Monday, December 10, 2012

Real Estate Contracts – Changes, Risks and Management

If you have bought and sold a couple of properties, you would have realized that the procedure is fairly standard and that the contracts are largely similar. This is the case especially if you have been the vendor/purchaser of registered property which has changed hands a few times. If you purchased from a real estate developer, your experience might have been a tad different with bulkier, more complicated contracts, split contracts, longer lead times for delivery of title etc, and escalation costs to provide the vendor with a buffer against inflationary pressures on inputs like labour and materials. 

While consistency suggests safety and reliability, as commercial activity and government regulations evolve, there will be changes in contract terms and management initiatives pre and post contract. We have seen this before regarding alterations made to payment terms based on decisions by the court in relation to forfeiture of deposits and based on changes in the law in terms of taxes and duties payable. For example, agreements used to call for a fifteen (15%) percent deposit but subject to forfeiture that requirement was adjudged as penal. Now the clauses as shown below, are drafted to allow not only for structured payments with a maximum of ten (10%) deposit but also for percentages to be changed depending on the legal tax/duties requirements which are, as we have shown before, subject to change.

 EXAMPLE 
 (i) A deposit of the sum set out at Item 7 of the Schedule on the signing hereof payable to the Vendor’s Attorneys-at-Law ASHLEY & ASHLEY. 
(ii) A further payment of the sum set out at Item 8(A) of the Schedule also to be paid on the signing hereof
(iii) Balance set out at Item 8(B) shall be paid on completion.   

But with globalization of markets, the global thrust against corruption and money laundering and the need to maximize economic opportunities while minimizing risks, questions arise whether the processes and documentation will become more complex with calls for more due diligence investigations, transparency, accountability, controls to protect reputations and heavy penalty clauses to discourage breaches; or whether this forecasts the expansion of the role of the real estate attorney to incorporate the contract manager function.

Let’s consider for example the situation of a well known US company purchasing land for development in Jamaica. What would be the consequences if such a buyer greases the palm of a government official with a view to gaining an advantage in the transaction such as a reduction in government duties based on a false property valuation? The Foreign Corrupt Practices Act (FCPA) has a notoriously broad reach and the fact that it is a US company would make it even easier. Should the lawyer and or the contract of the future embed clauses that address these issues or should that be reserved for the post contract execution phase? The kind of regulatory risk is likely to increase and it will behoove lawyers to consider the impact on their role in the transaction. 

There are several and significant risks inherent in real estate transactions and especially in construction contracts. These include deceptive vendors, fake titles, defective titles, design flaws, financial risks, process risks, payment schedule risks, natural and other disasters, labour issues and more. In some cases it is not practical for controls to be embedded in contracts. In terms of delay, there may be clauses to deter such as those which mandate interest charges or define liability or there may be clauses inserted to encourage early payment. It is not uncommon too to observe clauses related to insurance to address the effect of force majeure events and other potential disasters. On the other hand in order to ensure success of the commercial venture more effective communication, monitoring of obligations and controlling of risks could be of practical value in diminishing disputes and claims and simplifying emerging complexities. 

The real estate legal services sector is poised for change – more complexities, more regulations and more risks. It will be interesting to observe whether such change will also include partnerships between lawyers and contract management professionals.