Purchase and Sale of Commercial Real Estate

Negotiation Issues

The purchase and sale of real estate involves a variety of legal and business issues.  The key matters may be quite different depending upon the goals of the purchaser.  For example, a purchaser may be mainly concerned with the issue of its ability to use the property for a specific use, e.g. agriculture or another pre-existing use;  another purchaser may be only interested in changing its usage to a higher value use such as residential, industrial, retail office or other commercial uses. There are a variety of key concerns which a purchaser should review and negotiate carefully before signing a written offer to purchase commercial real estate.

Environmental Concerns       
The purchaser should obtain representations and warranties that the seller is not aware of any environmental problems associated with the property.

For a large-scale purchase, a prudent purchaser should make its review of a Phase I Environmental Site Assessment a contingency.  If the environmental report indicates potential environmental problems, the purchaser may decide to not purchase the property.
Alternatively, the parties may decide to obtain a Phase II report to determine the nature and extent of potential environmental problems and the estimated remedial expenses.  If the Phase II reveals additional environmental problems, but the purchaser still wishes to acquire the property, it will have other options, including negotiating a lower purchase price; requiring that problems be remedied at seller's expense prior to closing; establishing an escrow account at closing to pay for property clean-up costs; and requiring the seller to indemnify the purchaser for future remedial expenses.

The purchaser should thoroughly inspect the property before completion of the transaction.
The purchase agreement should allow the purchaser sufficient time to complete a thorough survey and inspection of the property for structural defects, HVAC, electrical, plumbing and mechanical problems, environmental matters, soil analysis and other matters of concern to the purchaser.

Option to Purchase
If the purchaser has lingering doubts, it may not need to purchase the property unconditionally.  Alternatives include an option to purchase in which the purchaser has the right but not the obligation to purchase the property during a specified time period.  The purchaser may sign a short-term or long-term lease with an option to purchase the property.  In this approach, the purchaser may investigate and use the property before deciding to complete the purchase.

A potential purchaser may negotiate a right of first refusal as a part of a lease in which the seller-landlord agrees to permit the purchaser-tenant to purchase the property in the event that the seller-landlord receives a bona fide written offer to purchase the property upon identical terms and conditions stated in the 3rd party offer. Transaction Costs
Although the allocation of transaction and other costs is often based on local custom, there is absolutely no reason that these costs cannot be shared in some other manner.  Because the amounts involved can be substantial, both parties should pay particular attention to the allocation of costs associated with roll-back taxes, special assessments and broker commissions.  The allocation of all costs should be considered prior to beginning contract negotiations.  Otherwise, for example, the seller may receive a smaller payout than originally anticipated.

Title Matters
The seller must deliver good and marketable title to the property, free and clear of all mortgages, liens and encumbrances.
The purchaser will need an owner's and lender’s policy of title insurance to ensure that title has no defects.  There may be other issues such as existing tenants, options to purchase, mechanic's liens, tax liens, foreclosure issues, problematical easements, building and use restrictions, or other matters which may affect title or make the property unsuitable for the purchaser's intended use.

The purchaser should ensure that it will acquire precisely what it anticipates it will acquire.  Particularly for development or rural properties, a survey is critical to ensure that there are no encroachments into or over the property lines, to ensure there are no set-back violations of local zoning ordinances and the utilities and recorded easements and other items are not located in locations detrimental to the intended usage.  For example, if the purchaser plans future development, it should be determined that it will not encroach upon existing easements or violate set-back requirements.

Tax Matters
Purchase Entity
Utilities & Easements
Impact of a Failed Transaction
Seller Concerns

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