Negotiating a commercial property sale is often a complex and protracted process. Although most commercial real estate purchase and sale transactions in Cleveland and Northeast Ohio follow the same workflow, every transaction is different. The commercial real estate attorneys at Manning & Clair can provide support and guidance to make the process less stressful and achieve the most positive outcome as possible when negotiating a commercial property sale.
What do you need to keep in mind as you enter a negotiation to buy or sell a commercial property? Manning & Clair offers the following reminders:
Term Sheets/Letters of Intent
Once a buyer and seller agree to enter a transaction for a specific property, the parties typically enter either a term sheet or a letter of intent (LOI). There is no significant difference between the two, and both types of agreements can take many different forms. Although LOIs are not binding on the parties, the key financial and business issues spelled out in the LOI are customarily treated as non-negotiable once the LOI is signed.
Even after the parties have agreed to the basic terms of the transaction covered by a thoroughly drafted LOI, several concepts remain open to negotiation and are typically addressed in the purchase and sale agreement.
Due Diligence for a Commercial Property Sale
A due diligence period gives the buyer the right to investigate various aspects of the property and the seller, and to terminate the purchase and sale agreement and receive a refund of its deposit if it finds any matters unsatisfactory. The buyer and seller typically negotiate this.
A buyer’s due diligence investigation typically falls into several categories, including the review of:
- Title and survey matters
- Leases, management agreements, and service contracts
- Environmental and engineering matters
- Use and zoning compliance
While the LOI typically includes the term of the due diligence period, the buyer and seller must often negotiate other details in the purchase and sale agreement:
- The amount of insurance buyer must provide to cover its actions on the property
- The notice mechanics for buyer’s election to continue or terminate the contract at the end of the period
- Any due diligence extension rights
Representations and Warranties
The involved parties typically negotiate representations and warranties in commercial real estate transactions and each party’s negotiating position often governs the outcome. The primary role of representations and warranties is to set out the facts the parties relied on in agreeing to enter the transaction.
Representations and warranties in commercial property sale and purchase agreements typically cover:
- The seller’s formation and authority
- Leases
- Environmental matters
- Management and other service contracts
- Litigation, liens, and judgments
Representations and warranties are equally important to both buyers and sellers. This is because the parties often use the representations and warranties in a purchase and sale agreement to determine risk.
Covenants
Unlike representations and warranties, which are limited to a particular section of a purchase and sale agreement, covenants and rights appear throughout the agreement. Covenants relating to the use and operation of the property during the contract period are of importance to both parties and heavily negotiated.
Typical seller covenants include:
- Rights of the seller to enter new leases and contracts
- Seller’s obligations for maintenance and repairs
- Maintaining insurance for the property at the same levels as existed on the contract date
Closing Conditions for a Commercial Property Sale
A seller has fewer closing concerns and thus fewer conditions than the buyer. If the buyer comes to the closing with the purchase price, the seller is likely to close. Customary conditions to a seller’s closing conditions include:
- Buyer’s funding of the purchase price
- Continued accuracy of the buyer’s representations and warranties
- Buyer’s execution and delivery of the closing documents
The Manning & Clair Difference
Manning & Clair Attorneys At Law have extensive experience providing Cleveland-area businesses of all sizes with expert advice as they navigate the turbulent waters of a real estate negotiation. Our experience and knowledge will go to work for you.
Manning & Clair Note: The information shared here is intended for a general overview and discussion of the subject. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. Please consult an attorney for advice about your individual situation.
