The due diligence you should do before buying property in Florida
Video Description
When the Florida Supreme Court decided the Johnson vs. Davis case in 1985, it announced a distinction between commercial and residential real property. Buyer beware or caveat emptor still applies in commercial real estate transactions so purchasers must perform pre-purchase due diligence but residential sellers have an obligation to disclose known material defects to buyers.
In this video Board Certified expert business lawyer David Steinfeld explains the differences between commercial and residential real estate, the pre-closing due diligence requirements you need to do in each, and commonly litigated issues in commercial real estate. Mr. Steinfeld has handled many commercial and residential property disputes and won jury trials for buyers where residential sellers failed to disclose defects and for sellers accused of the same.
In this video Board Certified expert business lawyer David Steinfeld explains the differences between commercial and residential real estate, the pre-closing due diligence requirements you need to do in each, and commonly litigated issues in commercial real estate. Mr. Steinfeld has handled many commercial and residential property disputes and won jury trials for buyers where residential sellers failed to disclose defects and for sellers accused of the same.
Video Transcript
I'm Dave Steinfeld, a lawyer with an expertise in Florida business litigation law and the owner of the Law Office of David Steinfeld. In this video I'm going to tell you some important points to know when investing in commercial real estate. Now this video doesn't provide you with any legal advice, but for that you can contact me through DavidSteinfeld.com and while you're there please take a look at the other videos and articles on Florida business law and other topics. Thanks for watching.
Commonly litigated problems in commercial real estate transactions
Ok let's talk about commonly litigated issues in commercial transactions. Just so that you are aware there are several articles that deal with commercial property transactions not on the transactional side but on the litigation side on my website that you're welcome to take a look at. The biggest distinction when we look at what we have here we have commercial property in Florida we have residential property sometimes you'd call commercial property non-residential property but it's commonly and always historically referred to as commercial property.
The difference between commercial and residential property
The biggest distinction between commercial property and residential property is that buyer beware, caveat emptor applies only in commercial properties. If you are purchasing commercial property in Florida you're automatically deemed to be a sophisticated person, a sophisticated business person, sophisticated investor. If you're purchasing residential property in Florida that's a whole different story and we're going to speak about that in another moment.
There's one particular case that I'm going to get into in the next video in further detail but it caused the sea change in this area. It's called Johnson versus Davis and it's from the Florida Supreme Court in 1985. Some of you may have heard of it or dealt with it or you see it on the disclosures on your FarBar contracts. Johnson versus Davis changed the landscape and its progeny thereafter defined how buyer beware applies to commercial but not to residential.
There's one particular case that I'm going to get into in the next video in further detail but it caused the sea change in this area. It's called Johnson versus Davis and it's from the Florida Supreme Court in 1985. Some of you may have heard of it or dealt with it or you see it on the disclosures on your FarBar contracts. Johnson versus Davis changed the landscape and its progeny thereafter defined how buyer beware applies to commercial but not to residential.
What level of due diligence is required
What does this mean then for you as real estate investor or people that you deal with that are investing in commercial real estate. If buyer beware applies then you've got to make sure that you perform a good level of due diligence before the transaction. What am I talking about with due diligence in the commercial transaction. Talking about examining both the physical aspects of the property as well as the non-physical aspects, the title, the documents and things. And this is where you want to engage competent counsel to represent you to assist you with those documents not just closing documents, but the real estate transaction documents and you've got to check the property.
You've got to do whatever you deem necessary in order to perform your own level of due diligence. But if you don't do any due diligence that's where you'll get yourself into hot water because it's buyer beware in commercial property. And you could wind up saddled with a property that was say formerly a gas station with a buried gas tank now it's your responsibility to clean that up.
So it's good to know those things that's why people are doing phase one and phase two environmentals, they’ll do soil studies, they'll do leveling checks and things for the soil, they'll check impact fees and whatnot, you'll check what's going on with a particular county as far as development and the county comp plan or the development plans to see are you buying a property that could be within several months subject to an eminent domain claim by the authorities because they're going to put a road right through it. You'd want to know something like that before you get involved in that transaction.
You've got to do whatever you deem necessary in order to perform your own level of due diligence. But if you don't do any due diligence that's where you'll get yourself into hot water because it's buyer beware in commercial property. And you could wind up saddled with a property that was say formerly a gas station with a buried gas tank now it's your responsibility to clean that up.
So it's good to know those things that's why people are doing phase one and phase two environmentals, they’ll do soil studies, they'll do leveling checks and things for the soil, they'll check impact fees and whatnot, you'll check what's going on with a particular county as far as development and the county comp plan or the development plans to see are you buying a property that could be within several months subject to an eminent domain claim by the authorities because they're going to put a road right through it. You'd want to know something like that before you get involved in that transaction.
Pre-closing misrepresentations
There are in the commercial property transactions there are two areas that are commonly litigated. One involves the pre-closing representations made by the seller and the other one the second one deals with performance failures in the transaction. Pre-closing the parties involved in the transaction are going to have communications and conversations back and forth. A lot of that nowadays very fortunately happens by email so there's a paper trail so to speak and it's documented.
But some of it also can be supported by oral representations, there can be separate discussions between the parties. It's critically important for the real estate investor who is buying into commercial property to know that those conversations, those communications pre-transaction and prior to the closing as well should be documented because if seller makes a representation going back to my analogy with the gas station and says no that used to be a gas station but there's no buried gas tank it was removed years ago.
If that induces the buyer not to perform some sort of an environmental study and then consequently the buyer finds out that that's not true, there is a buried gas tank, a single walled gas tank, and now that's got to be dug up and removed and it's a very significant expense, as the buyer in that transaction putting yourselves in that position you don't want to be sitting in front of a judge or a jury saying well that's what the seller told me because the seller on the flip side of that coin is going to say what no I never said that. But by documenting those communications between the parties by email even following up to oral communications that you've had with a letter or a memorandum or anything even though it's a little bit of extra work you will have a record of the transaction.
But some of it also can be supported by oral representations, there can be separate discussions between the parties. It's critically important for the real estate investor who is buying into commercial property to know that those conversations, those communications pre-transaction and prior to the closing as well should be documented because if seller makes a representation going back to my analogy with the gas station and says no that used to be a gas station but there's no buried gas tank it was removed years ago.
If that induces the buyer not to perform some sort of an environmental study and then consequently the buyer finds out that that's not true, there is a buried gas tank, a single walled gas tank, and now that's got to be dug up and removed and it's a very significant expense, as the buyer in that transaction putting yourselves in that position you don't want to be sitting in front of a judge or a jury saying well that's what the seller told me because the seller on the flip side of that coin is going to say what no I never said that. But by documenting those communications between the parties by email even following up to oral communications that you've had with a letter or a memorandum or anything even though it's a little bit of extra work you will have a record of the transaction.
Real estate contract performance failures
The other area that is commonly litigated with regard to commercial property transactions is performance failures and this is based in large part on the contract and that's why I said earlier when you engage in these types of transactions you want to have competent counsel representing you examining the documents with a professional set of eyes on them to decide what does this term mean, what is this supposed to generate. It can sometimes in a commercial transaction not be as simple as one party paying money and the other party delivering a deed.
If you're involved or you're representing someone as a broker let's say who's involved with purchasing a shopping center that's got tenants in it, now you've got to deal with those tenants, you've got to deal with those leases, you've got to know what you're doing with the zoning, the planning, the improvements on the property there could be all types of little changes and little factors that are built into that transaction. And it's when those aren't performed that you wind up with post-closing litigation over those which can be very material for the transaction and very substantial.
So you want to be sure that you have clear terms and that's where good counsel comes in to make sure that those terms are enforceable and clear.
If you're involved or you're representing someone as a broker let's say who's involved with purchasing a shopping center that's got tenants in it, now you've got to deal with those tenants, you've got to deal with those leases, you've got to know what you're doing with the zoning, the planning, the improvements on the property there could be all types of little changes and little factors that are built into that transaction. And it's when those aren't performed that you wind up with post-closing litigation over those which can be very material for the transaction and very substantial.
So you want to be sure that you have clear terms and that's where good counsel comes in to make sure that those terms are enforceable and clear.
