Article Title

Lyman J. (Greg) Gregory, III

lgregory@mmrlawfirm.com

828.281.2100

90 Southside Avenue,

Suite 100

Asheville, NC 28801

90 Southside Avenue Suite 100

90 Southside Avenue Suite 100

A Legal Moment

Dealing With Distressed Developments

        I have recently written on the topics of short sales and REO contracts.  Today, I continue with the theme of buying and selling real estate when the seller is in financial difficulty.  The recent economic downturn stalled a number of new projects in the middle of their development activity.  The resulting slowdown in sales caused some developers to get behind on their payments to contractors, and, in extreme cases, to declare bankruptcy.  In some situations, new developers have taken over stalled projects.  Here are some steps you can take to safeguard transactions involving distressed developments.

        First, if the developer has declared bankruptcy and is still under the supervision of the bankruptcy court, you will need to involve an attorney from the  beginning.  The complexities of the bankruptcy court should only be navigated with legal assistance to guarantee that the bankrupt party has the authority to undertake the transaction contemplated and that all approvals from the bankruptcy trustee, creditors, and the court are in place.

        Second, you should investigate whether there are any contractors' liens on the property with which you are dealing.  If you are representing a seller, interview him or her thoroughly to get the full picture of the lien status on the property, and then verify independently at the courthouse what the seller has told you.  If you are representing a buyer, research the lien records at the courthouse to determine the situation.  Your goal should be to have a plan in place to satisfy any contractors' liens at closing.  If you are not comfortable doing this research yourself, an attorney's office can assist.

        Third, if a new party has taken over from the original developer, research the title records to make sure ownership has transferred and any reserved developer rights have also  transferred.  This is critical if the new developer is working to complete the infrastructure and amenities of the project.

        Finally, I recommend investigating the status of the property owners' association if one is in place.  Is the developer still appointing the board?  Is the association functioning properly with a duly elected or appointed board?  Are dues from lot owners paid up?  Are collection efforts underway?  Ask as many questions as you can think of to find out if the association is functioning properly so that your buyer has a smooth transition to ownership.

        With this extra due diligence, you can still complete closings from distressed developments successfully and efficiently.

Do not hesitate to contact me to receive more information on this topic or to suggest topics for future editions of 'A Legal Moment'. You may not rely on this content as legal advice for any specific situation, but should instead contact an attorney for specific advice.