Business Entity Documents In Real Estate Transactions

On Behalf of | Jul 29, 2019 | Commercial Real Estate & Environmental Compliance |

Any business which has been involved in the purchase or sale of real estate knows that the title company asks for a lot of information from both sides before the transaction can close. One of the items which is requested seems something of a self-evident request: proof of a business’ legal existence. Generally, this will be a copy of the company’s articles of incorporation (if it is a corporation) or a certificate of organization (if it is a limited liability company, limited partnership or similar entity). Occasionally, this is one of the last things that seems to be requested or provided and few people understand the real reason for the request. While it is clear that proof of the existence is important just to prove that there really is an entity, most people do not understand the impact of the entity not being legally in existence.

Pennsylvania corporations do not legally exist until their application for articles of incorporation have been accepted by the Pennsylvania Corporation Bureau. There are similar requirements for limited liability companies as well as limited partnerships. While such requirements don’t necessarily exist for a partnership, a title company will generally ask for a copy of a written partnership agreement or a fictitious name filing just to confirm some sort of legal existence of the entity.

Under Pennsylvania law, a deed to a non-existent entity is void ab initio, or “void from the beginning”. It is as if the deed had never existed and the transaction or the conveyance never occurred. Interestingly, while there are several Pennsylvania cases going back to 1911, there is an excellent analysis in a federal case, Clarity Software, LLC v. Financial Independence Group, LLC, 51 F.Supp 3d 577, 589, W.D.Pa. (2014), which looked at the issue and provided a very clear explanation of the situation.

The impact of such a situation in a business real estate transaction is significant.  If the transaction is a sale, often the sale price will have been paid to the seller, but the seller still owns the property.  Similarly, if the transaction involves a mortgage, the mortgage is void because it encumbers property not owned by the borrower.

So, if a settlement company or title agent asks for corporate documents, don’t assume it is an unimportant request.  Failing to have these documents could jeopardize the entire transaction.