve the assumption by the buyer of on-goingagreements, such as leases. The seller might consider securing the assumption and indemnityobligations of the buyer with a mortgage on the property itself.

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44

CHECKLIST FOR

REAL ESTATE CONTRACTS

By: Michael G. O'Flaherty Stinson, Mag and Fizzell, P.C. 1201 Walnut Street Kansas City, MO 64106 Telephone: (816) 691-3180 Facsimile: (816) 691-3495 e-mail: moflaherty@stinson.com

This checklist should be used with discretion and should notnecessarily be considered as exhaustive or complete as to allpoints. Checklists, like the road to success, are always underconstruction.

Copyright 1999 by Michael G. O'Flaherty. All rights reserved.

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CHECKLIST FOR CONTRACTSOF SALE OF REAL ESTATE

1. Parties to contract -a. Correct names of all necessary partiesb. Execution by spouses or representation that party singlec. Entity selection issues

(i) Creditworthiness(ii) Insulation from liability(iii) Tax issues

d. Authority to sell or purchase(i) Seller record owner or agent with authority(ii) All owners in tenancy in common, joint tenancy or tenancy by entireties

executed(iii) If party is corporation, LLC or other entity

A. Necessary and appropriate officers, etc., have executedB. action properly authorized by board of directors or other governingbodyC. Need to qualify to do businessD. Need for shareholder approval or other approvals

(iv) If party is executor, trustee, administrator, guardian, etc., eitherA. Authorized to act by will or trust instrument, orB. Authorized to act by court order

2. Property subject of contract a. Legal description of property includedb. Estate held by seller recitedc. Any personal property included in sale

(i) Bill of sale provided--warranty or "quit-claim"(ii) Fixtures v. personal property clearly defined(iii) Repair of damages caused by removal(iv) Inventory of personal property required(v) Intangibles - names, logos, etc., good will, telephone numbers

A. Proprietary issuesB. Restriction on removal rights under Visual Artist Rights Acts or

similar lawsd. Any other property or rights conveyed

(i) Easement rights(ii) Licenses(iii) Agricultural rights(iv) Water rights(v) Mineral, oil and gas rights- Reservation

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(vi) Leases(vii) Party wall rights(viii) Plans, permits and licenses(ix) Seller's records required for operation of property(x) Sellers's rights under warranties(xi) Insurance and condemnation proceeds

e. Subject-to- clause (i) If seller, broad enough to cover all adverse title matters

A. Easements, restrictions, reservations and other matters of recordB. Leases and tenanciesC. Survey mattersD. Mortgages -- assumed or subject to

(ii) If buyer, no exceptions or only those limited to matters which do notunreasonably interfere with buyer's intended use of property--or, shown onexhibit

(iii) Zoning matters (iv) Taxes and assessments(v) Any unrecorded matters included(vi) Procedure for review and approval of exceptions

3. Purchase price -a. Total purchase price or method of calculating—recalculation based on area or acreageb. Allocation of price among purchased assetsc. Deposit required upon execution of contract

(i) Amount(ii) By whom held(iii) Interest paid on deposit

A. Tax I.D. numberB. To whom paid--does it become part of deposit

(iv) Form of paymentA. CashB. Wired fundsC. Check subject to collectionD. Letter of credit

d. Interim payments(i) Timing of payment(s)(ii) Conditions, if any, requiring interim payments(iii) Form of payment

e. Payment at closing(i) Amount(ii) Form of payment

A. CashB. Certified check or wired funds

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C. Check subject to collectionf. Balance of purchase price

(i) Loan from third party(ii) Seller financing

A. Amount of loanB. Rate of interestC. TermD. Payment amount and scheduleE. Balloon LoanF. Non-recourse loanG. Right to prepayH. Copy of note attached as exhibitI. Copy of mortgage or deed of trust securing loan attached as exhibitJ. Appropriate contingencyK. Mortgage registration fee

(iii) Subject to existing loanA. Contract contingency-Due on sale-PenaltyB. Remaining balance on loanC. Rate of interestD. Remaining term of loanE. Monthly paymentF. Seller to provide buyer copy of note, mortgage or deed of trust, any

amendments thereto and any other documents related to existing loan- Buyer reviews before closing or inserts "approval"

contingency

G. Buyer to assume existing loan or take property subject to g. Any contingent purchase price payments - Earnouts

4. Closing of transaction a. Date of closingb. Place of closingc. Time of closing--Is time of essenced. Right of either party to extend time for closing

(i) Conditions permitting extensions(ii) Limitations on right to extend

A. Outside dateB. Number of extensions permitted

(iii) Method of extendingA. Automatic extensionB. Notice required

e. Closing in escrow(i) Identity of escrow agent-title company

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(ii) Instructions to agent--separate agreement or in contract(iii) Insured closing letter re title company agent

5. Possession of purchased property a. Does buyer have right to possession prior to closing

(i) When possession delivered(ii) Rights while in possession

A. Right to make alterations or improvementsB. Rents and other income and expenses

(iii) Liabilities while in possessionA. Buyer to hold seller harmlessB. Buyer required to insure

- Property damage insurance- Public liability insurance- Limits required

(iv) Rights and liabilities upon failure to close transactionA. Buyer required to pay rentB. RestorationC. Seller required to reimburse buyer for improvementsD. Rights as to planted crops

b. Possession to be delivered at closing(i) Seller required to deliver all keys, garage door openers, etc.(ii) Seller required to disclose existence, if known, of any keys, etc., not in

possession(iii) Rights as to growing crops

c. Does seller have right to remain in possession for period of time after closing(i) When possession delivered to buyer(ii) Rights of seller while possession continues

A. Right to remove any propertyB. Right to plant or harvest crops

(iii) Liabilities while in possessionA. Seller to hold buyer harmlessB. Seller required to insure

1. Property damage insurance2. Public liability insurance3. Limits required

(iv) Rights and liabilities upon failure to deliver possession when requiredA. Seller to pay rentB. Seller liable for damages

6. Title insurance-Surveya. Title insurance

(i) What form of policy required

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(ii) When is delivery of commitment required(iii) Specific title company designated

A. ReinsuranceB. Insured closing letter for agents

(iv) Exceptions permitted include matters specified in contract(v) Exceptions permitted include standard printed exceptions(vi) Seller required to provide lien and possession affidavit(vii) If seller financing, is mortgage title policy required(viii) Special endorsements

A. Mechanics liensB. SurveyC. Zoning-3.1D. ComprehensiveE. OtherF. State insurance law considerations

(ix) Which party pays cost of title policyA. Owner's title policyB. Mortgagee title policy

(x) Delivery of exception documentsb. Survey

(i) What form required-ALTA-ACSMA. CertificationsB. Options

(ii) When is delivery required(iii) Specific company designated(iv) Which party pays cost

c. Objections(i) After commitment and/or survey, and exception documents delivered, period

in which buyer required to make objections(ii) Once objections made, seller

A. Required to cure or contract terminates automaticallyB. Required to cure or buyer has right to accept lesser title or terminate

contractC. Required to cure up to set dollar figure, otherwise contract terminates

unless buyer accepts lesser titleD. Required to cure up to set dollar figure, otherwise buyer has option to

terminate contract or receive specified dollar amount from seller andaccept lesser title

(iii) Title/survey matters after contract signedA. Periodic updatesB. Seller agrees not to cause problems

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7. Conveyance of Title a. Type of deed required

(i) General Warranty Deed(ii) Special Warranty Deed

A. If seller is trust, use Trustee's Special Warranty Deed or Quit ClaimDeed

B. If seller is estate, use Executor's, Administrator's or PersonalRepresentative's Special Warranty Deed or Quit Claim Deed

C. Title insurance subrogation(iii) Quit Claim Deed

b. Is title merchantable if title company agrees to "insure over" an encumbrance whichwould otherwise cloud title

c. Other instruments of conveyance(i) Lease assignments(ii) Contract and intangibles assignments(iii) Bill of sale(iv) Assignments of permits(v) Assumptions of obligations

8. Prorations and Adjustmentsa. Time of proration

(i) Date of calculation(ii) When settled

A. At closingB. As soon after closing as practicalC. As to annual amounts, when determined

(iii) Any adjustment when final figures determinedb. Matters to be prorated or adjusted

(i) Taxes--cash or accrual(ii) Assessments-- Should seller warrant against

A. GeneralB. SpecialC. How adjusted if assessment already made and payable in annual

installments(iii) Insurance premiums(iv) Rents

A. Collected rentB. Delinquent rentC. Which party has right (or duty) to collectD. Limits on method of collectionE. Prepaid rent collected

(vi) Security depositsA. All, whether transferred or not

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B. Only those paid and assigned to buyer(vii) Interest on mortgages--principal reductions not computed in price(viii) Utility charges(ix) Fuel charges(x) Employees

A. ContractB. SalariesC. Accrued vacation time and fringe benefits of employees

(xi) Service contract charges(xii) Property association dues(xiii) Common area maintenance charges(xiv) Consumables

9. Risk of lossa. When does risk of loss pass from seller to buyerb. Types of occurrences covered

(i) Casualty--those actually insured against--those which could have beeninsured against

(ii) Condemnation(iii) Change in condition(iv) Change in laws or insurance regulations

c. Rights if occurrence prior to passage of risk of loss(i) Contract automatically canceled(ii) Buyer option to terminate contract or enforce--can seller also terminate(iii) Any reduction in purchase price if buyer enforces contract(iv) Buyer right to collect available insurance proceeds and close transaction

10. Due diligencea. Inspections and condition of property

(i) Systems and items- structure- foundation- HVAC- electrical- plumbing- appliances- termites

(ii) Repair of defective items required- Maximum dollar amount for repairs- Repairs done in good and workmanlike manner- Right of seller to terminate contract rather than repair- Repair required up to maximum dollar amount, if more required

then contract terminates

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- Repair required up to maximum dollar amount, if more requiredthen seller can terminate unless buyer waives excess repairs

b Environmentalc. Soilsd. Income and expensese. Continuing contractsf. Zoning and legal complianceg. Leases

(i) Review of all leases and related documents(ii) Verify accuracy of "pass throughs"(iii) Determine if consents are needed(iv) Estopples(v) Rent roll

h. Mortgages and encumbrances(i) Review documents(ii) Verify payments(iii) Determine if consents are needed(iv) Estopples

i. Employees, ERISA, unionj. Utilities

11. Contingencies a. Due diligence

(i) Standard for termination- specific- reasonable- sole discretion

(ii) Right to cure(iii) Mutuality issues

b. Financing(i) Specific

- amount - interest rate- term of loan- payment terms- lender or type of lender- termination date if loan not obtained- covenant to use best efforts to obtain loan- covenant to make application for loan within specified time

(ii) General- what is the intent

c. Existing Debt(i) Subject to or assumption

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(ii) Release of Seller(iii) Approval of loan documents(iv) Consent of lender(v) Estopples

d. Contract contingent on sale of another propertye. Contract contingent on any licenses or permits

(i) Zoning change(ii) Occupancy license(iii) Governmental inspection certificate(iv) Building permits(v) Liquor licenses(vi) TIF or incentive package

f. Contingent on lease estopples(i) All or a percentage of tenants or area or rent(ii) Form and content(iii) Landlord's Certificate as a substitute

g. Other contingencies(i) Performance by Seller(ii) Accuracy of covenants, representations and warranties(iii) Utilities available(iv) Approval of leases, mortgages, continuing contracts, covenants, conditions,

easements or restrictions of third parties or governmental agencies(v) Acquisition of other property or easements or other rights(vi) Consents of landlords, mortgagees and all other parties(vii) Is insurance available-cost(viii) State tax clearances(ix) Any bulk sale requirements(x) Any Hart Scott requirements

12. Covenants, representations and warrantiesa. Covenant of authority enter into contractb. Covenant of due organizationc. Covenant that entering into contract not violative of any

(i) Law, statute, ordinance or regulation(ii) Prior options, first refusals or contractual covenants(iii) Leases(iv) Mortgages(v) Vovenants, conditions, easements or restrictions of third parties or

governmental agencies(vi) Other agreement

d. Covenant respecting continuing contracts and agreements - there are none(management, service contracts, construction or architectural) except as listed, anythat are accepted are in full force and effect except as specified in contract

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e. Covenant that property unencumbered except as specified in contractf. Covenant that no notice received of any matter affecting property which has not been

disclosed in contractg. Covenant against seller operating property after contract executed other than in

ordinary course of business(i) Leases(ii) Contracts(iii) Alterations or additions

h. Covenant by seller of good title to property-relationship to title insurancei. Covenant no leases except as disclosedj. Covenant against lease modification, termination or acceptance of prepaid rent for

more than thirty days in advance--as to any leases:(i) No defaults(ii) Prepayments or rent concessions(iii) Security deposits(iv) Work to be performed(v) Delinquencies(vi) Unpaid leasing commissions(vii) Future leasing commissions

k. Covenant property in compliance with law-no violations1. Covenant all warranties will be true and correct at closingm. Parties not foreigners—agreement to provide FIRPTA affidavits at closingn. Absence of toxic waste—all environmental issueso. All information provided by seller true, correct and completep. Covenant re condition of propertyq. Employees matters - union contracts-salaries-vacation-ERISAr. Miscellaneous provisions as to covenants, representations and warranties:

(i) Do they survive(ii) Are they automatically repeated at closing or does the continued accuracy

constitute a condition(iii) Limited to "knowledge" and if so, whose knowledge - watch imputation.

Consider limiting to specific people.s. Negation of representations and warranties--as is

13. Defaulta. What constitutes buyer's default

(i) How many days must failure to perform continue(ii) Any notice of default required(iii) Right of seller to seek specific performance(iv) Seller's option as to whether contract terminated(v) Any limits on seller's remedies(vi) All money deposited forfeited as liquidated damages(vii) Buyer liable for seller expenses incurred

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b. What constitutes seller's default(i) How many days must failure to perform continue(ii) Any notice of default required(iii) Right of buyer to seek specific performance(iv) Right of buyer to recover interest on monies deposited(v) Buyer's option as to whether contract terminated(vi) Any limits on seller's monetary damages or other buyer's remedies(vii) Seller liable for buyer expenses incurred(viii) Buyer's sole remedy refund of deposit

c. Survival issues(i) What survives—all or selective(ii) Any limits as to time or amount

d. Attorney's fees-prevailing party

14. Miscellaneous provisionsa. Contract assignable

(i) Is original party released(ii) Limits on assignees

b. Representation against broker commissions or agreement providing for payment ofcommissions(i) Buyer not liable for commission(ii) Any commissions due on extension or renewal of tenant leases(iii) Compliance with licensing laws

c. Eminent domain provision(i) Effect of partial taking(ii) Effect of total taking(iii) Effect of taking of use

d. Existing service contracts assigned(i) Are contracts assignable(ii) Must buyer assume

e. Any warranties of purchased property(i) Real or personal(ii) If not, recital that purchased "as is" or disclaimer?

f. Seller agrees to maintain property and make repairs between execution of contractand closing

g. Provision against oral amendment of contracth. Does contract inure to benefit of and bind heirs, successors and assigns of partiesi. Provision that no oral representations made by partiesj. Is time of the essence of contractk. May contract be executed in counterpartsl. Any choice of law electionm. To whom and what address are notices to be given

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(i) Method of delivery required- mail- fax

(ii) Personal delivery permissible(iii) When notice deemed effective(iv) Effect of notice improperly given

n. Payment of costs provided for(i) Recording of instruments(ii) Transfer taxes or fees(iii) Mortgage registration fee or other similar tax or fee(iv) Title policy premiums-special endorsements(v) Escrow closing fees(vi) Attorney's fees of parties

o. Is contract or memorandum to be recorded(i) Signatures acknowledged(ii) Restriction in contract against recording of contract

p. Corporate resolutions, partnership or LLC consents, opinionsq. FIRPTA affidavitr. Exchange provisionss. Tax considerations