What Legal Considerations Should be Made in Commercial Real Estate Transactions?

What is Corporate Real Estate?

Commercial real estate is all real property used by a company for its operational purposes. It provides companies with a productive environment to house employees, manufacture and distribute products, and provide services to consumers. This branch of real estate is associated with every class of property, land, and buildings.

What is the Role of Due Diligence in Commercial Real Estate Transactions?

The goals of due diligence in a commercial real estate transaction are to thoroughly inspect the basics of a property, seller, financings, and compliance requirements to reduce and mitigate financial risks arising from uncertainties. The process involves a detailed examination from buyers to determine zoning restrictions, potential liens, and the risk of encroachments on the property.

Due diligence preceding a commercial real estate transaction will also help alleviate post-transaction surprises through extensive research of the property including encumbrances and restrictions. Without due diligence, a buyer may not discover until after a transaction that the property is not suitable for the buyer’s needs, resulting in a costly mistake.

Due diligence typically involves the following:

• Assessing the physical condition of the property through inspection
• Verifying the legal ownership and title status of the property
• Checking that zoning regulations comply with local laws
• Examining financial legalities such as taxes, liens, and encumbrances

A seller-provided disclosure can help alleviate some of these concerns by transparently disclosing certain defects or issues related to the property. The legal duty of disclosure varies by jurisdiction and may cover items such as pest infestations, water infiltration, or environmental issues. Failure to disclose these issues may lead to legal consequences for the seller, such as breach of contract or financial liability. Adherence to disclosure regulations helps to promote trust and protects both parties from litigation and economic risks.

Considerations for Due Diligence

Additionally, proper due diligence will uncover or alleviate the risk of  the following:

• Title and ownership issues: A clean and marketable title is a must for any real estate transaction. Title searches may help to reveal any outstanding liens, easements, or encumbrances that could affect the property’s ownership.
• Taxation and assessment issues: Due diligence also involves investigating the property taxes that all corporate properties are subjected to. Property taxes should be heavily considered in the final cost of the property to the buyer.
• Contract and disclosure review: Failure to thoroughly review the terms of a contract can lead to legal consequences. To ensure the buyer has a complete understanding of the contract terms and conditions, an attorney at Saltzman Mugan Dushoff should be consulted.

What is the Importance of Zoning and Land Use Regulations for Corporate Real Estate?

Zoning regulations refer to how a property may be used and can significantly impact its value. Buyers must research and understand the zoning laws of the area. Zoning changes can affect the availability of a property’s intended use. 

The focus and purpose of zoning laws are to separate different or incompatible property uses to avoid issues such as a manufacturing facility being placed in a residential neighborhood. Exceptions and variances with zoning laws may be considered if the property causes a perceived hardship or to address a unique need that serves the public interest.

There are five major zoning divisions recognized in urban areas:

• Commercial
• Mixed residential-commercial
• Residential
• Special, such as power plants, airports, shopping malls, sports arenas, etc
• Industrial

Zoning and land use challenges may include the following:

• Zoning variance denials: Zoning variances allow a property to be used in a way that deviates from established local zoning regulations. Denials may occur if the proposed use fails to meet the strict requirements of concern or compatibility with surrounding properties.
• Land use disputes: Land use disputes may occur between neighboring property owners or with local governments. They often involve issues related to property boundaries, easements, and adherence to land use plans.
• Conditional use permits: Permits are required for certain property uses that are not permitted in a certain zone. Obtaining these permits can be difficult, especially when there is community opposition or environmental concerns.
• Rezoning challenges: Rezoning involves redefining the established use of a property to align with the owner’s purposes and requires approval from the local zoning board. Rezoning can be a challenging process due to opposition or failure to adhere to comprehensive plan requirements.
• Environmental and community impact: Projects with the potential to impact the environment or local communities often face harsh scrutiny. To avoid this, a developer may need to provide studies and assurances to demonstrate compliance with local regulations.

What Essential Documents are Needed for Commercial Real Estate Transactions?

While the intended use or goals of a property may differ, the following documents are routinely expected from commercial real estate transactions:

• Purchase agreement: A purchase agreement outlines the terms and conditions of the sale and includes details such as the purchase price, closing date, deposit amount, and contingencies that must be met before the sale is final.
• Title report: This essential document provides the ownership history, existing liens, or encumbrances for the property that may affect its title.
• Lease agreement: Commercial properties with existing tenants require review of lease agreements so the owner can understand the property’s income potential and any obligations associated with the property.
• Closing documents: To officially recognize the transaction, the seller and buyer must sign several important closing documents, including a deed transfer, a settlement statement, and any additional agreements discussed.
• Environmental reports: Environmental reports may be required to assess potential contamination or hazardous materials on the property. These reports are crucial in identifying environmental risks associated with the property and determining remediation measures, if necessary.

Do You Need an Attorney?

If you are considering a commercial real estate venture, you need an experienced attorney by your side. Saltzman Mugan Dushoff has experience with commercial real estate transactions and is ready to assist you in due diligence, contract examination, and any litigation or dispute that may arise. Contact us today at 702-330-3441 to schedule your free consultation.