COMMERCIAL REAL ESTATE DUE DILIGENCE
As it relates to commercial real estate, the phrase due diligence generally refers to the buyer’s investigation and research of the property prior to completing the purchase. In a typical transaction a buyer would want to investigate and understand the state of the property’s title, any liens, encumbrances, encroachments, etc. on the property, the status of real estate taxes, perform a physical inspection of the property and building, review any leases, sub-leases, licenses to determine the rights of tenants, including the current financial and rent rolls, review building, zoning, codes, ordinances or other regulations that may affect the potential use or development of the property, review the covenants, conditions & restrictions and other association governing documents in the event the property is part of an association, identify any hazardous waste or other environmental concerns, and generally investigate whether or not there are any other material issues that affect the value or desirability of the property.
In the state of California, there is not a legal requirement as to how much due diligence a buyer needs to perform when purchasing commercial real estate. Arguably, a buyer of commercial real estate could forego doing any due diligence whatsoever and waive any right to inspect the property. However, that is obviously ill-advised given the numerous issues and complexities of purchasing commercial real estate as stated above.
The terms of a commercial real estate purchase agreement are negotiable but generally require the buyer to make a substantial deposit upon signing of the contract. At that point, the buyer will have an agreed-upon amount of days, e.g. 30, 45 or 60 days, in which to make whatever investigations and studies with respect to the property as the buyer deem appropriate. Typically, the buyer hires professionals to perform much of this due diligence, e.g. title companies, appraisers, property inspectors, attorneys, etc. If during that inspection time period, the buyer discovers something material that would affect their desire to purchase the property, the typical agreement will include a process where the buyer can give written notice to the seller and back out of the contract. What happens at that point with the return or retention of the buyer’s deposit is governed per the terms of the contract. Ideally, a buyer of commercial real estate would want to negotiate a full refund of their deposit in the event the agreement is canceled prior to the expiration of the buyer’s inspection period. On the other hand, if the buyer makes no discoveries about the property that concern them and the deadline to complete the buyer’s inspection has passed, then a buyer’s inspection rights are normally deemed waived and any earnest money deposit will be deemed non-refundable. Additionally, if the buyer discovers a material defect with the property after the purchase is complete then a typical commercial real estate purchase agreement would hold the seller harmless from any liability to the buyer for that defect at the property unless there was some clear evidence of fraud or concealment by the seller, which is always difficult and costly to prove after the fact in a court of law or other dispute resolution proceeding.
Notwithstanding the foregoing, most buyers of commercial real estate will negotiate terms in the purchase and sale agreement that obligate the seller to turn over any information and documents they have regarding the property and there also may be certain other disclosure provided as required by law, e.g. hazardous waste or environmental contamination. This exchange of information can help the buyer prioritize their investigation and flush out any issues in a timely manner.
There is not a one size fits all method for conducting due diligence on commercial real estate and the factors will normally change depending on the type of property, e.g. shopping center, office building, medical facility, restaurant, warehouse, industrial or manufacturing property, residential apartments, agriculture, vacant land, etc. Therefore, it is important for buyers to take meaningful and timely action in performing their due diligence on a commercial real estate property and consult professionals as appropriate. The attorneys at the Blake Law Firm regularly assist and consult with buyers and sellers of commercial real estate properties in California.
If you are interested in or have any questions regarding commercial real estate due diligence, the experienced and knowledgeable attorneys at the Blake Law Firm are available to help you with any and all real estate matters. Call us today at (858) 232-1290.
The information provided above does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only and do not create an attorney-client relationship.
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