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Lawyers and Real Estate – Deal Killers or Deal Makers?

Lawyers and Real Estate – Deal Killers or Deal Makers?The level of foreign direct investment into real estate can be affected by lawyers working in that segment, who demonstrate tendencies and attitudes which typically kill deals. This means that sellers lose on income, buyers lose on investment targets, and monies are not exchanged, thereby slowing the economic cycle in the real estate segment.

Just who do lawyers think they are, interfering in deals and transactions? How can cautious, balanced, educated legal advice be tempered with the willingness of the parties to enter into a transaction? The line between deal killer lawyers and deal maker lawyers can sometimes be a blurry one, but in this article, I will set out my opinions based on a multitude of experiences with different lawyers from different countries and backgrounds, and also from having recruited and trained lawyers in Asia over the past 10 years.

All lawyers like to think of themselves as good at what they do, they have their legal training, a license or practicing certificate from one or more jurisdictions, but what actually makes a lawyer passionate or interested in a field such as real estate? When I interview lawyers for potential recruitment, or deal with lawyers on the ‘other side of a table’ of a transaction, I try to remain open minded, and always have to bear in mind the best interests of my client, and managing such interests regardless of the personality or tendencies of other lawyers. Often, a deal is made enjoyable when a courteous and polite lawyer, simply doing their best for their client, is involved in a transaction. An understanding of each parties background and expertise, and appreciation of opinion, whether aligned or differing, is conducive to a smooth transaction.  There are so many different ‘types’ of lawyers, but it is possible to loosely divide certain key traits of lawyers in real estate into deliberately sweepingly general categories:

SOME CATEGORIES OF LAWYERS

Academic Lawyers

Generally, such lawyers are well educated; have obtained a Masters of Law, perhaps internationally, and have often thought about pursuing the notion of becoming a judge. Oftentimes, the passion for in depth reading of sometimes quite obscure materials, can lead to a disconnect between such lawyers and the business world they are operating in although this is not true in every case of course. Many academic lawyers are able to buck the trend by ensuring that they also sharpen their business edge by forging close relations with business people and making efforts to immerse themselves in business and not just law.

Commercially-Minded Lawyers

In almost every brochure for a top and mid-tier law firms in the UK back in the 90s, I saw reference to ‘our lawyers are truly commercially minded’ and such like intended to attract clients. However, you can often find that an expression of commercialism is far removed from practicing commercial attitudes and beliefs. Commercially minded lawyers are able to accept that notwithstanding their advice, their caution, or spelling out of risks to their clients, that their clients ultimately can override that advice, at the client’s choosing and election, in order to achieve or attempt to achieve a commercial goal. In order to be able to operate in the midst of clients who are successful in their own right, lawyers have to understand that they are not the owners or providers within their client’s industry. Therefore, there are boundaries whereby commercial beliefs can override legal recommendations.

Litigiously Aggressive Lawyers

Such lawyers have immense value when the chips are down, and clients have nowhere else to turn except the courts to resolve a dispute. However, sometimes the worst combination in a commercial real estate deal can be a lawyer who is generally involved in litigation, dips into the commercial world, and simply approaches an amicable transaction as if it may at any moment transpose into all out war. This type of lawyer is generally a real estate agents worst nightmare as litigious behavior can often cause parties to lose faith in a deal that could easily be transacted.

Meandering Indecisive or Over Cautious Lawyers

This type of lawyer rests firmly on the fact that clients make decision, but to an extreme. Where clients are actually seeking guidance and direction, such lawyers simply bounce back questions to their clients, fudging the purpose of the original questions, or simply ask their clients to choose deeming that every question is a ‘commercial’ issue and not a legal issue and therefore cannot be commented upon by the lawyer. This can create a glaring gap in the relationship between a client and a lawyer, and can be the source of much frustration for clients who certainly feel in exchange for their paying legal fees, that they do not receive mostly questions or obfuscation in return.

Aside from the ‘categories’ of lawyers generally described above, there are, unfortunately, many instances of demonstrations of behaviours and attitudes that have a net effect of damaging the health of real estate markets:

DEAL KILLER BEHAVIOURS OF LAWYERS

Unnecessary Slowness / Deliberately Slowing Deal Time

In a real estate transaction there will more often than not have been a viewing of the property, a review of the particulars, and discussions with agents regarding terms, maybe a physical inspection or even a survey. The parties will have typically agreed on key terms before instructing lawyers, although admittedly sometimes lawyers are asked to assist even on the key terms.  However, generally speaking, the parties to a transaction should be instructing their lawyers to proceed with a deal, not prevaricate. There always some exceptions, such as one party secretly advising their lawyer to deliberately delay whilst they secure finance or release their monies from a locked-up investment fund.

However, at the point the parties instruct their lawyers to proceed, this is what their lawyers should do. I have lost count of the number of times that the parties agree that they will enter into a reservation agreement, simply for a deposit to be paid on a property, only for that agreement to fall by the wayside due to prevarication on the matter of the deposit; or reservation terms.

In Thailand, the matter of deposits on real estate transactions is difficult. There is an Escrow Regime, but it is unwieldy and inaccessible for small to medium size transactions. Some international banks offer escrow outside of the regime prescribed by law, but their terms are so strict that the parties are simply agreeing to the deposit being kept in a bank account if a dispute over terms arises, and  such monies never being released until such dispute arises. This really only protects purchasers, not sellers. The best solution can often be for a smaller deposit below the international standard of 10% to be placed at risk but on refundable basis subject to contract. The enforcement of a reservation agreement or deposit agreement is subject to the legal system and courts of Thailand, which are typically not internationally regarded as efficient or as predictable as other jurisdictions, such as the UK, Hong Kong, Singapore. This means there can be prevarication when two parties are from different jurisdictions.

Whatever the balance of this issue is, the main point is for lawyers not to dance around for days or weeks, and to have a game plan prior to engaging with the other parties’ legal counsel. If the game plan is to draw out the process of agreeing a reservation agreement, or to not care if it is drawn out, this can be to the detriment of the real estate transaction, and ultimately the entire economics of real estate albeit on a small proportionate basis.

Macho and Academic Prowess Posturing

I had a pretty ordinary experience for a lawyer in the UK. I studied in the UK for 15 years from the age of 6 until 21. I studied law for 3 years at University, 1 year as a postgraduate, and then spent a year gaining paralegal experience in a Magic Circle (top 5) law firm, prior to starting my training contract to become a ‘solicitor’, which in the UK generally means a lawyer dealing with instructions and transactions, not advocacy, although there are solicitor-advocates. I have also recently studied Hong Kong law – and in particular Hong Kong’s property law system is startingly different to the UK which I point out because many people assume Hong Kong law must be almost identical to UK law, which these days it is isn’t, although many principles of course are similar and are rooted in the same laws. I value my experience with clients and transactions over the years far more than my academic history, or that of others.

I mention all of this, because it is easy to attempt to defeat such experience with macho and academic posturing. This is symptomatic of the educated elite throughout the world. If I were to elect to posture, I could easily draw upon my unique spread of experience between the UK and Asia as many couldn’t compete. I could posture my ownership of a law firm for over a decade which started at an early age. What good would such posturing do for a client? – Zilch. I choose not to do so, as this is completely irrelevant to a client’s goals and objectives. I believe the real estate market would be better off with less posturing, and more doing.

Much to the externally imposed and not self-imposed ignorance of many clients, the first encounters between their lawyers can often deteriorate within minutes, into ‘posturing’.  A seemingly innocent enquiry such as ‘where did you study’ can quickly turn into University snobbery, even between 40 something-year olds who probably can’t remember much at all about their University days. Recently, I was informed by a Thai lawyer, that they had ‘studied in the UK for a year, and therefore understood me’ – perhaps an innocent remark, but ultimately completely impossible to be true. As there are approximately 64m people in the UK, and as I studied there for 15 years, and lived there for 26 years, it is very unlikely that someone studying in the UK for just one year could possibly understand the legal system or the population of the UK. Likewise, I could never assert I completely understand Thailand, even after being here for 10 years.

Posturing is a worthless pastime, and is clearly of no interest to clients, their business goals, their opportunities to make profits, and should in a professional environment, be completely dispensed with.

International Racism and Prejudice

I have to admit that I have a poorly hidden intense dislike of any person that demonstrates this type of behavior. However, often people are guilty of demonstrating prejudice, simply by making generalisations and applying such to individuals, without realizing they are doing so. I also believe innocent prejudice and racism should not be forgiven, but re-education is the way forward in such situations.

The possibilities for this behavior in a transaction are complex and sophisticated. I will give you a made up example: Russian purchaser wishes to buy multi-million dollar property and appoints UK qualified lawyer, working as a consultant in a Thai law firm. Dutch seller wishes to sell to reinvest proceeds into the Thai Stock Exchange, and appoints Thai lawyer working in a global international law firm, comprising many nationalities, to assist in the sale. A truly international deal, and you would like to assume therefore, that race, nationality and other matters should be completely irrelevant to a transaction. Often racism is thought of as a throwback to slavery; suppression of people due to the colour of their skin or racial profile. Modern racism can manifest itself in many different ways due to the way society has evolved. In the example I have give, here are the types of racisms that can manifest themselves:

(a) legal counsel may be overzealous in money laundering enquiries to the point of embarrassing one of the parties due to prejudicial beliefs

(b) Thai lawyer may challenge foreign consultant for not being a Thai lawyer, or foreign consultant may challenge Thai lawyer for not being aware of rules in Russia, Holland, or an international matter affecting the transaction

(c)  Interpretation of instructions from Dutch client to counsel, from counsel to other counsel, and back to Russian client may result in distortion based on language; cultural and business differences

Over 10 years in Thailand, employing Thai lawyers, and staff paying and setting up businesses to assist with foreigners directly investing in Thailand, I have still encountered racism and prejudice. Only recently I was working on a real estate transaction, and we were 5 weeks into negotiations. My client raised an issue which was not in alignment with the other party. Instead of accepting this issue being an issue from a client, I was greeted by a ‘racist rant’ comprising the question “Are you a Thai lawyer? Do you have a Thai lawyer license?” from a lawyer who was working in a law firm with foreign consultants, and a law firm which prides itself on globalism, and has lawyers from all over the world of differing nationalities and qualifications, on cross border transactions.

Would that lawyer have raised the same question to associates or partners in his own law firm – I doubt it.  Was it relevant to that lawyer that I am married to a Thai, am a resident in Thailand, have a half-Thai half-British son – no. Was any of this relevant to the real estate transaction ? – no. Was it relevant that we all know foreigners are prohibited from ‘practicing’ law in Thailand, and therefore completely unnecessary to point this out – no.  So many ‘no’s’, I wish there were more positives to draw upon from such sorry exchanges.

My point here is that this type of behavior is completely out of line with the interests of clients, and if clients were to know what actually happens between lawyers working on such deals, they would more often that not, be totally shocked about the lack of disregard for their own interests in such situations.

I can see no real solution for this type of situation arising, other than clients taking the lead, and insisting their lawyers do not demonstrate such behavior in transactions. Sure, there can be no ‘mind control’ police to combat racism, and in many countries there are no discrimination laws, in fact many laws are deliberately discriminatory, but nevertheless, clients can take a strong lead in bringing their legal counsel into line, and insisting upon certain codes of conduct and behavior. I can say with a certain confidence that if racism was demonstrated in a transaction in the UK, the laws and code of conduct there would inevitably allow a lawyer to complain, and result in censure on the offending lawyers part. This doesn’t make the UK perfect by any means, as the reality is that often the recipient of racism decides not to complain, as they don’t want to be perceived as a victim or as weak, nor to lend dignity to an undignified assault.

Verbally Agreeing Terms, and Writing Completely Different Terms in the Contract – “Computer Bravery”

This is one of the key deal killers in real estate transactions. Again, often unbeknownst to clients, legal counsel can have a ‘telephone’ negotiation over a point or series of points. A dangerous deal killing strategy which can be employed by one of both sets of legal counsel is to simply indicate in the most general terms possible, that there is agreement between the parties on the principle of the issue. Then, as soon as the telephone call is over, one of both sets of legal counsel retreat to the safety of their computers, and set-to in order to draft the most draconian punitive or downright tricky clauses and provisos possible, not in keeping with the spirit of the transaction. Recently, both clients having agreed escrow on a deposit monies, with a 30 page escrow agreement, one legal counsel then inserted language in a reservation agreement regarding the ‘balance of the purchase price monies’ to be paid on completion, the words ‘escrow to be used at the discretion of the purchaser’ appeared. Clearly this would be unacceptable to a seller, who would need not only comfort on the deposit monies escrow, but would also need comfort on the matter of the main part of the purchase monies – being the balance of the payment and couldn’t just leave the matter to the ‘discretion’ of the purchaser which would clearly be unsafe for a seller. In a buying and selling transaction, there is no need to try to make one party be placed in an unsafe position.

The number of times irrelevancies; laziness to address issues; or ‘email/computer’ bravery manifests itself to the detriment of a real estate transaction,  is countless over the years. Clients often are not aware this situation is happening, and simply perceive the legal exchanges as ‘this is what lawyers do with documents’. There are in fact better ways of exchanging documents, to avoid countless rounds of ‘tracked changes’ and discussions over language, but it all depends on the legal training of the parties involved. I don’t mean’ legal training in an ‘academic’ way, I mean legal training in an ‘anti-deal-killing’ way.

POSITIVES FROM THE NEGATIVES

I don’t like writing negative articles without some positives to draw upon. The purpose of highlighting deal killing issues is to educate clients on what their lawyers can get up to behind closed doors, which can often be to their detriment and therefore empower clients to choose and monitor their lawyers more carefully.

The other purpose of highlighting deal killing behavior is to allow young and upcoming lawyers, truly interested in improving and participating in the economics of an industry they work in, such as the real estate sector, by balancing some of their natural tendencies, by tempering prejudices, by accepting globalism and embracing it as the way people do, and want to do business in today’s more developed societies. Such balance does not have to override the best interests principle.

The future for Asia in this regard, is potentially bright. The AEC’s goals of allowing more free movement of labour; allowing professionals to practice in a more multi-jurisdictional manner; concentrating on harmonization of aligned economic practices, and celebrating the different strengths of the ASEAN members are noble goals indeed. How each of us individually put into practice these noble goals in our working lives will shape the business; social and political framework of where we live, and for the next generations. Those of us in the real estate industry owe our livelihoods to its health and wealth. We don’t need to create real estate bubbles, but we should not create real estate troubles, through deal killing behavioural tendencies.

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