Buying and selling real estate are often significant financial transactions for a closely-held business. Commercial real estate sales are common, and the contracts are based on standardized forms so these transactions often look and feel routine. But these are complex contracts, involving significant risk due to the amount of money in question and the fact that lawsuits are likely to result if there are problems with the contract and transaction documents that are not resolved prior to the closing.
What are some examples of problems with real estate contracts? Or in other words, when should a business owner consider having your attorney review a real estate contract, to prevent or solve these problems? The following are examples of problems with real estate contracts that should you should look for during the due diligence period, and which should lead you to call your lawyer if found or suspected:
- If you are the seller and carrying part of the purchase price, if the buyer or seller is an entity – a corporation or an LLC – but there is no personal guarantee by a principal, or there are limits in the personal guarantee.
- Unusual exclusions or exceptions in the title insurance policy, or other indications of title problems. The exceptions are found in Schedule B2 of the title policy.
- If the property has tenants, but the rent roll, affidavit or certificate concerning leases are not complete, not up-to-date, or otherwise inaccurate. There should also be assignment documents pertaining to the existing tenants that should be closely reviewed.
- Indemnity agreements are missing or insufficient, or you are being asked to sign one that you didn’t expect or don’t understand.
- Missing or incomplete corporate documents that would prove the representative of an entity – whether buyer or seller – has the legal authority to enter into the transaction (for example, Certificate of Good Standing, Affidavit Regarding Financial Condition, Borrowing Resolution).
- Any documents that contain errors, whether typographical or substantive.
The larger and more complex the deal, the more critical it is that all documents which form part of the real estate purchase and sale transaction are complete, accurate and do not raise any red flags about underlying problems with the property or the state of its title.
If you have any questions about real estate contracts or other commercial transactions, please contact David Closson, attorney and the head of our Business Law Group, at [email protected].