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    August
    06
    2008

    Using Wisconsin's Commercial Offer to Purchase Form

    Douglas S. Buck & Katherine R. Rist

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    Generally speaking, the terms and provisions of the standardized commercial offer to purchase form create a contract with broad representations, limited contingencies, and unlimited remedies. Here are some of the issues parties should consider when using the commercial offer to purchase form.

    Wisconsin LawyerWisconsin Lawyer
    Vol. 81, No. 8, August 2008

    Using Wisconsin's Commercial Offer to Purchase Form

    Generally speaking, the terms and provisions of the standardized commercial offer to purchase form create a contract with broad representations, limited contingencies, and unlimited remedies. By contrast, many commercial real estate sale agreements contain narrow representations, open-ended contingencies, and limited remedies. Here are some of the issues parties should consider when using the commercial offer to purchase form.
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    by Douglas S. Buck & Katherine R. Rist

    Sidebar:

    Attorneys in Wisconsin who handle commercial real estate transactions find one type of purchase and sale contract appearing on their desks time and again: the WB-15 Commercial Offer to Purchase form (the form or WB-15). The Wisconsin Department of Regulation and Licensing (DRL) developed the form, which was last updated in 2000. The form is intended specifically for use by licensed real estate brokers in connection with the sale and acquisition of a wide range of commercial properties, including apartment, industrial, retail, and office buildings. This article lists important issues for purchasers, sellers, brokers, and attorneys to consider when using the form.

    Background

    Wisconsin law forbids all persons, including licensed real estate brokers, from practicing law without a law license1 Therefore, to assist brokers in carrying out their duties without violating the law, the DRL adopted an extensive set of preprinted and preapproved forms, such as the WB-15, which may be used by brokers. In accordance with chapter RL 16 of the Wisconsin Administrative Code, brokers who use and fill out these forms are not considered to be practicing law.

    One of the major benefits of standardized forms such as the WB-15 is that, through regular use, attorneys and brokers can become familiar with the forms' terms and provisions. This familiarity allows attorneys and brokers to quickly spot issues or concerns related to a particular type of transaction. However, perhaps the biggest downside to the form is that purchasers, sellers, and brokers sometimes mistakenly believe that the form adequately covers all the issues that might arise in connection with their transactions.

    The form's drafters knew that it is impossible to address in a single preprinted form every potential issue related to a broad range of commercial transactions and real estate investment classes. The form thus represents a starting place for the parties to begin their negotiations and should be used only after a careful examination of how the form addresses the various issues involved in a transaction. In fact, in a complex or major real estate transaction, the use of the WB-15 usually is not appropriate. That said, many brokers, purchasers, and sellers feel more comfortable using the form as a starting point.

    In addition to examining the issues that the form addresses, it also is important to consider the issues that the form overlooks. Attorneys frequently use addenda or riders to address issues about which the form is silent or to tailor the form to the transactions at hand.

    Some key topics for attorneys, brokers, sellers, and purchasers to consider when using the form include representations and warranties, rent rolls, estoppels, title, surveys, investigation periods and contingencies, earnest money, and default. This list is by no means exhaustive, but the discussion below of these items should provide a better understanding of the form's terms and provisions. Even when electing not to use the form, the parties to a commercial real estate contract should consider many of the issues discussed in this article.

    Representations and Warranties

    The WB-15 contains a general representation to the purchaser that the "Seller has no notice or knowledge of conditions affecting the Property or transaction" (lines 52-53). A "condition affecting the Property" is defined by the WB-15 broadly to include a wide range of matters (lines 57-75). A seller's counsel should review these representations with the client to ensure their veracity, and a purchaser's counsel should consider whether these representations are broad enough.

    When electing to simply use the WB-15 language, sellers should carefully examine the precise language of the form. For instance, the form contains a very open-ended representation in lines 74-75 that the seller has no notice or knowledge of any "other conditions or occurrences which would significantly reduce the value of the Property to a reasonable person with knowledge of the nature and scope of the condition or occurrence." This is a vague provision, and at least one Wisconsin court has interpreted it to include a wide range of matters that the parties might not contemplate.

    In Kailin v. Armstrong,2 the plaintiff-purchaser sued the defendant-seller for a breach of this clause, after the seller allegedly failed to disclose to the purchaser a tenant's history of delinquencies and rent arrearages as of the date of the contract. In ruling in favor of the purchaser and allowing the case to go to trial, the Wisconsin Court of Appeals noted that the language in lines 74 and 75 of WB-15 "is obviously intended to include conditions or occurrences that are not specifically listed, but that a buyer would want to know about because of their effect on the value of the property."3

    From the purchaser's perspective, even if the seller agrees to make the representations contained in the WB-15, the purchaser might actually want to broaden the representations by eliminating the "materiality" qualifiers that the form attaches to several of the representations. For example, one of the condition-affecting-the-property clauses in the WB-15 is any "material violations of environmental laws or other laws or agreements regulating the use of the Property" (line 67). A purchaser, its investors, lenders, or other interested parties might simply not be interested in a transaction if there are any violations of environmental laws or other laws affecting the use of the property, even if the seller believes they are not "material." A purchaser also might want to specify that the form's representations are made not only "as of the date of acceptance," as provided in line 52 of WB-15, but also as of the time of closing.

    Douglas S. Buck Katherine R. Rist

    Douglas S. Buck, U.W. 1993, is a partner at Foley & Lardner LLP, Madison, focusing on commercial real estate, zoning, and lending. Katherine R. Rist, U.W. 2005, is an associate at Foley & Lardner LLP, Madison, focusing on commercial real estate law.

    In addition to the representation on conditions affecting the property, the form also contemplates that the seller will fill out and deliver to the purchaser a real estate condition report. Such a report is prescribed by Wis. Stat. chapter 709. However, it should be noted that under chapter 709, a real estate condition report is required only when transferring residential property (such as an apartment building) with one to four units. In other words, a real estate condition report is not required in a commercial transaction, unless the transaction involves an apartment building with fewer than five units. Accordingly, it is not uncommon for parties to strike the provisions requiring the seller to deliver a real estate condition report.

    Sellers often add three other terms and provisions to the representation sections of commercial real estate contracts. First, sellers' attorneys will frequently add extensive "as is, where is" and release language to their contracts. Typically such provisions note, among other things, that the seller and its principals, employees, and brokers have not made any representations or warranties - except as expressly contained in the agreement - on which the purchaser is relying. Second, large institutional sellers often seek to include language whereby purchasers agree to place a cap, or limit, on the damages that the purchasers can recover from the sellers for a breach of the representations and warranties after a transaction has closed. Third, sellers often add language whereby purchasers agree to limit the time periods in which they can bring a breach of representation or warranty claim against the sellers. All these provisions can have a material impact on the transaction, including potentially the purchase price, and purchasers should weigh the benefits and potential consequences of such provisions before agreeing to them.

    Some purchasers agree to such provisions on the assumption that, regardless of the limits on damages or time periods that they agreed to in the contract, they can later sue unscrupulous sellers in tort for fraud or misrepresentation. However, given the increasing use of the economic loss doctrine in Wisconsin, this assumption may not be correct. A judicially created rule, the economic loss doctrine was first applied to bar purchasers of products from recovering under tort theories from manufacturers for damages that the courts considered to be solely economic losses. Courts have since applied this doctrine to real estate transaction4 and have thereby barred parties from bringing general tort claims, such as intentional or negligent misrepresentation, against the other party after a purchase contract has been executed. For example, in a decision issued by the Wisconsin Supreme Court in July 2008, the court ruled that the economic loss doctrine bars common-law claims for intentional misrepresentation even in the context of residential transactions5

    Without the ability to bring an action in tort for misrepresentation, purchasers are left with claims for breaches of the express misrepresentations and warranties contained in the contract itself. The applicability of the economic loss doctrine to real estate contracts places an increased importance on the specific language used in the representations and warranties in the form.

    Rent Roll and Estoppels

    From a real estate investor's perspective, one significant omission in the form is the lack of any representation related to the property's leases (if any). Typically, a seller or its broker will deliver a rent roll to the purchaser setting forth the amount of rent, security deposits, lease expiration dates, and other key facts, such as delinquencies, related to the property's leases. Such facts often play a large role in helping the purchaser determine the purchase price and, thus, are essential to the purchaser's interest in a property. A purchaser therefore should consider having the content of the rent roll incorporated into the seller's representations in the contract.

    In addition, real estate investors often want assurances that the rental income to be acquired arises from valid and binding leases. As a result, it is common in many commercial real estate transactions (other than ones involving apartment buildings) for the purchaser to require the seller to deliver a so-called estoppel letter from its tenant(s). In an estoppel letter, a tenant certifies and confirms to the purchaser various facts, such as the rental amounts, security deposits, expiration dates, and, importantly, that the lease is without default. Once signed, an estoppel letter is intended to prevent the tenant from later claiming rights or causes of action against the new owner contrary to the statements made in the estoppel letter.

    The absence of any reference to a rent roll or to estoppel letters is an excellent example of the type of important issue that the form simply does not address but that should, at a minimum, be contemplated by the parties before signing a contract.

    Title

    Title is a key component to any real estate acquisition. However, with respect to title, the form contains two major drawbacks. First and foremost, the form does not allow enough time for the parties to review the title. Under the WB-15, the seller is not required to provide a title commitment (a report on the status of title) until three business days before closing (line 195). This leaves the parties with very little time to review title and any underlying documents associated with it.

    This short period to review title is an issue for both sellers and purchasers. Purchasers often want to review the title to a property promptly after signing the contract. That way, the purchaser can spot any issues before making financial commitments to its lenders, appraisers, and other consultants. From a seller's perspective, it may be helpful to know about title issues well before the scheduled closing date so that the seller, if it so desires, has time to cure any title problems, especially if the seller needs funds from the sale to meet other financial obligations.

    The second major drawback with the title provision is that it requires the seller to deliver to the purchaser evidence that the title is "merchantable" (WB-15, line 196). The term "merchantable" is synonymous with "marketable."6 Both terms, however, are amorphous. The courts have attempted to provide some clarity by defining these terms, but their decisions have not yielded much precision. WB-15 provides that the following constitutes merchantable title: a title "free and clear of all liens and encumbrances, except: municipal and zoning ordinances and agreements entered under them, recorded easements for the distribution of utility and municipal services, recorded building and use restrictions and covenants" (lines 181-85).

    Many title matters defined as merchantable by the WB-15 could be considered unacceptable to a purchaser. For example, consider the situation in which the title commitment for a neighborhood retail center reveals a use restriction, or protective covenant, in favor of a neighboring property that forbids restaurants from being operated within the center. Under the WB-15's language, the purchaser does not have the right to object to such a use restriction if it is not inconsistent with the property's present use nor does the purchaser have the right to terminate the contract on discovering the restriction (line 185). However, such a use restriction may have a material adverse effect on the value of property to a purchaser, especially if the purchaser was considering bringing in one or more new restaurant tenants.

    From the purchaser's perspective, a real estate contract should not try to define merchantable title, as the form does, but instead should give the purchaser a reasonable period of time in which to object to any unsatisfactory title matters. Under this type of provision, if the seller is unable or unwilling to cure a title defect identified by the purchaser well before closing, the purchaser may terminate the agreement and receive a return of its earnest money. It should be noted, however, that there is some concern that such an open-ended title provision, which relies on the purchaser's "satisfaction" for its fulfillment, may render the agreement void under Wisconsin law (see the discussion below of Investigation Periods and Contingencies).

    From a seller's perspective, the form's merchantable title language is favorable. The seller has no affirmative obligation to deliver merchantable title. Thus, if the seller cannot cure a title defect, and the purchaser will not waive its objections, the contract is simply declared null and void (WB-15, lines 203-04). The purchaser, who may have expended significant sums on due diligence and loan commitments for the property, is potentially left with no recourse against a seller that is unwilling or unable to cure title defects.

    Survey

    In a commercial real estate transaction, title and survey contingencies often go hand in hand. As the cliché goes, a picture is worth a thousand words. A detailed survey of a property, which shows the location of all improvements and easements, may reveal significant matters regarding access to the property, zoning violations, encroachments, adverse possession claims, or unrecorded easements that otherwise would go undiscovered by the purchaser. These matters can be crucial to the purchaser's intended use and operation of the property and have a significant impact on the purchaser's willingness to buy the property.

    The form does not require the delivery of a survey and, furthermore, contains no express contingency granting the purchaser the right to object to matters disclosed by a survey. Purchasers, therefore, should consider adding a survey contingency and retaining some right to object to matters revealed by the survey.

    Another important consideration for purchasers is that, without a recent survey and an owner's affidavit, a title company in Wisconsin normally will not issue a title policy with "extended coverage" over the general exceptions to the title policy. Since a large number of title claims relate to matters excluded from coverage by the general exceptions to a title policy, obtaining a survey and removing the general exceptions by an endorsement to the title policy can be valuable to a purchaser.

    Investigation Periods and Contingencies

    As the form is written, the purchaser's obligation to close on a property's acquisition is contingent on only a few express contingencies. The purchaser must affirmatively elect these contingencies by checking the appropriate boxes and filling in certain information. The enumerated contingencies in the WB-15, any number of which a purchaser may elect, are: 1) financing; 2) a document review, covering the seller's authority to sell the property, a list of personal property, and a Uniform Commercial Code search; 3) a phase-I environmental site assessment; and 4) a physical inspection.

    The form's express contingencies are much more limited than what is normally found in a typical commercial real estate contract and, consequently, purchasers should consider adding additional contingencies. Additional contingencies could include items such as a zoning review, estoppel letters, surveys, and a statement that all the seller's representations and warranties will be true as of the closing.

    When electing to use the form's contingencies, a purchaser should carefully deal with the precise language used in, and the limitations placed on, the contingencies. For instance, the financing contingency is very favorable to the seller. It allows the seller to bind the purchaser to the contract, even if the purchaser's lenders deny its requested loans. Specifically, lines 169-74 of the WB-15 provide that, if a purchaser is denied financing by a lender or another third party, the seller itself can elect to provide such financing to the purchaser.

    Other provisions the parties might want to modify are the environmental and physical inspection contingencies. The environmental contingency limits a purchaser to conducting a phase-I environmental site assessment by explicitly forbidding the purchaser from undertaking testing (WB-15, lines 86-89). Furthermore, the WB-15 defines a physical defect as, among other things, "structural, mechanical or other condition[s] that would have a significant adverse effect on the value of the Property" (line 286, emphasis added). This definition of a physical defect could potentially lead to a dispute between the parties as to its application to their particular facts and circumstances.

    The form, with its narrowly enumerated and defined contingencies, differs significantly from many commercial real estate contracts that, by contrast, allow the purchaser to undertake very broadly-defined investigations and to terminate the contract and receive the return of its earnest money if the purchaser is dissatisfied with the results of these investigations. Under this latter form of contract, the purchaser often is expressly required to act reasonably in making such a determination, but in other forms the purchaser is allowed to terminate the contract if the results of its investigations are unsatisfactory to the purchaser in its sole and absolute discretion.

    As mentioned above, courts in Wisconsin have on occasion voided contracts that allow one party to determine, without limitation and in a subjective manner, the meaning of an ambiguous term. For example, in Gerruth Realty Co. v. Pire7 the parties' contract stated that the transaction was generally "contingent upon the purchaser obtaining the proper amount of financing." In Gerruth, the Wisconsin Supreme Court ruled that such a phrase was so vague as to make the contract void for indefiniteness: "[A]ny interpretation, which allows one party to a contract to determine without limitation and in a subjective manner the meaning of an ambiguous term, comes dangerously close to an illusory or aleatory contract."8

    Following the Gerruth precedent, other courts in Wisconsin have observed that a contract is illusory when performance is conditioned on an event wholly under the control of one of the parties: "[P]romissory words are illusory if they are in form a promise that is conditional on some fact or event that is wholly under the promisor's control and his bringing it about is left wholly to his own will and discretion."9 Cases such as Gerruth and its progeny are the reason why the form's language seeks to precisely define the contingencies it contains, thereby limiting the purchaser's ability to unilaterally determine if the contingency is satisfied.

    Courts in many other jurisdictions, however, allow parties to freely negotiate contracts whereby one party can elect, in its sole and absolute discretion, to terminate the agreement if its investigations are unsatisfactory10 These courts reason that a purchaser, who may spend substantial sums of money in negotiating a contract, obtaining a survey and environmental report, seeking financing, and perhaps paying a commitment fee to a lender, should be able to rely on the validity of its termination rights during the inspection period, even if these rights are unilateral11 Unilateral contingencies, while certainly not appropriate in a preprinted form, have the benefit of allowing parties to avoid potentially expensive litigation over whether the purchaser acted reasonably or in good faith in terminating the contract during a contingency period.

    Parties in Wisconsin who wish to modify the form to add broad contingencies should carefully document the fact that each such contingency represents a negotiated term that was clearly understood and agreed to by all the parties to the contract. In this regard, many attorneys add language to their contingencies whereby the parties waive any and all rights to challenge the enforceability of the agreement on the basis that the conditions or contingencies are at the seller's or the purchaser's sole discretion or on the basis that the agreements contained therein are illusory.

    Earnest Money

    Although the form provides for the payment of earnest money by the purchaser, it does not explicitly specify how the earnest money will be disbursed if one or more of the contingencies is not satisfied and the transaction does not close. Instead, the WB-15 states that "[i]f this Offer does not close, the earnest money shall be disbursed according to a written disbursement agreement" (lines 243-44).

    In practice, parties generally do not execute written disbursement agreements specifying the terms under which the earnest money will be released. Under such circumstances, the parties to the form are left to agree, or potentially disagree, first as to whether the contingency has been met and then, if the contingency has not been satisfied, who gets the earnest money. The form sets forth a basic dispute resolution process for parties to use if they do not agree on these questions. If that dispute resolution process is not successful, the form states that the parties may apply to a court of law to resolve their disagreement.

    A purchaser who makes a significant earnest money deposit under the terms of the form should specify the parties' agreement that if the purchaser's contingencies are not met, the earnest money will be returned to the purchaser. This is typically the implied understanding of most sellers and purchasers, but the form does not explicitly provide that the purchaser is entitled to receive a return of its earnest money if, for example, the environmental contingency has clearly failed.

    Default

    Finally, what happens under the terms of the form if one party defaults? The form does not mandate any remedies. Instead, it lists a number of remedies available to the parties and then states that, "[i]n addition, the Parties may seek any other remedies available in law or equity" (line 228). The WB-15 also discusses the fact that the parties can seek nonjudicial dispute resolution, including binding arbitration (lines 230-32). In a sense, the form's default section is a disclosure provision, which reviews the broad range of options open to the parties but fails to mandate any specific remedies.

    By contrast, in a vast majority of commercial real estate contracts, if the purchaser breaches the contract, the purchaser's earnest money is surrendered automatically to the seller as liquidated damages and as the seller's sole and exclusive remedy. This type of provision benefits both sellers and purchasers by allowing the parties to avoid potentially costly litigation.

    Purchasers and sellers should note that the form does not give either party the unilateral right to surrender or receive the earnest money as liquidated damages. Instead the WB-15 states the seller may "request the earnest money as liquidated damages" (lines 223-24, emphasis added). Thus, if a term of the form is breached and the breaching party does not agree to surrender the earnest money, the nonbreaching party may bring a suit for, among other things, specific performance or for damages12

    As a result, if the parties wish to create a binding liquidated damages clause, under which the seller's remedies are limited to retaining the earnest money, they must modify the form. Another common provision not contained in the WB-15's default section is an agreement allowing the prevailing party to recover its attorney fees from the nonprevailing party in any litigation that ensues.

    Conclusion

    Parties have many issues to consider when using the commercial offer to purchase form. Generally speaking, the form's terms and provisions create a contract with broad representations, limited contingencies, and unlimited remedies. By contrast, many commercial real estate sale agreements contain narrow representations, open-ended contingencies, and limited remedies.

    Some additional issues to think about, but which are beyond the scope of this article, include provisions regarding broker fees, closing documents, cross indemnities, delinquent rent prorations, and the termination of any existing management contracts. An in-depth analysis of the form's terms and provisions, as well as many of the other DRL forms, can be found in the publication Real Estate Transaction Systems, available from the State Bar of Wisconsin.

    Another excellent reference when using the WB-15 is Wisconsin Real Estate Clauses and Other Standard Provisions, by Scott C. Minter and Richard J. Staff.

    Endnotes

    1See Wis. Stat. § 757.30; State ex rel. Reynolds v. Dinger, 14 Wis. 2d 193, 109 N.W.2d 685 (1961).

    22002 WI App 70, 252 Wis. 2d 676, 643 N.W.2d 132.

    3Id. ¶ 22.

    4See, e.g., Van Lare v. Vogt Inc., 2004 WI 110, 274 Wis. 2d 631, 683 N.W.2d 46; Mose v. Tedco Equities - Potter Rd. Ltd. P'Ship, 228 Wis. 2d 848, 859, 598 N.W.2d 594 (Ct. App. 1999); Kailin v. Armstrong , 2002 WI App 70, 252 Wis. 2d 676, 643 N.W.2d 132.

    5Below v. Norton, 2008 WI 77, __ Wis. 2d __, 751 N.W.2d 351 .

    6Baldwin v. Anderson , 40 Wis. 2d 33, 43, 161 N.W.2d 553 (1968).

    717 Wis. 2d 89, 115 N.W.2d 557 (1962).

    8Id. at 92.

    9Nodolf v. Nelson, 103 Wis. 2d 656, 660, 309 N.W.2d 397 (Ct. App. 1981). See also Vaisman v. Goerich, No. 91-0047, 1991 WL 198167 (Wis. Ct. App. Aug. 13, 1991) (unpublished limit precedent opinion); Metropolitan Ventures LLC v. GEA Assocs., 2006 WI 71, 291 Wis. 2d 393, 717 N.W.2d 58.

    10See, e.g., Mattei v. Hopper, 330 P.2d 625 (Cal. 1958); Reese v. Walker, 151 N.E.2d 605 (Ohio Mun. 1958); 43 Marquette L. Rev. 265, 283 (1959-60). See also West Allis Sav. Bank S.A. v. State Sand & Gravel Co., No. 93-1971-FT, 1994 WL 109994 (Wis. Ct. App. Apr. 5, 1994) (unpublished limit precedent opinion).

    11Although it did not examine due diligence investigation periods, the Wisconsin Court of Appeals recently distinguished Gerruth in a decision filed on May 7, 2008. The court held that an attorney review period in a residential real estate transaction contract did not render the contract illusory because the right to cancel was limited in terms of time and because the obligation to seek an attorney review was a form of consideration. See Devine v. Notter, 2008 WI App 87, __ Wis. 2d __, __ N.W.2d __.

    12Galatowitsch v. Wanat, 2000 WI App 236, 239 Wis. 2d 558, 620 N.W.2d 618; Home Value Inc. v. Pep Boys, 213 F.3d 960 (7th Cir. 2000) .