Colorado Real Estate Journal - December 16, 2015
This is the first of a series of a dozen or so articles that come from some years of experience using the Colorado Real Estate Commission-approved Contracts for Purchase and Sale of Real Estate for commercial real estate transactions. One does not get very far into the contract before facing the first choice to be made. Who is the buyer? Seems easy enough, but consider the following.
Tip: Exercising a little discipline when naming the buyer in the contract avoids problems down the road. For individuals, the name as it appears on a driver’s license or state-issued identification card is a good choice. The name in those documents is recognized under the Uniform Commercial Code for financing statements. See C.R.S. § 4 9 503(a)(4)(C). It also makes it easy for a notary public when it asks for identification for an acknowledgement. The notary statute specifically allows for a notary to use a driver’s license or identification card for determining a person’s identity. See C.R.S. §12 55 110(4)(b)). Tip: For an entity that has a document filed in the business records of the Colorado Secretary of State (or the similar office in another jurisdiction), use the name exactly as it appears in those records. The Colorado business laws refer to this name as the “true name” [see C.R.S. § 7-90-102(63.7]) In Colorado, where a “one-keystroke difference” in a name (with a few exceptions) could refer to a different entity, using the exact name is very important. See C.R.S. § 7 90 601(2). Thus, abbreviations (“Co.” for “Company,” “Inc.” for “Incorporated,” “LLC” for “Limited Liability Company,” etc.) should be used only if they appear in the true name and should not be used if they do not. Although commas, periods, apostrophes and capitalizations are not as critical, you should use them or not as occurs in the true name. Trap: If the buyer is a trust, plan on working with the lawyer who represents the trust. Trusts are getting more common all the time as baby boomers work on their estate plans. When it comes to real estate, a trust is one of the most complicated types of ownership. If the trust has to buy the property, consider using a limited liability company with the trust as its sole member. Don’t get me started. I only get to write about 900 words per issue. Tip: When the buyer is an entity, further identify it by the type of entity and the state in which it was organized (e.g., “a Colorado limited liability company” or “a Delaware corporation”).It is important to include that information for a number of reasons, not the least of which is that there may be an ABC Inc. in almost every state of the union. So, which one owns the property? Everything that has been said about the name of the entity also is true about the description of the entity. The best practice is to state the entity description in the contract right after the buyer’s name. It is very important to get the entity description absolutely right. And, of course, the name and entity description used in the beginning of the contract should be the same as that used in the signature block. Trap: The entity description of the buyer, if it is a limited liability entity, is important for another reason – liability. If the buyer is not identified as a limited liability entity, the person signing for it might not have the limited liability he or she wants to have. See Water, Waste & Land, Inc. v. Lanham, 955 P.2d 997 (Colo. 1998). Tip: If the buyer named in the contract is an entity, make sure the entity exists. Checking the records of the Secretary of State is easy and can be done anytime, day or night, via the Internet: http://www.sos.state.co.us/biz/BusinessEntityCriteriaExt.do. How much does it matter? If the entity is not formed, is the contract enforceable? By whom? What is the personal liability of the person acting for the unformed entity? All are open legal questions, suggesting that you should not sign a contract for a buyer that does not yet exist. Interestingly, every once in a while, real property is conveyed to an entity that has not been formed. That has occurred often enough that Colorado has a statute addressing the problem. The statute provides that title vests in the grantee named in the deed when the entity is formed. See C.R.S. § 38 34 105; Title Standard 3.4.1. So, if the buyer does not exist and you close the contract and buy the property, the solution is to form the entity. Trap: There might be title issues relating to the interim, before the entity is formed, but at least title to the real property is no longer floating in outer space. Trap: Using a nominee as the buyer is a bit tricky from a legal standpoint. For example, the law is pretty clear that an agent for an undisclosed principal, such as a nominee, is personally liable for its actions. See Water, Waste & Land, Inc. v. Lanham, 955 P.2d 997 (Colo. 1998). At the same time, a person who allows a nominee to take title to its real property is taking the chance that the nominee will mess up its title, as would happen if a judgment was entered against the nominee. See C.R.S. § 38 30-108. The next installment will address issues related to the seller’s name. Easy, you say? Stand by for some surprises.