What do a commercial litigator, a divorce attorney, an eminent domain lawyer, a banking attorney and a general practitioner have in common? At some point, each will encounter real property, either as the subject of litigation or as collateral in a settlement agreement.
The complexities and nuances of real estate law have trapped even the most sophisticated real estate lawyers, much less lawyers in other practice areas who only rarely deal with real property. Here are three traps for the unwary in real estate law and practical steps to avoid them.
• Trap No. 1: not knowing the property. It seems obvious, but amidst the hustle and bustle of day-to-day practice, attorneys often overlook the importance of visiting the property. Particularly when an attorney is representing an institutional land owner or commercial mortgagee, the client may not have visited the property recently (or at all) and may only be able to speculate about its present condition.
Know thy property, know thyself. There is no substitute for visiting the property in person . This provides a more thorough understanding of the property’s physical nature. Better yet, an attorney who can attest to a judge that he has seen the property with his own eyes gains credibility in the courtroom.
Opposing counsel should not be the one to break the news that there are trespassers, vandalism, damage or other issues that afflict the property. Counsel should avoid the surprise factor and make a trip with the client to visit the property together.
More than a physical inspection, counsel also should not overlook the importance of title reports, appraisals, lienholders, easement holders, encumbrances and tax assessments. An opposing party’s, or even a client’s, opinion of ownership, condition or value of the property is hardly objective.
Counsel should ask detailed questions about the property and carefully review title and appraisal reports. He should inquire about all property records and go back a number of years. Even better, counsel should obtain an independent title report and appraisal and review any documents the report references. The terms of a deed of trust or promissory note may encumber the property and may implicate important choice of law, venue and remedy provisions. Any of these terms could easily devalue the property and decrease the likelihood of success in court if not addressed in advance.
• Trap No. 2: not knowing the players. Easements or other interests unknown to the client may often encumber property. The client also may hold a conveyance instrument or release of lien that, for whatever reason, was not recorded in the real property records. Parties also often inadvertently overlook tenants or leasehold interests. Failure to identify all interested parties could derail a suit, resulting in incomplete relief or requiring the addition of parties at inconvenient times, at great expense and delay to the client.
Identifying interest holders is of particular importance for eminent domain attorneys representing condemnors. Well-settled Texas case law can entitle parties other than fee owners to compensation for condemned property. Such parties can include lessees for years, easement holders, tenants for life, mortgagees, taxing authorities and any other party with a compensable interest in the condemned property.
This makes it even more important to analyze fully the client’s property and identify interested parties before initiating condemnation proceedings. Identifying all interested parties is also key for landowner’s counsel, who may need to advise clients that they have to divide a condemnation award with other interest holders.
• Trap No. 3: conveyance of property in settlement agreements. In an attempt to resolve a case and reach a cost-effective result for a client, litigators in settlement negotiations sometimes can be too quick to suggest the exchange of a real property interest. Without proper precautions, this can lead to several unintended consequences.
First, land exchanged in a settlement negotiation may become more of a liability than an asset if the property has hidden or unknown issues, such as outstanding tax liens, environmental liabilities or title issues. This risk reinforces the cardinal rule: Know thy property, know thyself. A client who thought he or she was getting a good deal by exchanging real property in settlement may, in fact, be taking on nothing more than a headache with unexpected remediation costs and future legal bills.
Second, suggesting an ill-conceived property exchange could violate Texas Disciplinary Rule of Professional Conduct 1.01, which requires a lawyer to be competent to represent a client in the legal matter in which she is employed. Litigators should not act as part-time real estate counsel unless they are competent to do so.
This is not to say that real property is off limits. But if an assessment of the property raises issues beyond counsel’s purview, he should consult a real estate attorney; that person can conduct due diligence and guide the lead counsel through the nuances of conveying a real property interest prior to inking a settlement agreement or agreed judgment. There also may be tax benefits or liabilities to consider, depending on the type of conveyance and property interest.
These are just a few real estate law traps that can ensnare lawyers seeking to achieve the best result for a client. There is no substitute for a well-prepared attorney armed with first-hand knowledge of the property.