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.
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