The Ins and Outs of Real Estate Non-Disclosure Agreements

Real Estate Non-Disclosure Agreements: What are They?

Non-disclosure agreements (or NDAs) are confidentiality contracts between parties to a deal or transaction. They provide a safety net for the previously exchanged proprietary information or other confidential information that parties may want to keep confidential. Commercial and residential real estate transactions regularly include NDAs for obvious and good reasons.
Parties to a real estate transaction are well served by including a non-disclosure agreement to protect against the accidental or casual release of private or proprietary information. Non-disclosure agreements are designed to avoid misunderstandings and sometimes pricey disputes with contending parties.
An NDA is usually a two-way agreement where both parties are protected from disclosing information misappropriated from the other. An NDA should be broad enough to prevent inadvertent disclosures , but specific enough to survive scrutiny from the courts should one party fail to comply with the restrictions set forth in the NDA.
A practical example: a competing grocery chain is seeking to acquire a grocery store property owned and operated by another chain. Executives representing each organization will meet frequently in "test the waters" negotiations. Included in their discussions will be matters that are sensitive to both parties. It is particularly important for the buyer to understand the seller’s history with the property, including the pluses and minuses as perceived by the seller. The seller is probably at a point of no return and will not permit the buyer access to information relevant to the seller’s history with the property. Nevertheless, it is critical that the buyer has as much access to such information as possible. The seller, however, is equally invested in preserving its history with the property as private. Given the competing interests of the parties, an NDA requiring both parties to keep what is shared in the negotiations secret from all but the essential persons involved in the deal is a reasonable compromise for this situation.

Elements of a Real Estate NDA

An agreement not to disclose information. Used in all parts of business and in real estate. When it is a disclosure agreement between parties about the sale of or value of a piece of real estate or even an entire development, NDAs limit the parties from disclosing to outside parties the other side’s information. This can include sensitive material about the property, confidential purchase price, financing terms, and proposals being discussed with other users.
NDAs are negotiated between the parties and the seller or disclosing party wants the NDA to broadly define what if anything the receiving party can disclose about that information to a third party. Some sellers or the listing agent may want the NDA to prohibit any disclosure whatsoever, but this can be an unreasonable request. A purchaser or potential user of the property does not want to lose the ability to talk to other parties who may be involved in the deal, such as lenders and contractors, unless there is a well-defined area of disclosure. If this is the case, the purchaser should make a proposal of what disclosure the buyer wants. Even on the selling side, the seller may want an NDA for a broad definition of information to be protected, but should be reasonable in limiting the term of the NDA and the scope of the NDA so that the running of time will cure the requirement of nondisclosure so that it does not have an indefinite effect.

Circumstances for the Use of NDAs in Real Estate

Within the real estate industry, non-disclosure agreements (NDAs) are commonly used when parties are discussing the purchase of a property or a business. NDAs are often used whenever the seller of a property is disclosing to the other party information regarding the property.
NDAs are also commonly used in the case of a real estate development project that is being pursued by a joint venture between at least two parties. In these cases, an NDA is often required in order to facilitate the logistical discussion regarding the arrangement between the joint venture parties.
In these instances, the NDA most commonly excludes confidential or proprietary information, such as the purchase price or terms of sale, from the general description of what information is covered. The more transparent the disclosure, the more likely the NDA will be fully enforced by a court.

Advantages of Using NDAs in Real Estate

One of the most important advantages of an NDA is that it allows the parties to a transaction to openly and confidently share sensitive and confidential information without the fear that it will be stolen or misused. Whether they are buying, selling or leasing property, often the parties must share business and financial information with others in order to protect their own interests, without revealing details to the wider world. The use of an NDA can also reduce the amount of due diligence work required on the property, since certain aspects of its financial or physical state need only be disclosed to the other party rather than to everyone in the market.
The NDA is not merely intended to safeguard very confidential pieces of information, but also confidential commercial information. For example, the sales price of real estate at the end of an arms-length negotiation is generally not meant to be disclosed , nor should it be. Because NDAs specifically allow or deny particular uses for the information shared and impose penalties for unauthorized disclosure, they can absolutely and prophylactically forbid use of information in a way that benefits the acquirer or that would give them leverage in future negotiations. The precise terms of the NDA should be individually tailored to the relevant situation, but they often are beneficial for the seller or lender by allowing the seller to use sensitive sale information obtained from competing potential buyers to find the best deal possible. Building such trust makes a sale or financing more likely to go through, since both parties will worry less about whether the other is taking advantage of them. For the buyer, NDAs increase their negotiating leverage to some degree, as they can be more confident that sensitive information will not be exploited and can focus on determining whether or not to continue the business relationship without the fear that their potential partners will use that information against them.

Legal Issues and Considerations

In the context of non-disclosure agreements (NDAs) in the field of real estate, there are several legal and practical considerations for the parties wishing to engage in the process. The biggest concerns that arise in NDA’s involve enforceability. The first consideration is if the NDA is enforceable in the first place. As with any contract, an NDA must represent an agreement between two parties, intent to be bound by the terms of the NDA and a consideration. If the NDA is deemed unconscionable or if it represents a contract of adhesion, the NDA may not be enforceable in court or otherwise. Another callback to contract law is that the NDA must not violate public policy. Stipulations in an NDA that forbid disclosure of misconduct or illegal actions, or implicate the parties in those activities, will render the NDA void ab initio.
The second consideration is whether the NDA is enforceable in basis of its terms. Generally, the NDA will be enforced if it is reasonable in scope. As examined above, definitions and specificity are very important in NDAs. A court in New York will not enforce an NDA if the terms are too broad or if the NDA is designed solely for purposes of preclusion of competition. In the Dine-A-Mite case, the court held that a non-compete clause broader than necessary to protect the employer’s stated interests and which also impairs the ability of the employee to earn a livelihood may render the covenant void. In other words, if the NDA is too restrictive in its scope, the NDA may not be upheld. Courts in many states have upheld restrictive covenants, such as NDAs, as long as the clauses are reasonable in scope.
After examining the requirements of an enforceable NDA, it becomes clear that poorly-written NDAs will invite lawsuits, and unless the parties are willing to countenance the expense and stress of a lawsuit, consider retaining legal assistance with drafting the NDA.

How to Formulate a Suitable Real Estate Non-Disclosure Agreement

Creating a non-disclosure agreement for real estate protection isn’t too different from drafting an NDA for any other business purpose. Below is a comprehensive guide to following when crafting an NDA for real estate purposes:
Legal counsel: Before you draft, get some professional legal input on the creation of your real estate non-disclosure agreement. While this overview will cover the most general provisions, your attorney will be able to better tailor the document to fit your specific business needs and personal situation. Doing so will help ensure that your NDA satisfies disclosure and confidentiality requirements.
Keep it simple: Assuming you’ve gotten all the legal advice necessary to create a legally compliant NDA, it’s time to hammer the document out with legalese and the technicalities of binding contract language . If you can, keep things simple. A confused person is not more likely to keep a promise, meaning people who do not understand NDAs and what they’re signing may be less likely to keep the agreements. While you don’t want to strip your terms of any necessary details, err on the side of transparency and easy-to-understand language.
Custom drafts: Never make an NDA based on another version that you found online or in a Word template. You can use those documents as a reference, but just like with legal counsel, a cookie-cutter document is not going to suit your specific circumstances, and could contain holes that leave your most confidential information and trade secrets vulnerable.