How to Mitigate Your Legal Risks
By David Volk
Unlike Charlie Sheen-style “WINNING!” a good business person can win by making money in bad times with a long-term view. Read The Millionaire Next Door. The most reliable way to make money is by building wealth over a long period of time rather than by overly risky behavior.
Buy and hold used to be the real estate investing model. You rented it out, realized tax benefits, and paid down the mortgage. At some point, you marveled at your brilliance in building wealth. The real estate swinger approach was just the opposite. Risk evaluation was forgotten. For too many, the high risk approach became the new normal. The new new normal is back to making sound investment decisions after evaluating risks.
Business risk can be insured against, at least to some degree, by taking simple steps, e.g. effective deal writing, understanding the deal, and due diligence. If you sign it, you are stuck with it the way it is written unless the other side agrees to change the deal.
Following are some questions to consider insuring against risk:
- What am I agreeing to? Every word, every sentence of the contract matters. Do I understand it? Does it accurately explain what I am agreeing to?
- Can there be a side deal or additional terms that are not in writing? If you are counting on it, get it in the contract. In court, the parol evidence rule says oral items that vary the terms of a contract are not to be considered. Also, well written contracts have an integration clause that says there are no oral agreements, and that the written agreement is the complete understanding of the parties.
- Is the property residential or commercial? This affects a host of issues including whether latent defects have to be disclosed and should get you thinking about types of restrictions on the use of the property, e.g. is it zoned properly for my planned use? In the case of residential property, can I rent it on a short-term basis?
- Can I change the contract after I sign it? Usually not without the consent of the other party.
- How much is the deposit and will I get it back? You do not always get it back if the deal falls through, including instances where you change your mind, the property has defects, or you can’t obtain a mortgage loan commitment. Writing the contract effectively improves your chances of getting your deposit back.
- What are the rights and obligations regarding inspections and repairs? Can I get out of the deal if I do not like what I see in the inspection report?
- What should I know about association dues, special assessments and other association issues such as lien rights and common elements? You are not just buying property; you are buying the rights and responsibilities that go with it.
- Can I take possession before closing to start the fix-up, and do I get my money back for that if the deal falls through? Yes, this happens to people.
- What personal property is included? Don’t assume, for instance, that all those beautiful walk-in coolers and other restaurant equipment stay.
- Is a survey needed? Again, know what you are buying. What are all of the rights and responsibilities such as easements across the property?
- What is environmental contamination and why do I care? It can affect your use of the property, might put you at risk of cleaning it up, and affect your ability to borrow against it.
- The seller seems a little shady; what happens if he refuses to close? We saw a lot of this when prices were skyrocketing. You may be able to still get the property through a suit for specific performance which forces a seller to sell since each property is unique.
This only scratches the surface of suggestions for the prudent investor. Items discussed require a great deal more explanation so take time to reflect on what can go wrong. Then, take preventive measures to reduce your risk. Business agreements are fraught with peril if not properly written. Seek good help and be as cautious as you would be with any other major decision.