The most common commercial property post-closing issues can be avoided by detailed forward planning, precise commercial due diligence, and effective follow-up. Post-closing issues are typically legal, financial, and practical in nature.
Caveat Emptor, or “let the buyer beware,” is a powerful watchword in any commercial real estate transaction. When a buyer takes commercial property title, they also take the post-closing authority, responsibilities and limitations that come with it. So, be mindful of the potential issues below and understand how they may be avoided.
Post-Closing Legal Issues
Clear commercial property title and full ownership control are essential if development plans and intended revenue streams are to be met. The commercial property title search will result in knowing the chain of title, existing liens, and what the title commitment will include or exclude as listed in Schedule B-II. Breaks in the chain of title or indefinite current ownership may all lead to post-closing legal issues. Additionally, post-closing lien claims by former lenders or contractors from which the buyer was not protected may have a substantial impact on the project's financial success.
Avoid by: Preparing a comprehensive purchase and sale agreement (PSA) with significant seller representations and warranties. Ensure all necessary documents, such as existing title deeds, lease assumptions, liability assignments, liens, encumbrances, warranties, zoning disclosures, easements, and mineral or other rights are delivered.
The feasibility period must be long enough to allow proper review and for appropriate follow-up actions to ensure legal and financial responsibilities are where they should be.
Simple actions, at this stage, minimize potential issues, so the current owner should deliver an affidavit confirming there are no new encumbrances after the title search, and that the title holder and seller entities are identical. This is especially important if a new legal entity has been created to sell the property.
Post-Closing Zoning, Easement, & Limitation Issues
Current or future zoning changes may prevent any change-of-use plans by the new owner. This is usually more important for a purchaser of raw land, than an existing commercial property. The existence of drainage, utility, or public access easements may affect building extensions, commercial vehicle access, parking, or other plans for which the property was purchased. Other possible issues, including federal and state protections against claims, may also become an issue.
Avoid by: Conducting a full survey and working with appropriate municipalities to see if current zoning or future changes may limit development plans. Additionally, a Phase I Environmental Site Assessment may uncover potential environmental issues. Obtaining this information enables the purchaser to determine issues that may negatively affect the development plans of the property.
Post-Closing Liens & Other Unexpected Cost Issues
Transfer of ownership is accompanied by transfer of responsibility. The property owner or tenant may have unpaid contractor bills, a GC hiring subcontractors or receiving building supplies may also have unpaid bills.
A title search will uncover any existing liens, but it will not discover other potential liens which may be lurking. Those liens may become the new owner's responsibility.
Avoid by: Conducting a title update at the time of the transfer of the property. Ensure that the title company will issue a title policy without any exceptions for mechanics liens.
General Contractors and/or the owner transferring the property may be required to sign an affidavit confirming that no bill remains unpaid or that if it is still unpaid at closing. The owner transferring the property will indemnify the title company against any subsequent lien. In exceptional circumstances (i.e. an existing lien), it may be necessary to have a lien release bond deposited in commercial escrow to protect the buyer.
Post-Closing Revenue Decrease
Tenants are responsible for paying rent and other occupancy charges. Tenants with a poor record of payment, especially since the COVID-19 pandemic, may maintain that poor record. Renewal options, fixed, predetermined, or negotiable rent and occupancy charges increases may all negatively impact projected revenue.
Avoid by: Knowing the lease terms and payment history of each tenant, and deciding how to deal with them before closing.
Commercial property post-closing issues can be legal, financial, or construction related. Successfully avoiding commercial property post-closing issues begins with understanding what issues may arise and planning ahead.
JOE ACKER >
Joe Acker joined SimonCRE in 2015 as General Counsel, where he provides a broad knowledge of real estate law and a tenacious, yet affable negotiation style that is appreciated by all parties in a transaction. Over the course of his career, Joe has built a reputation as an experienced and knowledgeable commercial real estate and corporate transactional attorney. He has been involved in more than $2 Billion worth of real estate transactions.
Joe’s expertise encompasses all facets of commercial real estate law, including review and negotiation of purchase agreements and leases, due diligence for development projects, and coordination of pre and post-closing issues. He is also experienced in corporate transactions, including the purchase and sale of businesses, facilitation of corporate contracts, and the formation of corporations and limited liability companies.