Why a Simple Commercial Real Estate Transfer Isn't so Simple

As Business Lawyers we are often called upon to assist our clients with what’s perceived as a “simple” matter.  Case in point, a property owner calls and asks us to assist in the transfer of a commercial property that they’ve owned in their individual name for years.  The caller met with a “friend” who recently bought a property and as part of the process was counseled to take ownership through an LLC (limited liability company).  The friend was shocked to learn that the caller didn’t own his property through a corporation or LLC in order to protect himself from personal liability and to put some additional legal separation between the real property and the business that the caller also operates at the property. The caller expresses urgency in having us do a “quick” deed transferring the property to an LLC. 

For our purposes we will assume that the entity being used is an LLC, without delving into the various issues that need to be taken into consideration when deciding on the appropriate entity.  I will focus on a few crucial issues regarding the transfer that need to be considered prior to drafting a deed and running to the County Clerk’s office to record it.

Our first question: “Is there a mortgage on the property?”   The caller’s response: “Yes there is, why does it matter?”  Since there’s a mortgage the loan documents for the mortgage need to be reviewed, regardless whether it is a loan from a private party or an institutional lender (“Bank”), in order to determine if the Bank’s approval is required prior to transferring the property into the LLC.

Sign Up for E-News

Inevitably when we review the loan documents there’s a provision in the loan agreement, promissory note and/or mortgage that prohibits the property from being transferred without the Bank’s approval.  What happens if I transfer the property and don’t get the Bank’s approval prior to doing so?  The loan documents typically provide if the property is transferred without the Bank’s approval the debt is deemed to be in default and the balance is accelerated (the entire balance becomes immediately due and payable).  This unintended result can be if the property is transferred without checking the loan documents and securing the Bank’s written approval for the transfer. 

If the Bank approves the transfer it’s often conditioned on the borrower supplying acceptable current financial information for the current owner(s) and the LLC; the borrower obtaining an endorsement or new title insurance policy in the name of the LLC and including the Bank as an insured party; modification of the existing loan documents to include the LLC as a party; and the principals of the new entity signing personal guarantees.  You should keep in mind that the costs of addressing the Bank’s requirements will be borne by the borrower.

Next question: “Do you have a title insurance policy for the property?”  The caller asks, “Why are you asking about title insurance, all I want to do is transfer the property out of my name into an LLC?”  If there’s an existing title insurance policy and the property is transferred from the named insured to a separate entity, such as the LLC, it’s possible that the insurance policy will provide that coverage terminates upon the voluntary transferred of title.  In fact, there’s a New Jersey Supreme Court case, Shotmeyer v. New Jersey Realty Title Insurance Company, 195 N.J. 72 (2008), in which the Court determined that a title insurance policy lapsed when real property was conveyed from a general partnership to a separate and distinct limited partnership even though the individuals that owned the entities were the same.  Therefore, a determination will need to be made whether an endorsement or amendment can be added to the existing title insurance policy, or if a new title insurance policy needs to be obtained.

Along with addressing title insurance coverage, an updated title, judgment and lien search should be performed to determine if there are any liens or judgments against you or the property that you may not be aware of.  Unless the existing liens and judgments are released they will continue to attach to the property after it is transferred to the LLC. Interesting fact, under the current Uniform Commercial Code in effect in New Jersey a UCC1 financing statement (lien form) does not require the debtor’s signature prior to the lien being filed.  As such a lien can be filed without you knowing about it.  Also, UCC1 liens can also be discharged by filing a termination statement, which doesn’t require the signature of the party that holds the security interest.  In addition, the judgment search may reveal that a judgment you satisfied years ago is not reflected as satisfied in the public records. If any of these inappropriate or inaccurate items are revealed in the searches action should be taken to address them prior to the property being transferred.

As is common with many things in life, there’s often the “simple” and the “right” way to do things.  As illustrated above if one takes the simple path by forming an LLC, and preparing and recording a deed without determining the impact these acts will have on existing mortgages and title insurance this can turn into a financial nightmare.  Laddey, Clark and Ryan, LLP’s Business Law and Commercial Real Estate Practice Group is here to help you with your business and commercial real estate needs.  Please visit us at www.LCRlaw.com

 

 

TAP Into Another Town's News:

You May Also Be Interested In

Sign Up for E-News

Sparta

Sparta Police: Drunk Brooklyn Man Asks Police to Shoot Him

May 20, 2018

SPARTA, NJ – A Brooklyn man was taken for observation when he asked police to shoot him after having crashed his car down an embankment on County Road 517 near the Sparta Middle School.  On May 17 around 2:06 a.m. Sparta Police Officers Brian Porter and Timothy Lynott found Joshua Lindland of Brooklyn asleep in the driver’s seat of a gray Audi against a tree, police ...

Sparta Police: Passengers Face Drug Charges in Traffic Stop

SPARTA, NJ – Two Wantage women face drug charges after the car they were in was stopped for a broken headlight on Route 15.  On May 5 around 2 p.m. Sparta Police Officer Ben Griffin pulled over Alex Torres, 22, driving a white Honda Accord with two passengers, police say.

The officer saw a metal marijuana grinder behind the driver’s seat.  The car and ...

JCP&L Latest Information, Free Ice and Water

SUSSEX COUNTY, NJ – As of 8:47 p.m. JCP&L is reporting 12,745 customers or 22.11 percent, are without power in Sussex County.  In Sparta 2749 or 32 percent remain in the dark.

JCP&L said they anticipate the “vast majority of the remaining customers to be restored to service by late Thursday.”

JCP&L customers without power can get ice and water ...

Republican Party Values

May 21, 2018

Campaigns are interesting things.

Throughout the process, my opponents' supporters have labeled me a "political prostitute", "pimping" a message as a "spokesperson". I've been in a public meeting when referred to as a "lackey" who 
"belongs in a cage like the animal you are".

It's been said directly to me by a ...

Ethical Or Political Stunt

On May 9th Sussex County Freeholder Director Jonathon Rose announced formation of the Sussex County Transparency Committee. A committee established to monitor the ethics of County politicians.  

Alarming is what was left out of this announcement. Besides naming the dynamic duo Lazzaro and Graham, two other names show cause for curiosity. Jonathon never acknowledged, nor did he ...

Upcoming Events

Carousel_image_fd1cdb2a28e320db4cdd_img_7405

Thu, May 24, 6:00 PM

Sparta High School Media Center, Sparta

Sparta High School Art Gala

Arts & Entertainment

Carousel_image_6f4ecc7e007a7b295623_farmers_market

Sat, May 26, 9:00 AM

Sparta Health and Wellness parking lot, Sparta

Sparta Farmers Market

Carousel_image_eda4582229827b1fe4f5_img_7405

Sat, May 26, 11:00 AM

Sparta High School Media Center, Sparta

Sparta High School Art Gala

Arts & Entertainment

Sun, May 27, 1:00 PM

Van Kirk Homestead Museum, Sparta

Life Along the Wallkil River

Education

Carousel_image_6f4ecc7e007a7b295623_farmers_market

Sat, June 2, 9:00 AM

Sparta Health and Wellness parking lot, Sparta

Sparta Farmers Market

Carousel_image_6f4ecc7e007a7b295623_farmers_market

Sat, June 9, 9:00 AM

Sparta Health and Wellness parking lot, Sparta

Sparta Farmers Market

Sun, June 10, 1:00 PM

Van Kirk Homestead Museum, Sparta

Life Along the Wallkil River

Education

Carousel_image_6f4ecc7e007a7b295623_farmers_market

Sat, June 16, 9:00 AM

Sparta Health and Wellness parking lot, Sparta

Sparta Farmers Market

Thu, June 21, 2:00 PM

Van Kirk Homestead Museum, Sparta

Summer Afternoon Garden Soiree

Home & Garden

Carousel_image_6f4ecc7e007a7b295623_farmers_market

Sat, June 23, 9:00 AM

Sparta Health and Wellness parking lot, Sparta

Sparta Farmers Market

Newton's Petition to Move Election Certified, Tabled to May 30 by Council

May 15, 2018

NEWTON, NJ—The petition to move elections from May to November was certified by the clerk and presented to the Newton Town Council at the meeting on Monday night.  The petition has been circulating since April and was a point of controversy in the recent council election campaigns.

According to the town attorney, the town clerk certified “369 valid signatures of qualified ...

10-Year Old Boy Battling Cancer Receives Generous Donation From Randolph Hockey Family

May 20, 2018

RANDOLPH, NJ- While the inter-town hockey battles on the ice between Randolph and Roxbury are fierce at every age level, when it comes to real life battles off the ice there is no hesitation to offer help to their neighbor.

Such is the case with a recent gesture of unity and support from the Randolph Varsity hockey team, when they came together to deliver good wishes and ...

Why You Should Buy Your NJ Home Before Interest Rates Rise

Interest rates for a 30-year fixed rate mortgage climbed from 3.95% in the first week of January up to 4.61% last week, marking a 7-year high according to Freddie Mac. Many factors fueled the current pace of acceleration.  Sam Khater, Freddie Mac’s Chief Economist, opines:

“Healthy consumer spending and higher commodity prices spooked bond markets and led to higher mortgage ...

Is Your First Home Within Your Grasp Now?

 

Bottom Line


According to the US Census Bureau, ‘millennials’ are defined as 18-36-year-olds.


According to NAR’s latest Profile of Home Buyers & Sellers, the median age of all first-time home buyers is 32.


More and more ‘old millennials’ (25-36) now realize homeownership is within their grasp now!

Are YOU ready for ...

Find Your Dream Home During Our DOUBLE Open House Weekend!

The forecast for this weekend is rain, rain, and more rain---so why not spend your time touring your new home?  Team Nest Builder offers 2 wonderful Open Houses this weekend, PLUS a new listing for you to check out via video tour!

27 Hilltop Trail, Sparta

Step into your own fairytale with this Lake Mohawk, storybook-sweet 3-bedroom, 1.5-bathroom gem! Gather in front of the rustic ...

Help Feed Hungry Sussex County Families Through Foodstock

Did you realize food pantry shortages INCREASE during the summer months? Decreased donations and increased need due to the summer break from school lunch and breakfast programs leave many Sussex County families hungry.  

Enter Foodstock:  an annual spring countywide food drive started 15 years ago through the coordinated efforts of Pass it Along, United Way of Northern New Jersey, ...

3 Tips for Making Your Home-Ownership Dream a Reality

 

Here's Highlights:


Setting up an automatic savings plan that saves a small amount of every check = one of the best ways to save without thinking much about it.


Living within a budget right now helps you save money for down payments while also paying down other debts holding you back.  What are you willing to cut back on to make your dreams of homeownership ...

AtlantiCast

AtlantiCast: Episode 15

On this week’s AtlantiCast, learn some important tips for controlling and avoiding diabetes from an Atlantic Health System expert, see how Atlantic Health is advancing cutting-edge research, hear what’s being done to keep health care environmentally friendly and much more!

 

Sussex County Board of Chosen Freeholders May 9 video

SUSSEX COUNTY, NJ - Video of the Sussex County Board of Chosen Freeholders May 9 meeting. 

 

SURVIVING A STROKE: Quick Medical Response Gives Mom Her Life Back

Carotid artery dissection. It’s one of the most common causes of stroke in younger adults.

And while you might not associate the word “stroke” with younger patients, the condition – if not treated immediately – could lead to paralysis and even death.

Lindsey Singh can attest to the importance of immediacy. The 31-year-old mother of two from Flanders experienced ...

Newton Town Pool Registration is Open

May 23, 2018

NEWTON, NJ – Memberships are available for the Newton Town Pool for the 2018 summer season. 

The Newton Town Pool has two water slides, a fully enclosed kiddie pool with walk-in entry, a grass picnic area, a picnic pavilion, lounge chairs, large pool umbrellas, snack stand, updated change rooms and an ADA lift.

The pool will be open June 25 through August 26.  Open swim ...