What due diligence is necessary in Florida commercial real estate transactions
Caveat emptor or buyer beware applies to commercial real estate purchases in Florida. This is primarily true because the nature of the transaction is drastically different as compared to residential purchases. Thus due diligence in such transactions is of critical importance.
Due diligence is critical in commercial real estate transactions
Buyer beware has not applied to residential real estate transactions for over thirty years. The 1985 Florida Supreme Court decision in Johnson versus Davis clearly established that fact. In a residential transaction the seller must disclose known material defects that are not observable to the buyer. This is to aid the buyer who may not be sophisticated in real estate and may even be a first-time home buyer. The reality is that the average person only buys or sells a house several times in their entire life.
In contrast commercial real estate buyers are more often a company or group of investors purchasing through a structured legal entity like a limited liability company or a real estate investment trust. Those purchases are also likely to be significantly larger in their figures. As a consequence due diligence is crucial and rests on the shoulders of the buyer.
In contrast commercial real estate buyers are more often a company or group of investors purchasing through a structured legal entity like a limited liability company or a real estate investment trust. Those purchases are also likely to be significantly larger in their figures. As a consequence due diligence is crucial and rests on the shoulders of the buyer.
What kind of due diligence should you do
The degree of investigation into any commercial property purchase is highly dependent on the nature of the transaction and the acceptable level of risk. If the purchase is simply to re-zone or convert the allowed use of the parcel then the investigation may not be as critical as the purity of the title. Conversely if the purchase is to improve the parcel or operate a business similar to the existing business there, then the physical structure and integrity of any building or improvements may become more important to the investigation.
As an example, a group of investors purchased an office complex in South Florida with the belief that they would do a better job filling the spaces and collecting rent. Unfortunately what they discovered after the closing was that each of the several buildings in the complex had serious design defects that led to water intrusion and significant mold issues. For that reason many of the prior tenants had moved out leaving the property vacant but looking attractive to an investor with the hopes of filling it up again. The result of the buyer's rush to purchase and ineffective due diligence in that instance was the loss of the property and the sizeable monetary investment. The takeaway is due your due diligence.
As an example, a group of investors purchased an office complex in South Florida with the belief that they would do a better job filling the spaces and collecting rent. Unfortunately what they discovered after the closing was that each of the several buildings in the complex had serious design defects that led to water intrusion and significant mold issues. For that reason many of the prior tenants had moved out leaving the property vacant but looking attractive to an investor with the hopes of filling it up again. The result of the buyer's rush to purchase and ineffective due diligence in that instance was the loss of the property and the sizeable monetary investment. The takeaway is due your due diligence.
Due diligence is not limited to the physical property
Depending on the property the due diligence may focus on non-physical issues like reviews of rent rolls, speaking to existing tenants, and the operation of a business or businesses on the property. The due diligence can also focus on the physical condition of the property itself. Naturally, some portion of the due diligence touches the title to the property but that is generally done even in residential transactions as a normal part of the financing process. Only where title defects or issues are found does some accommodation need to occur in the transaction if there is a correction required before closing but some issues like liens can be remedied in the closing itself.
Purchase agreements normally define the due diligence
Whether and how to undertake non-physical reviews and physical inspections is often addressed in the pre-purchase agreement such as a non-disclosure or in the purchase agreement. An existing landlord would be ill advised to allow any prospective buyer to interact with tenants who may not be aware of the pending sale. Thus most such investigations will be structured between the parties if the seller is sophisticated. Likewise physical inspections that are conducted though qualified experts requires coordination and access that is often addressed in the pre-contract or contract documents when the buyer demonstrates a commitment and the seller acknowledges that the buyer is serious.
Who should you use for commercial due diligence
Due diligence naturally reaches the property and its title. Vetting and selecting the right person or company for a particular portion of the due diligence is important. A sophisticated commercial buyer may have a team upon which the buyer relies but everyone has to start at some point. An experienced attorney can also help the purchaser bring together a qualified team of professionals such as accountants and property inspectors.
Due diligence also extends to the documents that form the transaction from the first interaction of the parties. Florida law requires that real estate sales occur under written contracts. However that requirement is only for the title transfer. It is not required to have written agreements before the sale such as non-disclosure agreement or memorandums of intent that are commonly used in the transactions.
With regard to the actual purchase agreements, residential transactions now use form documents approved by the Florida Board of Realtors known as FarBar contracts. But standard form contracts are rare in commercial transactions because each situation is unique and the transaction is commercial. Any party contemplating a commercial real estate transaction should also have qualified and experienced counsel review the pre-purchase contracts and the purchase and sale agreement before signing such documents.
An expert business litigator like David Steinfeld who has experience litigating breaches of commercial real estate contracts can be of great benefit to draft and review documents incident to the purchase as well as purchase and sale agreements for parties that intend to buy or sell commercial real estate in Florida.
Due diligence also extends to the documents that form the transaction from the first interaction of the parties. Florida law requires that real estate sales occur under written contracts. However that requirement is only for the title transfer. It is not required to have written agreements before the sale such as non-disclosure agreement or memorandums of intent that are commonly used in the transactions.
With regard to the actual purchase agreements, residential transactions now use form documents approved by the Florida Board of Realtors known as FarBar contracts. But standard form contracts are rare in commercial transactions because each situation is unique and the transaction is commercial. Any party contemplating a commercial real estate transaction should also have qualified and experienced counsel review the pre-purchase contracts and the purchase and sale agreement before signing such documents.
An expert business litigator like David Steinfeld who has experience litigating breaches of commercial real estate contracts can be of great benefit to draft and review documents incident to the purchase as well as purchase and sale agreements for parties that intend to buy or sell commercial real estate in Florida.
Prepared by business litigation expert attorney David Steinfeld
David Steinfeld is one of the few Board Certified business law experts in Florida. He has been licensed for more than 25 years. He is AV-Preeminent rated, ranked as one of the Best Lawyers in America by U.S. News and World Report, and consistently named a Florida Super Lawyer and one of Florida’s Legal Elite. Dave has also received Martindale’s prestigious Judicial Edition Award for high reviews by Judges, its Platinum Client Champion Award and has a 10.0-Superb rating on AVVO as well as a 10.0 rating on Justia, lawyer reviews websites.
Check out business lawyer David Steinfeld online for helpful videos and articles on Florida business law, real estate disputes, and electronic discovery solutions for your business. This article is provided for informational purposes only.
Check out business lawyer David Steinfeld online for helpful videos and articles on Florida business law, real estate disputes, and electronic discovery solutions for your business. This article is provided for informational purposes only.
