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COMMERCIAL
REAL ESTATE IS UNIQUE
For
those unaccustomed to buying and selling commercial real estate,
the process can be quite unnerving. Experienced legal counsel
can provide a steadying hand and direction in the negotiation,
management, and successful closing of the transaction. Experienced
attorneys can help clients avoid these common mistakes:
- Making
certain factual assumptions about the property that may be unfoundedAllowing
the passion of wanting the deal to cloud judgment and override
an objective analysis of potential hidden dangersNot
knowing the right questions to askMissing
the opportunity to structure a transaction to minimize taxesNot
knowing which exceptions on the title policy can be removed
- Getting
the property under contract and with the right to inspect and
otherwise evaluate the property before making a final decision
to purchase
DUE
DILIGENCE
Due
diligence is a process, and it changes to fit the uniqueness of
every different transaction. The purpose of due diligence is to
obtain and evaluate information about a tract of land, and its
improvements if any, as well as the legal status of the buyer
and seller. The lawyer and client should meet as soon as possible
to discuss and set the due diligence parameters for a transaction.
Often as due diligence proceeds, new facts are discovered which
necessitate a change in some provision of the transaction. This
may be information about a defect in the property that makes the
property less valuable than originally thought, or its zoning
or other land use regulation. It could be that the buyer decides
to change the form of business organization that purchases the
property, or any number of other matters.
REPRESENTATIONS,
WARRANTIES, COVENANTS AND CONDITIONS
These
are the heart of a commercial real estate contract. They can have
a huge impact on the ultimate value of the deal for each party.
As a group, they should be specifically tailored to each tract
of land and each party involved.
For
the buyer, representations and warranties are designed to inform
about the condition of the property and its title, and to provide
protection against loss after the sale. For the seller, they limit
the seller's liability relating to the property after the sale.
By spelling out who is responsible for what, and who is not responsible
for what, they have the effect of allocating risk between the
buyer and the seller.
Covenants
are promises by a party that have some independence from the rest
of the transaction. Examples include covenants regarding operation
of the property during the pendency of the contract, or the subdivision
and zoning of the property. In most contracts, the performance
of covenants is a condition to the obligations of the parties
to close the transaction.
Conditions
list certain factual matters that must occur, or a state of facts
that must exist, before a party is required to close the transaction.
Common conditions include the absence of bankruptcy of each party,
or the buyer's ability to obtain financing, its ability to obtain
governmental permits or a change in zoning, or the adequacy of
utilities or access to the property.
A
well written contract will clearly distinguish between representations,
warranties, covenants and conditions, so that all parties know
what to do in order to successfully close the transaction, and
what the consequences will be upon failure.
OUTLINE
OF A TYPICAL SALES CONTRACT
A
typical sales contract might include the following provisions:
- Identification
of Buyer and Seller
- Description
of Property and Improvements
- Description
of status of title to be conveyed
- Purchase
Price
- Earnest
Money
- Escrow
Instructions
- Closing
Date
- Conditions
to closing
- Identification
of documents to be delivered at Closing by each party
- Identification
of Title Company
- Disclosures
of property condition
- Representations
and Warranties of property condition
- Disclaimers
of representations and warranties
- Covenants
of each party
- Title
policy matters
- Survey
Requirements
- Review
Period of Buyer for survey and title policy
- Feasibility
Review Periods, if any
- Survival
of representations and warranties after closing
- Prorations
and adjustments
- Termination
prior to closing, and remedies upon breach
- Identification
of when title and risk of loss passes to the buyer
- Allocation
of closing costs
- Alternative
dispute resolution (e.g. arbitration)
These
are modified and deleted, and other provisions added, depending
on the particulars of the specific contract.
SURVEYS
Most
if not all commercial real estate purchases and sales include
a survey, and all that involve a title policy will require a current
survey. Most lenders also require a current survey. Surveys identify
the tract being transferred, asa well as identifying floodplain
areas, easements and other burdens on the tract. They also allow
the parties to ascertain that any improvements do not violate
any setback or height restrictions, nor encroach on adjoining
property or easement areas.
TITLE
POLICIES
Title
insurance policies are just that-insurance policies that insure
the title to land. Title policies come with exceptions to coverage.
While some exceptions cannot be removed, an experienced lawyer
can help by negotiating to remove as many exceptions to the title
policy commitment as possible. The fewer exceptions, the better
the client's coverage. And in either event, knowing what is and
is not covered is, in itself, valuable information. A good relationship
with a title company can go a long way to removing questionable
exceptions.
Choosing
the right title company is critical. Technically, a title company
owes both the buyer and seller the same duty, and is to be neutral
between them. However, it is practically impossible to serve two
masters equally. One will always be preferred. Having a good relationship
with a title company can make a material difference in a deal.
Issues range from the ability to obtain a return of earnest money
(or to prevent such a return), to removal of exceptions to the
title policy.
There
are title policies to insure liens of lenders, and there are policies
to insure the owners. An owners policy, with the right type of
survey, insures the legal description of the tract as well as
the title of the seller. By obtaining this type of policy, a buyer
is insured against incorrect surveys and against anyone else claiming
to own the land.
WHEN
SHOULD A LAWYER BE RETAINED
Retain
a lawyer before you sign anything relating to real estate and
let the lawyer review what is to be signed before you sign it.
Real estate is often treated very uniquely under the law. A lawyer
should review a contract to purchase or sell real estate before
it is signed. Do not rely on what the other party or any broker
tells you. Once you sign a document, that document will limit
the value of a lawyer's services because it limits the ability
of the lawyer to change the deal. As an added bonus, commercial
real estate transactions often proceed the smoothest and fastest
when each party is represented by qualified, experienced attorneys.
FOR
MORE INFORMATION
Please
visit The McTexLaw Commercial Real Estate
Resource Center for more information, articles and cases of
interest. |
