Purchasing commercial real estate represents a large expenditure and a transaction that most people do not do frequently. Although a qualified attorney is a necessity for such a large undertaking, it helps to know the basics. Most attorneys will tell you that an informed client makes a deal go much smoother.

Are You In or Out?

Like any contract, once signed, a purchase agreement is binding. By executing the contract, each party agrees to the terms of the deal spelled out within. A typical purchase agreement, however, includes contingencies and timeframes that make the deal more difficult to get out of.

Earnest money accompanies the executed agreement as a sign of good faith. That money is not forfeited until after the due diligence period has expired. Before that, if the buyer proves the property does not meet certain contingencies spelled out in the contract, he can recoup part or all of his money.

When the contingency period has expired, the buyer can still walk away from the deal, but it will cost money. In some cases, the purchase agreement is structured to include a second payment of earnest money following the contingency period, increasing the cost of breaking the deal after that point. Be aware of these clauses in the agreement, and make sure you allot enough time to complete due diligence.

Build Equity, Not Inequity

Inequitable conduct exists when a party to a contract, either the buyer or the seller, does something that is meant to deceive. The action can be as simple as non-disclosure of known property conditions, or it can involve actions related to the property carried out with a third party.

A claim of inequitable conduct could result in a court decision to void the contract, so it’s important to consider. Kearns suggests that even when the contract includes clauses meant to protect you from typical risks — such as specific terms under which the deal becomes binding — an inequitable conduct claim could prevail.

Protecting yourself in commercial real estate purchase agreements against inequitable conduct includes more than just the wording of the contract. Here are some tips:

·         Avoid delays in signing and transmitting executed contracts. The deal can fall apart in the cracks. When you receive a signed contract, execute and return it immediately.

·         Don’t rely on clauses in the contract to protect you. Protect the fairness of the deal by communicating all relevant information.

·         Speak up quickly if you change your mind on the contract. The opposing party needs to know as soon as possible that they are free to negotiate another deal.

Negotiate a Good Deal

The essence of a good real estate deal is that everyone gets what they want. The buyer acquires a property to suit his needs, and the seller is fairly compensated for giving up his property. A purchase agreement represents balance between these two parties. Being aware of the elements of a contract can help negotiate a robust deal.

Negotiations should focus on the due diligence portion of the agreement. When completing your due diligence, you may find issues with the title, environmental studies, or zoning. Some of these issues could be remediated by the seller. Other issues may affect the value of the property without changing your desire to own it.

Commercial real estate deals typically fall apart due to these elements:

·         Tile defects
·         Problems with land use and zoning
·         Debt service and lender requirements
·         Mechanics liens
·         Market fluctuations
·         Environmental contamination or hazardous waste

When any of these issues arise, it represents an opportunity to negotiate. You may want to request more time before forfeiting earnest money to address issues, ask the seller to cover or contribute to costs associated with remediation, or even alter the amount of property you’re willing to purchase.

Protect Yourself

As the buyer, your biggest concern should be the due diligence period. Make sure it’s long enough for you to complete the proper inspections.

You’ll also want to check the remedies set forth in the contract. If you discover a problem during due diligence, is the contract automatically null and void, or do you have to give the seller a chance to remedy?

Be clear on the timeframe and contingencies that bind the contract. If disaster strikes after the contingency period is completed, but before the deed is transferred, are you locked into completing the deal?

Commercial purchase agreements are similar to any other contract. You want to read and understand the implications of the contract, especially the contingency clauses. Once you sign an agreement, it could be difficult or costly to back out. Most importantly, always hire a qualified attorney to represent your interests. Protect yourself, and don’t try to do it all on your own.