Purchasing commercial real estate is a complex undertaking that goes far beyond finding the right piece of property. From negotiating the purchase and sale agreement to navigating financing requirements and closing logistics, each stage presents distinct legal considerations that can impact the transaction’s outcome. An informed buyer who engages experienced counsel early and conducts thorough due diligence is well-positioned to avoid costly surprises and protect their investment.
Do Diligence Where Diligence Is Due
Why Is Due Diligence So Important in a Commercial Real Estate Purchase?
In a real estate transaction, due diligence is a critical process that involves inspecting and assessing a property. The due diligence period is typically negotiated as part of the purchase and sale agreement. It can last anywhere from several days to several months, depending on the property’s history, size, land use, zoning classifications, and other complexities. In some transactions, purchasers negotiate a “free look” period that permits termination for any or no reason, while others allow termination only upon dissatisfaction with specific items, such as environmental problems or the condition of the property.
Due diligence encompasses a wide range of inquiries. It typically includes reviewing existing leases, title and survey documents, zoning and land use compliance, environmental assessments, and existing loan documents. The findings from due diligence directly impact purchase and sale agreement negotiations—particularly the scope of representation and warranties, indemnification obligations, and purchase price adjustments.
Read the Contract! (and Get a Lawyer)
What Should You Know Before Signing a Purchase and Sale Agreement?
The purchase and sale agreement (a.k.a., an “agreement of sale”) is the backbone of any commercial real estate transaction. Its provisions allocate risk between buyer and seller and establish the transaction’s structure, ideally setting the parties up for a smooth closing.
Key negotiated provisions include representations and warranties, which often survive closing for six to twelve months. Seller covenants generally require the seller to operate the property consistently with prior practices during the contract period. Risk of loss provisions address the allocation of responsibility in the event of a casualty or condemnation. Regarding remedies for breach, the seller’s exposure is typically limited to liquidated damages through retention of the earnest money deposit. In contrast, the purchaser’s remedies are generally limited to termination with return of the deposit or specific performance. Specific performance is a legal order from a judge that forces a buyer or seller to complete a real estate contract instead of simply paying money damages.
Financing and Lender Requirements
How Does Financing Affect a Commercial Real Estate Purchase?
Whether a financing contingency is included in the purchase and sale agreement depends on market conditions and the parties’ relative leverage. Purchasers may negotiate for a mortgage commitment letter contingency to allow additional time to secure financing.
Existing mortgage considerations also come into play. Loan assumption—involving assumption of fees, lender consent, and potential amendments to loan terms—may be preferable to obtaining new financing. The lender independently conducts its own due diligence regarding title and survey matters in order to protect its security interest.
Title and Survey Matter
Why Are Title and Survey Reviews Critical?
Buyers must thoroughly understand the state of title, including all liens and encumbrances affecting the property. Title insurance shifts the risk of undiscovered defects to the title company, providing important protection for the buyer’s investment.
A land survey confirms property boundaries, depicts easements, reveals potential encroachments, and eliminates the general survey exception from the title policy. Purchasers should pay close attention to title objection periods, which are strictly enforced. Missing a deadline to raise objections can result in defects becoming permitted exceptions that the purchaser must accept at closing.
Wrapping Up the Deal: Closing and Post-Closing Obligations
What Happens at Closing and After the Deal Is Complete?
The closing of a commercial real estate transaction involves coordinating multiple parties, including the title company, the lender, surveyors, counsel for each party, and various consultants. The key closing documents include the deed, assignment and assumption of leases, bill of sale, FIRPTA certificate, and bring-down certificates confirming the continued accuracy of representations.
Prorations and adjustments cover rent, real property taxes, utilities, operating expenses, and security deposits. These calculations can account for many factors, particularly in multi-tenant properties with varying lease structures.
Post-closing obligations include preparation of final prorations once actual figures become available, delivery of recorded documents and the final title insurance policy, and resolution of any holdback escrows established for representation survival periods or unsatisfied closing conditions.
Closing Remarks
Every commercial real estate purchase presents its own set of legal challenges, depending on the type of property, market conditions, and the parties involved. Engaging experienced real estate counsel early in the process—ideally before signing a letter of intent—helps to ensure that potential issues are identified and addressed proactively, paving the way for a smooth and successful transaction.
Scott R. Lipson and Vivian S. Hadian are real estate attorneys in the firm’s Allentown office, where they represent clients in the Lehigh Valley in connection with the acquisition, sale, and development of their commercial, industrial, and residential real estate.
