Should Your Township Use “...
In this month’s E-Letter we discuss whether a township can enforce its ordinances without involving a court. Often zoning ordinances, nuis...Read More
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Approximately 13% of the land in Michigan is owned by State and local government units. With Townships being among those owning a vast amount of property, it is not uncommon for Townships to engage in the purchase of property for the benefit of their local communities or the sale of property not needed for municipal use. Townships may obtain property for various reasons, such as constructing or acquiring new Township halls, expanding Township park systems, preserving open space and farmland, and acquiring new property and buildings for new or expanding emergency services. Real estate transactions, however, can pose a significant risk in acquiring or transferring title of real estate. This E-Letter focuses on five areas that will help Townships minimize the risk involved with buying or selling property and ensure a straightforward real estate transaction.
Real estate transactions—whether buying or selling property—can be exciting and provide significant positive impacts to a local community. Certain transactions can also be complex, and far too often, Townships are engaging in these transactions without the support of real estate professionals. Unless a Township has a Board, Board member, or staff member with expertise and experience in real estate, numerous pitfalls can be avoided or overcome with the assistance of qualified professionals. The number of qualified professionals available to assist are vast and may differ depending on the type of property purchased. For any particular property, Townships should consider consulting the following professionals: a real estate agent, attorney, appraiser, environmental consultant, and surveyor.
Real Estate Agent: In Michigan, real estate agents act in a transaction as a seller’s agent, buyer’s agent, or dual-agent. This type of classification indicates the individual to whom the agent owes fiduciary duties. Thus, it is preferred that a Township uses an agent that owes only fiduciary duties to it. Agents are generally engaged at the outset of a sale or purchase and can provide a broad array of service and expertise to a transaction that exceeds the scope of this E-Letter. Of relevance, an agent will assist with providing customary documents, recommendations on other qualified professionals, guidance on market data, and assistance in preparing the Township for each step of the process from executing the purchase agreement to arriving at closing prepared to complete the transaction. As a buyer’s agent, the agent will assist in locating suitable properties, scheduling showings, initial negotiations of a written purchase agreement, and assisting the Township in the entire process. As a seller’s agent, the agent will assist with marketing the property, advising on a purchase price, as well as guidance on the purchase agreement. The seller’s agent will also typically take responsibility of moving the transaction forward with a title company and working towards completion of the transaction. Importantly, either agent will be able to provide a customary real estate purchase agreement that addresses typical transaction issues and can be used by Townships to negotiate the purchase or sale. Agents are typically paid through a fixed-percentage of the sale price. Townships should consider leveraging a local agent to assist in a smooth transaction and reduce the likelihood of issues arising on the eve of closing or even after closing.
Attorney: The Township’s attorney can be crucial to a successful real estate transaction when: (1) executing the written purchase agreement; (2) verifying and resolving title issues; and (3) confirming the accuracy of the final closing package. The Township should engage the Township’s attorney in drafting and reviewing the purchase agreement. This ensures that the agreement aligns with the parties’ negotiated deal and expectations. The Township’s attorney can also consult and provide direction on selling or buying unique parcels, such as tax-foreclosed property or unbuilt condominium lots. For instance, the Township attorney can even assist the Township prior to a sale in verifying title and ownership of a property. Similarly, as we recommend below, Townships should obtain title insurance. In the process of obtaining title insurance, a summary of the properties’ ownership records, along with recorded easements or other instruments of record, will be identified. The Township’s attorney can provide advice on the meaning of these recorded instruments, any red flags, and the impacts of the recorded instruments. Last, as we also recommend below, Townships should request a closing package for legal review to be available several days in advance of closing. This allows the Township to review the closing package and confirms its accuracy with the executed purchase agreement. The Township should consider when to engage an attorney and what scope of review will be performed. Given the importance of receiving title to the property as advertised, the Township is well suited to avoid issues through use of its attorney.
Appraiser: Appraisers are licensed and trained to study and review a piece of property to determine its value using valuation methods. Appraisers are regularly involved in residential transactions due to the use of banks or similar financial institutions that lend money to purchase real estate. During the financing process, banks verify through an appraisal that the collateral used to support the loan (i.e., the real estate being purchased) is sufficient to cover the amount financed. Municipal transactions, especially when buying real estate, are often not financed. This means that many Townships may not have the same verification of value occurring during a typical residential transaction. A Township, however, should know that it can engage with an appraiser even if the Township is purchasing with available funds. An appraiser can independently verify the purchase price and assist the Township in setting a price (especially for unique properties, such as an old Township Hall or Firehall) or providing data to support a specific offer to purchase. This avoids the pitfall of selling for too little or paying too much, and also creates a record for the Township as to the value of the asset acquired or disposed of.
Environmental Consultant: Environmental consultants are qualified individuals that verify contamination on a property and assist with recommendations on cleanup, mitigation, and due care. Townships selling property may not require an environmental consultant unless the property has known contamination. In such an instance, environmental consultants can assist in preparing a framework for transfer of the property. But even if contamination is unknown, environmental consultants are important in verifying if contamination exists prior to accepting title. Such contamination may be so substantial that purchasing the property may not be proper.
Surveyor: A surveyor is qualified and licensed within the State to determine the legal boundaries of a property. Surveyors are also well-equipped to review recorded easements and observe encroachments, verifying their location. Townships, especially as buyers, will find this valuable in verifying if any recorded easement will limit the use of the property, such as impacting the desired location for a building.
General law and Charter Townships are authorized under applicable state law to buy and sell real estate. A Township’s authority is not without limitations, however. State law imposes an obligation on the Township to ensure that buying property is for “public purposes.” Similarly, the Townships are authorized to sell property when such property is “not needed for public purposes.” Townships should ensure that the purchase or sale of property complies with this requirement. Townships can satisfy this requirement by adopting a resolution that makes one or more specific findings as to why the purchase or sale of a particular property is consistent with this requirement. Within that same resolution, the Township can specifically authorize the purchase or sale, whichever is applicable. This resolution can be provided to the title company to satisfy any concerns the title company may raise in verifying that the sale or purchase is within the Township’s authority and is authorized by the Township.
Townships should also identify the official or officials authorized to act on behalf of a Township in that particular transaction. The Township Supervisor is the legal agent of the Township. However, title companies often request a resolution that specifically identifies the authorized official or officials that may act on behalf of the Township to sell or buy a particular property, as well as sign all related closing documents. Furthermore, many Townships authorize more than a single official, such as relying upon both the Supervisor and the Clerk.
If an authorizing resolution is not executed prior to closing, it may not be raised until immediately prior to closing. Because Townships must comply with the Open Meetings Act, a Township Board may not be able to convene and approve the necessary resolution—causing the closing to be postponed. To avoid this last-minute delay, Townships should consider engaging their Township attorney and, if applicable, the title company early in the transaction to prepare the contents of an acceptable resolution. Many title companies will take the opportunity to review the initial form and determine if it will be sufficient to satisfy any applicable title standards. This allows the Township advance notice if a new or amended resolution is necessary and avoids this issue causing a delay in closing.
When buying property, there may be risks of third parties not involved in the transaction later raising claims against the Township’s title to the property. These third-party claims can take the form of liens, encumbrances, or easements, and even give rise to a title claim, which may have to be resolved through paying a lien or purchasing any unknown rights created by the encumbrance to title. These so-called “clouds on title” may exist without any knowledge of the seller. A title company will provide title insurance insuring the owner against certain third-party claims. In the process of preparing the insurance, the title company performs an extensive review of a property’s chain of title. This process will identify potential claims, which can be resolved prior to closing. A selling Township, while not insured by the policy, also benefits from reducing the risk of post-closing, third-party claims. Note that even if no money is involved and the property is being donated to the Township, it is wise to have the title company perform a title search to review the ownership history.
The Township should provide the ownership history and other recorded instruments collected by the title company to the Township’s other consultants. For a purchasing Township, the Township’s attorney can review the title work and corresponding recorded instruments to verify any concerns the Township may have for its intended use. The Township’s surveyor will also be able to use the instruments in preparation for a survey that identifies not only the boundaries of the property (often called a “boundary survey”) but further verifies the location of easements and encroachments. This can be important when locating a building site and identifying post-closing, third-party claims.
Identifying title issues is not the only value of title insurance. Even with a diligent inquiry, it is possible that not every third-party claim will show up on the search. In these instances, title insurance may be extremely beneficial for both a selling Township and buying Township. An owner’s title insurance policy (meaning the policy directly benefitting the buyer of the property) may pay costs to defend against a lawsuit in which a third party claims ownership of the property. Furthermore, if a lien goes undiscovered, the insurance may also cover the costs of paying off the lien.
For these reasons, a title company and title insurance can help Townships avoid unknown or unidentified title issues. This is crucial for a Township acquiring property, so the Township and its attorney can verify the seller’s right to sell the property and any liens or encumbrances of title. Title insurance may also protect a Township for issues that remain unidentified and are not discovered until after closing if covered by an applicable title insurance policy.
Townships should be very cognizant of environmental contamination. A general visual inspection of a property may not demonstrate any likelihood of contamination. However, as news stories reveal, contamination may not arise from a current use of property or have originated from that property. Environmental contamination can arise from prior historical uses—even those that may seem rather surreal and picturesque such as an old apple orchard. Adjacent or nearby uses could also have leached contamination into the groundwater aquifer, contributing to contamination on the property the Township is selling or buying. Given that identifying contamination can be difficult, Townships should consider whether determining site pollution is appropriate with the guidance of an environmental consultant.
Consistent with applicable state law, environmental consultants can also provide information to Townships on conducting and submitting a baseline environmental assessment (“BEA”) to mitigate environmental liability after a purchase. In some instances, the Township may even decide to conduct soil borings to confirm or discover current pollutants. Importantly, financial costs to confirm these issues prior to the purchase are a sound investment. The Township is better situated to discover potential or known environmental contamination prior to acquiring the property, as clean-up or required environmental remediation can be costly.
Closing day can be very stressful. To make closing less stressful, a Township—whether buying or selling—should arrange for a chance to review the closing package prior to the closing date. The closing package will include a final closing statement, the deed, any applicable financing documents, and transfer forms (such as a property transfer affidavit). The Township, including its agent and attorney, should review these documents in advance to ensure there are no surprises or inadvertent errors at closing. This includes verifying the settlement statement and amounts paid by each party (including proper application of any escrow and proration of taxes), verifying the proper spelling of the authorized Township officials, verifying the address of the Township Hall on any documents that will be submitted to the Township later, confirming all documents required for closing as identified on the title commitment have been received, and if real estate agent costs or other professional charges are applied at closing, they are properly reflected and any costs as to fees are charged as provided in the purchase agreement or other service contracts. A detailed review of the closing package in advance is of great assistance to the title company and provides sufficient time to correct any noted errors, or at a minimum, allows the Township to know that everything will be in order on the day of closing.
We hope that these five insider tips will give you a better understanding of your options when engaging in your Township’s next real estate transaction. If you wish to explore how you can further streamline buying and selling Township property, our firm has considerable experience in handling real estate transaction matters, and we would be happy to assist you and your Township’s real estate needs.
By: Chris Patterson
This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.
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