Typically, a commercial real estate purchase agreement is more complex than purchasing a personal residence. The legal contract defines aspects such as ownership rights, both parties’ financing options, and other critical details to be outlined in all terms for payment, party responsibilities, and any conditions of the sale to meet before the transfer of ownership can occur.
Commercial purchase agreements allow the seller to strike a deal with an eligible buyer to transfer their real estate property ownership in exchange for cash or other trade value. The buyer commonly deposits earnest money (known as consideration) to make a valid contract. Consideration is usually between two and five percent of the purchase price. This deposit money is only refundable if problems are encountered during property inspection or other due diligence.
Commercial Property Types
There are eight types of commercial property, including multifamily (apartments), office, industrial, retail (shops, restaurants, etc.), hotels and hospitality, mixed-use, special purpose, and land. Those who invest in commercial properties can greatly benefit from using contingency plans within the agreement. A commercial real estate contract with the proper contingencies can mitigate unnecessary risks for buyers and sellers.
A commercial real estate contract contains provisions, context, and jargon that even experienced real estate investors find difficult to understand. A commercial real estate lawyer can explain the contract specifics and what you need to include, providing added safety measures that can differentiate between a successful sale or purchase and a disaster.
Parts of a Commercial Real Estate Contract
Standard sections of a commercial real estate purchase agreement include the sale of property, title and survey, due diligence period and inspections, representations, covenants, and warranties. The purchase agreement also includes closing terms, default and termination, condemnation or casualty damage, real estate commission, contingencies, and miscellaneous clauses.
Contingencies that may benefit a deal include:
- Qualifications for secure financing
- Satisfactory and unencumbered title
- Property survey and appraisal
- Inspection contingencies
- Review of all leases
- Property income and expenses
- Approval of land use
- Environmental conditions
Critical Contingencies for All Contracts
All real estate deals, commercial or otherwise, have inherent risk. No matter how much due diligence you conduct and how careful you are, there is always some exposure to negative consequences. Therefore, contingency planning is critical to mitigating as much potential risk as possible. These four real estate purchase agreement contingencies are, without a doubt, necessary.
- Financing Contingencies– This single aspect is crucial. The buyer must have access to adequate funding. If the buyer’s access to capital is interrupted or cut off, there can be no deal. Lending guidelines may change a week before an anticipated purchase agreement close date, and the capital required may be adjusted. Some hopeful buyers are over-exposed to creditors and may have their request for a loan declined entirely.
Alternatively, if you use a private money lender, they may get cold feet or experience a personal challenge that will pull them from funding a deal they couldn’t wait to do last week. There are many reasons buyers can lose funding which is why a contingency makes sense. It states that the buyer may terminate the deal if unable to secure financing. Typically, there is negotiation with the seller defining the terms they find satisfactory.
- Title Contingencies– Legitimate concerns exist regarding title issues throughout every real estate transaction because titles are a complex matter. Commercial real estate is subject to public record errors, missing heirs, unknown easements, unknown liens, and a host of other discrepancies that can impede or implode the purchase process.
Include a title contingency to account for unexpected title issues in your commercial real estate purchase agreement. The blog Property Metrics explains, “a buyer’s title contingency will generally provide that if the buyer objects to any title conditions, they can give the seller the opportunity to cure or insure over the buyer’s title objections. Where the seller can’t or won’t cure or insure, the buyer has the option of terminating the contract or waiving its objection.”
- Survey Contingencies – A proper survey of the commercial property for sale will provide the size and location of the asset in question. While you may be aware of this information, a professional survey will also reveal important details, such as if the building has adequate access to public roads and utilities. A complete survey will be able to locate easements and any potential impact they may have on your plans for your intended use of the property.
Every issue a survey uncovers requires review to resolve problems before closing the deal. In particular, a real estate attorney can interpret the survey information and help a potential buyer avoid making the catastrophic mistake of buying an unusable property. Contingencies include which party pays for the survey, how long the buyer has to make objections to the finished survey, and how long the seller has to rectify outstanding issues or problems.
- Inspection Contingencies– Similar to selling residential property, commercial real estate is subject to pre-sale inspection. The inspection process provides details on the state of the building for purchase. A thorough inspector will consider the entire property, which may include public access sidewalks, driveways, and more, for a detailed account of their findings. Generally, these inspections do not come back with out-of-the-ordinary surprises. However, if red flags exist, buyers must immediately elevate the concern to the seller and will be protected with an inspection contingency contract clause.
Granting the purchaser this contingency provides the ability to back out of a deal if the inspection uncovers previously undisclosed red flags. A robust inspection contingency clause can also compel the seller to cover the problem’s repair costs or negotiate a lower price based on repair pricing assessments the buyer would elect to cover.
Commercial real estate purchase agreements are a dynamic process until the moment of contract finalization and signature. Specific legal language can provide both a buyer and a seller with flexibility when facing unexpected issues. Detailed contingency plans can either mitigate risk or provide an exit strategy for an interested party to remove themselves from a potentially bad deal. Whether you are a buyer or seller, retaining a real estate attorney to protect your interests during negotiations and before finalizing the purchase is invaluable to making a solid commercial real estate deal.