Microsoft Word - 107_Kepple_7 Key Issues for Your Next Deal.doc

2017 Real Estate Institute – November, 2017

SESSION 107

Commercial Real Estate Purchase

Agreement Panel: 7 Key Issues for Your

Next Deal

Patrick E. Mascia

Briggs and Morgan PA

Minneapolis

Debra K. Page

Lindquist & Vennum LLP

Minneapolis

Larry M. Wertheim

Kennedy & Graven Chtd

Minneapolis

Lloyd G. Kepple

Fox Rothschild LLP

Minneapolis

Minnesota CLE’s Copyright Policy

MINNESOTA CLE is Self-Supporting

A not for proﬁt 501(c)3 corporation, Minnesota CLE is entirely self-supporting. It receives no subsidy from State Bar dues or from any

other source. The only source of support is revenue from enrollment fees that registrants pay to attend Minnesota CLE programs and

from amounts paid for Minnesota CLE books, supplements and digital products.

MINNESOTA CONTINUING LEGAL EDUCATION, INC.

Minnesota Continuing Legal Education's publications and programs are intended to provide current and accurate information about

the subject matter covered and are designed to help attorneys maintain their professional competence. Publications are distributed

and oral programs presented with the understanding that Minnesota CLE does not render any legal, accounting or other professional

advice. Attorneys using Minnesota CLE publications or orally conveyed information in dealing with a speciﬁc client's or other legal mat-

ter should also research original and fully quoted sources of authority.

Minnesota Continuing Legal Education wants practitioners to make the best use

of these written materials but must also protect its copyright. If you wish to copy

and use our CLE materials, you must ﬁrst obtain permission from Minnesota CLE.

Call us at 800-759-8840 or 651-227-8266 for more information. If you have any

questions about our policy or want permission to make copies, do not hesitate to

contact Minnesota CLE.

All authorized copies must reﬂect Minnesota CLE’s notice of copyright.

COMMERCIAL REAL ESTATE PURCHASE AGREEMENT PANEL:

7 KEY ISSUES FOR YOUR NEXT DEAL

Table of Contents

Title Page

I. WHO GETS THE MONEY? EARNEST MONEY DEPOSITS IN

COMMERCIAL PURCHASE AND SALE AGREEMENTS ............................................1

II. CONTINGENCIES - WHAT’S REASONABLE AND WHAT’S NOT? ........................14

III. CASUALTY AND CONDEMNATION IN PURCHASE AGREEMENTS. ...................21

IV. PRIMER ON RIGHTS OF FIRST REFUSAL, ETC. .......................................................25

V. CASE STUDY OF HAZARDS OF RIGHT OF FIRST REFUSAL. CITY

CENTER COMMONS, LLC. VS. DESOTO ASSOCIATES, LLC, 2017 WL

1436093 (MINN. APP. 2017). ...........................................................................................27

VI. TRUST ME, WE NEED THE TIME! SELLING LAND TO A DEVELOPER –

DEALING WITH ENTITLEMENTS ...............................................................................31

VII. REPS AND WARRANTIES FROM BUYERS IN PSAs – WHAT’S FAIR AND

WHAT’S NOT? .................................................................................................................37



I. WHO GETS THE MONEY? EARNEST MONEY DEPOSITS IN COMMERCIAL

PURCHASE AND SALE AGREEMENTS

(Lloyd G. Kepple, Esq., Fox Rothschild LLP, St. Paul, MN, November 2, 2017)

A. IN GENERAL

1. In connection with the purchase and sale of commercial real estate, it is

customary for the buyer to deposit earnest money (“Earnest Money”)

concurrently with execution of the purchase and sale agreement (“PSA”).

These materials will discuss basic issues relating to Earnest Money

deposits (“Earnest Money Deposits”)

B. AMOUNT AND FORM OF EARNEST MONEY DEPOSIT

1. Amount of Earnest Money. The amount of the Earnest Money Deposit is

a negotiation between the seller and the buyer. While a negotiation can

produce any result, the Earnest Money Deposit is generally an amount of

between one percent (1%) and five percent (5%) of the purchase price set

forth in the PSA.

a. With respect to larger real estate transactions, the amount tends

more towards the lower end of the percentage spectrum, and with

respect to smaller commercial deals, the amount can approach the

higher end of the percentage spectrum.

2. Form of Earnest Money.

a. Cash Deposits. In nearly all commercial real estate transactions,

the Earnest Money Deposit in the form of a cash deposit placed

with the escrow agent (“Escrow Agent”).

(i) The transmittal of the Earnest Money is often by wire

transfer to the account of the Escrow Agent.

(ii) Other forms of transmittal of the Earnest Money Deposit

are also used on occasion, including certified check and, in

the cases of smaller transactions, simple personal or

uncertified funds via check which will need to clear before

the Deposit is officially recognized.

b. Non-Cash Deposits. While cash is generally the rule, I have seen

certain transactions where letters of credit or even promissory

notes have been utilized, but these alternatives are rarely utilized.

C. TIMING OF DEPOSIT AND INTEREST

1. Initial Deposit. The initial deposit of Earnest Money (“Initial Deposit”) is

generally deposited concurrently with the execution of the PSA or in rare

cases, within a short designated period of time (one to two business days)

following execution of the PSA. In many cases, and particularly so with

respect to purchases of existing income property, the Initial Deposit is the

only deposit, and there are not subsequent deposits made during the due

diligence and pre-closing process.

2. Additional Deposits. In other cases, and particularly so with respect to

development deals, there are one or more additional deposits of Earnest

Money (“Additional Deposits”) beyond the Initial Deposit made during

the course of the transaction.

a. The most common circumstance under which an Additional

Deposit is made occurs upon the expiration of the due diligence

period (“Due Diligence Period”, also called “Inspection Period” or

“Feasibility Period”, depending on the nature of the transaction).

If the buyer elects to proceed with the transaction and make the

Additional Deposit following the expiration of the applicable Due

Diligence Period, the Additional Deposit, together with the Initial

Deposit, are generally deemed nonrefundable (or “Hard Earnest

Money”). This action by the buyer is also sometimes referred to

the buyer “going hard” with the Earnest Money Deposit.

b. In some cases, the buyer may request an extension of the Due

Diligence Period to complete due diligence or address an issue that

has come up during due diligence. Depending on the

circumstances, sellers are sometimes willing to grant extensions of

the Due Diligence Period upon the deposit by seller of a special

Additional Deposit. The circumstances of such due diligence

extensions and amounts of additional Earnest Money are typically

a matter of negotiation at the time the extension issue is addressed,

although in some circumstances the PSA will specifically describe

such extension rights in favor of the buyer and specify and amount

of additional Earnest Money to be deposited in connection with the

exercise of such extension rights.

3. Additional Staged Deposits on Development Deals. In a development

deal under which it is contemplated that the buyer will be seeking various

governmental approvals to proceed with the development, it is not unusual

for the PSA to provide for a timeline of contemplated development

approvals and corresponding required Additional Earnest Money along the

way of achievement of those approvals. It is also not uncommon for

portions of the Earnest Money Deposit to become nonrefundable (i.e., “go

hard”) at various stages of the development process. This is a matter of

negotiation based on the unique components of the development deal.

D. WHO IS THE ESCROW AGENT?

1. Title Company. In most commercial real estate purchase and sale

transactions, the buyer is seeking title insurance and an insured closing. In

addition, the buyer may be financing the transaction, and the buyer’s

lender will require an insured closing insuring the first priority status of

the mortgage loan or other security granted by the buyer to secure

repayment of the loan. Accordingly, in the vast majority of commercial

real estate transactions, the title company will serve as the Escrow Agent

and hold the Earnest Money Deposit.

a. The terms governing the Escrow Agent are typically set forth in a

written document. Attached as Exhibit A to these written materials

is a Deposit Escrow Agreement (“Escrow Agreement”) in the form

we often utilize with respect to commercial real estate purchases

and sales. The Escrow Agreement is attached as an exhibit to the

PSA and is also executed as a separate document concurrently with

PSA execution by the seller, the buyer, and the title company.

(i) It is also not uncommon to find the terms of the escrow

arrangement set forth in the PSA rather than set forth in a

separate Escrow Agreement, in which circumstances the

title company will execute the PSA for the limited purposes

of agreeing to the escrow provisions set forth therein

(whether by joinder or by direct execution with such

limitations specified). In California deals, this is routinely

the case. Also in California, there is utilization of free-

standing authorized commercial escrow companies who

often operate independently of title companies.

(ii) While it is rare, some title companies or title agents will

require their own Escrow Agreements, although a well

crafted PSA will generally contain the provisions that a title

company or other Escrow Agent requires to be included in

the document. See Sections IV(D)(H) and (K) of the

attached Deposit Escrow Agreement for an example of

provisions that Escrow Agents generally require for self

protection in connection with escrow arrangements.

2. Other Escrow Arrangements. In rare circumstances, the parties will agree

to utilize an Escrow Agent other than a Title Company.

a. Attorney as Title Agent. In some limited circumstances, and

particularly in smaller commercial real estate deals, the parties

provide for the attorney of the seller or buyer to act as escrow

agent. This is a potentially dangerous arrangement for the attorney

that risks violation of ethical provisions. It is not recommended,

because an attorney can get squeezed between his or her

obligations as an escrow agent and his or her advocacy role on

behalf of the client.

(i) If asked by a client or other parties to serve as an Escrow

Agent, the attorney should decline, and it is likely that the

rules of the law firm (driven by the professional liability

carrier) may not allow the law firm to serve as an escrow

agent. In some circumstances, if such restrictions do not

exist and if there is no feasible alternative, an attorney

should take on the role of an Escrow Agent only after fully

disclosing the potential conflict to both parties and

obtaining express consent of all parties in writing that if a

conflict should arise, the attorney would represent only the

attorney’s client and would not be permitted to represent

any other parties to the agreement. Best rule, however, is

to always avoid this circumstance.

b. Seller Acting as Escrow Agent. While rarely seen in the context of

a commercial real estate transaction, sellers are sometimes

designated as the holding party of the Earnest Money Deposit. The

perils of this arrangement for the terminating buyer are obvious. If

the buyer elects to terminate prior to the expiration of the Due

Diligence Period, the disappointed seller will be the party obligated

to refund the Earnest Money. A disappointed seller is much more

likely to seek reasons why it is entitled to retain Earnest Money

(i.e., claiming lack of diligent inspection by the buyer or failure to

return certain required documents). Accordingly, buyers are well

advised to insist on the title company being utilized to hold Earnest

Money in connection with commercial real estate transactions.

E. INTEREST ON EARNEST MONEY

1. Most PSAs and Escrow Agreements require the Escrow Agent to deposit

the Earnest Money into an interest-bearing segregated account (and in

many cases an account with a financial institution insured to the maximum

extent possible by the FDIC). The interest accrues as part of the Earnest

Money Deposit to be applied with the Deposit to the purchase price at

closing (assuming the transaction proceeds to closing) or refunded to seller

or buyer as the case may be, pursuant to the terms of the Escrow

Agreement.

F. REFUNDABILITY/FORFEITURE OF EARNEST MONEY

1. Refundability of Earnest Money Deposit to Buyer.

a. Prior to Expiration of Due Diligence. Most commercial PSAs

provide that the buyer has the right to terminate the PSA prior to

expiration of the Due Diligence Period and receive a refund of the

Earnest Money Deposit.

(i) The refundability right of buyer upon termination is

generally unconditional, although in some cases negotiated

conditions will be placed upon the return of the Earnest

Money by the seller. Such conditions might include (A)

the return of due diligence information and other

documents furnished by the seller to the buyer during the

Due Diligence Period or (B) certification of the buyer

backed by lien waivers (and in some cases, a sworn

construction statement) evidencing payment in full of

vendors who accessed the property during due diligence to

make sure that no liens are filed upon the property

following the termination of the PSA and the return of the

Earnest Money. If the parties have agreed that the Earnest

Money is an unconditionally refundable prior to expiration

of the Due Diligence Period, consider including the buyer

provision set forth on the attached Deposit Escrow

Agreement in Section IV(A).

b. Title Matters. Under some PSAs, the title review period is on a

separate time track from the Due Diligence Period. And generally

no matter what the time threshold, the buyer retains the right to

terminate the PSA if the seller is unable to produce the required

title at the time of closing.

(i) In addition to a refund of the Earnest Money Deposit, a

buyer may seek to negotiate in the PSA the right to obtain

reimbursement (usually up to a capped amount) of its due

diligence costs if the acts or omissions of a seller following

the expiration of the Due Diligence Period cause a title

issue which frustrates the buyer’s plans for the property and

causes the buyer to terminate the PSA. An example would

be, in a development transaction, the granting by seller

during the due diligence process of an easement in favor of

a third party that frustrates the intended use of the property

by the buyer.

c. Casualty and Condemnation. The terms of the PSA typically grant

the buyer (and in some cases the seller) the right to terminate the

PSA with respect to certain casualty and condemnation events.

Buyers will typically seek to have the right to terminate upon the

occurrence of any casualty or condemnation event, whereas sellers

will typically seek to require a threshold level of casualty or

condemnation resulting in damage or destruction or taking in an

amount greater than a specified amount (e.g., 20%) of the purchase

price.

d. Failure to Satisfy Buyer Conditions. Most commercial PSAs

provide that in the event buyer conditions are not satisfied on or

prior to the closing date, than the buyer will have the right to

terminate the PSA. An example would be, on an existing income

property, the failure of the seller to furnish clean tenant estoppel

certificates from the required percentage of the existing tenants

(assuming the seller is not permitted to ameliorate said failure by

furnishing its own seller estoppel certificates).

e. Seller Failure to Close. Commercial PSAs almost uniformly grant

the buyer the right to terminate the PSA and obtain a refund of the

Earnest Money Deposit if the seller fails to close. This presumes

that the buyer will elect termination and return of the Earnest

Money Deposit as its remedy—buyer may also have negotiated a

right to seek specific performance.

2. Forfeiture of Earnest Money Deposit to Seller.

a. Failure of Buyer to Close or to Satisfy Seller Conditions. To the

extent the buyer fails to close on the closing date specified under

the PSA or to the extent buyer fails to perform certain conditions

required to be performed by buyer under the PSA, most

commercial PSAs grant the seller the right to terminate the PSA

and retain the Earnest Money Deposit as liquidated damages. In

some cases the PSA will also provide that the seller has a specific

performance right, although seller exercise of a specific

performance right is generally extremely challenging. as a practical

remedy. If the parties concur that the seller the unilateral right to

obtain payment of the Earnest Money Deposit from the Escrow

Agent, consider including the pro-seller provision set forth in

Section IV(A) of the attached Escrow Deposit Agreement,

although note that it is relatively rare for a seller to obtain such a

provision in a Minnesota deal due to the statutory notice

requirements of Minn. Stat. Section 559.21.

(i) Note: Minn. Stat. Section 559.21 requires that the

seller give the notice of termination in accordance with

Section 559.21 (subd. 4), which requires 30 days’ notice

to seller in accordance with the statutory requirements

prior to any effective termination occurring. While

reference to 559.21 is not typically included in PSAs, it

is a statutory requirement that must be observed by

terminating sellers.

G. ANCILLARY ISSUES AROUND EARNEST MONEY.

1. Transmittal of Estoppels. Some buyers will require the Earnest Money to

go hard before being obligated to transmit tenant estoppel certificates to

the tenants for execution prior to the closing. This approach can put time

pressure on the timely closing of the deal, although it may be workable if

there is sufficient time prior to closing or if the seller has confidence that

its property management relationship is sufficiently strong to obtain

estoppels on an expedited basis.

2. Leasing Restrictions. The ability of the seller to continue leasing the

property following PSA execution and pending closing is a matter of

negotiation that is covered in a well crafted PSA. Any such ability of the

seller to so lease the property without full buyer consent is typically

confined to specified leasing parameters which and terminates once the

Earnest Money goes hard, meaning the seller must thereafter obtain buyer

consent to any subsequently executed lease.

EXHIBIT A

DEPOSIT ESCROW AGREEMENT

TO: ________________ Title Insurance Company

__________________________________

RE: Title Commitment No. _______________ with respect to property known as

____________________in _________________, _______________

DATE: _________________, 20__

I. PARTIES

A. Seller:

B. Buyer:

C. Escrow

Holder:

D. Buyer’s

Counsel:

E. Seller’s

Counsel:

II. PRELIMINARY STATEMENTS

Concurrently with the execution and delivery of this Deposit Escrow Agreement, Seller

and Buyer have executed and delivered a certain Purchase and Sale Agreement, dated

_______________, 20___ (hereinafter referred to as the “Agreement”), a copy of which

has been provided to Escrow Holder. Capitalized terms not otherwise defined herein

shall have the meaning ascribed to such terms in the Agreement. Under the terms of the

Agreement, Seller has agreed to sell to Buyer a parcel of real property known as

__________________________ located in _____________________,

_______________.

A. Pursuant to Section ___ of the Agreement, within two (2) Business Days of the

execution and delivery of the Agreement, Buyer is required to deposit with the

Escrow Holder the sum of _____________________________________

($___________) (together with any interest earned thereon hereinafter referred to

as the “Deposit”), to be held by Escrow Holder pursuant to the terms and

provisions of this Deposit Escrow Agreement.

B. Pursuant to the Agreement, (i) under certain circumstances Seller and/or Buyer

has the right to terminate the Agreement and, in such event, the Deposit is to be

returned to Buyer and (ii) in the case of Buyer’s default, the Deposit is to be paid

to Seller, as liquidated damages. Buyer and Seller covenant and agree to execute

and deliver to Escrow Holder joint written instructions to pay the Deposit to the

party entitled to receive same pursuant to the terms of the Agreement.

C. Provided that the Agreement has not been terminated, the Deposit is to be applied

towards the Purchase Price at Closing as set forth in the Agreement.

III. DEPOSIT OF DEPOSIT; INVESTMENT DIRECTIONS

A. On or before the date of acceptance hereof by Escrow Holder, Buyer has

deposited the Deposit with the Escrow Holder in accordance with the Agreement.

By its execution hereof, Escrow Holder acknowledges receipt of the Deposit.

B. Escrow Holder is hereby authorized and directed to invest the Deposit or any

portion thereof in interest bearing account(s) with a financial institution whose

deposits are insured by the Federal Deposit Insurance Corporation or in

accordance with further written direction of Seller and Buyer (or Seller’s and

Buyer’s counsel). Unless otherwise provided pursuant to the provisions of

Section IV hereof, such investment shall be for the benefit of Buyer. The Federal

Taxpayer Identification Number of Buyer is _________________.

IV. INSTRUCTIONS

A. The Escrow Holder is instructed to hold and invest the Deposit, until the Escrow

Holder is in receipt of (i) a joint written direction from Seller (or Seller’s Counsel)

and Buyer (or Buyer’s Counsel) or (ii) an order, judgment or decree addressed to

Escrow Holder which shall have been entered or issued by any court and which

shall determine the disposition of the Deposit;

[PRO-BUYER ADDITIONAL PROVISION: provided, however, that in the

event Buyer terminates the Agreement pursuant to Section ____ of the

Agreement, then Escrow Holder shall release the Deposit to Buyer within two

(2) Business Days after written direction from Buyer or Buyer’s counsel]

[PRO-SELLER ADDITIONAL PROVISION: provided, however, that in the

event Seller terminates the Agreement pursuant to Section ______ thereof,

then Escrow Holder shall release the Deposit to Seller three (3) Business Days

after direction therefor from Seller or Seller’s counsel by written notice.

[NOTE THAT IN MINNESOTA THIS PRO-SELLER PROVISION IS

SUBJECT TO THE 30-DAY CANCELLATION REQUIREMENTS OF

MINN. STAT. SECTION 559.21(4).]

B. Any party delivering a notice required or permitted hereunder shall

simultaneously deliver copies of such notice to all parties listed in Section I of this

Deposit Escrow Agreement. All notices required herein shall be sent in

accordance with Section 10 of the Agreement.

C. Except as otherwise expressly set forth in this Agreement, Escrow Holder shall

disregard any and all notices or warnings given by any of the parties hereto.

D. If Escrow Holder obeys or complies with any order, judgment or decree of any

court with respect to the Deposit, Escrow Holder shall not be liable to any of the

parties hereto or any other person, firm or corporation by reason of such

compliance, notwithstanding any such order, judgment or decree be entered

without jurisdiction or be subsequently reversed, modified, annulled, set aside or

vacated. In case of any suit or proceeding regarding this Deposit Escrow

Agreement to which Escrow Holder is or may be at any time a party, Seller and

Buyer shall each be liable for one-half of all such costs, fees and expenses

incurred or sustained by Escrow Holder and shall forthwith pay the same to

Escrow Holder upon demand; provided, however, that in the event Escrow Holder

is made a party to any suit or proceeding between Seller and Buyer, the prevailing

party in such suit shall have no liability for the payment of Escrow Holder’s costs,

fees and expenses and the non-prevailing party shall be liable for the entire costs,

fees and expenses sustained or incurred by Escrow Holder and shall pay the same

forthwith to Escrow Holder upon demand.

E. Escrow Holder is not to be held responsible for any loss of principal or interest

which may be incurred as a result of making the investments or redeeming said

investment for the purposes of this Deposit Escrow Agreement.

F. In no case shall the Deposit be surrendered except (i) in the manner specifically

described in this Deposit Escrow Agreement; (ii) pursuant to a written instruction

signed by Seller (or Seller’s Counsel) and Buyer (or Buyer’s Counsel); or (iii) in

obedience to the process of order of a court as aforesaid.

G. All fees of Escrow Holder shall be borne by Seller and Buyer as set forth in the

Agreement.

H. Except as to deposits of funds for which Escrow Holder has received express

written direction from Seller and Buyer (or Seller’s and Buyer’s Counsel)

concerning investment or other handling, the parties hereto agree that Escrow

Holder shall be under no duty to invest or reinvest any portion of the Deposit at

any time held by it hereunder; provided, however, nothing herein shall diminish

Escrow Holder’s obligation to apply the full amount of the Deposit in accordance

with the terms of this Deposit Escrow Agreement.

I. Any order, judgment or decree requiring the Escrow Holder to disburse the

Deposit shall not be binding upon Buyer or Seller as to the ultimate disposition of

the Deposit unless and until a final, non-appealable order, judgment or decree is

entered by a court having jurisdiction thereto.

J. This Deposit Escrow Agreement and all provisions hereof shall be binding upon

and shall inure to the benefit of the parties hereto and their respective legal

representatives, successors and permitted assigns.

K. In the event of any dispute between the parties hereto as to the facts of default, the

validity or meaning of these instructions or any other fact or matter relating to the

transaction between the parties, the Escrow Holder is instructed as follows:

(i) That it shall be under no obligation to act, except under process or order of

court upon joint written instructions of Seller (or its counsel) and Buyer

(or its counsel), or until it has been adequately indemnified to its full

satisfaction, and shall sustain no liability for its failure to act pending such

process or court order, notice or indemnification;

(ii) That Escrow Holder may, in its sole and absolute discretion, deposit the

Deposit described herein or so much thereof as remains in its hands with

the United States District Court sitting in _________, ________ and

interplead the parties hereto, and upon so depositing such property and

filing its complaint in interpleader it shall be relieved of all liability under

the terms hereof as to the property so deposited, and furthermore, the

parties hereto for themselves, their heirs, legal representatives, successors

and assigns do hereby submit themselves to the jurisdiction of said court

and do hereby appoint the then Clerk, or acting clerk, of said court as their

agent for the service of all process in connection with such proceedings.

L. [INCLUDE ONLY IF BUYER IS A TRUSTEE, PENSION FUND, OR

SIMILAR ENTITY] In accordance with the declaration of trust of Buyer, notice

is hereby given that all persons dealing with Buyer shall look solely to the assets

of Buyer for the enforcement of any claim against Buyer as neither the trustees,

officers, employees nor shareholders of Buyer assume any personal liability for

obligations entered into by or on behalf of Buyer.

This Deposit Escrow Agreement may be executed in one or more counterparts, each of which

shall be deemed an original. Said counterparts shall constitute but one and the same instrument

and shall be binding upon each of the undersigned individually as fully and completely as if all

had signed but one instrument and shall be unaffected by the failure of any of the undersigned to

execute any or all of said counterparts.

[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the undersigned have executed this Deposit Escrow Agreement as of

the date and year first above written.

SELLER:

By:

Name:

Its:

BUYER:

By:

Name:

Its:

ACCEPTED AND AGREED TO this

______ day of _____________, 20__.

_______________ TITLE INSURANCE COMPANY

By:

Name:

Its:

51418445.v1

II. CONTINGENCIES - WHAT’S REASONABLE AND WHAT’S NOT?

(Debra K. Page, Lindquist & Vennum, LLP, St. Paul, MN, November 2, 2017)

A. OVERVIEW: Contingencies are often the most highly negotiated portion of any

commercial real estate Purchase Agreement. To the extent that knowledge has

value, Buyer may obtain knowledge of the Property to be purchased during the

contingency period without the financial risk of an absolute purchase. The Seller

is able to limit information until a “sale” has been accomplished, but Seller also

faces both a delay in the closing and the risk that the sale may not occur due to a

defect in the Property or the failure of another condition.

B. PURPOSE: Contingencies allow Seller and Buyer to finalize all binding sale

terms, subject to the occurrence of specific events. Essentially, the parties have

an agreement, with the opportunity to terminate. Negotiation of contingencies

should balance Seller’s need for the certainty of a sale with Buyer’s need for

certainty as to the condition of the Property and/or the available uses of the

Property.

C. ELEMENTS.

1. Benefitted Party. The determination of the benefitted party is crucial to

provision of termination rights. Generally, the non-benefitted party

(typically Seller) may not terminate the Agreement for failure of a

contingency unless otherwise specifically stated. Patterson v. Stover, 400

N.W.2d 398 (Minn.App. 1987); Teachout v. Wilson, 376 N.W.2d 460

(Minn.App. 1985).

2. Scope. The non-benefitted party will desire to limit the scope to a specific

concern (e.g. obtaining a building permit for a specifically defined facility)

to avoid discretionary termination on the part of the benefitted party. In

contrast, the benefitted party (typically Buyer) seeks broad opportunities

to determine the feasibility of purchase, to investigate and, if necessary, to

terminate the Purchase Agreement.

3. Timing. The same deadline need not be used for each contingency,

however, timing should be clearly stated for each contingency.

a. Determination of Contingency Date. Some Purchase Agreements

set forth a specified “Contingency Date” whereby each

contingency must be satisfied or deemed waived. Other Purchase

Agreements set forth the number of days from the execution date

of the Purchase Agreement for various contingencies, which

number of days may vary from contingency to contingency.

b. Extensions of Contingency Date. The parties may desire for the

opportunity to extend the contingency period(s). The Buyer may

desire extensions to provide additional time for inspection, etc.

51418445.v1

The Seller may be of two minds as to extension: either (a) Seller

may desire extensions to “keep the deal alive” or (b) Seller may

not desire extensions to bring some certainty to the Agreement

within a relatively short period of time. Negotiation considerations

include the length of time for extensions, the number of extensions

and whether or not additional earnest money (refundable or

nonrefundable) is required for an extension.

4. Standard of Satisfaction. Standards for satisfaction or failure of

contingencies may range from (a) simple receipt of a document; to (b) the

“sole discretion of Buyer” as to the form and content of the document; to

“conditions which allow for continued use of Property in the manner used

as of the date of this Agreement”. Typically, Seller seeks a specific

objective standard, while Buyer seeks a broader, more discretionary

standard. The standard may be limited by conditions required for Buyer’s

proposed use of the Property (which favors Buyer), as opposed to

conditions required for continuation of the current use of the Property

(which favors Seller).

5. Standard of Proof. Seller may desire to require Buyer’s production of

written materials documenting failure of contingency to confirm the

failure of the contingency and avoid discretion on the part of Buyer. Other

Sellers desire these materials to provide them with the knowledge

necessary (a) to make improvements to the Property prior to remarketing

for resale or (b) to negotiate a more accurate subsequent Purchase

Agreement for the resale of the Property.

6. Required Diligence to Satisfy. An express obligation to act with due

diligence and in good faith during the available contingency period gives

the non-acting party (typically Seller) grounds for claiming default,

retaining earnest money, seeking damages or perhaps enforcing specific

performance. Where the standard of diligence is not set forth in the

Agreement, implied covenant of good faith may apply to prevent one party

from depriving the other of the benefit of the bargain. H Enterprises

International, Inc. v. General Electric Capital Corporation, 833 F.Supp

1405 (D.Minn. 1993). However, Minnesota courts have been reticent to

apply good faith to sales contracts. The Seller may require an opportunity

to be informed of contingency status at certain intervals, with opportunity

to terminate Agreement for failure to exercise good faith.

7. Payment and Entry Responsibility. The benefitted party is not always the

party responsible for the cost or provision of inspections or other

materials. Because Seller may desire receipt and ownership of written

materials generated in the course of any given contingency, Seller may be

willing to pay for the cost of those materials. Sellers should also consider

the result of mandatory reporting requirements for certain previously

51418445.v1

undisclosed conditions (typically arising from environmental

investigation) and the desire to control the reporting and subsequent

processes. In this event, a Seller may also be willing to pay for the cost of

the inspection (Phase I or Phase II).

8. Opportunity to Require Cure. In lieu of termination, the parties may

desire to either have the opportunity to cure or require the cure of any

condition of the Property not determined to be satisfactory during the

contingency period. The nature of the failed contingency may determine

the desired approach, for any given contingency.

a. Buyer’s Cure. Buyer may prefer to have the opportunity to cure

the failed condition (to confirm the sufficiency of the cure), with

the cost of the cure to be deducted from the purchase price. In this

event, Seller will desire to limit or cap the expenditure to be

deducted.

b. Seller’s Options. Seller may prefer either (a) the opportunity to

cure (which opportunity also carries the right to control the cost of

the cure) or (b) the right to terminate in lieu of effecting or paying

for a cure.

9. Cooperation of Non-acting Party. Certain contingencies undertaken by

Buyer will require the cooperation or action of Seller, e.g. subdivision,

rezoning. These property status changes should be conditioned upon

closing in the event the transaction is not consummated. Provision should

be made for costs incurred by Seller in connection with the cooperation or

action. If Seller’s costs are paid by Buyer, typically, only out-of-pocket

costs are paid and Seller incurs the administrative or personal burden of

the review of Buyer’s work and/or the time incurred for required

appearances before public bodies or review boards.

10. Waiver. Waiver rights are generally imperative for Buyer. Failure to

provide for waiver may result in Seller’s refusal to close the sale (due to

changed circumstances) for the express failure of a contingency which was

of less significance to Buyer.

a. Exercise of Right. Which party(ies) can exercise the waiver right?

Unilateral rights should be clearly stated.

b. Mechanism. Is waiver of a contingency automatic or does the

Agreement require written notice of waiver? Buyer may be held to

have effectively waived contingency where Buyer continues to

exercise its rights under Purchase Agreement. Patterson v. Stover,

supra at 401.

11. Termination. The Purchase Agreement should confirm the manner in

which the Agreement will be terminated upon exercise of a contingency.

51418445.v1

The Seller may desire to clearly provide for automatic termination in event

of failure of contingency to avoid need for cancellation of Purchase

Agreement. Where a term essential to the final bargain is dependent upon

a contingency, the provisions of Minnesota Statutes § 559.21 do not apply.

Romain v. Pebble Creek Partners, 310 N.W.2d 118, 122 (Minn. 1981)

(contingency for parties’ agreement as to financing is an essential term of

the Purchase Agreement). Nonetheless, Sellers may desire to obtain a quit

claim deed from Buyer coincident with the termination effected by the

exercise of a contingency. In the event of termination, Sellers should also

use caution to require a return of any other materials provided to Buyer

during the course of the inspection or contingency period.

12. Earnest Money. If a contingency is exercised, will Buyer be entitled to a

return of all or part of the earnest money?

D. GENERAL CATEGORIES

1. Approval for Terms of Sale.

a. Internal. Either party may require contingency for approval by

board of directors, partners, trustee in bankruptcy, or executive

committee.

b. External. The Seller may require a contingency for partial release

of mortgage or approval for prepayment not otherwise allowed

under Seller’s contractual agreements with third parties.

2. Approvals for Use of Property.

a. Governmental. Buyer may require contingency for confirmation

of availability of rezoning, subdivision, environmental permits,

building permits or sign permits. Seller prefers specificity because

Seller may be able to satisfy contingency on Buyer’s behalf if

Buyer is not proceeding diligently and in good faith.

b. Private. Buyer may require contingency to obtain franchise rights

for specific use or to obtain a tenant (or a franchisee) for proposed

use.

c. Site Assembly. Where Buyer requires adjacent property(ies) to

complete the intended development, the Purchase Agreement may

be contingent upon Buyer’s successfully obtaining purchase

agreement from those neighboring property owner.

3. Approval of Condition of Property.

a. Physical Condition/Inspection. Buyer may desire a “free look”

into all aspects of building and land, including (a) review of soils

51418445.v1

(for compaction, elevation, etc.), (b) roof report, (c) inspection of

all building systems and equipment, or (d) opportunity for

percolation tests.

b. Availability of Utilities/Services. Particularly for undeveloped

property, Buyer may require confirmation of availability of

utilities. Buyer should use caution to obtain information as to

availability, location and condition of water and sewer systems

(public or private), particularly in areas outside MUSA line.

c. Environmental. Even where Seller provides environmental

warranties and representations, Buyer will desire opportunity to

confirm environmental status of Property. Phase I is typically

required for financing purposes. Buyer should obtain from Seller

all written environmental information available to Seller prior to

commencing new environmental reviews.

d. Access. Buyer may require availability of certain or increased

access to the Property. This may be particularly necessary where a

change in use of the Property is contemplated.

4. Approval of Income/Expenses of Property.

a. Review of Existing Contracts. Buyer will want Seller to provide

all existing maintenance, management and/or service contracts

and/or equipment leases for Buyer’s review and satisfaction with

terms. Buyer may also desire that contracts be confirmed with

estoppel certificates from Seller and other parties to such contracts,

if necessary for Buyer’s continued operation of the Property.

b. Termination of Existing Contracts. Buyer’s proposed use of the

Property may require Seller to terminate certain existing contracts

and/or leases and provide written confirmation of such termination.

c. Review of Existing Leases. Buyer will require contingency for its

satisfaction with terms of leases.

d. Estoppel Certificates from Tenants. Buyer (and Buyer’s lender)

will require that all leases be confirmed with estoppel certificates

from each tenant. Buyer should attach the form of the desired

estoppel certificate to the Purchase Agreement and indicate that

contingency requires all estoppel certificates to be executed and

delivered to Buyer. Seller should confirm that form of estoppel

certificate promised to Buyer is obtainable pursuant to the terms of

the lease(s).

e. Certified Rent Roll from Seller. Buyer will require receipt of rent

roll, certified by Seller to be accurate.

51418445.v1

5. Approval of Title. Title examination is typically not set out as a specific

contingency. Acceptance of state of title, however, remains a contingency

to closing. Good practice lists title as one of the contingencies and refers

to the title examination section, to clarify that marketable title is a

condition precedent to closing.

6. Financing of Purchase.

a. Assumption of Existing Financing. Assumption contingency

should include (a) specific approval of existing lender, (b) approval

of Seller as to form of release, (c) approval of Buyer as to terms of

financing, and (d) party responsible for payment of assumption

fees. Buyer should review certified copies of documents and

obtain certification from the lender as to the balance and other

terms as well as to the nonexistence of defaults.

b. Commitment from New Lender. Seller will prefer more objective

criteria for determination of satisfaction of financing contingency,

whereas Buyer will desire flexibility in determining available

financing options. Seller’s preference sets out details as to

maturity, amortization, acceptable rates, and loan-to-value

amounts. Buyer prefers to refer to “loan terms acceptable to

Buyer”.

c. Satisfaction of Financing Contingency. A Buyer is financially

ready and able to perform pursuant to a financing contingency if

Buyer has obtained a binding commitment for a loan for the

purchase by a financially able third party, irrespective of whether

the loan will be secured in whole or part by the Property to be

purchased. Jones v. Amoco Oil Co., 483 N.W.2d 718, 722

(Minn.App. 1992); ERA Town & Country Realty, Inc. v. TEVAC,

Inc., 376 N.W.2d 526, 528 (Minn.App. 1985).

7. Confirmation of Status at Closing. Buyer will desire entire purchase

contingent upon Seller’s confirmation of Seller’s warranties and

representations by means of a bring down certificate. Buyer may also

desire confirmation of condition, inventory, personal property by

inspection.

E. INTERRELATION WITH OTHER PORTIONS OF PURCHASE

AGREEMENT. The contingency section must interrelate with other portions of

the Purchase Agreement to avoid qualification or limitation of the contingencies

on the part of Buyer.

1. Representations and Warranties. Representations and warranties provide a

base for Buyer’s investigation and inquiry regarding the Property and offer

Buyer an additional remedy regarding the purchase of the Property.

51418445.v1

However, Buyer should use caution to not over-rely on representations

and warranties and should continue to use due diligence by inspecting the

Property. Alternatively, Seller should use caution to not make

representations or warranties which are later determined to be untrue on

basis of Buyer’s investigation and inquiry.

2. As-Is Condition. Where Buyer has extensive contingencies and inspection

rights, Seller will desire that the sale of the Property be in its AS IS

condition and refrain from extensive Seller representations. However,

most Buyers desire a representation regarding the condition of the

Property, notwithstanding the inspection contingency.

3. Indemnities. As with representations and warranties, Buyer will desire

indemnities regarding the representations, warranties and condition of the

Property to provide an additional remedy regarding the sale and the

Property. Again, Buyer should not rely on the indemnities as a substitute

for contingencies and should continue to use due diligence by inspecting

the Property. On the other hand, Seller should confirm that any

indemnities are limited to known facts.

4. Confidentiality. Seller may require that information provided to Buyer for

review be held confidential. Where documentation must be provided to a

lender or other third party, the same concerns may apply.

5. Right to Enter Property. Where contingencies include physical

inspections of the Property, the Purchase Agreement should specifically

set out the right on the part of Buyer to enter the Property. The Seller may

desire to limit entry to only certain defined activities. Any right to enter

should be accompanied by an indemnity as to liabilities arising out of the

entry onto (and tests and investigations of) the Property. Buyers should be

careful to avoid liability for conditions discovered during inspection.

51418445.v1

III. CASUALTY AND CONDEMNATION IN PURCHASE AGREEMENTS.

(Debra K. Page, Lindquist & Vennum, LLP, St. Paul, MN, November 2, 2017)

A. OVERVIEW: Casualty and condemnation clauses are often the most overlooked

portion of any commercial real estate Purchase Agreement. Many attorneys use

their time and energy to cut the best deal and don’t spend time on these “lesser”

provisions.

B. LEGAL IMPACT: Law varies from state to state on risk assumption in a

purchase agreement.

1. Equitable Conversion. Equitable conversion has its roots in common law

and held initial significance for inheritance and testamentary transfers. In

contracts, equitable conversation determines that the risk belongs to the

Buyer, whose right is personal property. This results in Buyer’s

requirement to purchase the Property following damage, destruction, or

condemnation without recourse against Seller (unless Seller caused the

damage) and without a reduction in the purchase price.

2. Uniform Vendor and Purchaser Risk Act. First enacted in 1935, the

UVPRA was intended to protect the Buyer before closing and Seller after

the closing. It avoids equitable conversion by placing the risk of loss on

Seller (unless Buyer has earlier taken possession). UVPRA is premised on

the tenet that the party in possession bears the risk. 13 states have adopted

the UVPRA to date, including South Dakota, Wisconsin, Illinois and

Michigan.

3. Silence as to Risk. Where the Purchase Agreement is silent as to risk, in

those states which have enacted the UVPRA, the risk lies with Seller and

in other states, equitable conversion may or may not control.

4. Minnesota Law. Minnesota has not adopted the UVPRA and Minnesota

courts have not resolved the issue of Seller/Buyer risk. Tollefson Dev.,

Inc. v. McCarthy, 668 N.W.2d 701 (Minn. Ct. App. 2003); Gilles v.

Sprout, 196 N.W.2d 612 (Minn. 1972). It is, therefore, essential that all

purchase agreements cover risk responsibility carefully.

C. CASUALTY CLAUSE ELEMENTS.

1. Notice from Seller. The Seller is the party with the information about the

casualty and is required to provide notice to Buyer. Query whether

“immediate” notice if performable or enforceable?

2. Threshold for Trigger of Rights. De minimus damage should not result in

termination of the transaction if the repair can be effected promptly. The

threshold which allows for Buyer’s termination or other rights can be

quantified by (a) the cost of the repair, (b) the percentage of the Property

51418445.v1

damaged, or (c) by reference to the continued use of the Property in the

same manner. If “materially” or “substantially” are used for the threshold

of damage, the parties should expect a dispute about those terms absent

better definition.

3. Rights upon Trigger. The casualty clause should clearly describe the

rights of the parties.

a. Repair/Rebuilding. Is repair or rebuilding required? If so, by

whom? Will the repair or rebuilding allow for a delay in closing or

must it be completed by closing (considering practical inability to

do so)? If Buyer intended to demolish the building for another

development, the Purchase Agreement may provide for full

demolition and removal of debris, as opposed to rebuilding.

b. Payment for Repair/Rebuilding. Are insurance proceeds to be used

for repair/rebuilding? If so, clear assignment of all proceeds and

claims should be provided if Buyer is to repair. And, consideration

should be given to the deductible amount. If Buyer is to repair, a

credit for the deductible should be provided against the purchase

price.

c. Termination. When termination is allowed, is Buyer the only party

to exercise that right? Is termination an option or does the

Purchase Agreement automatically terminate in such event? In the

event of a total casualty, Seller may desire to terminate the

Purchase Agreement and start fresh with the Property. The

property may actually have greater value without the building or

improvement.

d. Resulting Changed Condition. The Buyer may have concerns

about changed soil or other conditions caused by a fire or other

force majeure event. The Buyer may require the right to

investigate those conditions prior to exercising its rights.

4. Insurance Settlement. The Buyer will want Seller to include Buyer in any

insurance settlement discussions.

5. Insurance Requirements. The casualty section should specifically require

Seller to maintain insurance at replacement value until closing.

Assignment of both the claim and the proceeds should be clearly set out.

And, the parties should agree that all executed assignment documents be

provided at closing, if not before.

D. CONDEMNATION CLAUSE ELEMENTS.

1. Notice from Seller. The Seller is the party to whom information about any

condemnation will be provided and is required to provide notice to Buyer.

51418445.v1

Care should be taken to describe both pending and threatened eminent

domain actions, as well as time period for reporting notice to Buyer.

2. Threshold for Trigger of Rights. The issues here are similar to casualty.

However, “partial” or “temporary” or “construction” condemnation

actions should be clearly dealt with, as the impact of these may be borne

only by Seller, depending on the length of time of the Purchase

Agreement. Certainly, de minimus condemnation should not result in

termination of the transaction and may not result in a reduction of the

purchase price. As with casualty, the threshold which allows for Buyer’s

termination or other rights can be quantified by the percentage of the

Property taken, or by reference to the continued use of the Property in the

same manner. Again, avoid “materially” or “substantially” unless later

dispute is desired. Consideration should be given to the nature of the

Property, as well. A downtown property may not be able to sustain any

condemnation without significant loss, given the location of the Property

upon the block.

3. Rights upon Trigger. The condemnation clause should clearly describe

the rights of the parties.

a. Repair. If the taking is of an access point or roadway, is repair

required? If so, by whom? Will the repair allow for a delay in

closing or must it be completed by closing (considering practical

inability to do so)?

b. Termination. When termination is allowed, is Buyer the only party

to exercise that right? Is termination an option or does the

Purchase Agreement automatically terminate in such event?

4. Condemnation Proceeds. The party to receive the condemnation proceeds

should follow the party who will bear the loss by reason of the

condemnation. For temporary or construction eminent domain matters,

Seller may well be the party to bear the loss if the closing of the purchase

follows the expiration of the condemnation. But, if the condemnation

results in an easement that restricts access or parking, Buyer is more likely

to bear the loss. Are insurance proceeds to be used for repair/rebuilding?

If proceeds are to be assigned to Buyer, clarity as to the assignment of all

proceeds and claims should be provided.

5. Condemnation Settlement. The Buyer will want Seller to include Buyer in

any condemnation settlement discussions.

E. INTERRELATION WITH OTHER PORTIONS OF PURCHASE

AGREEMENT. The casualty and condemnation sections must interrelate with

other portions of the Purchase Agreement to avoid qualification or limitation of

the contingencies on the part of Buyer.

51418445.v1

1. Representations and Warranties. Representations and warranties should

include reference to no existing casualty or condemnation, including

pending or threatened actions.

2. Closing Documents. The list of closing documents should reference any

assignment documents required by reason of casualty or condemnation

arising during the term of the Purchase Agreement.

3. Right to Enter Property. Where Buyer has a limited right to enter the

Property for a limited time period, that time period should be extended in

the event of casualty or condemnation to allow for Buyer’s review of

existing conditions.

51418445.v1

IV. PRIMER ON RIGHTS OF FIRST REFUSAL, ETC.

(Larry M. Wertheim, Esq., Kennedy & Graven, Chtd., St. Paul, MN,

November 2, 2017)

A. OPTION TO PURCHASE.

Irrevocable offer by owner to sell property on the terms specified in the option,

which the prospective buyer may accept by exercise at the holder’s option during

the option period.

1. Holder of option controls whether and when (during the option period) to

exercise.

2. Price can be fixed or established by appraisal procedure or other formula.

3. Generally, most advantageous to holder of option as holder can typically

exercise at any time during the prescribed option period.

4. Generally, most disadvantageous to owner as owner is basically precluded

from marketing the property during the option period.

B. RIGHT OF FIRST REFUSAL (ROFR).

Typically, right of holder of ROFR to purchase the property on same terms and

conditions as offer from third party that owner has accepted.

1. Holder of ROFR does not control timing; dependent on trigger of third-

party offer.

2. As ROFR is generally right to purchase at same terms as third-party offer,

holder of ROFR does not control the price.

3. As a result, less advantageous to holder of ROFR as compared to option.

4. While ROFR does not absolutely preclude owner from marketing the

property during the option period, risk that the third party offeror will,

without any fault, lose the right to purchase the property to the holder of

the ROFR can make it hard to find a third party willing to negotiate a

purchase agreement subject to a ROFR.

5. Owner and third party can only proceed with purchase if holder of ROFR

waives (or fails to timely exercise) the ROFR.

C. RIGHT OF FIRST OFFER (ROFO).

Generally, right of holder of ROFO to be offered the property before owner can

market the property to others.

51418445.v1

1. Holder of ROFO does not control timing; ROFO triggered when owner

desires to sell the property before third-party is identified.

2. Price established by notice from owner to holder of ROFO.

3. If holder of ROFO declines to exercise, owner is free to sell to any third

party for a specified period of time at or above a price (or at % discount of

that price) specified in notice to holder of ROFO.

4. More advantageous to owner than ROFR as owner decides when and on

what terms owner would be willing to accept and avoids problem of

negotiating with third party under cloud of ROFR; may allow owner to

discount price after exposure to the market without going back to holder of

ROFO.

51418445.v1

V. CASE STUDY OF HAZARDS OF RIGHT OF FIRST REFUSAL. CITY CENTER

COMMONS, LLC. VS. DESOTO ASSOCIATES, LLC, 2017 WL 1436093 (MINN.

APP. 2017).

(Larry M. Wertheim, Esq., Kennedy & Graven, Chtd., St. Paul, MN,

November 2, 2017)

A. AMBIGUOUS DESOTO ROFR.

Lot 5, a vacant lot owned by the Forest Lake Economic Development Authority

(EDA), was subject to a declaration containing a certain ROFR in favor of

DeSoto:

The EDA hereby grants to DeSoto a ninety (90) day right of first refusal to

participate with the EDA (on an equal basis) in any development of such Lot 5

(although Desoto acknowledges that the EDA is allocated all fair market value

with respect to Lot 5 in its undeveloped state in all events).

1. What exactly does DeSoto, the holder, have a right to refuse?

2. Typically, a ROFR is a right of the holder to refuse (or accept) purchase of

the property on the same terms and conditions as contained in an offer

from a third-party offeror.

3. Here, the facts that Lot 5 was vacant, the ROFR specifies a right to

“participate” with the owner “on an equal basis,” and that the owner is

“allocated” the value of Lot 5 in its undeveloped state suggests that the

ROFR is something other than a right to pre-empt an outright purchase of

the property by a third party. Arguably, this ROFR is just a right

(somewhat undefined) granted to DeSoto to co-develop Lot 5 and share

with the EDA in the profit from only the EDA’s development of the

Property. If that’s the case, DeSoto’s ROFR does not apply to an outright

sale by the EDA of an undeveloped Lot 5.

B. PURCHASE AGREEMENT WITH THIRD-PARTY OFFEROR CITY

CENTER.

The EDA received a favorable third-party offer from City Center to purchase

outright Lot 5. City Center planned to construct a building on Lot 5 and lease it to

the Credit Union.

1. The EDA insisted that its purchase agreement with City Center (the

Purchase Agreement) contain the following Paragraph 25:

2. Notwithstanding any contrary provision contained in this Agreement, [the

EDA’s] obligations under this [Purchase] Agreement are conditioned and

contingent upon waiver of the right of first refusal of DeSoto . . . (the

“Right of First Refusal”). As soon as possible after the Agreement Date,

51418445.v1

[the EDA] shall send written notice to DeSoto advising DeSoto of

DeSoto’s rights under the Right of First Refusal with respect to this

Agreement as well as requesting DeSoto’s waiver of the Right of First

Refusal with respect to this Agreement (collectively, the “Right of First

Refusal Notice”). . . . Notwithstanding any contrary provision contained

in this Agreement, in the event that DeSoto exercises the Right of First

Refusal with respect to this [Purchase] Agreement, this [Purchase]

Agreement shall be null and void as between [the EDA] and [City Center]

and the Earnest Money shall be refunded to [City Center]. (Emphasis

Supplied)

3. Per the Purchase Agreement, the EDA sent a letter to DeSoto, the ROFR

holder, advising DeSoto that it could “exercise” the ROFR by sending

timely notice and depositing substitute earnest money. In response

DeSoto, who, at about the same time, entered into a separate purchase

agreement to sell Lot 5 to the same Credit Union, sent a notice purportedly

exercising the ROFR and deposited the earnest money.

4. Based upon DeSoto’s “exercise” of the ROFR and pursuant to Paragraph

25, the EDA sent notice to City Center declaring the Purchase Agreement

null and void.

5. In response, City Center sent a letter to the EDA claiming that the ROFR

didn’t grant DeSoto the right to step into the shoes of City Center’s

Purchase Agreement. Countrarywise, DeSoto claimed that the ROFR did

grant that right and insisted in proceeding with its purchase of Lot 5.

C. THE LITIGATION.

1. Despite the suggestion of the EDA that one of the parties commence a

declaratory judgment action, City Center, the third-party offeror, sued

DeSoto, the putative holder of a ROFR, alleging claims of tortious

interference with contract and prospective economic advantage. The EDA

was not named in the litigation.

2. DeSoto moved for summary judgment and the district court granted

summary judgment in favor of DeSoto and dismissed City Center’ lawsuit

on the grounds that, under Paragraph 25, the Purchase Agreement was null

and void and therefore, DeSoto did not interfere with the Purchase

Agreement.

3. On appeal, the Minnesota Court of Appeals affirmed the grant of summary

judgment to DeSoto on the grounds that since the Purchase Agreement

was contingent on DeSoto’s waiving its ROFR and since DeSoto did not

waive its ROFR, the Purchase Agreement “was not breached when the

EDA did not sell Lot 5 to City Center.” As a result, without a breach of

contract by the EDA, City Center was unable to establish the necessary

51418445.v1

element of intentional procurement of a breach of contract by the EDA

and its claims for tortious interference failed.

4. It is noteworthy that the Court of Appeals observed in passing that

“Contrary to City Center’s assertions, resolution of this case does not

require us to determine the meaning of DeSoto’s rights of first refusal

under the [Declaration].”

D. MORALS OF THE STORY.

1. In drafting the ROFR, be careful what you intend to give the holder a right

to refuse. If you intend to create a ROFR that grants something other than

a right to step into the shoes of a third-party purchase agreement (e.g., a

right to co-develop the property), say so explicitly and expressly.

2. If an owner is in any way uncertain as to whether a ROFR is applicable to

a third-party offer, the owner should error on the side of caution and make

any acceptance of the third-party offer contingent on the waiver of the

questionable ROFR. If, instead, the EDA had acted on the supposition

that the Purchase Agreement did not trigger DeSoto’s ROFR, but it

ultimately turned out that the ROFR did apply, failure to make the

Purchase Agreement subject to the ROFR (and offer Lot 5 to DeSoto)

would likely expose the EDA to either a claim by City Center for breach

of the Purchase Agreement or a claim by DeSoto for failure to honor the

ROFR, or both. On the other hand, there’s no percentage in guessing

since if the owner makes the accepted offer subject to the ROFR and

purports to honor what might be an inapplicable ROFR, the worst that can

happen is that, as in the Court of Appeals case, the owner will end up

selling the property on the same terms to the what-might-be-an-

undeserving party, rather than to the original third-party offeror. As City

Center Commons LLC v. DeSoto Associates, LLC recognized, since the

Purchase Agreement provided that it would terminate if DeSoto exercised

its (questionable) ROFR, the EDA is immunized against claims by the

third-party offeror City Center. The upshot of all of this is that, although

delayed because of the litigation, the EDA gets to sell Lot 5 just as it

originally agreed to, albeit with a different buyer.

3. In theory, a declaratory judgement action involving the three parties would

have clearly resolved the issue of a questionable ROFR so that the parties

could proceed accordingly. However, such an action may not be available

due to costs of litigation, the delays involved in prosecuting a lawsuit

while keeping a transaction in limbo, or possibly an unwillingness of one

or more of the parties to recognize that an opposing party may have a

colorable claim.

4. Most interestingly, as previously noted, due to the terms of the City Center

Purchase Agreement and the nature of its lawsuit, the Court of Appeals

51418445.v1

found it unnecessary to determine, as a threshold matter, whether the

ROFR actually gave the holder the right to step into the shoes of the third-

party offeror. Thus, in this case, the ROFR contingency in the Purchase

Agreement and the tort lawsuit all may have had the effect of legally

converting what, in actuality, might have been an irrelevant right to

participate in a vacant land development into a full-blown regular ROFR

giving the property to otherwise-undeserving holder.

51418445.v1

VI. TRUST ME, WE NEED THE TIME! SELLING LAND TO A DEVELOPER –

DEALING WITH ENTITLEMENTS

(Patrick E. Mascia, Briggs and Morgan P, St. Paul, MN, November 2, 2017)

A. INTRODUCTION

Developable land within the city is scarce. Therefore, real estate developers are

focusing on creatively utilizing the few remaining sites or redeveloping obsolete

uses into modern, functional space. This often requires rezoning, subdivision and

other entitlements from the governing jurisdiction. Depending on the size of the

project and the ordinances of the governing jurisdiction, a general list of potential

necessary entitlements is as follows:

1. Rezoning / Comprehensive Plan Amendment

2. Site Plan Approval

3. Preliminary Planned Approval

4. Subdivision Approval

5. Environmental Review (AUAR, EIS, EAW)

Obtaining these entitlements takes time. Four to six months from the time the

Developer submits the application is not out of the question. If environmental

review is involved, a year or more is typical. Not all real estate lawyers do land

use work, but we need to have a basic understanding of entitlement / land use

regulations in the governing jurisdiction to properly advise our clients. We must

also have a basic understanding of the development process and what a developer

is required to produce and submit to obtain these entitlements. Finally, if we are

representing the seller, we need to understand our client’s motivation for selling.

Price? Timing of close? Closing certainty? Understanding these things will help

us prepare a reasonable purchase and sale contract.

KEY ASSUMPTION: THE LAND SALE TRANSACTION

BENEFITS THE SELLER AND THE BUYER. THEREFORE,

EACH PARTY WANTS THE TRANSACTION TO CLOSE.

OUR JOB IS TO FACILITATE THAT.

For purposes of this presentation, I assume the transaction is typical and not

extreme. In other words, the land price negotiated is not so cheap that the buyer

will acquire the land regardless of entitlement risk. Similarly, the land price is not

so high that the seller is willing to wait forever. In a typical transaction, finding

the right balance between price and risk for both sides is not easy, but it is the art

of the deal.

51418445.v1

This presentation is intended as a general overview of the development and

underwriting process for a typical developer and to suggest alternatives for

reasonably accommodating that process in a purchase and sale agreement with a

developer. Each transaction is unique and these alternatives are not intended to

cover all situations. There is no form that applies to all transactions – creativity is

valued!

B. DEVELOPMENT PROCESS

1. Development Costs

In a typical development process, the developer invests significant time

and money into the project before submitting any applications to a

municipality. The amount invested depends on the size and type of

project and can range from a single industrial building (perhaps a $25,000-

$50,000 investment) to a multiple phased, mixed use development

(multiple millions). These costs are incurred for the following purposes:

a. Due Diligence (title, survey, Phase I, geotech, building hazardous

materials studies [if demolition is involved], infrastructure studies)

b. Site Planning

c. Building design (schematic design, design development,

construction drawings)

d. Infrastructure design (roads, water, sanitary sewer, storm service,

etc.)

Each project requires a team of architects, engineers and lawyers. Often,

this team is assembled during land negotiations, sometimes not.

Assembling the team and doing the work takes time. In most cases, the

developer will not make a significant investment on engineering and

design until it has the land under control.

2. Project Feasibility

a. Underwriting / Pro Forma

The land price is often negotiated by the developer based on a pro

forma the developer prepares on the equivalent of a napkin.

Experienced developers have a general idea of the land price it can

afford to pay for a particular project, making assumptions about

infrastructure costs, building shell cost, tenant improvement costs,

soft costs and rents. The developer makes those assumptions

based on its experience in the marketplace and negotiates land

price accordingly. However, once the developer puts the land

under contract, it must confirm these assumptions. At this point,

51418445.v1

the developer is not seeking final price confirmation and a final

budget – the pro forma is a living document that may change up to

the date construction commences. The strength of any pricing /

cost exercise depends on the level of design. Schematic design is

fluffy – construction document pricing is much more firm and,

depending on the form of construction contract, perhaps absolute.

Pricing and market risk is a development risk — in negotiating

purchase agreements, developers will try to eliminate it or at least

minimize it. Finding the tipping point is the art of the deal for both

sides.

b. Return Expectations

What is or is not feasible from a return expectation standpoint

depends on the developer and the developer will not disclose its

numbers. A long term holder/investor will focus on cash on cash

yield (annual return on total project cost). A merchant builder will

focus on value creation (margin between sale price and total

project cost).

c. Conclusion

The developer is checking the feasibility of the project on an

almost daily basis. At the time the developer applies for

entitlements, the developer will at least generally believe the

project is feasible. If it cannot get to this level, it will terminate the

contract. If it can, it will move forward in the entitlement process.

C. ENTITLEMENTS

1. Pre-Application

In many cases, as part of its feasibility analysis, the developer will meet

with city staff and generally discuss the project. The goal of this meeting

is to introduce the project, the developer's vision for the project and to

gauge the city's interest in the project. The city has significant authority

with respect to land use matters; therefore, depending on which

entitlements are necessary for a project, the city will push back —

sometimes hard. No one wants a land use lawsuit, even if the City’s

response pushes the boundaries of legality; therefore, this is a negotiation.

The city's response can range from:

a. "Love it, let's go! Let's collaboratively define the entitlement

process and we will push this through quickly."(Rare)

b. "Don't even try." (Rare)

51418445.v1

c. "This looks OK. I think we can get the council to support this, but

we will require you to ___________" (fill in the blank with any

number of strings that may be attached to the approval, most with

cost attached). (Typical)

This meeting, or these meetings, are critical. They provide the developer

with important intelligence to analyze risk.

2. Application

The entitlement process officially commences with an application (and

payment of a fee). Many cities require the developer to establish an

escrow to cover the city’s third party and other costs around the time of

the application. The application (once the City deems it “complete”) starts

the clock on Minnesota’s “60 day rule” with respect to certain

entitlements. The 60 day rule gives the city 60 days to approve or deny an

entitlement requested in a “complete” application. If the city does not act

in that time period, the application is deemed approved. The statute give

cities the ability to extend the 60 day period to 120 days under certain

general circumstances. In reality, most cities immediately extend the 60

day period or they send the developer a letter explaining why the

application is incomplete, thus tolling the start of the 60 day rule clock.

3. Contents of Application

The required contents vary by municipality and depend on the type of

entitlement the developer is seeking. For most project approvals (not

including re-zoning), the developer must include design documents and

plans (site plan, electrical/lighting plan, stormwater plan, landscaping

plan, etc.). At this point, the city is not concerned with the interior of the

building (therefore, the city does not need construction documents); the

City is focused on the exterior and how the building will look and

function. Therefore, required plans typically fall between schematic design

and construction documents (referred to as “design development” or “DD”

drawings).

Preparing design development documents, which expand upon very basic

schematic/concept designs into building functionality and building

systems, takes time and costs money. In a typical development process,

the developer will incur design development costs only after (i) land

control, and (ii) a general determination of project feasibility. Once the

developer decides to incur the cost, the design development process starts

and may take a couple of months to complete. At that point, the developer

can submit an official application and start the “60 day” clock.

51418445.v1

D. NEGOTIATING THE PURCHASE AND SALE AGREEMENT

1. Introduction

Now that the stage is set, how does the seller negotiate the land sale deal?

The buyer may be making a significant investment and is taking risk. The

seller has its own goals and motivations. As counsel to the seller (and

buyer), we must balance the risks and motivations and attempt to come up

with reasonable solutions.

2. Steps to Take

a. Seller Due Diligence. We think of due diligence as a buyer task.

However, the Seller must also engage in due diligence. For the

most part, this means asking questions and discerning the buyer's

motivations and risks, such as the following:

(i) Is the buyer credible in the marketplace and does it have

the ability to perform? Does the buyer require financing?

(ii) What is the buyer's vision for the project?

(iii) How much time is reasonably required?

(iv) How much money will the buyer invest in pre-development

expenses? What level of investment is required to

commence the entitlement process?

(v) How long will the entitlement process take and what is the

city’s likely reaction to the project?

(vi) How do I protect my client through the entitlement process

if the land sale goes awry?

Asking the right questions is important. Developers will generally

not disclose confidential information (return expectations, margins,

potential tenants, etc.), but will often be transparent about process,

timing and design/engineering/due diligence costs. Understanding

the developer' risks and motivations helps you craft a better

contract for your client.

3. Crafting the Contract

a. Negotiations with respect to accommodating a developer buyer’s

desire for time to acquire project entitlements usually involves the

following standard purchase and sale agreement provisions:

(i) “Due Diligence Period” or “Feasibility Period”

51418445.v1

(ii) Earnest Money

(iii) Representations and Warranties/Affirmative Covenants

(iv) Default

b. All of these provisions, to a certain extent, are linked and function

together. The following are such suggestions for crafting a contract

that balances each side’s risks and rewards.

(i) Feasibility Period Staging. The feasibility period should be

tied to a reasonable period of time for the buyer to reach an

acceptable level of risk before buying the land. The buyer

will always try to push the time period out as far as

possible. Consider staging the feasibility period. With this

approach, the buyer gets a short period of time (perhaps 60-

90 days) to perform all physical, title/survey, Phase I and

document review due diligence. If the buyer does not

terminate the contract during that initial feasibility window,

the buyer waives the right to terminate the contract for

those matters. The buyer would then have a longer period

of time to obtain entitlements and approvals, etc.

(ii) Earnest Money Deposits. Earnest Money can also be staged

with the staged feasibility period. Initial earnest money

does not need to be a large amount if it covers a short

window. Consider requiring the buyer to make additional

and progressively larger Earnest Money Deposits at various

milestones during the development process. This helps

keep the buyer’s feet to the fire.

(iii) Feasibility Period Extensions. If the buyer believes the

initial feasibility/entitlement period is tight, the buyer may

request extensions for some flexibility. Consider

conditioning the extension on (i) some of the earnest

money becoming non-refundable (subject to Seller default);

(ii) buyer’s deposit of additional, non-refundable earnest

money; or (iii) requiring an additional, non-refundable

deposit that is not applied to the purchase price.

(iv) Affirmative Covenants. You should consider requiring the

buyer to share information and due diligence reports. You

should also consider requiring the buyer to (i) apply for

entitlements on or before a certain date; (ii) invite a seller

representative to attend meetings with the city; and (iii) do

other things that are under buyer’s control on or before

specific milestones. SIDE NOTE: the buyer will also

51418445.v1

require certain levels of cooperation from the seller. Most

cities will require the property owner to sign (or consent to)

all development applications. Depending on what the city

requires, indemnities may be important in the contract. The

seller’s lawyer must understand these city requirements on

the front end to appropriately draft the contract.

(v) Default. Termination and retention of earnest money for

buyer’s default is typical. If seller defaults, termination

with an earnest money refund and specific performance are

typical; however, it is reasonable for the buyer to request

the right to sue for direct (not consequential) damages, such

as out of pocket costs, etc. Consider agreeing to a

liquidated amount. If the Seller defaults and has agreed to

pay the buyer’s out of pocket costs, consider requiring the

buyer’s consultants to provide reliance letters to the seller

to perhaps avoid re-inventing the due diligence wheel on

the next deal.

VII. REPS AND WARRANTIES FROM BUYERS IN PSAs – WHAT’S FAIR AND

WHAT’S NOT?

(Patrick E. Mascia, Briggs and Morgan P, St. Paul, MN, November 2, 2017)

(Discussion from Podium)