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What are some of the common pitfalls involved in a commercial real estate deal?
Most problems arise in commercial deals from an over-eagerness to get the deal done. It pays to slow down, give yourself enough time to perform all the due diligence you need, give yourself all the contingencies you need in the purchase agreement, and mitigate as many risks during due diligence as possible. It’s much more difficult to handle problems that arise during a deal if you haven’t laid the groundwork for a successful deal and are simply scrambling for solutions at the last minute.
When problems do arise, it’s tempting to simply dismiss them and assume they can be handled later. This is usually a mistake. Some issues are impossible to work through once a deal closes. Most issues can be handled post-closing, but at greater risk and expense and often with less satisfactory results. It’s always worth the time to take a step back, examine the problem with your lawyer, and discuss it – does it make more sense to take care of it now or push it off until after closing? What’s the best way to handle it?
In commercial real estate, as in life, it pays to take a step back and look at the big picture before rushing ahead with the details. Some of the most common pitfalls involved in a commercial real estate deal arise from the failure to look before you leap.
For example, every lawyer dreads the call from the client who, to save time and money, negotiated and signed a purchase contract or lease without involving the lawyer and is now embroiled in a dispute involving his or her rights or responsibilities under the document. Unfortunately, at that point, the client is at a significant disadvantage, often because the document doesn’t say what the client thinks it says or because the document doesn’t accurately reflect the terms that the client thought he agreed to. Consulting a lawyer first can help to ensure that the transaction documents are drafted to accurately reflect the parties’ agreement and that the parties understand their rights and obligations. A lawyer will often bring up important deal points that the parties haven’t considered. And a good lawyer can help to ensure that, with an investment of time and money up front, the parties’ relationship runs smoothly in the long term.
Another pitfall in smaller commercial deals arises when parties succumb to the temptation to use off-the-shelf forms, either from an old deal, from the Internet, or from a third party whose interests may not be completely aligned with the client’s real estate documents often seem simple – a deed, for example, is just a few pages long, so how complicated can it be? But in shorter documents, every work takes on greater importance. Take a deed, again – changing the words “general warranty” to “special [or, in Ohio, limited] warranty” results in a significant change in the seller’s obligations and buyer’s rights. Notary clauses are notoriously tricky and must be drafted correctly to be effective. A lawyer can help the client navigate these (often mind-numbing) complexities. In addition, a lawyer is legally and ethically obligated to represent her client’s best interests. This isn’t necessarily true of all other consultants, who may not be required to draft documents in the client’s best interests and may not be qualified to explain the client’s legal rights and responsibilities. And, of course, the Internet is the Wild West of legal documentation. There is simply no guarantee that the deed you downloaded is in your best interest, or even correct under state law.
Another common pitfall is not thinking through commitments made during early stages of a deal. For example, a letter of intent may not be legally binding, but it reflects an understanding between two parties, and if one side tries to change the terms agreed to in the LOI during the negotiations of the final documents, the other side may view it as a failure to negotiate in good faith. This may not have legal consequences, but it can sour a deal quickly and isn’t the best way to start a business relationship.
Failing to plan ahead and pay attention to details also often causes problems in commercial deals. For example, commercial lenders often require estoppel certificates and subordination, nondisturbance, and attornment agreements from each tenant (or, at a minimum, the most significant tenants) in a building being purchased or financed. This often seems like a pesky detail when the parties are negotiating big-picture terms like interest rates and guaranty terms and performing due diligence on the property, and it can end up being pushed to the end of the deal timeframe. But if it is not handled early and pursued diligently, it can delay the entire deal.
Another problem that arises in the commercial context, during the rush to close, is giving in to the temptation to push too much to post-closing. Some details (such as a few estoppels and SNDAs from small tenants, as described above) may be appropriately handled after closing. Others are much easier to handle prior to closing and may result in unintended risks if pushed to the post-closing period. A lawyer can help you sort through which risks are worth taking.
For more information on pitfalls you should be watching out for during a commercial real estate transaction, contact Griffin Fletcher & Herndon LLP today to speak with an experienced commercial real estate attorney.
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