Although gap closings have been utilized in commercial real estate transactions for quite some time, the mechanism is now more
applicable than ever. Gap closings allow real estate to be easily conveyed by parties without the necessity of leaving their desks – and in a COVID-19 world, their own homes. In light of this shift to remote work, it is vital that commercial real estate attorneys, and their clients, understand the gap closing — its virtues as well as the issues it may entail.
Gap closings are transactions where, after documents and funds
are delivered, there remains an interval of time before recording of the
documents. As with traditional closings, a title policy is issued insuring
title typically from the date of the most recent title commitment. The title
insurance company insures the “gap” between the closing table and the recording
of documents.
This “gap” may occur for any number of reasons. For instance,
several states have a recording lag – meaning that even if documents are
presented for recording on the day of closing, they may not be processed for
several weeks. The impacts of the COVID-19 pandemic and governmental orders
restricting operations of registries of deeds and other service vendors have
increased recording lags since early 2020.
Typically, these gaps occur when the buyer is located in one
state, the seller in another, and the property in yet another and closings are
generally run through the buyer’s designated title company in the state where
the buyer is located. In these scenarios, the title company is responsible for
shepherding all documents, receiving and disbursing funds, and putting closing
documents to record.
What’s the Risk?
The risk in any gap scenario is an intervening matter of record,
or title, such as a tax lien or a judgment against the seller, may be recorded
between the time of closing and when closing documents are recorded – the
result being that buyer may not receive the quality of title that was
negotiated. The parties will then look to their title insurer for coverage.
Depending on the jurisdiction, electronic recording may be an
option. Many jurisdictions permit the e-filing of recordable documents and many
will likely follow suit in the future. However, as nationwide transactions
become more common, as portfolio transactions (buyers acquiring multiple
properties, perhaps in multiple states, from the same seller) increase, the
likelihood of getting to record on “closing day” becomes increasingly unlikely.
In the current climate of commercial real estate transactions, gap closing is
not just an option — it is a frequent necessity.
Who Bears the Risk?
So, who bears the risk? In certain states, it is merely
customary for title companies to assume the risk. This risk may be mitigated,
in part, by updating title immediately prior to closing – thereby shortening
the gap, and by the title company overnighting documents to a local agent who
records upon receipt. In addition, title companies typically seek to spread the
risk by requiring a gap indemnity, whereby seller indemnifies the title company
for matters of record appearing between the date of the Commitment and
recording.
With respect to gap indemnities, it is essential that the
indemnitor be financially capable. Often, the holder of commercial real estate
is a single asset entity whose only asset is the underlying property. Once that
property has passed to the hands of the buyer anyone looking for recourse
against the (now asset-less) seller may only find empty pockets. The better
practice is to ask a seller’s parent company, or other financially viable
party, to give the gap indemnity.
It is also important that buyer’s counsel carefully prepare
their closing instruction letter to the title company. Among other elements,
the closing instruction letter in a gap closing should bind the title company
to issue the policy in the form of the marked commitment or pro forma “with no
additional exceptions.” Doing so will ensure that the title company is
obligated to issue the same policy for which the buyer negotiated, regardless
of intervening matters of record.
Taking these steps, understanding the process, and using quality
title insurance companies combine to ensure that the gap closing runs smoothly
and the parties receive the benefits of their bargain.
A partner at Sherin and Lodgen, LLP, Jennifer L. Ioli is a commercial real
estate and environmental attorney with experience in acquisitions, development,
leasing, and financing. In particular, Jen represents retailers, developers,
and institutions on all aspects of commercial real estate transactions,
including advising on environmental regulation and due diligence. A partner in
the firm’s Renewable Energy Practice Group, Jen advises industrial companies on
the roll-out of solar leasing to accomplish their business goals. Her email address isjlioli@sherin.com.
