Authority Documentation in Real Estate Transactions
by Harold A. Buell, Jr.
Most lawyers have some experience with “Authority Documentation.” It is the pile of documents, often an afterthought, that every buyer, seller and lender require of the opposing party to consummate the given transaction. Often the “Authority Documentation” consists of forms that are consistently re-used by practitioners with little attempt to adapt the forms to the particulars of the transaction. These documents, however, often include representations and grants of authority that create pitfalls potentially exposing parties to additional liability. The cautious practitioner must always keep in mind the scope of the transaction when reviewing authority documentation.
First, one may wonder why authority documentation is needed in a real estate transaction.
The Texas Property Code requires a conveyance of an estate in land that is for more than one year to be in a writing subscribed by the conveyor, or by the conveyor’s agent authorized in writing. This statute precludes an unauthorized agent from conveying land owned by its principal. And, to convey property by or through an entity, an individual person is required to sign on behalf of the entity, as its agent. Thus, viewed in light of the Texas Property Code, there must be an individual person, authorized as an agent in writing, for an entity to convey real property.
An individual agent, however, can exceed the agent’s actual authority. But Texas law provides a remedy for those situations, by allowing actions taken without actual authority to be subsequently ratified by a later written consent. By this statute, the directors or managing persons of an entity, through authority documents, give their consent to an individual person who acts as the agent for the entity in signing the conveyance documentation.
The Texas Business Organizations Code, unless an entity’s governance documentation provides to the contrary, allows the directors or managing persons to take action without holding a meeting, providing notice, or taking a vote, so long as each of the directors or managing persons entitled to vote signs a written consent to the action.
A lender, purchaser or seller, by requiring execution of authority documentation before closing, protects itself from the exposure that may result from the potential lack of authority of an individual purporting to be an agent of the applicable entity. Additionally, the authority documentation generally results in a reaffirmation and ratification of the prior actions taken by the individual person who has acted as an agent for the entity, further limiting the potential exposure to a lender, purchaser or seller resulting from unauthorized acts of an agent.
The typical consent form requires an entity and/or its officers to acknowledge and certify certain items are true and correct. Many of these items may be verified with little effort and carry little risk to those who execute the documentation. These items include representations, for example, that there are currently no proceedings pending for the dissolution of the entity or that all taxes and fees required to maintain the entity’s existence have been paid when due and are not currently delinquent.
However, often upon further review, other more troublesome representations may require additional consideration before allowing a client representative to execute the authority documentation. For example, does the entity really want to “ratify, confirm, and approve” “any and all actions” that were taken by its officers or representatives prior to the adoption of these resolutions? Perhaps this ratification should be limited to the time frame relevant to the transaction at hand.
In a lending transaction, the proposed authority documentation often results in a certain officer or representative being granted the power to negotiate, purchase, sell, assign and transfer the property upon such terms and conditions as such person, in their sole discretion, deems necessary or advisable. Then, that power is coupled with the often-found representations that: (1) the authority document and representations therein may be relied upon in renewing and extending the entity’s obligations; and (2) the authority documentation supersedes and controls any provision in the entity’s governance documentation to the contrary.
These covenants could create a continuing actual authority in the agent that is often overlooked. The practitioner who is dealing with an entity comprised of multiple individuals should carefully consider the interaction between such a grant of continuing actual authority and the unforeseen disputes between the individuals that may arise in the future.
Taking the time to thoroughly review these documents to ensure any representations made, and authority granted, are limited to the scope required by the transaction can serve to avoid unanticipated consequences that can result from overly broad authority documents.
Harold A. Buell, Jr. is a real estate and corporate law associate with Griffith Nixon Davison, PC. He can be reached at HBuell@gndlaw.com.