APPARENT AUTHORITY:

Apparent authority is the “power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from, and in accordance with, the other’s manifestations to such third persons.” Restatement (Second) of Agency §8. Apparent authority differs from “authority” that is “the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.” Id. At §7. For example, apparent authority is such authority as the corporation knowingly permits an officer or agent to assume, or which the corporation holds the officer or agent out as possessing to the third party. A person who knows that an officer or agent of a corporation habitually transacts certain kinds of business for such corporation under circumstances that necessarily show knowledge on the part of those charged with conduct of corporate business may assume that such agent or officer is acting within the scope of his authority. Wood Co. v. McCutcheon, 7 A.2d 564 (Pa. Super. 1939); See also, 15 Pa. Cons. Stat. An. § 1506(a)(1988) (stating that notwithstanding anything in the corporate articles of incorporation or by-laws to the contrary, one or more corporate officers with apparent authority to sign any document on behalf of the corporation can bind the corporation). Although apparent authority issues may arise with other entities (any principal-agent relationship), these issues most often occur with respect to a corporation (as principal) holding out an officer (agent) to a third party as having authority to transact certain business.

At common law, five entities were recognized: Individual (sole proprietorship); tenancy by the entirety; joint tenant; tenants in common, joint venture; tenant in parency; and trustee of a trust. Issues of apparent authority were not as prevalent.

BUSINESS ENTITIES:

Artificial (statutorily created) entities (corporations, limited-liability companies, partnerships, limited-liability partnerships, business trust or real estate investment trust) act through their representatives who must have proper authority to act on behalf of the legal entities that they represent.

1. Corporations:

a. Domestic Corporations: A corporation is an artificial, legal entity created and governed by the law of the State where the corporation is incorporated. Corporate existence begins when articles of incorporation are filed with the Department of State. 15 Pa. Cons. Stat. Ann. § 1309(a)(1988). The articles state the name of the corporation and may authorize the corporation to issue various classes of stock, which usually grant shareholders varying degrees of control over the corporation through voting rights. 15 Pa. Cons. Stat. Ann. § 1504(a) (1988). Typically, corporations are governed by a board of directors. 15 Pa. Cons. Stat. Ann § 1721 (1988). Pennsylvania corporations must have corporate officers, including: President, secretary and treasurer, each of whom may, or may not be, directors. 15 Pa. Cons. Stat. Ann. § 1732(a) (1988). The business Corporation Law of 1988 grants “for profit” business corporations a blanket right to acquire, own, sell, convey, or mortgage real property. 15 Pa. Cons. Stat. portion and any other person, when signed by the president or vice president and secretary, or assistant secretary or treasurer or assistant treasurer of the corporation, shall be held to have been properly executed for, and in behalf of, the corporation.” 15 Pa. Cons. Stat. Ann § 1506(a)(1988). Therefore, the proper combination of corporate officers will always have express corporate authority adequate to convey real property on behalf of the corporation.

b. Foreign Corporations: In Pennsylvania, a “foreign corporation” is a corporation chartered or incorporated in a State or country outside of Pennsylvania. The Pennsylvania Business Corporation Law of 1988 provides that a foreign corporation, whether it has obtained a “certificate of authority” from the Pennsylvania Department of State, or not, will have the right to acquire, hold, mortgage, lease and transfer real and personal property in the Commonwealth in the same manner and subject to the same limitations as a domestic-business corporation. 15 Pa. Cons. Stat. Ann. § 4142(a)(1988) (granting foreign corporation with certificates of authority the same rights as a domestic business corporation.) 15 Pa. Cons. Stat. Ann. § 41`432(a)(1988) (granting foreign corporations with certificates of authority the same rights as a domestic corporation); and 15 Pa. Cons. Stat. Ann. § 4143(a) (granting non-qualified foreign business corporation the same rights to acquire, hold, mortgage, lease, and transfer real property as a qualified foreign business corporation).

While Pennsylvania law has removed the historic restrictions on the ownership of Pennsylvania real estate by foreign corporations, those entering into real estate transactions with foreign corporations should determine whether the foreign corporation is a validly-existing, legal entity in the foreign corporation’s state of incorporation. To this end, foreign corporations should be required to produce a “certificate of good standing” from the corporation’s home state. In addition, although foreign corporations need not qualify to do business in Pennsylvania (by obtaining a certificate of authority) in order to own real estate in Pennsylvania, without a certificate of authority on file with the Department of State, no corporate tax search or clearance certificate can be obtained because the Department of State would have no record of the foreign corporation paying taxes to Pennsylvania. Therefore, purchasers of real property form a foreign corporation should also require the foreign corporation to file a certificate of authority with the Pennsylvania Department of State and produce a clearance certificate at closing that evidences payment of all corporate taxes.

c. Non-profit Corporation: Although sections 5502(4) and (5) of the Non-profit Corporation Law of 1988 empower non-profit corporations to acquire and sell real property, § 5546 imposes special corporate authorization requirements for such transactions. Specifically, the sale or purchase of real property by a Pennsylvania non-profit corporation requires the approval of: (i) two-thirds of the members in office of the Board of Directors; or (ii) if there are 21 or more directors or members in office, the vote of majority of the members in office.

d. Documents to be Reviewed: Certificate (articles) of Incorporation and Amendments; Good-standing Certificate; Resolution; By-laws; Proof of Settled Taxes; Proof of Bulk-sales Compliance.

2. Limited-Liability Companies (LLC): In Pennsylvania,
limited-liability companies are governed by the Limited Liability Company Act of 1994. LLCs offer certain advantages of both the corporation and the partnership. Like shareholders of a corporation, all “owners” of an LLC have limited liability for the debts, obligations, or liability of the LLC, and for the acts or omissions of any other member, manager, agent or employee of the LLC. 15 Pa. Cons. Stat. Ann. § 8922(a) (1994). Moreover, like a partnership, an LLC is taxed as a “flow-through” entity, wherein individual partners are taxed on their earnings, while neither the IRS nor Pennsylvania imposes a separate tax on the LLC.

An LLC is established by filing a “certificate of organization” with the Pennsylvania Department of State. 15 Pa. Cons. Stat. Ann. § 8913 (1994). If the certificate or organization states that “management of the company of Good Standing.

3. General Partnership: The Uniform Partnership Act, which has been adopted in Pennsylvania, defines a “partnership” as “an association of two or more persons to carry on as co-owners a business for profit.” 15 Pa. Cons. Stat. Ann §831 (I)(a) (1988). Each partner has: (i) Unlimited liability for the debts and obligations of the partnership. 15 Pa. Cons. Stat. Ann. § 8327(2) (1988); and (2(ii) the right to participate in the management of the partnership and to act as the partnership’s agent in entering into legal transactions. 15 Pa. Cons. Stat. Ann § 8321(a) (1988). Under the uniform Partnership Act, partnerships are treated as separate legal entities able to acquire, convey, and mortgage property in the partnership name. 15 Pa. Cons. Stat. Ann § 8313 (1988).

Pennsylvania law requires partnerships to file fictitious-name registration statements with the Pennsylvania Department of State. 54 Pa. Cons. Stat. Ann. § 303(b) (1982). If the partnership has filed a fictitious-name registration statement, a search o. § 8312(3) (1988). As a result, even a recorded deed may not reveal whether real property is owned by a partnership.

If partnership property is acquired in the name of one or more of the partners, as stated above, a search of public records may not disclose the rights of the partnership to the property. In such a case, the partner(s) in whose name(s) the title is, can with proper authority, lawfully convey title to the partnership property. However, the Uniform partnership act provides that the act of less than all of the partners will not bind the partnership if the conveying partners do not have authority to act for the partnership. 15 Pa. Cons. Stat Ann. § 8321(a) (1988). If a deed to partnership real estate is executed by one partner without the authority of the others, the partnership may sue to have the deed that purports to make the conveyance set aside. 15 Pa. Cons. Stat. Ann. § 8322(c) (1988). The unfortunate grantee will look to the title company for compensation for the loss of the property.

There are two instances when less than all of the partners of a partnership can effectively convey real property without authority from the partnership: (i) A single partner does not need partnership authority to convey real property if the sale of the partnership property was for the carrying out of the business of the partnership in the usual way. 15 Pa. Cons. Stat. Ann § 8321(b) (1988); and (ii) if a single partner sells partnership property without partnership authority to a purchaser who gives valuable consideration for the real property and has no notice of the conveying partner’s lack of authority.

When partnership property is acquired in the partnership name (and not in the name of an individual partner), such property must be conveyed in the partnership name. 15 Pa. Cons. Stat. Ann, § 8313(c) (1988); See also, In re Machi Produce, 128 Bankr. 134 (WD. Pa. 1991).

Partnership property is considered separate and distinct from the property of the individual partners. Liens against individual partners are not liens against partnership property, and a partner cannot independently claim an interest in, convey, or encumber any partnership real property.

When a partnership intends to mortgage partnership property, the consent of all partners is required unless: (i) The conveying partner (or partners) obtains proper authority from the partnership; (ii) or the non-mortgaging partners have abandoned the business of the partnership. 15 Pa. Cons. Stat. Ann. § 8321(c) (a) 1988). Any mortgagee subsequently purchasing at a sale upon foreclosure of any mortgage executed by such an authorized or non-abandoning partner, will be entitled to exclusive possession of the real estate. Id.

Documents to Review: Partnership Agreement and All Amendments; Partnership resolution or Consent of Partners; Fictitious-Name Registration (General Partnerships); Certificate of Good Standing (Limited Partnerships); Certificate of Limited Partnership; Opinion of Counsel.

4. Limited Liability Partnership (LLP): Limited Liability Partnerships became available as a form of business association in Pennsylvania in 1994. A registered limited liability partnership is merely a general partnership or limited partnership that files with the Pennsylvania Department of State a “statement of registration” signed by a general partner electing LLP status. 15 Pa. Cons. Stat. Ann § (a) (1994). By registering as an LLP, general partners may limit their liability for partnership acts and “shall not be individually liable directly, or indirectly, whether by way of indemnification, contribution, or otherwise, for debts and obligations of, or chargeable to, the partnership that arise from any negligent or wrongful act or misconduct committed by another partner or other representative of the partnership.” 15 Pa. Cons. Stat. Ann. § 8204(a) (1994).
General partners in an LLP remain liable for all other debts of the partnership. 15 Pa. Cons. Stat. Ann. § 8204(b)(2)(ii) (1994).

The Committee Comments to § 8201(c) make it clear that registration as an LLP “does not change the basic form of organization of the registering partnership or limited partnership as either a general or limited partnership … [and] a registered liability partnership is intended to be treated as a partnership under Pennsylvania Law in the same man document on behalf of the business.

If the sole proprietorship identifies itself by a “fictitious name” under the Pennsylvania “Fictitious-Names Act”, then the sole proprietorship must register such trade name with the Pennsylvania Department of State by filing a “fictitious-name registration statement.” 54 Pa. Cons. Stat. Ann § 311(a) (1982). The fictitious name registration statement identifies the name and address of the sole proprietor and briefly describes the nature of the business.

Documents to Review: Fictitious Name Registration Statement.

PRESERVING THE RECORD:

The following documents should be produced or obtained when legal entities enter into real estate transactions in Pennsylvania

1. Corporation:

a. Domestic Corporation:

(i) Obtain Articles of Incorporation.

(ii) Obtain By-laws, if any.

(iii) Obtain Corporate Resolutions.

(iv) Obtain Good-Standing Certificate.

(v) Include a representation from the corporation in the Seller’s Affidavit that the corporation is not selling more than one-half of its real estate holdings. If it is doing so, require Seller to obtain a Clearance Certificate from the Commonwealth, confirming that all tax obligations of the Seller for the period from the date of the last tax year through the date of conveyance have been satisfied.

(vi) Obtain any written Partnership Agreement to determine whether the conveyance of real property is in the ordinary course of the partnership’s business. If the conveyance is not in the ordinary course of the business of the partnership:

(i) Review the partnership agreement to determine which partner are authorized to execute documents related to the transfer of the real property;

(ii) Obtain a Consent of Partners Agreement, signed by all of the partners, confirming the name of each partner, stating which partner(s) have authority to sign on behalf of the partnership; and have each of the partners represent and warrant that the partnership agrees to be bound by the acts of such partner(s);

(iii) Include provisions in the Seller’s Affidavit confirming that:

(A)      the partnership owns the subject property;

(B)      the transfer of the partnership property is authorized by the partnership; and

(C)     the partnership authorized the person(s) who signed the documents related to the transfer of the real property to do so.

(iv) Obtain an Opinion of Partnership Counsel stating, at a minimum, that the partnership is validly organized under applicable law; that the partnership has the power to own, buy, or sell the real property; that the partnership has been duly authorized by all necessary actions, to transfer the real property and that the documents related to the transfer, if signed in accordance with the partnership agreement or the consent of the partners agreement, will constitute legally-binding obligations of the partnership.

(v) If the partnership is acquiring real property, use all partners names in the Deed of Conveyance (i.e., A and B as co-partners, trading as X and Y Company, a Partnership).

4. Limited Liability Partnership:

a. Obtain the Statement of Registration.

b. Follow procedures outlined in subsections 3(a)(I) through (v), but with respect to the limited-liability partnership rather than the general partnership.

5. Limited Partnership:

a. Obtain the Certificate of Limited Partnership and review the Certificate to determine whether any restrictions affect the transfer or acquisition of real property by the limited partnership.

b. As stated before, the absence of any relevant provision of the Pennsylvania Uniform Limited Partnership Act governs limited partnership. Accordingly, the same rules governing partnerships generally govern limited partnerships, and the procedures outlined in Subsections 3(a)(i) though (v), should be followed.

6. Sole Proprietorship:

Obtain and review the Fictitious-Name Registration Statement to identify the sole proprietor and determine whether the individual signing the documents in connection with the transaction is the sole proprietor and has proper authority to convey or acquire the real property.

TRUSTS:

A trust is a legal entity created by a grantor for the benefit of designated beneficiaries under the laws of the state and is a valid trust instrument. The trustee holds legal interest to the trust property, while the beneficiary hold(s) equitable interests to the trust property.

When conveying real property to, or acquiring property from, a trust, it should be determined whether the trustee has the proper authority to undertake the transaction in Pennsylvania, except as provided in a valid will or trust document, a trustee has the right to sell any real property not specifically devised by the settler, even without express authority. 20 Pa. Cons. Stat. Ann. § 3351 and § 3354 (1972). In addition, the trustee may sell specifically-devised estate property with the joinder of the specific devisee.

Pennsylvania law now protects those who purchase real property from trusts by providing that once a valid agreement of sale has been executed, where the trustee has authority to sell and where the court approval to sell is not required or has been obtained (when required), the receipt of a better offer from a potential purchaser of real property by the trustee will not “relieve the personal representative of the obligation to perform his contract, or …. constitute ground for any court to set aside the contract or refuse to enforce it by specific performance.”

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