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Attorney Transaction Killers Series - Rule #2 for Attorney Review of Real Estate Transactions - Understand the Impact of Drafting Delays - Time is Really of the Essence

Attorney Transaction Killer Series - Time is of the Essence

Rule #2 for Attorney Review of Real Estate Transactions

Understand the Impact of Drafting Delays - Supply, Demand and Market Conditions

As an attorney and a real estate broker, I understand the need for attorney review of some (not all) real estate transactions to protect the interests of the tenant or purchaser. However, this "How the Attorney Killed my Real Estate Deal" series will focus on how inexperienced attorneys can inadvertently kill a deal or transaction through overzealous negotiation, risk-proof contract drafting, and plain ineptitude. For the "How the Attorney Killed my Real Estate Deal" series, you may have to read each installment sequentially as facts or circumstances are not fully repeated or explained in each part of the series.

Transaction Killer Factual Scenario:

In a prior installments, I discussed the importance of selecting an attorney who can facilitate as opposed to impede a transaction is so important to getting the deal done. In response, I received several comments from attorneys expressing some concern about the purpose of the series. I want to assure the real estate attorneys out there that their hard work and value that you add does not go unnoticed. This series is aimed at those attorneys who don't review transactional documents and don't necessarily appreciate the dynamics of residential real estate sales transaction.

Time is of the Eseence - Just Get It Done

In real estate, there is no more true fact then "time is of the essence." Now, I am not talking about the legal definition and use of this term. Rather, I am talking about the need for timely action. The inertia associated with slow or plodding or untimely review of transactional documents can kill a deal as sure as a missed deadline or unsatisfied contingency.

How Long is Too Long to Complete Attorney Review

Now, back to the original story. When we left off at the last installment, we talked briefly about the initial revisions sent regarding the Lease and Lease Purchase Addendum. What we didn't discuss was the timing of the receipt of the initial revisions. In the transaction that serves as the case study for this series, the attorney review period was two to three weeks. For a residential lease transaction, this type of review period is entirely too long.

Here is the timelines for the attorney review of the transaction:

  • Day 1 - Lease and Lease Purchase Agreement sent to Customer for attorney review.
  • Day 7 - Comments in poorly written form received from Customer's Attorney (5:00 p.m.)
  • Day 8 - Revisions to Lease & Lease Option sent to Customer's Attorney for review (11:30 a.m.)
  • Day 9-10 - Weekend - No Response.
  • Day 11 - Telephone Conversation - Requesting Comments on Revisions.
  • Day 12 - No Response to Telephone Call.
  • Day 13 - No Response to Telephone Call.
  • Day 14 - Telephone Conversation - Customer's Attorney indicates review of Revisions is complete and will send written comments.
  • Day 15 - Written comments received from Customer's Attorney (2:00 p.m.). Telephone Call to Customer's Attorney - No Response.
  • Day 16 - No Response to Telephone Call.
  • Day 17 - Reply to written comments sent to Customer's Attorney. (12 noon). No response to telephone call or e-mail.
  • Day 18-19 - Weekend - No Response.
  • Day 20 - Sent e-mail informing that showings resumed for property.
  • Day 21 - Property leased to other interested party.

After reviewing the time line, you can certainly see the worst case for attorney review. The Owner's Attorney prepared and sent revisions in 18 hours after receipt of the initial revisions and 46 hours after second set of revisions. This included time necessary to review the terms with the Owner and to revise the Lease and Lease Addendum. In contrast, the Customer's Attorney took 7 days to propose the initial revisions and took an additional 7 days to respond to the revisions made by the the Owner's Attorney. 14 days to review a Lease and Lease Option is entirely too long. Even after e-mails and telephone calls to the Customer's Attorney, there still was no response to the final set of revisions.

Bargain from Strength - Understand Supply, Demand, Market Conditions and the Value Proposition

Now, this brings me to my second point. Before an attorney starts their review of the contract documents, it is important to understand the time deadlines as well as the bargaining power between the parties. In leasing transactions, there is typically little or no attorney review. In my area, residential leases are generally offered on a "take it or leave it basis." Other than the monthly rent, security deposit, utilities, lease term, and landlord repairs, there is typically little or no discussion or negotiation of the remaining terms.

Understanding the Value Proposition

In the situation that serves as the basis for this series, the Customer's Attorney was either unaware of the typical custom in residential leasing or simply didn't care. However, there was something more. The Customer's Attorney didn't take into consideration supply, demand, market conditions or the value proposition associated with the Property. Had the Customer's Attorney considered these items, she would have found as follows:

  • Discounted Rent - Rents for the neighborhood average between $1.00 to $1.10 per square foot. The negotiated rent at $0.93 per square foot (or $0.56 per square foot after apply the seller credit) represents a savings of $1,032.00 in reduced rent over the lease term.
  • Deeply Discounted Sales Prices - The option price was $200,000.00. This represented a discount of 24% of list price or $64,000.00.
  • 40% Seller Credit - Rental credit applied to the sale of $6,000.00.
  • Appreciated Values under Option (as opposed to Lease Purchase): Although there are no guarantees, median prices in the neighborhood continue to rise. In 2008, the median price increased 8%. Assuming a modest 1% increase in prices, the option price represents a possible price appreciation during the lease term of $2,000.00.
  • Higher Level of Finish - Builder Upgrades totaling $10,000.00.

Using rough calculations, the value proposition is pretty simply to understand. Compared to other units in the building and neighborhood, this transaction offered a savings of over $83,000.00. It doesn't appear that this value proposition was clearly understood or appreciated by the Customer or the Customer's Attorney.

Understanding the Market

Similar to the value proposition, there appears to be any clear understanding of market conditions, supply, or demand. Although notice was provided that the unit would be released for sale or lease unless the revised Lease and Lease Purchase Addendum were signed, no response was ever received from the Customer's Attorney and the Property was released for showings. In 48 hours, the unit was under contract on the same terms offered to the Customer. I attribute this to the quality of the finishes and the favorable terms offered. Nevertheless, it appears that the Customer's Attorney miscalculated supply, demand and market conditions. Although it may be a buyer's market, premium units that are well priced sell or lease quickly - buyer's market or not.

The Rules:

So, here is a simple rule for attorney review: When you are reviewing a real estate transaction, the Attorney:

  • Should respond in a timely manner.
  • Should communicate issues to the other party so that they are aware of an issue and can prepare a timely response.
  • Should understand that there is no deal until the transactional documents are signed.
  • Should understand that supply, demand, market conditions, favorable pricing, quality of the property, the value proposition offered by the transaction, etc. can increase the importance of getting the deal done quickly.

Interested in professional representation by a real estate professional who understands the need for prompt action to get the deal done? Contact Ryan Shaughnessy at PREA Signature Realty at 314-971-4381 or send an e-mail to Ryan@PREASignatureRealty.com.

Attorney Review Series

Attorney Review Series - Residential Leases

Posted Sunday Aug 16