Of all the mistakes I have seen over and over again in a couple of decades of commercial real estate law, one of the most frequent is failing to get your deal – and the information you need for your deal — in writing. Tragically, that can blow the deal, and often it does. It’s even more tragic, when it happens, because it would be so easy to avoid the problem.
This sounds obvious: virtually everyone in any aspect of the commercial real estate industry — investors, sellers, brokers, title insurers and certainly the lawyers — know that deals involving real estate need to be in writing. In the heat of a negotiation, it may not be clear why, though.
Under American law, many contracts may be enforceable whether they are oral or put into writing. But real estate contracts are an exception: each must be in writing, and signed by the person against whom you want to enforce it. In this case, “enforce” means get the government to stand behind it – by bringing courts, sheriffs, county recorders and other civil servants into the picture to force compliance. Ultimately, if you have an “enforceable” contract, you have a right to have the state intervene to make the other party to the contract either do its part of the deal, or pay you damages if it fails to do so. And not, if you don’t.
The Renaissance Had a Word for It.
That rule goes all the way back, at least, to 15th century English contract law, which considered some kinds of agreement so important, or so easy to claim and hard to disprove, that Parliament decreed in 1677 that they could only be enforced if in writing. A lot of that 300+ year old statute survived right into current laws, where, for example, California’s Civil Code Section 1624(a) says among other things that an unsigned, unwritten contract is invalid if it:
- will take more than a year to perform;
- is a guarantee of someone else’s debt;
- is an agreement to loan more than $100,000;
- is an agreement to sell real estate, or lease it for more than a year;
- is an agreement to pay a debt secured by a lien on purchased real estate; or
- employs someone (like a broker) to buy or sell real estate, or lease it for more than a year, for a commission.
I see that last one all the time. No broker agreement, and then the broker wonders why he or she doesn’t get paid!
Our 15th century forebears had a fancy legal name for people who do deals, but intend not to keep their contract promises. In the Renaissance, they called that “fraud.” Thus, the 1677 Act was the “Statute of Frauds”, and that’s still the name used by lawyers today, for the general rule that, whether thee selleth or buyeth thine real property, thee just hath to get it in writing.
What dealmakers need to keep in mind.
Having some sort of written, signed contract isn’t a complete answer to this issue. Every piece of a deal that you care about is part of “the contract” … or not, if you forget to get it in writing. This is why good dealmakers (and their lawyers) always carefully check their term sheets, or internal approval writeups, against the final form of written agreement, before signing.
We’ve all seen “Frankendocuments”: pasted-together final agreements, where the bits and pieces of “the deal” are assembled into a patchwork contract with amendments, hand-written edits, codicils, appendixes, corrigenda, restatements … and whatever other little pieces of paper are stapled onto it at the closing table. Sometimes I’ve even seen documents that contain references to a completely different deal, where the deal document has clearly been assembled online without careful review.
It’s an easy environment in which to make a mistake. But here’s the thing. If a term you care about didn’t make into that pile of signed final language, then it’s probably not enforceable in court: and this is true whether or not the rest of the contract holds up. So our “get it in writing” advice, handed down to us all the way from the Renaissance, has to be applied to each economically-important piece of a deal, not just the main agreement or form.
If you care about it, get it in writing.