Different rules apply in commercial sales and residential sales. If you are representing either the buyer or the seller of commercial property, you need to know these differences.
No Duty To Disclose Latent Defects
The most important difference in residential and commercial sales and leases is that in commercial sales and lease agreements, there is no duty for the seller to disclose latent defects. As we all know, residential sellers do have a duty to disclose latent defects. If you are representing a buyer or a tenant of a commercial property, it is Buyer Beware! There may be structural problems, mold, termites, and HVAC issues, it doesn’t matter. The seller does not have to disclose. Even if the seller is directly asked whether the property has any latent defects, the seller does not have to answer. It is up to the buyer to fully inspect any item that is of concern to that buyer and that’s often the seller’s answer. The seller cannot lie. If the seller lies, that would be fraud in the inducement of a sale. The due diligence period in a commercial contract if generally much longer than in a residential contract. It is often a period of months to get all of the needed inspections.
Of course, a seller may decide to disclose defects, even though not required to do so.
Buyer beware! Get inspections throughout!
A REALTOR® Has a Greater Duty to Disclose than the Seller of Commercial Property
As REALTORS®, we owe a duty to disclose latent defects of which we have knowledge. Our duty is to disclose “All material adverse facts pertaining to the property that could not have been discovered by the buyer in a reasonable inspection.” Knowledge is the key. If a REALTOR® does not have knowledge of a latent defect, they cannot disclose what they do not know. That’s why listing agents of commercial properties often do not ask sellers whether there are any defects in the property.
The Buyer Has the Duty to Discover.
Caveat emptor fully applies in a commercial transaction. Buyers of commercial properties are assumed to be sophisticated and to know how to protect themselves. If the buyer intends to build, zoning, soils testing and environmental testing are important. If the buyer intends to operate a retail store, HVAC, utilities, electrical, mold, structure and more are important. Every buyer is unique and have unique needs to know.
GAR Commercial Forms Package
You have probably noticed that there is not a commercial disclosure form in the GAR Commercial Forms package. Of course, that is because there is no duty to disclose. There is also not a financing contingency. Normally, the buyer figures out their financing during due diligence. That isn’t to say there cannot be a financing contingency.
In addition to the GAR forms, many commercial brokers use the Atlanta Commercial Board Forms.
Seller Representations and Warranties
A form of buyer protection often found in commercial contracts is the exhibit “Seller Representations and Warranties (GAR CF22).” To protect a buyer, it should be added to a commercial buyer’s offer and written to survive the closing of the transaction. The GAR contract includes the representations as surviving the closing. Using this form, the buyer can pick those representations that are important to that buyer. The issues most negotiated in commercial contracts are the representations and warranties and how long they last.
Earnest Money In a commercial transaction, the closing attorney, a title company, seller’s agency or the buyer’s agency can hold earnest money just like in a residential transaction. The GAR Commercial Purchase and Sale Agreement allows disbursement of the earnest money in a disputed situation to be either by a reasonable interpretation by the Holder or by arbitration.
On most larger deals, the parties generally will not want an agency making a reasonable interpretation of a dispute, so most will name title companies or closing attorneys as the Holder. If a resolution to an earnest money dispute in a large transaction can be reached, both attorneys and title companies will often interplead the funds into a court and step away.
Other items of note:
A change was made to the Temporary Occupancy Agreement (TOA) in the June 1, 2023 contract forms. The change adds language in P.11 that attorney’s fees would be owed by the seller if the seller fails to vacate the premises as agreed and the new owner has additional costs or loses a tenant or a new sale. This is in addition to the right to attorney’s fees in P.12 if the situation goes to litigation. It gives the new owner a better bargaining position with the holdover seller without going to litigation.
Buyer Access to the Property
The TOA allows the new owner to enter the premises to “inspect, repair and maintain” (P.9) as well as to “inspect, examine, survey, meet contractors and prepare for Buyer occupancy of Property.” (P.10)
Some new owners do abuse these rights. To protect seller clients against abuse, consider adding the following language in the Special Stipulations on the TOA:
Holdover Daily Rent
The Seller sometimes needs to be encouraged to vacate the property on time. If the buyer has to file for an eviction, it takes time. Therefore, we recommend a daily holdover rent cost that gets the Seller to leave. Depending on the situation, a daily fee of $300, $500 or even $1,000 is not unreasonable. You don’t want to have a cost that is cheaper than a hotel and storage.
Rent for the Agreed Period of Occupancy.
Note that there is not a place in the GAR TOA for a rental fee during the agreed period of occupancy. If a fee is negotiated, be certain that its timing and method of payment is consistent with the terms of the buyer’s mortgage. An alternative way for a seller to pay a negotiated fee is to lower the price of the property to the buyer. It is common for the seller to remain in the property for no charge at all as a negotiated term of the sale.
RE/MAX Agent Responsibilities
Please review the following agent responsibilities for rental and property management situations. Additional detail can be found in the RMAA Policy and Procedures Manual.
Property Management Responsibilities Any Associate dealing in property management shall:
Property Management CE Courses
Properties Owned and Managed by a RMAA agent or associate broker.
Move-In, Move-Out Inspection Form
Security Deposits should be held by the landlord unless the Company is under a Property Management Agreement with the Landlord. The appropriate GAR form should be used in any lease where the Company is the Holder of the security deposit. In the rare situations where the Company is to be identified as the Holder of the Security Deposit while NOT managing the property, the Associate must:
Lease Purchase Agreements Not Recommended
Broker advises against the use of Lease Purchases in relation to a real estate transaction. In situations where a tenant wants to establish a right to purchase rented property, it is best to execute a Residential Lease and an Option Agreement.
July 14, 2023
We often see special stipulations submitted by a buyer regarding low appraisals . A typical special stipulation sets a high price that a buyer will pay, but not a low price that the seller will accept. Listing agents can protect their seller against being forced to sell based on a very low appraisal. Consider the following scenario.
A property is under contract for $735,000 with the following special stipulation:
“Buyer agrees to pay $5,000 over the appraised price if the property does not appraise for the offer price.” The property does not appraise for the offer price and instead appraises at $660,000.
Does the Seller have to sell the property and at what price?
Because a special stipulation controls over previous inconsistent content in a contract, the special stipulation changes the price that the buyer pays. The appraised price is $660,000, so the seller has to sell at $665,000, $70,000 less than the original contract price. If the seller refuses to sell at $665,000 and goes to court, a court would likely agree with $665,000.
To protect your seller, a better special stipulation should include both a low price a seller will accept and a high price that a buyer will pay. If you are representing the seller, counter with this language to set a low price:
Buyer agrees to purchase the property for $5,000 over the appraised price. Notwithstanding the above, the purchase price shall not be more than $____________ nor less than $_____________.
Source: Weissman Academy, Seth Weissman, Secrets of Safeguarding You and Your Seller.
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