Massachusetts Real Estate Purchase and Sale Issues for Buyers

MASSACHUSETTS REAL ESTATE PURCHASE AND SALE ISSUES FOR BUYERS

JOHN SULLIVAN is the Chair of DLA Piper’s U.S. real estate group.

THANOS MATTHAI is an Associate in DLA Piper’s real estate group. Both John and Thanos are resident in DLA Piper’s Boston office. The authors wish to thank Bob O’Connor, a real estate partner in DLA Piper’s Boston office, for his contributions to this article. The authors also would like to thank Taylor Tremble for his research for this article as a summer associate in DLA Piper’s Boston office.

The following article is a high-level review of some of and other closing documents, and in Dukes and Nan- the material issues that should be considered by a law- tucket Counties, the buyer pays land bank fees as yer representing the buyer of commercial real estate described below. The seller typically pays the transfer in Massachusetts.1 The authors recommend that a tax and the cost of recording releases or discharges to licensed and experienced Massachusetts real estate clear title matters. lawyer be consulted with respect to any transaction that involves real estate located in Massachusetts. 2.1 Transfer Taxes Under G.L. c. 64D, § 1, a documentary stamp tax is 1. TITLE INSURANCE imposed on a “deed, instrument or writing, whereby Because Massachusetts is not a “filed-rate” state, title any lands, tenements or other realty sold shall be insurance premiums are negotiable, particularly for granted, assigned, transferred or otherwise conveyed larger transactions. The title insurance premium does to, or vested in, the purchaser or purchasers, or any not include title search and examination fees. By cus- other person or persons, by his or her or their direc- tom, title insurance premiums and title search and tion, . . . .” The state transfer tax is calculated at the rate examination fees are paid by the buyer, except in the of $2.28 per $500 of consideration (or $4.56 per $1,000 city of Worcester and surrounding communities where of consideration), except that Barnstable County (Cape the seller typically pays these costs. The form of Own- Cod) has a separate county stamp tax, such that the er’s and Lender’s title insurance policies generally used combined state transfer tax and county stamp tax is in Massachusetts are the ALTA Owner’s Policy (6-17- $6.48 per $1,000. Additionally, conveyances in Dukes 06) and ALTA Loan Policy (6-17-06) respectively. ALTA County (Martha’s Vineyard) and Nantucket County endorsements are generally available in Massachusetts. (Nantucket Island) are subject to a land bank fee of two percent of the purchase price of the property.2 2. CLOSING MATTERS The title insurance company usually serves as the Although Massachusetts law is unclear on whether the escrow agent for purchase and sale transactions in transfer of direct or indirect interests in entities that Massachusetts. Customarily, each of the buyer and the own real estate in Massachusetts is subject to the pay- seller pays fifty percent of the escrow agent’s escrow ment of transfer taxes, the Massachusetts Department fees. The buyer customarily pays to record the deed of Revenue has found the transfer tax to be applicable

SEPTEMBER 2017 THE PRACTICAL REAL ESTATE LAWYER | 47 to certain indirect transfers3. Although the authors are secure the seller’s obligation to pay its tax liabilities. To aware of no case in which the Massachusetts Depart- address this, the deed must either be accompanied by ment of Revenue has sought to enforce payment of a written waiver from the Massachusetts Department transfer taxes with respect to the transfer of interests of Revenue or contain one of the following statements in limited liability companies, limited partnerships or by the grantor: (i) that the sale of the property con- corporations, existing case law and Massachusetts veyed by the deed does not constitute a sale of all or Department of Revenue guidance does not preclude substantially all of the assets of the grantor or (ii) that the possibility of such enforcement. the grantor has not elected to be classified as a corporation for federal income tax purposes. Massachusetts does not have a separate leasehold tax, but the Massachusetts Department of Revenue has (i) 2.3 Municipal Lien Certificates found that the “leases or assignments thereof which are In Massachusetts a municipal lien certificate issued by for very extended terms or are renewable indefinitely the local municipality stating the amount of taxes and are taxable”, (ii) has stated that a lease for ten years, other assessments assessed against a property should renewable for an additional ten years, is not taxable, be recorded along with a deed or a mortgage. The and (iii) has stated that a lease for 99 years is taxable.4 recording of a municipal lien certificate limits the lia- Massachusetts does not have a mortgage tax. bility of the new property owner for unpaid property taxes and assessments to what is set forth on the certif- 2.2 Conveyance icate. A buyer should make sure that the purchase and The conveyance of real estate in Massachusetts is cus- sale agreement requires the seller to deliver a munici- tomarily by quitclaim deed, which incorporates certain pal lien certificate for recording at the closing. If asked, statutory covenants and is the equivalent of a limited title insurance companies will often order the munici- warranty deed in many other jurisdictions. In certain pal lien certificate from the applicable municipality. areas of western Massachusetts, conveyance may be by Some municipalities can take weeks to issue municipal warranty deed and buyers of property located in west- lien certificate, so the buyer should plan accordingly. ern Massachusetts should confirm whether or not this is the custom for the applicable county. The deed must 2.4 Acquisition of Condominium Interests: state the actual amount of consideration being given 6(d) Certificate and must also meet certain recording standards of the Under G.L. c. 183A, § 6, condominium expenses and Registry of Deeds or Registry District of the Land Court. assessments (and late charges, fines, penalties and The sale “otherwise than in the ordinary course of busi- interest assessed by the condominium association and ness” of all or substantially all of the assets in Massa- all costs of collection, including attorneys’ fees, costs chusetts of a “business corporation defined in section and charges) are a lien against condominium units 30 of chapter 63” is subject to the requirement under from the date such assessment becomes due and pay- G.L. c. 62C, § 51 that the Seller give advance notice to able. When acquiring condominium units in Massachu- the Commonwealth of Massachusetts (the “Common- setts, the buyer should require the seller to deliver at wealth”) of the transaction, make tax filings and pay closing a certificate under G.L. c. 183A, § 6(d) from the its taxes prior to the sale. A “business corporation” is condominium association (commonly known as a 6(d) defined as “any corporation, or any ‘other entity’ as certificate) verifying that there are no unpaid condo- defined in section 1.40 of chapter 156D . . . that is clas- minium fees and assessments against the applicable sified for the taxable year as a corporation for federal unit(s). The 6(d) certificate is recorded at closing along income tax purposes.” Under section 1.40 of chapter with the deed to prevent a condominium association 156D, “any other entity” would include limited partner- from filing a lien for unpaid condominium fees against ships, general partnerships, limited liability partner- the applicable unit(s). ships, limited liability companies, joint ventures, joint stock companies, business trusts and profit and not- 2.5 Final Water/Sewer Readings for-profit unincorporated associations. The Common- A final water and sewer reading is customarily com- wealth has a lien on the assets of the seller (including pleted at or immediately prior to the closing of the the real estate owned by the seller prior to the sale) to sale of real property in order for the municipality to

48 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2017 issue a final water and sewer bill to the seller, thereby must either be signed by the manager of the limited ensuring that the buyer does not succeed to water and liability company or a person authorized to execute, sewer charges that are applicable to the seller’s period acknowledge, deliver and record any recordable docu- of ownership of the property. Final water and sewer ment affecting an interest in real property who is listed readings must be scheduled with the local water/ on the good standing certificate. The application form sewer department. The amount of advance notice to be filed with the Secretary of State to qualify a lim- required to schedule a reading may be anywhere from ited liability company to do business in Massachu- one day to up to weeks depending on the municipal- setts allows the applicant to list any individuals who ity. For properties located in Boston, a title insurance are authorized to execute, acknowledge, deliver and company will normally require a certificate of water record any recordable document affecting an inter- and sewer charges from the Boston Water and Sewer est in real property. Any individuals who are listed as Commission showing a complete and final meter read- such on the application will be listed on a certificate of ing and that all previous charges have been paid. good standing issued by the Secretary of State for the applicable entity. It is customary to list the names of 2.6 Disclosure of Beneficial Interests any officers or authorized signatories of the company G.L. c. 7C, § 38 (formerly G.L. c. 7, § 40J) requires that on this application form for this purpose. a disclosure of beneficial interests be filed with the Massachusetts Division of Capital Asset Management For recordable documents filed on behalf of a corpora- and Maintenance by any person who is renting, sell- tion, the Land Court relies on G.L. c. 156D, § 8.46, which ing, acquiring or leasing real property from a public requires that such documents be either be accompa- agency. This requirement would apply to such transac- nied by a separate vote or signed by (i) the president tions with redevelopment authorities, housing author- or a vice president and (ii) the treasurer or the assistant ities, the Massachusetts Department of Transportation, treasurer. For recordable documents filed on behalf Massachusetts Bay Transportation Authority and other of a partnership, evidence of authority is customarily public agencies. The disclosure must include a list of all provided by recording a certificate of limited partner- persons “who have or will have a direct or indirect ben- ship issued by the Secretary of State within the past eficial interest in said property” and their addresses. If 60 days for the partnership that lists the identity of there is any change in the beneficial interests through the general partner(s). If the general partner executing transfer of the property or otherwise, an updated dis- the document is a limited partnership, the same evi- closure must be filed. dence of authority to enter into the transaction must be satisfied as to that limited partnership; if the general 3. ENTITY MATTERS partner is a limited liability company or a corporation, Except in the case of registered land (see below), evi- evidence of authority is provided as set forth above. dence of authority is not a requirement to record a An additional provision that applies to limited liability deed or mortgage in Massachusetts, but title insur- companies is that a foreign entity that is a manager of ance companies customarily require that evidence a Massachusetts limited liability company or a foreign of authority be recorded with the applicable deed limited liability company registered to do business in or mortgage to avoid any questions about authority Massachusetts must itself be registered to do business being raised at the registry of deeds when the applica- in Massachusetts.5 A foreign entity is not required to ble deed or mortgage is submitted for recording. The be registered in Massachusetts to manage a foreign evidence of authority that is customarily provided for entity that is registered to do business in Massachu- non-registered land is the same evidence of authority setts as long as the management of that other entity is required by the Massachusetts Land Court pursuant to the Land Court Guidelines (see below) with respect to the sole activity of the foreign entity in Massachusetts. registered land. As an example, a Delaware limited liability company that is the manager of a Delaware limited liability com- Documents filed on behalf of a limited liability company owning real property in Massachusetts would pany must be accompanied by a long form good need to register to do business in Massachusetts; how- standing certificate issued by the Secretary of State ever, any entity that is the manager of the manager of the Commonwealth within the past 60 days and entity would not be required to register to do business

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS MASSACHUSETTS REAL ESTATE PURCHASE AND SALE ISSUES FOR BUYERS | 49 in Massachusetts so long as the manager entity’s sole created by the project be filled by Boston residents; a activity in Massachusetts is to manage the property transportation access plan agreement with the Boston owner entity. Transportation Department setting forth transportation and traffic mitigation requirements; and a devel- 4. CERTAIN DUE DILIGENCE MATTERS opment impact project agreement setting forth linkage requirements, such as payments to be made to 4.1 Zoning fund housing and job creation. Any applicable Article Municipalities in Massachusetts customarily do not 80 agreements should be reviewed carefully for several issue zoning confirmation letters. While many buyers reasons. Certain agreements may state that they may conduct zoning due diligence on properties by order- require the consent of the BPDA or notice to the BPDA ing zoning reports from zoning specialist companies, it prior to the sale of a property. Article 80 agreements is useful for practitioners to review the underlying zon- often contain a right to request an estoppel certificate ing on their own or to consult with a local practitioner. from the BPDA or other city department regarding the Boston and Cambridge zoning, in particular, can be status of the agreement and any obligations thereun- complicated. The Boston Zoning Code and the Cam- der and it is worth a buyer considering whether the bridge Zoning Code are constantly being amended to receipt of such estoppel certificates should be a condi- add overlay districts, special parking districts, planned tion precedent to its obligation to close under the pur- development areas and similar items, and there may chase and sale agreement or a closing delivery. Finally, be multiple levels of analysis and zoning requirements it is not uncommon for the linkage and mitigation depending on the location of a property. requirements set forth in the Article 80 agreements to apply to a project for a period as long as twenty years 4.2 Linkage/Mitigation Requirements after the project has been completed and therefore a In Massachusetts, linkage and/or mitigation require- buyer may not have anticipated linkage and mitiga- ments related to the development and construction tion requirements in its underwriting if the project has of a property may impact that property for many years been stabilized for a long period of time. after the property has been constructed, occupied and stabilized and may sometimes require that the consent 4.3 Building Jacket/Permit Searches of a governmental agency to a sale of the property or The inspectional services or building department in transfer of a mitigation agreement from the seller to many municipalities in Massachusetts, including Bos- the buyer be obtained or that written notice of the ton, allow searches of the building records maintained sale or transfer of mitigation agreement be provided by such department for a property. These records to the governmental agency at some point before or normally include copies of open and closed permits, after the transaction has occurred. notices of violations, certificates of occupancy and other building related matters. Searches can some- In Boston, the Boston Planning and Development times be performed online but must otherwise be Authority (the “BPDA”, formerly known as the Boston performed at the office of the inspectional services or Redevelopment Authority) is charged with administer- building department. These searches can be a valu- ing the city’s review of projects under Article 80 of the able due diligence tool because they may reveal the Boston Zoning Code, which applies to certain types of presence or lack of certificates of occupancy, building development including any project that seeks to add code violations and significant ongoing work at the more than 50,000 square feet to the gross floor area of property in the form of open permits. a development. Development projects that are subject to Article 80 review are often subject to a number of linkage/mitigation requirements and agreements such 4.4 Chapter 91 Licenses as a cooperation agreement with the BPDA detailing G.L. c. 91 (commonly known as “Chapter 91”) was the mitigation and community benefits to be provided adopted in 1866 to protect the public’s interest in by the developer; an affordable housing agreement to waterways. Chapter 91 and the regulations promul- designate a certain percentage of units in the project gated thereunder in 310 CMR 9.00 et seq., authorize as affordable units; a Boston residents job policy requir- the Massachusetts Department of Environmental Pro- ing that a certain percentage of constructions jobs tection to issue licenses or permits regulating the use

50 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2017 of waterways, which includes filled and flowed tide- nature of the organization’s activities. After its review, lands, great ponds, and non-tidal rivers and streams.6 the attorney general’s office usually will issue a letter Activities requiring licenses include constructing, plac- indicating that the organization’s statutory notice obli- ing, excavating, improving, or filling any structures not gations have been met. The attorney general’s guide- previously authorized or for which a previous license is lines indicate that judicial approval for a transaction not valid.7 A Chapter 91 license must be recorded with may needed where the transaction involves a change the applicable registry of deeds within sixty days after in corporate purpose, the disposition of a large part of issuance in order to be valid and therefore any Chapter a charity’s assets without receiving fair value and the 91 license should appear on a title search for a prop- charity’s dissolution.12 erty.8 Licenses are usually for a fixed term of thirty years and renewable for additional thirty year terms but in 4.6 Railroad Land certain circumstances may be longer or shorter than Under G.L. c. 40, § 54A, a purchaser of any land for- 9 thirty years. Given the intricacies and complexities merly used as railroad right-of-way or appurtenant of Chapter 91, any intended acquisition of waterfront property formerly used by a railroad company cannot property or property near waterfronts should include obtain a building permit from a city or town before a review by experienced Massachusetts counsel as first obtaining written consent (after public hearing) to whether a Chapter 91 license may be required for to the issuance of such permit from the Secretary of 10 existing and/or proposed structures. the Executive Office of Transportation. The request for consent must be made by the building inspector for 4.5 Attorney General Clearance for Certain Real Estate the applicable city or town and must include detailed Sales by a Not for Profit information about the proposed project, including a Under G.L. c. 12, § 8, the attorney general is mandated plan showing the former railroad land and a plan of to enforce the “due application of funds given or construction for the proposed project. The Executive appropriated to public charities within the common- Office of Transportation will review the submission, wealth and prevent breaches of trust in the adminis- schedule a public hearing on the matter and issue a tration thereof.” To that end, corporations constituting written decision following the public hearing.13 public charities are required to give notice to the attor- Additionally, all railroad rights-of-way or related facili- ney general at least thirty days before selling, leasing, ties offered for sale by railroad companies must first exchanging, or otherwise disposing of all or substan- be offered in writing to the Commonwealth. The offer tially all of its assets if such disposition will materially must include the proposed price of the rights-of- change the nature of the corporation’s activities. G.L. way or facilities and any other terms proposed to be c. 180 § 8A(c). included as part of the sale. The railroad company is The analysis of whether an entity onstitutes a public free to sell its rights-of-way or facilities to a third party charity turns on a result of case law rather than stat- if (1) the Commonwealth rejects the offer, or (2) ninety utes. The attorney general’s office has issued guide- days elapse after the date of the offer. The railroad lines on G.L. c. 180, § 8A stating that the attorney gen- company may not, however, sell the rights-of-way or eral’s office expects to receive a notice if more than facilities to a third party on more favorable terms than 75 percent of the organization’s assets are being sold were offered to the Commonwealth. G.L. c. 161C, § 7. and provides some guidance on how to determine whether the transaction will materially change the 5. REAL ESTATE TAXES AND REASSESSMENTS nature of the organization’s activities.11 The attorney The fiscal year of the Commonwealth runs from July general guidelines state that this notice requirement 1 to June 30 (for example, fiscal year 2018 runs from does not apply to mortgages, pledges or otherwise July 1, 2017 to June 30, 2018). Property values are cal- granting a security interest. The attorney general culated on January 1 at the beginning of each fiscal guidelines also state that the notice requirement does year for which the tax is assessed.14 For fiscal year 2018, not apply to long-term leases or joint ventures unless the assessment date is January 1, 2017. Real estate taxes a long-term lease or joint venture will result in the are generally payable in quarterly installments due on transfer of all or substantially all of the organizations August 1, November 1, February 1, and May 1. There- property and/or assets and a material change in the fore, the real estate tax payment for the period July 1,

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS MASSACHUSETTS REAL ESTATE PURCHASE AND SALE ISSUES FOR BUYERS | 51 2017 to September 30, 2017 (i.e. the first quarter of fis- on Registered Land last updated on February 27, 2009 cal year 2018) would be due on August 1, 2017 and the and the filing requirements set forth above are fol- real estate tax payment for the period October 1, 2017 lowed strictly by the Land Court. to December 31, 2017 (i.e. the second quarter of fiscal year 2018) would be due and payable on November 1, 7. MISCELLANEOUS 2017. In certain communities taxes are payable in bian- nual installments due on November 1 for the first half 7.1 G.L. c. 93A - Consumer Protection Statute of the fiscal year and May 1 for the second half of the Massachusetts’ consumer protection statute (G.L. fiscal year. c. 93A) makes unlawful any unfair methods of com- petition and unfair or deceptive acts or practices in 6. REGISTERED LAND the conduct of any trade or commerce.15 The statute The registered land regime in Massachusetts is a Tor- applies to trade and commerce generally and can be rens system where title to the property is certified by applied to real estate transactions, lease transactions the Commonwealth. The registered land regime is and financings. The statute creates a private right of administered by the Massachusetts Land Court, which action for money damages. The claimant may recover is a division of the Trial Court Department of the Com- the amount of actual damages and can also recover monwealth. The Land Court has concurrent jurisdic- double or treble damages if a court determines that tion with the Massachusetts Superior Court over most the unfair or deceptive act or practice was a willful or real property matters. A description of the land and a knowing violation of the statue or that the defendant’s list of all encumbrances are included on a certificate failure to satisfy the claimant’s initial demand was in of title issued by the Land Court. Documents affecting bad faith with the knowledge that the respondent’s 16 the property must be filed with the Registry District act or practice was in violation of the statute. of the Land Court in the county in which the property is located as opposed to the Registry of Deeds. Cer- 7.2 Electronic Signatures tificates of title often list encumbrances that have long In connection with electronic transactions (defined since been discharged or released or expired, such as as transactions in which the parties have agreed to notices of leases that have expired and subordination, transact by electronic means),17 a signature may not be non-disturbance and attornment agreements related denied legal effect or enforceability solely because an to financing that has since been repaid. The process electronic record was used in its formation. Addition- of removing items from a certificate of title is time- ally, if the law requires a signature, an electronic record consuming and title insurance companies will usually or signature satisfies the law.18 The electronic signature issue a Torrens endorsement that removes such items statute does not apply to transactions to the extent as exceptions to a title insurance policy upon being they are governed by other laws, such as laws govern- provided with evidence that the applicable item is no ing, wills, divorce, adoption, hazardous materials, the longer an encumbrance. creation of trusts, product recalls and certain other matters.19 Legal descriptions for registered land include refer- ences to a Land Court Plan (i.e., a plan filed with the 7.3 Statute of Limitations for Breach of Written Contracts Land Court) and documents filed with the Land Court are assigned a document number instead of a book The statute of limitations for a claim for breach of a and page number. Properties may sometimes be com- written contract is six years. For contracts under seal, prised of both parcels of registered land and parcels however, an action must be brought within twenty of non-registered land and documents affecting such years of the cause of action accruing. G.L. c. 260 §§ 1 properties must be filed both with the Registry District and 2. To take advantage of the longer statute of limi- of the Land Court and recorded with the Registry of tations for documents executed under the seal, the Deeds. Unlike the Registries of Deeds, Registry Districts signature page of a document usually contains a state- of the Land Court retain original documents instead of ment that the document is executed as a sealed instru- returning them, so, for example, a lender would only ment or under seal. be able to obtain a certified copy of a mortgage submitted for filing. The Land Court has issued Guidelines

52 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2017 Notes 1 Note that this Article is limited to the acquisition of commercial 8 310 CMR 9.10(5). properties in Massachusetts and that there are additional 9 310 CMR 9.15. considerations to be taken into account in transactions that 10 If it is unclear as to whether Chapter 91 applies to a property, involve the purchase of residential real estate, including a request for a determination of applicability may be made to certain statutory requirements regarding security deposits, DEP. 310 CMR 9.06. septic tanks, smoke detectors and carbon monoxide 11 The Commonwealth of Massachusetts, Office of the Attorney detectors, lead paint, and condominium conversions. General “Attorney General Guidelines on Notice Requirements 2 See St. 1985, c. 736, as amended by St. 1987, c. 17; St. 1987, of G.L. c. 180, § 8A(c). c. 673; St. 1993, c. 247; and St. 2009, c. 78 with respect to the 12 The Commonwealth of Massachusetts, Office of the Attorney Martha’s Vineyard Land Bank. See St.1983, c.669, as amended General “Attorney General Guidelines on Notice Requirements by St.1984, c.407; emergency letter January 3, 1984 9:42 a.m.; of G.L. c. 180, § 8A(c). St.1985, c.202; St.1987, c.666; St.1991, c.392; St.1994, c.309; St.2002, c.370; St.2006, c.130; St.2010, c.354; and St.2016, c.407 13 Massachusetts Department of Transportation, Massachusetts with respect to the Nantucket Land Bank. General Law, Chapter 40, Section 54A, Statement of Procedures, available at http://www.massdot.state.ma.us/ 3 Department of Revenue Directive 95-5 (transfer taxes payable portals/12/docs/40_54A.pdf. on transfer of beneficial interests in Massachusetts nominee trust). 14 G.L. c. 59, Section 2D. 4 Department of Revenue Letter Ruling 79-52. 15 G.L. c. 93A, § 2. 5 950 CMR 112.06(7)(b). 16 G.L. c. 93A § 9. 6 310 CMR 9.04. 17 G.L. c. 110G, § 5. 7 310 CMR 9.05. 18 G.L. c. 110G, §7. 19 G.L. c. 110G, § 3.

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