Sale and purchase

Due diligence

Are there any particular due diligence considerations for real estate sale contracts concluded in your state?

In Alabama, title insurance charges are based on rates filed by title insurers with the state. These rates are non-negotiable. Generally, buyers should review all materials necessary to understand the condition of the real property and improvements located thereon, in addition to all agreements affecting the property and income generated thereby. Accordingly, buyers should review an updated title report and all underlying recorded documents, updated survey, reports pertaining to the environmental condition of the property (including, without limitation, a Phase I, entitlements, permits and government approvals related to the present use of the property and zoning requirements applicable to the property that could affect how it can be modified, rebuilt or redeveloped, in addition to the property’s compliance with existing zoning requirements. Additionally, with respect to the improvements located on the real property, buyers should review a property condition report, plans and specifications for such improvements, warranty information, certificates of occupancy, and permits and other government approvals related to the improvements. Finally, buyers want to validate the income-generating potential of the property, and should review the rent roll, all leases in effect at the property (with a specific focus on provisions that may impact the buyer’s income stream or right to sell or lease the property as the new owner, including, without limitation, rights of first refusal or offer to lease or purchase, termination rights, free rent periods, abatement conditions, tenant inducement costs, landlord work obligations, etc.) and all contracts and agreements in effect at the property (including service contracts). Buyers also look for anything that would limit their ability to eventually resell the property. Additionally, the buyer will want to know if the property is in a district subject to additional taxes for neighborhood improvements and will want to search for any liens against the property or pending litigation or bankruptcy filings against the seller that could affect the sale of the property. Due diligence regarding the physical condition of the building and other inspections may be handled by consultants or engineers, typically hired by the buyer, though sometimes hired by the buyer’s law firm.

Contracts

Are sale contracts in your state subject to any formal or substantive requirements?

Alabama sale contracts are subject to the state Statute of Frauds. Oral promises for the sale of land are unenforceable. In addition, the Statute of Frauds will void written contracts with an insufficient description of the land that is the subject of the transaction. All contracts for the sale of real property must be in writing and signed by the party against whom enforcement is sought. Notwithstanding notarization requirements, signatures may be electronic. Ala. Code § 8-1A-7.

Obligations and liabilities

What are the seller’s disclosure obligations and other liabilities, and what are the consequences of breach?

In general, Alabama retains the caveat emptor (“let the buyer beware”) rule. But in Alabama sales contracts, there are three instances in which a seller or seller’s agent has a duty to disclose: (1) defects affecting health and safety, (2) the existence of a fiduciary relationship between the buyer and seller, and (3) upon specific inquiry by the buyer. Moore v. Prudential Residential Services Ltd., 849 So. 2d 914 (Ala. 2002); see also Ala. Code § 6-5-102. Under the health and safety disclosure duty, the seller or the seller’s agent must disclose when he or she (1) has knowledge (2) of a material defect (3) that affects health and safety, and (4) that defect is not known or readily observable by the buyer. A buyer must show that a defect posed a direct threat to the buyer’s health or safety. Teer v. Johnston, 60 So. 3d 253, 256 (Ala. 2010). If a seller or seller’s agent breaches this duty, he or she is liable for damages that result from the nondisclosure. Fennell Realty Co., Inc. v. Martin, 529 So. 2d 1003, 1005 (Ala. 1988). This duty does not impose a duty to inspect upon the seller or the seller’s agent. Blackmon v. First Real Estate Corp., 529 So. 2d 955, 956-57 (Ala. 1988). Next, Alabama law requires disclosure when parties share a fiduciary relationship. Cato v. Lowder Realty Co., 630 So. 2d 378 (Ala. 1933). Factors that indicate a fiduciary relationship include a relationship of trust or confidence, the value of a particular fact, the relative knowledge or inequality of condition between parties, or other circumstances. Richard Brown Auction & Real Estate, Inc. v. Brown, 583 So. 2d 1313 (Ala. 1991). Third, Alabama law requires that a seller or seller’s agent respond truthfully to questions posed by a buyer concerning known defects. Commercial Credit Corp. v. Lisenby, 579 So. 2d 1291, 1294 (Ala. 1991). Potential buyers should recognize that “as is” clauses may shield sellers from fraud claims by buyers. See Massey v. Weeks Realty Co., 511 So. 2d 171, 173 (Ala. 1987).

Are there any other obligations on the buyer, aside from paying the purchase price?

The buyer has no obligation to the seller aside from paying the purchase price.

Special considerations

Are there any other special considerations for real estate sale and purchase transactions in your state?

The only special consideration is to note that Alabama retains the general rule of caveat emptor (“let the buyer beware”).