Reviewing Commercial Real Estate Contracts

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By Rochford Law Posted on January 12, 2018 at 9:29 AM

Whether you are buying, selling or managing a property, you need legal guidance and representation to protect your best interests. The state of Tennessee has legislation in place that protects both the buyer and the seller of a commercial property. In particular, the Tennessee Statute of Frauds requires, in writing, documents that comply with the strict regulations. Unless adequately drafted, these materials are unenforceable which may void the entire transaction.

Navigating the complexities of these documents takes time, and unless you obtain the right legal representation you'll not only lose out on a potentially fantastic investment, you will have wasted time and money.  Hiring a commercial real estate lawyer helps simplify the buying and selling of property. The attorney can guarantee both the purchaser and seller are protected throughout the process. A lot of detail goes into a contract, and understanding the nuances is the responsibility of a good lawyer. Although you'll want to review and discuss the options for your deal, there are a few clauses that are particularly important to review when you are buying and selling commercial property.

Zoning/Land Use Clause for Buyers and Sellers

Before investing in a commercial property, you'll need to check zoning and land use regulations. The value of your investment depends mainly upon the ability to use the property as intended. For any business planning to purchase a space that accommodates their end use, there is usually little reason for concern. However, if there are substantial changes required to run the business as intended, then a buyer must be satisfied that local zoning ordinances will permit the intended use. A buyer will want the advice from a trusted lawyer to include appropriate language if the property needs a particular permit, lot consolidation, lot split, or variance and whether the documents can be obtained within a realistic timeframe. From the seller's perspective, anyone purchasing a property and requesting a clause about the use of land and zoning will need to ensure the terms are outlined that give the buyer a chance to obtain the necessary documentation.

The Financing Clause in a Commercial Property Agreement

The average sale of commercial property includes discussions about the price, primarily when the buyer will rely solely upon the rental value to pay off the loan. Taking care to evaluate this section of the agreement is in the interest of not only of both parties but also the lender financing the purchase. When you buy a commercial property for your business, the cash flow for the property will have an enormous impact on your financial success. Most commercial contracts include a contingency which states that the buyer must qualify for any financing required to purchase the property. Retaining an attorney is beneficial to both parties because leases are not examined until after the parties enter into negotiations. Therefore, a seller wants to include clauses that appeal to potential buyers and buyers want to ensure there aren't issues involving income and expenses that could become problems later.

Complying with Environmental Regulations

Zoning and land use aren't the only issues that arise when discussing the end use of the property. Commercial properties must comply with the laws regarding environmental matters involving the use of the property. Dry cleaners are a great example of businesses that warrant special consideration. The solvents used on-site are hazardous which means they need additional environmental attention. For this reason, a buyer should request warranties and representations regarding previous ecological issues. Such investigations gives the purchaser peace of mind that the space being purchased would not have had exposure to these chemicals which might cause unnecessary damage. Other concerns include petroleum storage tanks used at gas stations. Because of consolidations in the industry, spaces that were once a gas station have been converted to strip malls. The use of an attorney is compelling when discussing these terms in order to protect both the buyer and the seller in the contract negotiations.

Understand the Due Diligence Clause

Due diligence is a term that refers to the time which a buyer is getting familiar with the property and the price. For the purchaser, this clause is vital because it allows time to ensure you comply with zoning/land regulations, obtain funding, and satisfy any necessary insurance requirements. Understandably, this process can take months, and from a purchaser's perspective, you'll want a realistic time frame included in the contract. For the seller, limiting the amount of time for due diligence means you don't have to keep the property off the market for long and possibly lose out on a potential sale. Including language in the contract such as "time is of the essence" gives the seller provisions to declare the buyer at fault and in breach of contract and move on to other prospective buyers.

The Title and Survey Clause in the Buying and Selling of a Commercial Property

Anyone purchasing a commercial property should have a thorough understanding of the benefits of the deal. Including a contingency that requires the sale to undergo a comprehensive title and survey report provides the purchaser with complete knowledge of what is included in the agreement. These terms take into consideration the extent of the seller’s property and ownership interest. A whole host of issues could crop up in the closing, so a buyer should have detailed language to protect against problems that might arise. The seller will want to provide strict rules that permit the right to terminate the agreement and limit buyer's request to a reasonable standard. This language will give the seller the chance to resolve issues before any sort of termination of the contract.

Rochford Law & Real Estate Title provides effective handling of your commercial real estate contracts. Contact us today to take the next step in your real estate venture.

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Topics: Commercial Real Estate Law