Do you know the difference between commercial property contracts and
leases vs. residential contracts? Check out part 1 of this 2 part series
on Commercial Contracts and Leases for valuable information on this topic.
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
period—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 days—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.
One
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Gary
began his real estate career in Honolulu in 1966, selling land and
homes as head of one of Hawaii's largest brokerages, and has now sold
and leased real estate in Idaho, Virginia, Puerto Rico and Florida.
For the last 30+ years Mr. Tharp has been one of the leading
commercial investment real estate brokers in Orlando, Florida and a
nationally known mentor. Gary is widely regarded in commercial real
estate, having developed tools and systems of commercial property
evaluation that have become industry standards used by professionals
nationwide. He is in demand by lawyers seeking expert witnesses in
real estate cases. With development experience ranging from office
buildings to industrial parks, Gary is Florida Partner for the Lynxs
Group, national developer of air cargo facilities, Fellow of the
faculty of the CCIM Institute, and Board of Advisors with HIS Real
Estate Network, commercial real estate buying group.
