Commercial real estate transactions are highly complex processes involving large amounts of negotiation. The purchase contracts involved in these transactions are often highly detailed, and they vary significantly from property to property. What may be the case for one property may not be the same for another.
In addition, the parties involved in the transaction vary as well, and that can have a large impact on how the contract looks by the end. If there’s an imbalance of power, for instance, one side may get what it wants while the other has to deal with the consequences.
Regardless of the circumstances, there are several keys to drafting an effective commercial real estate contract.
The Free-Flowing Nature of Commercial Real Estate Contracts
First, it’s important to note that a commercial real estate contract is fairly free-flowing. There are no hard and fast rules on what structure it should take or what provisions should be included—the only real requirement is that both parties agree to it.
That said, that doesn’t mean there aren’t any best practices when it comes to these types of contracts. Various points to remember are described below.
Complete Description of the Property
The description of the property should be as accurate and complete as possible. Ideally, the contract should include a legal description, and if it does not, some provision should typically be made to allow the description to be amended later on (such as after a land survey).
Not only should the property itself be described, but other aspects of interest to the property should be included as well. These might include permissions, lease contracts, easements, IP, etc.
Buyer Contingencies and Due Diligence
With any commercial real estate purchase, there’s a certain amount of due diligence involved. The contract should provide the buyer with the time they need in order to carry out the following:
- Survey the property
- Review leases
- Examine environmental condition of the property
- Assess income and costs
- Review land use approvals, easements, etc.
- Examine the title
The buyer also needs time to secure financing, which often takes a while. If the property doesn’t meet the buyer’s expectations, provisions are often included to allow the seller to bring it up to the buyer’s satisfaction or to let the buyer back out of the purchase.
Effective real estate contracts set forth the seller’s representations of the property and any relevant warranties. These are essentially guarantees that the property meets basic requirements, such as:
- Necessary permits are in place
- The property is free of encumbrances
- The property is in compliance with zoning laws, environmental regulations, etc.
- All claims against the property are disclosed
- Documents, leases, etc. are all accurate and up to date
- No one other than current tenants have a right to occupy the property
These items should be described in clear detail, and any mitigating factors should be included.
Given the complexity of commercial real estate contracts and the heavy amounts of negotiation they involve, legal representation is a vital element of drafting the agreement. Hart David Carson LLP has a high level of experience in real estate transactions, and our attorneys are ready to assist you through this process. To schedule a consultation, contact us today.