Commercial Property Contracts and Leases [leasingexecutive]

Commercial Property Contracts and Leases [leasingexecutive]

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Commercial Property Contracts and Leases

Contracts written on commercial property differ slightly from those for residential properties:

Commercial Property Contract Differences

A residential contract is not appropriate to use for commercial purposes, because there are certain things that commercial buyers and sellers want to do that the standard residential contracts may not include, such as:

• Delayed deposit
• Particular documents from Seller
• Extended inspection periods
• Specific representatives and warranties
• Closing commercial considerations
• Brokerage fees

Tip: Always use a special commercial contract that provides for these major differences.

Delayed Deposit

In a residential contract, the deposit check is customarily attached as a gesture of good faith and to demonstrate the ability to complete the deal. Apparently, commercial sellers aren’t nearly as influenced by this custom.  In commercial agreements, the deposit is usually received within two or three days after signing the contract. This gives everyone a chance to sign, so you don’t have several deposit checks floating in and out of escrow accounts all over the county.

Almost all commercial real estate investors use delayed deposits. If you are making an offer on a property, you write the contract and prepare the offer. Where the contract says Deposit, you enter whatever amount your deposit is going to be and say that it will be posted with the seller’s nominee.

The deposit is usually sent within three business days of all parties signing; in case contract negotiations take two or three weeks.  Commercial sellers consider this standard operating procedure. However, there may be an occasional commercial business proposition, resulting in a signed contract with no money deposited.

Documents from Seller

As part of the commercial property contract or lease agreement, the seller must submit certain documents to you within a specified time, after the contract is executed, such as:

• Engineering plans, drawings, surveys, and artist’s renderings
• Economic and financial studies relating to the property

In the event that you do not purchase the property for any reason other than Seller’s default, you must return all information to the Seller, together with any information that you may have compiled with respect to the property.

Inspection Period

Your commercial property contract should also state that you have an inspection periodâ€"a free look. This period is to allow you to conduct different types of inspections and pursue any lines of inquiry for the next 60, 90, or even 120 daysâ€"whatever it will take to get the job done.  During that period, whatever deposit you submitted is not at risk. The inspection period starts when the Seller delivers the documents you requested. That way, your due diligence clock doesn’t start immediately, which gives you sufficient time to address important issues, like environmental factors.

This period is extendable, so always ask for extensions. You are determining the usability of the property and may decide not to buy it. Therefore, you must be able to give notice of termination of this agreement at any time prior to the expiration of the inspection period or any extensions. If you decide to terminate the agreement, all deposits must be returned to you.

You may extend this inspection period for up to three 30-day periods without asking for the Seller’s permission. However, you must give the Seller advanced written notice before the end of the inspection period, together with an additional deposit.

Stay tuned for more, as we will follow up with part 2 of Commercial Contracts and Leases in an upcoming article.

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