Commercial real estate deals require extensive experience and a thorough awareness of events that might prevent you from getting the best out of a deal.
And while obtaining financing or legal issues that arise during the due diligence period might end a deal, there are also numerous legal issues that can arise at the last minute. These legal issues are putting at risk the deal or potentially costing you hundreds of thousands of dollars if not properly addressed beforehand.
Below are some of the most common legal issues that can arise during a commercial real estate transaction.
Assumption Of Liability
It’s important to ensure that upon purchasing a property, you do not become liable for any legal violations which existed due to environmental hazards that were actually caused by the previous owner.
Not only would this leave you legally liable for any damage caused as a result of the hazard, but it would also mean you are responsible for removing the hazard and restoring the investment property to environmentally safe levels.
Commercial Property Insurance
Disputes about commercial property insurance coverage are one of the most common legal issues that arise in commercial real estate. It is to the advantage of an insurance company to pay as little as possible. Disagreements about what is covered and for how much, do occur. Typically insurance companies cover:
- office furniture
- items in inventory and stockrooms
- machinery and equipment
- lighting fixtures, HVAC systems
- the building itself
One common dispute that occurs is over the amount an insurer is willing to pay for an item. For example, the investor or tenant might expect the insurer to pay for the cost of replacing the item, while the insurer might agree to pay only the present market value – including depreciation.
Another type of disagreement is over the definition of a “fixture.” Normally that would mean any kind of equipment that can’t easily be removed from the building’s premises. However, insurers have contended that it refers only to lighting or plumbing fixtures, and not, for example, built in machinery.
Lastly, there are certain events, such as natural disasters or floods that can cause immense damage to a commercial property but aren’t covered by insurance.
The best way to make sure you’re not hit by an unexpected loss is to have a lawyer who specializes in insurance to check any contract with the insurance company before you sign an agreement.
Contract Issues
Liens on the title
A title search should always be done during the due diligence period to ensure there aren’t any liens on a property.
A lien on the property can negate the seller’s ability to sell the property, as in foreclosure, or it could simply obligate the buyer for a sum of money that technically should belong to the seller.
In the latter instance, a deal can still be salvaged, if the seller agrees to deduct the amount of the lien from the selling price.
Zoning And Land Use Issues
Considering alternative uses for an investment property is one way to build equity.
Still, a real estate attorney needs to make sure there are zoning or land use rules or exceptions that might prevent you from capitalizing on higher.
An attorney is also essential for addressing planning boards, applying for permits, and acting as your representative during town zoning committees.
Reps & Warranties
Reps or representation is a statement of a fact from the present or past that is used when entering into a contract. For example, a rep may state that the seller is not by default, or does not own a loan upon selling the property.
A warranty, on the other hand, is a promise that something is true.
Reps and warranties, though lumped together as part of the legalese of a standard contact, are actually an important way for your attorney to protect you from risk and put you in a more advantageous position.
Generally, sellers aim for adding as few reps and warranties as possible, while buyers prefer to use them to limit their risk. Conflict arises when one of the reps or warranties proves to be false, or is a deal killer.
Defects In Title
While deeds are theoretically meant to determine who owned which land, sometimes not all deeds are recorded, or the information listed in the deed doesn’t match up with the actual land mentioned.
Another problem occurs when property owners sell only partial interests in the property when a lien against the title is discovered. This can also include easements, which may not always be recorded in the public records.
While it is impossible to avoid all of these legal issues – some will pop up no matter how careful you are. Making sure you have an experienced team on your side before you sign on the dotted line is the best way to protect yourself from deals gone wrong.
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