Avoid The Pitfalls With Attention To Details

Nothing can be more vexing for novice commercial Realtors® than getting the lease or purchase contract right.
   
Generally, commercial agents do not use standard forms for their transactions. This is largely due to the notion that each commercial transaction is unique. Issues related to tenant improvements, free rent, engineering studies and contingencies differ from one transaction to another. Also, the broad array of transactions – from the leasing of an office condo to the sale of a shopping center or a special use warehouse – makes it difficult to employ a format of filling in blanks on a form.
     
Whether a lease or purchase agreement, it is a legal document, and Realtors® are not lawyers. Even the most experienced commercial agent must use caution in preparing such documents. Drafting legal documents can subject the Realtor® to liability for practicing law without a license. Realtors® could also be held accountable for any legal shortcomings in the contract, or the failure to adequately explain the meaning of its contents to their clients. 

"Whether a lease or purchase agreement, it is a legal document, and Realtors® are not lawyers."

Realtors® need to know what is in the lease or purchase agreement in order to protect the interests of their clients, and to make sure the business issues are correctly addressed.  It is the Realtor’s® responsibility to understand the financial aspects of a transaction and represent the clients in negotiating those concerns.  Frequently, clients will urge the Realtor® to prepare a lease or contract for the client’s use. If the Realtor® does so, it is important to clearly identify the document as a draft and to urge the client in writing to have it reviewed by a lawyer prior to signing. 
   
In a process fraught with liability, it is important for Realtors® to know experienced lawyers who specialize in commercial real estate.  They should have confidence referring clients to those lawyers. Often, clients are inclined to turn to a lawyer they happen to know, or who handled a divorce case, or sued an insurance company, and assume that person is  experienced in the nuances of commercial real estate. 
A lawyer could change the financial aspects of the transaction in the drafting of the contract. Since Realtors® represent their clients’ financial interests, they must ensure that contract discussions with the client’s lawyer are consistent with the client’s business intentions. 
   
Commercial transactions begin with a Letter of Intent (LOI) in which the parties negotiate the proposed terms of the final agreement in written offers and counteroffers. While the LOI should be clearly marked as a nonbinding agreement, courts have examined the contents of the negotiation to determine the parties’ intent. 
The final contract should:
1) Clearly identify all parties to the transaction. All identified parties must sign it, or it is void. For a lease, this includes any personal guarantors. Whether the guarantors will sign the initial contract or a separate guaranty agreement may become an important question to be resolved.

2) Properly describe the property. If it is a purchase agreement, it should also include the identity of any tenants, the length of their leases, whether the leases can be assigned, and what deposits the landlord has from the tenants. 

3) Accurately state the purchase price, or lease rate. If it is a purchase agreement, the purchase price should include any financing contingencies, the earnest money deposit, and whether that is refundable. If it is a lease, the contract should include any negotiated “free rent” or “rent abatement.”

4) Establish the condition of the property. If the seller or landlord has agreed to make any improvements to the property prior to the settlement or commencement of the lease, those should be specified in the contract. If the property is being sold or leased “as is,” the landlord should identify which systems or structural features (roofs, windows, etc.) are warranted and will be maintained.  If it is a sale, the transfer of all existing warranties should be specified. If the property sold is a condominium, the condo association must also provide “condo docs” to the purchaser within 10 days of the signing of the purchase agreement, including the bylaws. It must also state whether there are any payments owed by the seller, or any special assessments. 

5) Include specific provisions to convey the parking rights to the purchaser or tenant, including whether the parking is assigned or unassigned, free or paid. Similarly, if there are any restrictions or provisions for signage, those need to be identified.

6) Specify zoning and usage at the time of the signing of the purchase agreement or the lease. These can be changed between the time of the signing of the contract and the settlement of the property or the commencement of the lease, which could materially affect the property’s value. If necessary, contracts should be contingent on tenants or purchasers acquiring special use permits from the city or county to enable them to use the property as anticipated. Any rights given to the buyer to change the zoning should also be included.
     
The amount and timing of commission payable to the agents involved in the transaction is another concern. Most commercial properties are not listed in MRIS. Consequently, the commission arrangements made with the listing agents are not disclosed. The agent for the purchaser or tenant should seek a written commission agreement from the listing agent, to be signed by both brokers. The commission agreement is a separate contract between the brokers and is generally not included in the purchase agreement or lease.
     
To help Realtors® better understand the issues associated with commercial realty, NVAR is providing a series of classes. Attorney Jerry Friedlander and I will be teach these classes. Friedlander is the author of “A Broker’s Guide to Virginia Real Estate Law” and an NVAR continuing education lecturer.