In a recent transaction for a lender financing the acquisition and operation of a commercial real estate property, an unusual exception to title appeared, which is called a Party Wall Agreement. A review of the title insurance and property survey indicated that the acquisition property shares a wall with the immediately adjacent property.
Party walls often are seen and taken for granted. Picture row houses and commercial structures sharing walls. Which owner or owners can claim those walls? Although party walls may be quite common, Party Wall Agreements are unusual.
Often owners do not consider the party wall until a problem occurs. When an issue with a shared wall arises, the result suddenly becomes complicated, without an agreement outlining the responsibilities and obligations of the two owners.
A Party Wall Agreement provides clarification about the ownership and maintenance obligations for the shared wall. The focus is to prevent and avoid disputes before a problem with a party wall, which affects the adjacent owners.
In addition to shared walls, party walls also include those attached and adjacent to the property, walls belonging to a single building structure, dividing walls between adjoining units, and those standing on the land of two or more owners. Traditional party wall principle dictates that each owner possesses as much of a party wall as is located on their land. Essentially, each owner acquires title to one-half of the wall, and each owner also secures an easement for the support of the party wall.
A Party Wall Agreement between adjacent owners is a useful, effective tool in understanding the agreements and restrictions relating to the common wall. These agreements define which party bears the obligation for the cost of maintaining the common wall, as well as the repercussions if the wall is not maintained.
Typically, a Party Wall Agreement requires the owners to maintain their portion of the wall consistently and harmoniously.
Such agreements delineate the process for making changes to the party wall, requiring agreement and consent from the adjacent owner. For example, a Party Wall Agreement will not inhibit an owner from nailing a picture to his internal portion of the shared wall or the other owner hanging a painting on the opposite side of the wall. However, a Party Wall Agreement will address structural changes and alterations to the party wall, which require the consent from the adjacent owner.
Once owners legally consent to the terms, Party Wall Agreements should be recorded in the applicable land records. By including the Party Wall Agreement in the applicable land records, potential purchasers know about it and understand their rights and obligations.
Establishing Ground Rules
This was the scenario for the recent transaction described above. Through a title search and receipt of a commitment for title insurance and the underlying exception documents, the buyers and consulting attorney could review and understand the Party Wall Agreement prior to closing. This group then could determine the best way to address the Party Wall Agreement, so the lender was comfortable with the borrower and acquiring owner taking on those rights and obligations.
Consenting to a Party Wall Agreement prior to possible disputes benefits the owners. In this recent transaction, the attorneys requested an estoppel certificate by the adjacent owner that confirmed no known defaults under the Party Wall Agreement or possible claims relating to it at the time of closing.
Those involved in the deal understood the rights, the obligations, and the validity of the Party Wall Agreement.