What Are Ancillary Documents?
Ancillary documents are typically defined as those supplemental documents that are attached to a primary agreement and that expire or become void upon the expiration or termination of that primary agreement. These associated documents can help provide the recipient with a comprehensive understanding of the transaction, or they may enumerate additional or specific details that supplement the basic contract. In the context of an acquisition deal, for example, ancillary documents can include any of the agreements between the parties to the deal, that are entered into to consummate the transaction. A financing statement is another typical example. Oftentimes, assisting documents are entered into that may contain additional representations, qualifications, or exceptions that make the primary contract enforceable . An ancillary document like a title insurance policy, however, may also have an independent scope.
As a best practice, parties should enter into, have prepared, or sign any necessary ancillary documents that are related to the main contract. It is also best practice to specify in the contract which specific documents are being entered into to supplement the terms of the main agreement. Sometimes, using the phrase "ancillary documents" is preferred and sometimes specific documents are listed or set forth in a schedule. Both are acceptable.
Often, ancillary documents are helpful in documenting disclosures related to confidentiality, conditions and events of default, and damages – which can prolong the existence of the related contract or aid a party in the enforcement of its rights.
Different Types of Ancillary Documents
Ancillary documents can come in various forms, depending on the transaction. They often take the form of written agreements, such as restated partnership agreements or accreditation agreements for schools. These are examples of ancillary documents that assists in clarifying terms and conditions between the parties to a contract. For example, the prime agreement itself may be lengthy, with many modification and scheduling elements, which are included as they are incorporated into a specific attachment or exhibit to the agreement.
Some ancillary documents take the form of certificates. In the case of securitizations, there will be many ancillary documents, such as a servicing agreement, a security certificate, a trustee acting as a custodian and/or custodian agreement, and a credit report. On the other hand, in a licensing agreement context, the ancillary documents would include the license agreement, which sets out the territory, terms, payment and reporting requirements, exclusivity rights, and defendant language.
Ancillary documents/agreements can take the form of "purchase orders". This is often the case in the sale of real estate (e.g., a land purchase agreement). These agreements tend to be more straightforward and succinct.
The Function of Ancillary Documents in a Legal Transaction
In a legal transaction, ancillary documents serve as vital instruments which complement the primary agreement. Like appendices to a report, they provide additional data and help to provide detail to the agreement to which they are referring. For example, if a lease agreement refers to an Exhibit for specific terms and provisions to apply, that Exhibit would be referred to as an ancillary document. The primary agreement (in this example the lease) is meaningless if the Exhibit is not referenced or included.
In the foregoing example, the ancillary document was referenced in the primary document (the lease) but accommodated by the primary agreement by the inclusion of an exhibit reference. In such scenario, the ancillary document would be enforceable based upon incorporation by reference into the primary document. However, in an analogous situation but with a difference such that a settlement agreement expressly contemplates a separate ancillary settlement statement, the result would be different. For example, if the parties entered into a settlement agreement providing that it would not be completed until a Settlement Statement was executed by the parties, the Settlement Statement would be necessary to divest the parties’ obligation under the Settlement Agreement.
Thus far, the discussion on ancillary documents have addressed how ancillary documents may be referenced in a primary document or are otherwise optional. However, there exist ancillary documents where their existence or their contents are obligatory. For those documents that are obligatory, failure to produce or include an ancillary document may be grounds for asserting a breach of the primary agreement.
Components of Ancillary Documents
While the number and types of attachments to a primary agreement may vary widely based on the subject matter, transactions between parties will usually have a large number of ancillary documents. Generally, these documents will not contain provisions that contradict the primary agreement, but they will often contain provisions that elaborate on (or supplement) the provisions in the primary agreement. From the contracting party’s perspective, care should be taken to ensure that the contractually binding stipulations within an ancillary do not unexpectedly interfere with the rights and obligations in the primary contract. Therefore, most transactional parties will be familiar with terms within ancillary documents aimed at ensuring consistency with the primary contract: "as set forth in the Agreement," "subject to the terms and conditions of the Agreement," or "unless otherwise specified in the Agreement." Other terms, such as "notwithstanding anything to the contrary in the Agreement," could create conflicting obligations if the provisions are not clearly delineated.
Because a primary agreement and ancillary agreement may be evaluated on their own merits, it is important to follow a few simple guidelines to avoid misunderstandings later. First, parties should strive to refer explicitly to the specific section of the primary agreement so it is clear to the reader when the provision is applicable. Second, an ancillary document should mirror the primary agreement when possible, and any subsections from the primary agreement should be in the same format and be renumbered according to the relative placement in the primary agreement. Third, a reference to the primary agreement should be included on the first page after the title and date so that it is clear which agreement the ancillary document is meant to supplement. Also, depending on the specific language in the primary agreement, a consistent reference throughout the documents may be needed so that the reader can easily find the right section of the primary agreement to refer back to when reading the relevant provision. While not every provision in an ancillary document needs to enumerate the article, section, and subsection of the primary agreement, a general cross-reference would be advisable no matter how the document is titled. Finally, although written in a separate document, the governing language of an ancillary document should not attempt to modify the primary agreement. A court may invalidate an ancillary document provision as a contract modification, or treat it as an amendment to the primary agreement requiring additional signatures.
Remember later that there is no quick reference to find out what a specific provision means without reviewing the primary contract.
How to Draft Ancillary Documents: Tips on Good Practice
When drafting ancillary documents, it is important to keep in mind the context in which they will be used, the specific provisions they are intended to facilitate, and their place in the overall deal structure. The best way to keep this perspective is to draft ancillary documents alongside the core agreements of which they form a part.
Another important consideration is the timing of the initial drafting of ancillary documents. If ancillary documents are drafted too far in advance, or if they are drafted before a core agreement with which they complement has been finalized, significant time may have to be spent revising them later when the core agreement and the transaction dynamics have changed. A good approach is to follow the "four-room approach," which provides for separate rooms for the four different drafting processes – core agreements, ancillary agreements, transaction instruments specific to particular industries and transactions and closing documents. This approach allows the parties to start discussions on the core agreements and the ancillary documents at the same time, which shortens the transactional process – one of the primary objectives in contract practice.
A common pitfall that drafters face is presuming that everything in one core agreement should also be in an ancillary document. The drafter needs to ask questions such as: "am I replicating language here that is already in the core agreement – for example , in a waiver provision?" When considering whether to replicate language, the drafter must balance estoppel principles against the prospective validity of verbal waivers in the specific jurisdiction.
Another common problem with ancillary documents is redundancy. The drafter should be careful to avoid replicating provisions that are already in the core agreement. The drafter should also ask, "Is this provision in the ancillary document a restatement of language already in an ancillary document?" If so, the drafter should consider omitting any such redundant provisions.
Another issue to consider is whether an ancillary document is competing with another document. The drafter, therefore, should consider the following questions: "Is this ancillary document repeating provisions in a similar ancillary document? Is there any substantive difference in the provisions? Can the later ancillary document refer to the original and be drafted as a change?" If two ancillary documents change or amend each other, they should be cross-referenced to avoid inconsistencies and to create internal clarity.
Taking the foregoing precautions will make any required revisions easier to complete. Overall, careful and early consideration of these issues will help ensure that the ancillary documents appropriately achieve their intended purposes, and that they are flawless and consistent within the overall deal structure.
The Influence of Ancillary Documents on Business Contracts
When examining a business agreement, all the pieces count. It is not enough to have your agreement look right. The process that leads to execution and closing is critical. That process begins with the negotiations. With the exception of an asset purchase, there are almost always ancillary closing documents that are exchanged at closing that are used in the completion of the transaction.
When trying to determine who has what rights, or who has what obligations, it’s vital to pay attention to the the ancillary documents. They often contain key provisions that when missing from the main agreement can change the overall rights of the parties to the agreement. For example, perhaps each party agrees in the main deal documents that it will keep the other party and its affiliates indemnified for breaches. But then one party goes awry and drafts the less than complete indemnification provision. When examining the deal documents as part of a dispute down the road, will you be focusing on the original agreement? Or will you be compelled to examine the ancillary documents?
The best method of protection is to have every single document that is executed in connection with a deal reviewed by qualified counsel. This ensures that the purpose of every title and "scope" is fully realized. Only by doing this will you know exactly what your rights and obligations are and what your obligations are in the event of default. Also, it is the best method of ensuring that all the parties achieve the desired result.
The Importance of Ancillary Documents in Real Estate Deals
Ancillary documents play a crucial role in real estate by establishing terms and conditions for the transactions. In most cases, real estate doesn’t just sell itself; it needs to be packaged for buyers. Therefore, contracts, agreements, guarantees, and other documentation must be properly established to seal the deal.
A few of the most common types of ancillary documents in real estate include:
Offer letters: A person looking to purchase a piece of real estate needs to make an offer on said piece of real estate. An offer letter is a written agreement specifying the details of a request to purchase property. The letter includes the buyer’s name, the seller’s name, the price of the real estate, any inclusive terms, and a date as to when the offer will expire.
Transcription regulations leave room for offer letters to be overbroad. To hold a stranger legally responsible to an agreement, said agreement must be concise and vague offer letters can push the limits of what is and what is not enforceable.
Sales agreements: Once both the buyer and seller agree to the terms of sale for the property in question, a real estate sale agreement outlines the purchase and sale of real property. The sale agreement states the purchase price, the fact that the buyer will pay in full and the seller will convey legal title to the property subject to the terms of the agreement. Any contingencies are also noted, as well as the amount of the deposit to be paid by the buyer and the date for satisfaction of the deposits.
The agreement, unlike the offer letter, goes into detail and includes information such as the location of the property, the contingencies that must be met for the sale to go through (like purchasing a new home), and the identification of stakeholders (a bank in case of a mortgage) who will be involved in the real estate transaction .
Deeds: A real estate deed conveys a piece of property from one party to another by using a document containing the signatures of the grantor (the seller) and grantee (buyer). Deeds are signed in front of a witness or a notary public, and it must contain a description of the property and the purchase price of the property.
Lease: A real estate lease is a contract between two parties that state a landlord’s (lessor’s) responsibilities to a tenant (lessee) that is rented for a period of time, usually one year. Depending on the situation, leases may be short term or long term, and the payment will typically be a specified amount of money each month.
Notes: In a lease, a tenant is essentially paying rent for the right to reside in the property for a set period of time. A note, however, entails borrowing money to purchase the property, then paying it back, with interest, over a long period of time or lump sum. If terms, payment amounts, payments schedules and possible overdue payments and penalties (foreclosure) aren’t agreed upon, the lender risk losing out on interest payments while the borrower runs the risk of having the lender seize the property.
Mortgages: Like a lease, a mortgage is essentially a loan with an interest rate that is paid back over a long period of time, usually three to ten years. Whereas a lease is temporary and a party might be okay with being evicted if payments aren’t made, if a mortgage is turned into a rental agreement, the lender doesn’t have the risk that they could lose their investment.