The Anatomy of Confidentiality Agreements in Real Estate Transactions

A Primer on Real Estate Confidentiality Agreements

Understanding Confidentiality Agreements in Real Estate Transactions
Real estate confidentiality agreements are legal agreements that protect the transfer of confidential and sensitive information between a buyer and a seller in an effort to protect the privacy and commercial interests of one or both parties. A confidentiality agreement, also referred to as a non-disclosure agreement, contains specific terms including (but not limited to) the definitions of the confidential information, the exclusions from the confidential information, the obligations of the parties, the term of the agreement, the return of materials, terms of ownership, no license, and miscellaneous provisions. The terms of the agreement will be negotiated between the parties depending on the particular transaction.
The broad purpose of a confidentiality agreement is to protect the exchange of confidential information about a property among the buyer, the seller, the agent, and any other party that has reason to access confidential information about the property, i.e. contractors, appraisers, etc. This definition of confidential information may include, but not be limited to, financial statements, appraisals, credit information, tax information, marketing information, trade secrets, client lists, technical data, marketing plans, and trade-related data. A confidentiality agreement is often utilized in the context of a transaction because the buyer’s due diligence during the course of the transaction can require the sharing of confidential information about the property from the seller. This information is confidential and usually not publicly available. The seller desires to avoid the unwanted dissemination of confidential information about the property. Use of the confidentiality agreement to protect this information is commonplace in commercial real estate transactions.
A confidentiality agreement is often combined with other documents , such as a declaration of intent or an offer to purchase, to form one cohesive, legally-enforceable contract between the parties to the transaction. The confidentiality agreement prevents the disclosure of confidential information outside the parameters of the deal. If no confidentiality agreement is put in place, the buyer’s rights to disclose this information to third parties would extend beyond the confines of the deal, and the third parties could then damage the reputation of the transaction, the property, and/or the seller. If a confidentiality agreement is put in place, the nondisclosure of the confidential information is binding under the civil law of the state. Under the common law of the state, this confidentiality may not be recognized and the scope of its application may vary. To ensure that the confidentiality is enforceable under the appropriate set of circumstances, the use of a confidentiality agreement is recommended.
Certain disclosures are required by state laws, both by statute and common law, during the course of a real estate transaction. These disclosures cannot be waived by a confidentiality agreement, and thus, the confidentiality agreement must be reviewed and amended to comply with these statutory and common law requirements. For example, the North Carolina Residential Property Disclosure Act requires a seller of residential real property to provide the buyer a disclosure statement covering various defects on a disclosure form promulgated by the North Carolina Real Estate Commission. The Act does not grant the seller the option to withhold the disclosure of the problems identified on the form. In sum, the purpose of a confidentiality agreement is to protect the confidential information about the property from disclosure outside the scope of the transaction between a buyer and the seller.

The Key Elements of a Real Estate Confidentiality Agreement

A confidentiality agreement in the real estate context is intended to provide the seller and/or a potential buyer with a measure of protection to allow the party disclosing confidential information (the Disclosing Party) to share that information with a potential buyer (the Receiving Party). In that regard, the Receiving Party is prepared to agree to comply with terms of the confidentiality agreement as a condition to the Disclosing Party making information available to the Receiving Party.
The typical elements of a confidentiality agreement are as follows:
(i) Parties: the parties to a confidentiality agreement are the Disclosing Party and the Receiving Party;
(ii) Scope: the scope of a confidentiality agreement generally is for a defined period of time and permits the Receiving Party and its advisors to review the material contained in the information, subject to the obligations of the Receiving Party contained in the agreement. The most commonly agreed periods in a confidentiality agreement are 30, 60 or 90 days from the date of the agreement, which is the period that a prospective buyer is entitled to exclusive access to the information provided by the seller. A confidentiality agreement also acknowledges the desire of the Disclosing Party to protect its confidential and proprietary information from unauthorized disclosure. Subject to permitted use restrictions, any disclosure of the information by the Receiving Party is limited to its employees and agents who have a need to know, absent specific approval by the Disclosing Party;
(iii) Obligations: obligations of the parties are set forth in the confidentiality agreement. The Receiving Party generally agrees that all information disclosed to it is property of the Disclosing Party and will be treated as strictly confidential and will restrict the use of such information to the purpose for which it was furnished. In that regard, the Receiving Party generally agrees to return all confidential material to the Disclosing Party no later than the first date of the term of a sale contract if not used, and no later than two days after the Disclosing Party requests the return of such material unless and until a transaction is consummated. A confidentiality agreement generally is deemed null and void when the contemplated transaction is consummated. The Receiving Party also typically agrees that, upon receipt of any request for disclosure by applicable law or legal process, it is required to provide prompt written notice to the Disclosing Party for an opportunity to seek a protecting order assuring the confidentiality of the information; and
(iv) Permitted Uses: the authorized purposes for which a Disclosing Party will permit a Receiving Party to use the confidential information generally include due diligence reviews and environmental assessments of the property being considered for acquisition, and related activities in connection with the feasibility and negotiation of a contract to purchase the property or related activities; however, the Disclosing Party may impose further limitations on the permitted uses.

Advantages of Confidentiality Agreements for Buyers and Sellers

When implemented correctly, confidentiality agreements can be beneficial to both buyers and sellers of property. These agreements typically require the property seller to keep the terms of sale confidential during the duration of any negotiations. Property buyers can benefit in that the seller will often have more trust in them if they agree to the terms of the confidentiality agreement. Sellers favor confidentiality agreements because they can create a sense of trust with potential buyers. When buyers see that sellers require them to keep their bids confidential, they may be less likely to alter their bids to result in more competition or use the bid information to attempt to gain an advantage by reaching out directly to the other buyer, as discussed above.

How to Create a Real Estate Confidentiality Agreement

When entering into a real estate purchase sale or lease transaction, the buyer or tenant may have concerns about disclosing personal financial matters and/or business information in connection with the transaction. The seller or landlord may also wish to disclose proprietary information about its property and/or business. The parties may seek to enter into a confidentiality agreement prior to disclosing confidential information. This section provides tips for how to draft a real estate confidentiality agreement.
Define the "Confidential Information"
It is important to begin by making sure the agreement contains an appropriate definition of the "confidential information". The scope of the definition will be determined by the parties’ needs and circumstances but in any event should generally include the information that each party considers to be confidential. Depending on how the agreement is structured and how it is intended to operate, you may employ a very tight definition such as one that includes only information that is marked confidential. Alternatively, you may want a broader definition that may include information that a party reasonably believes is confidential, although that broad construction may create some ambiguity in the future if a dispute arises over whether certain information was confidential or not.
Be Careful with Exceptions
A confidentiality agreement should generally provide for certain exceptions to the requirements of confidentiality, including the following:
(a) Disclosure by persons who have to know
The agreement should not prevent a party from disclosing the confidential information to its employees, officers, directors, shareholders, investors and agents who need to know the information in order to evaluate the transaction or otherwise perform under the agreement.
(b) Disclosure to your financing sources and professionals
In addition to the exceptions in clause (a), the agreement should allow for disclosure to certain third parties such as banks, other lenders, potential tenants, potential assignees of the company, accountants, auditors, attorneys and other professional advisors who need to know the information in order to evaluate the transaction, prepare reports and perform other work in connection with the transaction.
(c) Information in the public domain
It is typical and appropriate to provide an exception for information that is in the public domain, although this will not, by itself, excuse disclosure of information that is in the public domain when it is disclosed if it did not exist in the public domain at the time of disclosure. In principle, an exception for information in the public domain should not excuse disclosure of confidential information.
(d) Information obtained from outside sources
The confidentiality agreement may provide an exception for information obtained from a source other than the other party, provided the source is not bound by a confidentiality agreement.
Limit the restrictions to one year
The obligation of confidentiality should be limited to a period of one year from the date of disclosure, except to the extent the other party also is entitled to receive that information after the date of the agreement.
Consider whether exceptions at termination should survive
The agreement may provide for exceptions from confidentiality for third parties – such as tenants, customers, suppliers or employees – who are involved in the transaction if you are willing to allow the other party to disclose information to those third parties after the termination of the agreement.
If permitted by the parties, a seller may want to also allow the buyer to consult with those same parties after termination and even to disclose certain limited information to them.
Be Careful with what is excluded from definition
Some agreements exclude information that was known to the receiving party prior to disclosure and also exclude information that was developed by the receiving party independently of the agreement or that is disclosed to the receiving party by a third party which is under no legal obligation to maintain confidentiality. Be careful with these exceptions because the exception for information known or discovered prior to disclosure could swallow up too much information unless it is precisely defined. Also, if you are the disclosing party and the property is subject to an easement, right of first offer/ refusal or restriction, be careful not to jeopardize these rights by agreeing to disclose information under a wide ranging confidentiality agreement, particularly an agreement providing for exceptions for the development of information by the other party or for information from third parties. Also, be particularly cautious about using the exception for information from a third party that is not under an obligation of confidentiality.
Obtain a receipt
You should obtain a receipt from the receiving party to the confidentiality agreement acknowledging that the information being provided is confidential, citing the confidentiality agreement, indicating the general nature of the information received (without listing specific items), identifying the date on which the information is received and acknowledging receipt of the same (if part of a larger bundle of documents).

Legal Consequences of Violating a Confidentiality Agreement

The legal implications of a confidentiality agreement breach in a real estate transaction can be severe. In the context of a confidentiality agreement, a party might execute the agreement for protection from disclosure of sensitive information in the event of third-party requests for the same. The confidential information may be disclosed to unauthorized parties, such as an existing landlord or tenant, or be used for a purpose other than the purpose intended by the owner or discloser.
In New York, a party who breaches a confidentiality agreement may be liable for damages. Further, they may also be subject to a permanent injunction. An owner can be entitled to an order enforcing specific performance to require the breaching party to comply with the terms of the agreement. However , if the time period in the agreement has expired, unfortunately the owner is restricted to monetary damages.
If a third party attempts to enforce a confidentiality agreement that was not executed by them, whether or not they are a third party beneficiary to the confidentiality agreement, the third party has no rights under the agreement. A third party is not entitled to protect confidential and non-public information under a confidentiality agreement when they are not a party to the agreement. In order to have standing to seek an injunction to protect the information, the third party must demonstrate an injury in fact and that their legal rights are in jeopardy of being prejudiced by the unauthorized disclosure of confidential and non-public information subject to the agreement.

New Problems, Some Old Solutions

Common challenges regarding implementation of confidentiality agreements in the real estate context include risk of exposure to non-market value valuations (which can be addressed through timing specific rights concerning such valuations), and overly broad definitions of Confidential Information that do not draw a distinction between business critical information and information that is less sensitive. It is also important to balance the interests of the seller and the purchaser regarding appropriate consequences in case of disclosure of confidential information. For example, where the purchaser is also an operator of similar properties, it may be expected that he would have access to competitor sensitive information and therefore the focus should be on the purpose for which the information is used, rather than the mechanism of its access.
Confidentiality agreements are often peppered with exceptions to potentially troubling matters, all of which are added so as to leave little room for litigation on these points. In real estate transactions, care needs to be taken when defining what represents Confidential Information and what does not. This is particularly true with respect to information of third parties or information that is already generally known by the public. The former category should be treated in a sensitive manner, as it could be extremely disruptive to some parties in the event that their proprietary information is provided to their competitors. The latter category may be subject to broader exceptions as generally known information (e.g. valuation methods and practices of how various parcels are valued).

Questions and Answers About Confidentiality

Why should I bother with a confidentiality agreement?
Confidentiality agreements can be an important part of a real estate transaction. They allow each party to share information that is sensitive without the fear of that information being disclosed to unauthorized third parties. Confidentiality agreements can also be an important means of establishing trust between the parties and laying the groundwork for more complicated negotiations and contracts.
When should I ask for confidentiality?
You should advise a party that you want them to sign a confidentiality agreement whenever you want to provide confidential or proprietary information that is not required to be disclosed according to law or otherwise. In the case of a commercial real estate transaction, it’s common to request an NDA before disclosing details such as financial statements, security deposits, contracts, bids, etc. Although these documents may be considered trade secrets under NY CPLR § 4508 or federal law, you must expressly state that the information is confidential if you want it treated as such under the law.
What information does my NDA cover?
Your NDA should cover any information that you are providing that is not generally included as required disclosures under real property laws, such as the Property Condition Disclosure Statement or other disclosures required by New York Real Property Law §§ 462, 442-H, 462-h, 465(5), 265, and 453-A. See disclosures to buyer section . Your NDA should also include information that you may want kept secret, such as your asking price, sale terms, rents, leases, contacts, architectural plans, or other information related to the property. The confidentiality clause in a real estate sales contract is not a substitute for a disclosure clause in a separate NDA. You should list the documents provided and copies of those documents should be attached to the NDA.
How long will the confidentiality agreement last?
In New York, the general statute of limitations for a contractual dispute is six years. However, you can contractually shorten the time, but not lengthen it. In addition, keep in mind that after the NDA expires, you still have the protections afforded to you by trade secrecy statutes (see section 6a), so no harm is done by entering into a longer NDA.
Can I sue for breach of a confidentiality agreement?
Yes. New York recognizes breach of contract actions for breach of NDA or trade secret statutes. See trade secrets. At trial, actual damages would be your burden of proof. However, you can also seek punitive damages, attorney’s fees, and injunctive, or restraining orders against the person that discloses your information in violation of a court order. If this is done without your approval and consent, you can also seek an order of protection.
Can I still hold a buyer responsible after the sale is finalized?
Yes. You have six years to bring your claim, unless you are able to establish that the statute of limitations is tolled because the seller fraudulently concealed damage. (Including itemized receipts is advisable).