Lawyers.com > Understand Your Legal Issue > Real Estate > Buying and Selling Commercial Real Estate

Buying and selling commercial property presents different challenges from buying or selling residential property, especially because the parties are generally not using standard form agreements. Agreements and their terms vary from transaction to transaction and may be different depending on whether they're drafted by the buyer or the seller in the deal. But most sales involve many of the same issues.

The Basics

There are no statutory requirements for the amount of earnest money put into escrow in a commercial transaction. So you need to carefully consider the risks and remedies available to both parties if the sale falls through. A seller may demand more earnest money, for instance, in return for keeping the property off the market to allow the buyer more time for inspection. And a buyer who is spending money on plans or land use approvals before closing may want to negotiate for more than just a return of its earnest money if the seller fails to close the sale.

In most cases, an investigation is a critical step. These investigations may be structured as "contingencies" that must be satisfied before the buyer is committed to go forward with the deal. Typically, if the property is not developed, a buyer needs at least 30 days to do an environmental assessment, obtain a survey and assure financing. Investigations may include:

• Physical inspection of the property.
• Confirming use/zoning. Is your proposed use allowed; if not, what's the process to seek approvals?
• Financing/commercial feasibility of the project.
• Review of property for potential environmental hazards (see below).
• If you're building or adding on, a preliminary soils report prepared by a soils or geotechnical engineer.

Buyers may need certain permits to develop the property so the agreement may be set up with a permit contingency for closing, which may be longer than the period for initial investigations. A seller will want to make sure that the buyer diligently pursues the approvals, so it's a good idea to put a schedule into the agreement to measure the buyer's progress.

Many lenders first require a Phase I environmental site assessment, and you may want to do one whether or not you have a lender. The "Phase I," prepared by an environmental consultant, reviews historic and current features, activities and conditions at the property to evaluate the potential presence of hazardous substances and what impact those substances might have on soil and groundwater quality. The report may also include a review for asbestos and lead-based paint in the buildings. Make sure you have time for testing and reviewing the results before locking into buying the property.

Warranties give the buyer recourse in case the seller or broker make misrepresentations. The more things about the property that the buyer can get the seller to warrant, the better for the buyer; the fewer warranties a seller has to give, the better for the seller. Of course, warranties are no substitute for a diligent investigation of the property. Discuss with your lawyer various warranties regarding rights of other parties in the property, payment of assessments or liens, foreign seller status for tax purposes, any hazardous materials now or previously on the property and the authority of both parties to enter into and perform the agreement.

The agreement should define which party is responsible for ordering a title commitment and who ultimately pays for title insurance. Practice varies from state to state. It is in the interest of both parties to get a title commitment as soon as possible and review it. An early review flushes out problems with who is in title, litigation regarding the property, encroachments, possible problems with the legal description, undefined utility easements that could interfere with the buyer's proposed construction and excess debt that would render the seller incapable of closing.

Buyers should be aware what form of deed the seller is offering and what that means to them in the way of warranties of title. Different states have different forms and meanings, so be sure to check with your lawyer and your title company about the most commonly used form. If the seller offers something less than the usual warranties, find out why. Beware of a seller who only offers a quitclaim deed; this generally makes it difficult for you to get the title company to insure your title.

Make sure the agreement addresses what happens in the event of a casualty to any improvements on the property or a condemnation of all or any portion of the property prior to closing. Buyers want to make sure that a seller is required to carry insurance on the improvements up until closing. The agreement should set out the terms for terminating the sale following damage to or condemnation of the property and should establish who gets the insurance money if the sale moves forward.

Getting Help

Although any lawyer who handles business transactions may do an adequate job of protecting your interests, lawyers who routinely handle real estate should have a better idea of how to best negotiate your agreement. In addition, they should know relevant state law and local practices. Ask these questions when you're looking for an attorney:

Does your lawyer represent buyers or sellers more often?

Do you need help with the land use process? Sometimes real estate attorneys don't know their way around the zoning/planning commission or building department in the property's locale and you'd be better off hiring a local land use specialist.

What are the lawyer's professional affiliations? Real Property Sections of the American and/or state and local bar associations? The American College of Real Estate Lawyers? What about other industry groups, such as one of the American Land Title Association groups, the Urban Land Institute or the National Association of Industrial and Office Parks?

Do other lawyers or businesses you respect recommend the lawyer? Did they find him or her responsive? As one saying goes, "time kills all deals." You don't want your lawyer to be the cause of delays.

What is the hourly rate of the lawyer you'll be using? Will an associate with a lower billing rate be doing any of the work? What is the experience of that person?

What's Next?

With a simple transaction, you might negotiate a deal and close within five or six weeks. But a more complicated deal could stretch for months. The time it takes depends on the motivation and financial situations of the respective parties, the condition of the property and requirements that may be mostly outside the control of the parties, like how long it takes to get a title commitment or a review from a land-use planning board.

Contracts to buy or sell land must be in writing and signed by the parties. The contract must identify the parties and the property. The legal name of the business entity should be used (ABC Hardgoods, Inc., a Washington corporation, for example) and it's advisable to use the legal description of the property, too(although it's not required). The contract must also state a price, the closing date and what will happen if review of the title discloses issues problematic for the buyer. There must be mutual agreement to all of the terms in order to have a binding contract.

It's helpful to give your lawyer your assessment of how badly each of the parties wants to do the deal. Is the seller more motivated by a higher price or a quicker closing date? Does the buyer have reasonable alternatives in that market? Is the buyer a better risk because there's no complicated financing?

Keep your lawyer apprised of anything that may need ongoing negotiating, such as not being able to obtain a permit within the allotted time.

Be clear with your lawyer about who has responsibility for reviewing the environmental or geotechnical reports and other information provided by the seller. Some sellers will routinely send copies to the buyer and the buyer's lawyer.

Suzanne DuRard is a Seattle attorney who has been practicing real estate and corporate law for 10 years.

Related Resources on lawyers.com^sm

- Need a form? Access hundreds of Business Legal Forms that cover a range of business legal needs such as Commercial Real Estate Lease
- Read more Commercial Real Estate articles and information
- Read more Small Business Law articles and information
- Review State Business Information Web sites
- Selecting a Good Lawyer
- Find Real Estate Lawyer in your area
- Visit Lawyers.com^SM Business Forums for more feedback and help