Contracts, Contracts, Contracts

On today’s show we’re talking about the complexity of agreements with contradictory language.

One of the realities of the real estate investment business is the need to pay close attention to all of your contracts. There are construction contracts, lending contracts, purchase contracts, letters of intent, employment contracts, insurance contracts. Contracts, contracts, contracts.

It’s often the case that contracts are put together using a template that has standard terms, and then the contract is modified by terms in attachments, or in some cases subject to the terms of other agreements that are referenced in separate documents.

A simple example of this is the standard AIA construction contract. This standard form is used extensively in the construction industry and is widely accepted as fair to both owners and general contractors.

But even a straightforward item like a construction contract is far from straightforward. There are the general terms referenced in the AIA 101 template. These terms are then modified by the AIA 201 contract. These documents then refer to the architectural drawings. The architectural drawings then refer to the architectural specifications. The AIA documents also refer to the general contractor’s schedule, and the General Contractor’s Basis of Estimate document.

It’s common to require five documents open at once to get a complete picture of what the document is actually saying.

It’s pretty common for the base contract to say that it is subject to the terms of the schedules and attachments. That means that if the base contract says the building is going to be painted blue and the architectural drawings say it is to be painted brown, then the drawings will take precedence. Where it really gets complex is if one of the other attachments says the building is to be painted yellow. Which of the contradictory attachments will apply? It’s not immediately clear in all cases. You might read the contract one way, and the builder might read the contract another way.

I’ve heard many investors say that contracts are not their strong suit and they rely upon the advice of their legal counsel to keep them out of trouble.

That’s all fine up to a point. The lawyer will probably do a good job of keeping you protected against the risks and pitfalls of legal challenges to your contract.

What they can’t possibly know is whether you want the building painted blue, brown or yellow. Only you know that. You can read the architectural drawings and see that there is an Ethernet connection in every room on the drawing. But there may be a line item in the basis of estimate that limits the number of Ethernet connections in the building. These need to be taken together. The complexity of not seeing the entire picture in a single place adds considerable risk of misunderstanding.

Legal documents are not drafted with hyperlinks to enable quick and easy reference to items that may affect the meaning.

So how do you make sense of this?

Unfortunately, there’s no shortcut, no easy button. It requires all parties of the contract to read and understand what the contract says.

Reading and understanding the contracts is incredibly detailed and painstaking work. We have a recently completed building design where the specification document alone that clarifies the architectural drawings is 650 pages.

Attention to detail may not be your thing. It might not be your strong suit. But there had better be someone in your team whose job it is to pay attention to the details and make sure they reflect what you want the contract to say, not just the legal risks. Your lawyer often won’t look much past the legal aspects.

Put on a big pot of coffee, get a comfy chair and prepare to dig into the details.