What this is: Commercial real estate financing transactions, typically requiring the appointment of a process agent, are often governed by New York law for a reason.
What this means: You should be careful when choosing the jurisdiction for governing law in real estate. We explain why.
In my professional experience, New York is routinely the first choice of governing law for cross-border transactions, especially in the Americas. This is no accident and may be even more predictable than the sunshine in Los Angeles (where I live); the consistency with which New York contract law is applied is remarkable. Further, many domestic commercial agreements are governed by New York law as well. Within the domestic sphere, commercial real estate transactions are no exception to this standard. Whether your current deal is structured as commercial mortgage-backed securities, mezzanine or tenancy in common financing, there’s a high likelihood that the governing law buried in the miscellaneous provisions of your agreements will be New York.
Why is this and why would this be the case even when the parties involved have little or no nexus to New York?
New York courts have interpreted and developed a body of case law that has addressed many of the most sophisticated commercial transactions since the beginning of the Industrial Revolution.1 Its history of case law is rivaled only by English law. And despite English law’s notable head start of a few hundred years, New York has, nevertheless, distinguished itself ahead of all other bodies of commercial law by adopting some concepts of civil law.
New York was also one of the first states to adopt the Uniform Commercial Code (UCC) governing commercial payment and security interests; relevant to any commercial real estate transactions involving a deed of trust. The Code reflects the requirement of “good faith,” which is also an essential component of New York contract law.
New York was also the first jurisdiction in the United States to treat private arbitration rulings the same as court judgments and is home to the world’s leading arbitral institutions.2
This is Not 'Night Court'
As a teenager in the 1980s, one of my first introductions to law was through comedy and the whacky cases and characters that came through the Manhattan chambers of Judge Harry T. Stone in Night Court.
While the material in this sitcom was entertaining and a fun introduction to legal procedure for a kid in suburban New Jersey like me, the idea of a dispute in your commercial real estate transaction ending up in a random state court on the same docket as petty theft, fender benders or messy divorce cases would be no laughing matter.
Thankfully, New York agrees and offers solutions to this potential problem. Not unlike the highly regarded Delaware Chancery Court (established to deal specifically with complex corporate disputes), the Commercial Division of the New York Supreme Court was established to deal with the most sophisticated commercial law disputes and is considered to be one of the most refined and developed bodies of contract, commercial and business laws available to govern commercial real estate finance transactions.
Here's why the Commercial Division of the New York Supreme Court is held in such high esteem:
- The Court’s experienced judges focus solely on commercial cases and rely on the benefits of an exhaustive array of precedents to give all sides the most competent and fair review of cases.
- Strict respect is given for the written contract and the intent of the parties involved.
- The Court’s procedural rules are “business friendly:” Designed to be clear and efficient, focused on prompt resolution to avoid the necessity of trial.
- The statute of limitations to bring a claim is 6 years.
- Parties with no connection to New York can choose to be governed by New York law when the obligation is significant enough in accordance with Section 5-1401 of the General Obligations Law.3
- The options of arbitration and waiver of a jury trial are available.
Need a process agent stat? Watch our video "Appointing a Process Agent in 3 Steps" to learn how you can appoint one in just three steps.
A Process Agent is Often Required
If you choose New York as governing law for your commercial real estate transactions, you'll often be required to appoint a process agent.
The role of the process agent is to (i) act as a representative upon whom court papers or service of process (SOP) i.e., Summons and Complaint, may be delivered to on behalf of certain parties to commercial real estate finance agreements and (ii) receive the SOP and to forward to their contact on record. Proper service of legal process establishing personal jurisdiction over the party or parties served and proper venue are 2 examples of the initial important first steps of the litigation process when bringing an action in New York courts.
When your commercial real estate transaction is significant enough for the parties involved to adopt New York law, it makes sense to choose a commercial process agent that not only understands your transaction, but the scope of its role in the event of any potential legal proceeding.
Center of the Universe?
After living on the West Coast for almost 30 years, it’s hard to imagine wanting to be anywhere else but Southern California. I've grown used to palm trees, predictable sunshine and spending as much time outdoors as possible. However, each time I visit New York for business, I'm reminded why some New Yorkers might consider our most populated city to be the center of the universe.
In addition to being the center for the arts, culture and media in the United States, New York is the leading global center for trade, commerce and finance, which is why so many choose the state as the governing law for the agreements in their business contracts, partnerships and commercial transactions.
3 Any contract obligation of $250,000 or greater allows domestic parties with no connection to New York to choose to be governed by New York law.
What are some of the other reasons to have New York as your choice of law?
Even though the NY GOL offers the parties the peace of mind and security that one’s choice of law and forum will be enforced if the criteria are met, this factor alone would not be enough to explain why New York is such a popular jurisdiction. Actually, many other reasons help answer that question:
- New York has a more sophisticated and developed body of commercial law than other US states, ensuring a neutral, secure and predictable outcome.
- Because of their location in one of the world’s most important international business centers, New York courts have developed broad and deep experience in handling cross-border commercial issues, with a unique understanding of the international business context in which a particular transaction was closed.
- International business parties can expect sophisticated approach to international commercial dilemmas, which will be solved by professionals (including attorneys and arbitrators) who have deep knowledge of New York law as well as international commercial practice and culture.
You can read more in our article The Benefits of Choosing New York Law in Cross Border Financial Transactions.
What should be on a checklist for a commercial mortgage-backed securities transaction?
Commonly found on a closing checklist for a CMBS transaction:
- Submit a Certificate of Formation to form a Delaware LLC as a single purpose entity (SPE) or bankruptcy remote entity (BRE) borrower.
- Qualify newly formed SPEs/BREs in the state where the commercial property is located.
- Act as independent manager for the transaction.
- Support public record searching for UCC filings.
- Obtain certified charter documents and Good Standing Certificates.
You can learn more in our article, Commercial Mortgage-Backed Securities Transactions.