Market makes contract details vital for buyers, sellers

Maia Albrecht

Although commercial real estate contracts may not be as plentiful in 2009 as in past years, attention to detail in drafting and negotiating contract provisions will be essential as buyers and sellers continue to grapple with concerns created in part by current economic conditions.

Although not new, following are a few of the issues that may garner more attention when hammering out the details of a commercial real estate contract in the existing market.

Buyers requiring financing to purchase real estate face unprecedented hurdles. Lending guidelines and policies are often rigorously enforced. Buyers must be knowledgeable of covenants to be imposed in financing documents and negotiate contract provisions that will allow them the time and means necessary to review the property information crucial to complying with those covenants after closing.

Financing contingency language should be drafted so as to accommodate a possible worsening of present market conditions. While flexibility will be critical, sellers will want to be assured that complying with the terms of the contract will not burden the operation or management of the property, or require unnecessary release of property information.

If the subject property is leased, then buyers will want the opportunity to thoroughly review existing leasing arrangements. Buyers may seek some form of reimbursement to counteract the long-term impact of any concessions extended to tenants. Status reports for each tenant must include disclosure of any potential default on the part of landlord or tenant.

Buyers may determine that it is more beneficial and request that tenancies or other binding agreements be terminated in advance of closing. In turn, sellers should refrain from issuing any guaranties regarding vacancies or rent collection and from establishing any post-closing escrows in support of the same, in consideration of rising rates of rental vacancies.

The property appraisal, once simply a step in gaining financing approval, has occasionally become a roadblock to closing in recent times. Now, the contract should reflect each party’s position regarding the impact of the appraisal on the purchase price. Provisions and conditions regarding the appraisal, and satisfaction of the associated contingency, are better set apart rather than grouped with other items of due diligence.

Deadlines alone are insufficient. Specific provisions for notification are also recommended. Even the cost of an appraisal may be a negotiated item. In short, the contract should provide sufficient details so as to guide the parties through this phase of the transaction.

Changes in the law as well as in the market require that buyers seeking to purchase property in a common interest association be prudent and thorough in their research of the association. Beyond review of the governing documents and current rules of the association, buyers should request and review documentation available to the seller/owner, including - but not limited to - insurance policies, accounting records, including audits, accounting statements and financial reports.

Additional information to be requested and reviewed at a minimum includes any unpaid assessment(s), late charges, interest, and costs of collection that may become a lien against the property, and a written statement from the association detailing the current regular and special assessments for the property, and any anticipated or approved changes in the assessments or fees that may impact property ownership post-closing.

Current market conditions also dictate that buyers and sellers each consider whether the other is in a financial position to complete the negotiated transaction. Buyers having a reasonable basis to conclude that a seller may file for bankruptcy before reaching the closing table should seek to limit their financial investment in the transaction prior to closing.

Buyers may also build default language into the contract permitting termination if a stated event occurs, such as a judgment in excess of a certain amount being entered against the seller. Conversely, a seller faced with a buyer who files for bankruptcy during the pendency of the contract may be most concerned with resolution of entitlement to the escrow deposit should the bankruptcy trustee reject the contract. Therefore, carefully and thoughtfully crafted escrow and damage provisions will be of greater importance.

Other methods for protecting each of the parties in such circumstances exist; however, both buyers and sellers should consult with legal counsel if any concern exists about the transaction.

Finally, current market conditions have made both parties keenly aware of the costs associated with each phase of a commercial real estate transaction. Accordingly, deadlines and methods of notification for each condition and contingency should be clearly delineated. The contract should reflect the precise and agreed upon roadmap for the transaction. Recognition of the impact of current market conditions on all facets of a commercial real estate transaction will make it more likely that the parties enter into a viable contract.

Maia Albrecht is a commercial real estate attorney with ShuffieldLowman in Orlando.