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Anonymous Purchase of Real Estate


Question: How can a buyer purchase a property and remain anonymous?

Response: Contracts must identify a buyer against whom the contract can be enforced. Yet sometimes buyers seek to remain anonymous. For example, Joe Developer wants to assemble contiguous lots in downtown Denver on which to build a new skyscraper. Mary seeks to buy neighbor’s house (with whom she has been feuding for years) to cut down the tree that blocks Mary’s view. Joe seeks to remain anonymous to avoid creating leverage for the holdout sellers. Mary wants to remain anonymous because the neighbor won’t sell to Mary, or because her neighbors would charge Mary a premium.

The solution is for the “Principal,” the buyer who wishes to remain anonymous, to purchase the property through a nominee. There are two basic structures for nominee transactions. In one, the nominee enters into a contract to buy the property and then assigns the contract to the Principal, and the Principal, not the nominee, closes on the purchase (“pre-closing assignment”). With the other structure, the nominee takes title to the property and later conveys it to the Principal (“post closing transfer”).

Pre-Closing Assignment: Simpler, Less Stealth

Pre-closing assignment is simpler than the post closing transfer option. Among other things, the nominee doesn’t need to come up with her own money to close. However, this simple structure has at least two disadvantages. One is that with the Colorado Real Estate Commission approved form (which prohibits buyer assignment without the consent of the seller) the nominee must alter the contract to establish that the nominee can assign the contract to another buyer. Before the nominee has the property under contract, the Seller knows that the nominee intends to assign her contract, perhaps putting the seller on notice that “something is up.

Another disadvantage is that at or before closing, the Seller will learn the true identity of the Principal and seller may resist closing. Most Principals would like to avoid the adventure of a specific performance lawsuit against the seller. All other things being equal, the Principal wants to keep the seller unaware of his identity until the Seller has conveyed away a deed.

More Stealth, More Complexity

Yet the post closing transfer structure is more complex. Among other things, the nominee must come up with the funds to close. While the principal can lend the purchase money to the nominee, this loan is more complicated to document when the Principal is also borrowing the purchase money. Further, both the nominee and the principal must be confident that the other will close on their respective purchase. Also, the nominee can inherit environmental liability for contamination the property merely by being in the chain of title. Notions of agency law that protect an agent from contract breaches by a disclosed principal do not protect a stealth nominee. The nominee will want indemnification from the Principal for environmental and other liability.

Regardless of which structure is used, there are a myriad of other issues that need to be addressed, in writing, between the nominee and Principal. While it is beyond the scope of this article to identify all of those issues, they include the compensation for the nominee, the consequences of breach by either side, the indemnification obligations from one side to the other, insurance obligations and the allocation of fire and casualty risk to the property before the Principal takes title. There are no “standard” nominee agreements and real estate brokers should not draft nominee agreements.

May buyers’ agents or transaction-brokers be nominees? Colorado Agency law requires all selling brokers to identify “all adverse material facts actually known by the broker.” Arguably, the identity of the principal is not a material fact. The seller consented to the sales price. But sellers might argue otherwise and this question hasn’t been resolved under Colorado law.

May brokers act as nominees when they haven’t brokered the deal between the seller and the nominee? When Colorado brokers purchase property for themselves, they often make a statement in the contract, based upon Real Estate Commission Rule E-25, that they are a Colorado licensee buying the property for their own account-a statement that is arguably misleading when the broker acts as a nominee.

Nominees need to be someone (or some thing) that the principal can trust absolutely. Often times, the best nominee is a corporation, limited liability company or some other entity which is controlled by the principal, but which can act through someone other than the principal.

Nominee transactions are not simple, but if there is enough at stake, they can be worthwhile.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

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