What Can Go Wrong at Closing?

0

John PelkeyOnce the FCC has granted its consent to the sale of a station, the parties’ focus naturally turns to the closing. There always is an inordinate amount of paperwork that must be produced by the attorneys and signed by the parties to memorialize the transaction. Given the volume of paper, it is not surprising that small hiccups occur. Usually, however, the parties can work together to remedy such problems without delaying the closing. There are certain matters, however, that can seriously delay the closing or even result in the transaction falling through. The key to preventing such potentially deal-breaking problems from arising is to begin preparing for the closing as soon after the execution of the purchase agreement as possible. Five of these potential problem areas require particular attention.


1. The Landlord Won’t Consent to the Assignment of the Studio or Transmitter Site Lease or Won’t Sign the Estoppel Certificate.
In most cases in which either the studio or the transmitter site is leased, the purchase agreement will require that the seller assign the lease to the buyer. Frequently, the lease will stipulate that it cannot be assigned without the landlord’s consent. Even in cases in which the seller had the foresight to include in the lease a provision allowing the seller to assign the lease to a subsequent buyer of the station without the need to obtain the landlord’s consent, the purchase agreement is likely to include a provision requiring the landlord to execute an estoppel certificate. An estoppel certificate is a document signed by the landlord in which the landlord confirms that the lease is in full force and effect, specifies the date through which the rent has been paid and acknowledges that neither party to the lease is in default.

Because the landlord must consent to the assignment of the lease or because the landlord must execute an estoppel certificate, the landlord’s involvement in the transaction becomes essential. The landlord might quite reasonably insist on some demonstration that the buyer is financially qualified to assume the lease. On occasion, the landlord will use the opportunity presented by the need for its signature as a vehicle for clarifying unclear provisions in the lease, for forcing a resolution of a dispute that has arisen between the landlord and the seller or for using the leverage of the impending closing to renegotiate some of the terms of the lease. In other cases, the landlord will disapprove of the wording of the estoppel certificate. In yet other cases, the seller will discover that the consent to assignment or the estoppel certificate cannot be signed by the person with whom the seller has been dealing for many years, but must instead be signed by someone in “corporate” who might well be located, not only in another state, but in another time zone.

Regardless whether the problem is a substantive one dealing with landlord-tenant disputes or the wording of documents or simply a mechanical problem in obtaining execution of documents by corporate officers located in another state, obtaining the necessary consent or estoppel certificate can delay the closing, sometimes by many days or even weeks. To avoid such delays, the seller should bring the landlord into the loop as soon after the execution of the purchase agreement as possible.

2. There is a Problem with the Title to the Real Property that is being Sold.
Usually, title deficiencies do not arise in a broadcast transaction given the fact that most stations have been bought and sold numerous times during the station’s history and any title problems will have been worked out. Exceptions to this general rule do occur, however. Especially if the transmitter site is on rugged, overgrown or mountainous property, it is not out of the question for previous surveys to be incorrect. In addition, it is not unusual for activity to occur at the periphery of the real property that can raise questions about access. For example, the direct deeded access to the transmitter site from the nearest road on which previous title searches have relied may no longer exist as new “shortcuts” to the tower have evolved or as a repositioning of a road has resulted in a no-man’s land of disputed ownership. Similarly, repositioning of guy wires may have resulted in a neighbor’s property being inadvertently crossed.

Here too, it is important that both a surveyor and a title insurance company be contacted early so that any problems with title can be smoked out well in advance of closing. It sometimes is beneficial to use the same title insurance company that issued the last title insurance policy for the property. That company may be more willing to “insure over” an apparent defect in title if the alleged defect is one that the company should have discovered when it issued the prior policy.

3. There Are Several Barrels of PCB-Containing Fluid Leaking on the Floor of the Transmitter Building.
As a general rule, environmental problems are getting to be less and less frequent and are not often the cause for a delay in closing. Many, if not most, stations have now been subjected to at least one Phase I environmental study. Those earlier studies would have disclosed most environmental problems and any such problems would have been remediated as part of a prior sale. If, however, the station that is being purchased has never been the subject of a Phase I study, such a study should be performed as soon after execution of the purchase agreement as possible given the potentially long lead time to cure any environmental problems that might be disclosed by that study or a follow-up Phase II study.

4. The Station Constructed a Tower at a New Transmitter Site Last Year but the Seller Cannot Provide any Records Demonstrating Compliance with the National Programmatic Agreement.
Although environmental problems generally are no longer likely to delay closing, a new concern has come to the fore, namely, questions that arise concerning the seller’s compliance with the National Programmatic Agreement. The NPA is an agreement into which the FCC has entered to help ensure that towers comply with the National Historic Preservation Act. That Act requires that, as part of deciding whether to grant a construction permit application, the FCC must take into account the effect that the requested facilities would have on historic properties, including properties to which Indian tribes and Native Hawaiian organizations attach religious or cultural significance.

Compliance with the NPA is required in the case of construction of a new tower and the FCC will not grant an application for such construction until the applicant can represent that it has completed the process of complying with the NPA. Many of the provisions in the NPA are complicated, however, and it is possible that an applicant could believe in good faith that it complied with the NPA when, in fact, it did not. If that applicant then tries to sell the station, the buyer may find itself in a quagmire that cannot readily be resolved. The buyer does not want to be in a situation where, on the eve of closing, it discovers that the new tower does not comply with the NPA. The only way to avoid such a situation is to require the seller to provide documentation concerning such compliance and to do so even before the purchase agreement is executed.

5. The Buyer Does Not Have the Money to Close.
Obviously, the buyer’s inability to come up with the purchase price at closing, at a minimum, will delay the closing and, in all likelihood, will result in the collapse of the deal. Even if the buyer provided the seller with assurances, backed up by a letter from its lender, that it had the financial wherewithal to close on the transaction, it sometimes happens that the promised funds simply do not materialize. Usually, however, the buyer’s coming up dry at the closing does not come as a total surprise to the seller. There are danger signs of which even a mildly observant seller becomes aware that telegraph that the buyer may be having trouble procuring funding for the deal.

For example, the deal may well be in jeopardy if either the buyer or its counsel becomes unresponsive. Closing a broadcast transaction takes a lot of work. There is a document flow that must be achieved if the deal is to close on time. If the buyer’s counsel does not produce the documents assigned to it by the purchase agreement or the closing checklist, or if the buyer’s counsel is slow to provide comments with respect to the draft documents produced by the seller’s counsel, the seller should begin to become suspicious. It could simply be a case that the buyer’s counsel is occupied with other matters.

Usually, however, the buyer’s counsel will inform the seller’s counsel of the reason why it has not been responsive. If the buyer’s counsel provides no plausible explanation for its delay in providing documents or reviewing drafts, or is slow to return phone calls from the seller’s counsel, red flags should go up.

If the buyer itself then becomes unavailable when the seller calls, the red flags should be accompanied by flares. A second sign that there is probably a problem with the buyer’s financing is if the buyer begins to allege obviously pretextual defects in the assets. Such allegations are usually doing nothing more than setting the table for a claim by the buyer that the seller itself is in breach of the purchase agreement. It is an obvious ploy to set up the factual predicate for a claim that the buyer, even though it is unable to pay the purchase price, is entitled to the return of the escrow deposit. Once the buyer begins making such pretextual claims, the seller should consider entering into litigation mode. From that point on, no communication should take place with buyer or its counsel without carefully examining the communication to determine how it fits into the seller’s litigation strategy.

During his more than 30 years as a communications attorney, John Pelkey has done nearly everything that there is to do in the communications field. He co-authored the Supreme Court brief that sanctioned competition in long-distance telephone service. He argued both before the FCC and the court the case that led to the issuance of the nation’s first cellular authorization awarded through comparative hearing. He was co-counsel in the successful federal court proceeding that struck down the Fairness Doctrine. He represents both commercial and noncommercial broadcasters and has handled numerous broadcast sales transactions. He can be contacted at [email protected].