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Purchasing Property with a Lease

Often when purchasing a company, certain assets pose issues not easy to discern. For example, a Purchaser can buy real estate through a purchase contract and perhaps even personal property such as furniture and furnishings, fairly easily. When purchasing real estate, title insurance can be ordered, surveys re-dated, and abstracts renewed. Information on mortgages can be obtained from a County Clerk’s office and assurances can be given of non-default status.

One major asset exists, however that is not so easy to determine currently–the status of Leases. But there are tools that can help, as follows; and requiring them in a Purchase Offer can be essential. These are some, but by no means all of such tools.

1.  Past Breach of Lease. If a purchaser is taking a Lease amongst other assets it is critical to know that the Lease is not in breach, and that there will be no future Landlord or Tenant action. But how to find this out? There would be no public filing regarding a breach particularly if no law suit has as yet been brought by or against either party.

The tool here, is an Estoppel Letter where the Seller, Tenant, and the Landlord each state, under oath or not, that there has not now nor ever been a breach. Having given such assurance, the assuring party is then estopped from asserting a current breach into the future. Of course, it would have been astute for the Purchase Contract to require an Estoppel Letter if and when demanded during the Lease Term. Careful drafting of Leases may even attach a sample Estoppel Letter in acceptable form, as an exhibit.

2.  Assignment of Subletting Clause. A purchaser must also study a Lease to determine what rights the Landlord has with respect to assignment or subletting. There are many variations of this so the Assignment and Subletting consents need to be carefully examined. For example, it is possible that if this is a store in a chain of branch stores, that there may be a lease clause simply stating that if all or a significant number of related locations are to be sold, the Landlord need only be given notice and its consent is unnecessary. Other typical such clauses may or may not require that Landlord consent, be reasonable or not and prompt or not. The number of days when Landlord consent is required to an assignment or sublet might also be stated.

3.  Use Clause. A purchaser must study the Use Clause in every lease. I was once confronted with a purchaser who wanted to open a car dealership. The lease prohibited car dealerships because the Landlord had also been a car dealer. Often, Leases require only that any Use be permitted by zoning. Sometimes a non-compete clause will determine prohibited competitive users even in an extended geographic radius.

4.  Attornment Clause. For a person purchasing a Landlord position, it’s important to determine if the Lease contains an Attornment Clause requiring the current Tenant to be governed by the new Landlord (Purchaser) as the original Landlord had been.

5.  Internal and External. Every provision in each lease must be examined including, for example, whether or not the Landlord’s approval of a new Tenant as an Assignee rather than as a sub-tenant excuses the current Tenant from further liability.

If so, or if not, a Purchaser of the Landlord’s position should request updated financials of all successor tenants. Hopefully, when the Lease was first drafted or in the purchase contract provision was made for requiring financial statements on demand. Otherwise, the current Tenant (or Landlord) may not be compelled to provide one. Knowing what items of equipment and personality go with the departing tenant or remain after the sale are often referenced in the Lease.

6.  Physical Examination. Purchasers are benefited by a physical examination not only by the Purchaser itself, but also by a building engineer or inspector. It may be that costly repairs need to be made for safety or government compliance, which might be used to offset the purchase price. It would be helpful to check with the applicable zoning or building department to determine if the building qualifies or perhaps has ever been cited under environmental, federal, state, and local legal and administrative guidelines.

All told, there are a number of important leasehold analyses which need to be examined when purchasing property that includes a lease. The tools to discover problems prior to purchase may not be obvious but they exist in your attorney’s lexicon.

Industrial Development Agencies Located In The Central New York Regional Transportation District No Longer Exempt From The Additional Mortgage Recording Tax

In 1969, New York State enacted the New York State Industrial Development Agency Act which created industrial development agencies (“IDAs”). New York State created IDAs to promote the economic welfare, recreation opportunities and prosperity of the inhabitants of New York State. IDAs have traditionally provided financial assistance by offering exemptions from sales and use taxes, mortgage recording tax, and real property taxes. Mortgages executed by IDAs have been exempt from the payment of all mortgage recording taxes, including (1) the Basic Tax of 0.50% of the amount of the mortgage, (2) the Special Additional Tax of 0.25% of the amount of the mortgage, (3) the Additional Tax of 0.25% of the amount of the mortgage for mortgages recorded in counties located within the Central New York Regional Transportation District and certain other transportation districts and 0.30% of the amount of the mortgage for counties located within the downstate Metropolitan Commuter Transportation District, and (4) any local mortgage recording tax imposed by some cities and counties.

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NYS Real Estate Transfer Tax on Conveyances of Real Property

In New York State, sellers who convey an interest in real property are required to pay New York State real estate transfer tax. In the usual sale of real property, the real estate transfer tax is computed at a rate of $2 for each $500 of consideration or fractional part thereof. For example, in a transaction in which the consideration paid is $100,000, the real estate transfer tax will be $400. The transfer tax is due when the instrument effecting the conveyance, which is a deed in the case of an interest in real property, is delivered from the grantor/seller to the grantee/buyer in the transaction.

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When Commercial Leases Don’t Mean What They Say

So you’re presented with a Commercial Lease, say a business retail tenant in a shopping center. You’re perhaps a Landlord, or a Tenant. You carefully review all of the terms and have no problem with their clarity. They’re explicit and unambiguous. What you might not realize is that there can be a third and silent party to the lease who may have other ideas – the Court, if there’s a law suit—which can amend even the plainest terms on the basis (called equity) of unfairness.

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October 3, 2015 – The Start of a New Era for Residential Mortgage Loan Closings

While October 3, 2015 came and went without any particular fan fair, it did mark the start of a new era in residential mortgage lending.  October 3 is the effective date for the Consumer Financial Protection Bureau’s new combined Truth in Lending – Real Estate Settlement Procedures Integrated Disclosure (a/k/a “TRID”).  For all residential mortgage loan applications taken on or after October 3, 2015 the lenders are obligated to utilize the “TRID” disclosure in connection with closing.  The familiar Truth in Lending Disclosure form and HUD-1 Uniform Settlement Statement – mainstays in the residential mortgage closing world for over thirty years – will be replaced with the TRID.

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Beware of Preserving Lien Priority When Modifying Mortgages

When lenders modify the terms of a mortgage loan they should be careful to obtain the necessary consents from any junior lien holders and to record the necessary documents memorializing the modification. In general, under New York law successive mortgages on the same property are entitled to priority in the order in which their respective mortgage liens have attached to the property. The mortgage lien generally attaches to the property when it is recorded in the county clerk’s office of the county in which the property is located.

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Good and Bad News for Non-residents owing New York Real Estate

The New York Department of Taxation has issued two new tax advisory opinions that have a significant impact on taxpayers who are non-residents of New York State.

We have previously posted information for non-residents.  See Ryan Emery’s posts of April 21, 2015 and March 19, 2014.  This blog reports on very recent developments based on two advisory opinions issued by the New York Department of Taxation on May 15, 2015.

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Vacation Home Owners – The Tale of Two Estates

While over 19 million Americans call New York State home, countless other non-residents own second homes in the state. Similarly, over 19 million Americans call Florida home but many non-resident retirees and snowbirds own vacation homes in the state to enjoy the warmer climate in the winter months.

The Problem

Whether you own a second home in Florida or New York, you should be aware that owning a second home in another state will expose your estate and loved ones to additional costs and burdens when you pass away.

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