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Considerations When Buying or Selling Commercial Real Estate

When structuring the legal document(s) guiding commercial real estate property sale, there are several considerations to examine, whether a buyer or a seller. Using a form of an attorney-prepared agreement requires scrutiny with extra attention to the rights necessary to proceed with the transaction and provide protection if something goes awry.

Some of the provisions and terms to consider when meeting with your attorney to structure the deal include:

Financing – Is there a need for a contingency? In some situations, financing is a given, or the buyer can proceed without financing, which provides leverage of different sorts to both buyer and seller. Consider whether financing, as a contingency, is a requirement, whether the deal might be more attractive to a seller without this contingency, or whether you disclose the financing for the deal.

Inspections – The standard contracts are form contracts with standardized, mostly non-negotiable provisions in a preprinted format. The terms, usually in the fine print, typically behoove one party of the transaction at the expense of the other. The party who routinely engages in these standard contracts may often represent a multinational corporation using contractual language by corporate lawyers representing superior bargaining power. With minor exceptions, the terms are not negotiable by the consumer. Under a standard contract, the buyer has a “free look” while under contract to determine if the deal meets all needs and the property’s condition is suitable. The buyer can move toward closing or walk away, but their deposit typically is non-refundable. Some issues you may encounter are similar to the inspection yet different enough to require a separate agreement in writing. Does the property require entitlements changed for the buyer to use as they wish? Will the property immediately be developed upon closing? Do other conditions exist and need attention before the buyer is required to close? Inspections and the need for further clarification in a separate agreement written by a real estate attorney who knows how to allow for permits and approval periods separate from or after the inspection period are invaluable.

Rentals – Property with tenant occupancy who remain after closing requires securing the existing leases and rent rolls. The seller provides the buyer with estoppel letters from tenants verifying each lease status. A Seller Representation Addendum is applicable but requires careful review for the buyer’s additional information to evaluate the leases. It is wise to have a real estate attorney prepare a supplement to ensure the buyer will get all the necessary information for analysis and ensure each estoppel binds the tenants to those representations.

Default and Remedies – Suppose you have contract forms that are reasonably balanced but do not allow for many options. The use of an arbitration addendum is often employed, but other issues may come forward like prevailing party attorney fees, liquidated damages, equitable remedies, and recovery of specified costs.

Warranties and Representations – Both parties should have these documents that address authority and ability to enter and subsequently complete the transaction. Numerous additional representations about the status of the property should be seller provided. General statements as to whether the following exist or threaten include:

  • Claims or litigation relating to the property,
  • Governmental agency actions that may affect the buyer’s ability to use the property,
  • Building department issues and code enforcement that may give rise to additional liens against the property or require compliance before the buyer moves forward with property changes,
  • Proceedings of condemnation that can reduce the amount of property the buyer gets to keep upon closing, and
  • Pending changes to curb cuts, roadways, or changes to nearby transportation facilities that can affect the use of or access to the property

Ensure the property description is accurate as old tax property or legal descriptions may not reflect the current saleable property, leading to boundary disputes, zoning problems, or worse with adjacent properties or upon resale.

Allow plenty of time for due diligence. It will often take longer than a twenty-one-day review period. Consider the property’s condition when agreeing to the price in the purchase as upgrades may be necessary, such as HVAC, signage, parking lot condition, etc.

Understand the transfer taxes, local taxes, and all other fees in the jurisdiction where the property is as each state has different sets of rules.

If there are tenants in occupancy upon sale, be sure to have estoppel certificates from each tenant. Some national tenants have up to twenty-one days to provide an estoppel certificate which may delay closing.

There is much to consider when entering the commercial real estate market. Before signing anything, your best strategy is to review the contract documents with a real estate attorney and add additional amendments or contracts if necessary. Their legal expertise can protect you from bad deals, enhance your strategies and secure your objectives. Contact our Chicago area office at 630-568-6656 to discuss how we can help you with any legal questions you may have.

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