Dissecting Commercial Real Estate Agreements: Important Components and Advice

Commercial Real Estate Agreement: What It Is

Commercial Real Estate Agreements are essentially a contract between the parties involved in a property transaction, clarifying their respective roles and obligations. The two core parties almost always include the buyer and the seller, although there can often be more agreements involved with other parties to the transaction involved. These agreements are legally binding contracts, which means that they have to be carefully considered, negotiated, drafted and signed.
The fundamental purpose of a Commercial Real Estate Agreement is to establish the legal terms of the property transfer. With this agreed upon in writing, all parties to this agreement understand their contractual obligations to one another. This makes the obligations binding under law , and only allows one party to defect under special circumstances, primarily if the agreement can be voided or annulled. The terms of a standard Commercial Real Estate Agreement should include at the very least: necessary parties, identification of the property, the purchase price, the initial deposit, and closing date. Other provisions or areas of formulated language could include: earnest money deposit, title insurance, liens, title issues, existing leases, encumbrances, mortgages, phasing, right of first refusal, preemptive rights, financing contingencies, judgments, property inspections, condemnation, environmental issues, nondisclosure, costs of sale, possession, zoning, liabilities, indemnification, releases and warranties, covenants, and cost sharing.

Key Components of a Commercial Real Estate Agreement

A commercial real estate agreement, or commercial lease, is a legally binding contract between the property owner or landlord (lessor) and the individual, business or group renting the property (lessee). Depending on the type of property being leased, and what the property will be used for, the commercial lease may cover a wide range of details. Below are some of the most common elements found in a commercial lease.
Description of Property
The first major component in a commercial lease is a thorough description of the property to be leased. It should include the following:
Information about the Lessor and Lessee
The commercial lease should describe the parties involved in the agreement, including the names of all individuals or businesses that will occupy the space. The lessor should also be listed along with the physical address of the property owner if they are not occupying the property themselves.
Financial Terms
These are arguably the most important pieces of information a commercial lease should include since they are the financial obligations of both parties, pursuant to their agreement of how much the space is going to cost or how much they are receiving for leasing that space. Financial terms will include all the following:
Legal Obligations
A commercial lease should also contain all the legal obligations of the landlord and tenant. This could include statements such as "the tenant is not to engage in any illegal activity within the property" or "the landlord will offer a month-to-month lease extension if the tenant provides notice." A commercial lease can cover any number of issues, so it is important for both parties to discuss what rights and obligations each will have, and get them all in writing.
Both commercial and residential leases may seem straightforward at the outset, but these are legally binding contracts that should be given careful consideration by both the lessor and lessee. Certain common issues can arise that could put either or both parties at risk if they are not addressed.
For example, what happens if one of the parties to the agreement passes away before the lease is up? Or if the property suffers damage and the tenant wishes to vacate without penalty? Having provisions in place to address these matters is extremely important, hence the reasoning for having a comprehensive commercial real estate agreement.

Commercial Real Estate Agreements: Common Types

Commercial real estate agreements can take many forms, and their terms dictate expectations between the parties involved. The most common, of course, is a commercial lease agreement, which is not subject to the same type of regulations as residential leases — such as rental laws or mandates to provide tenants with essential services like electricity, water or heat — and technology is now even permitted by many jurisdictions to give landlords and tenants greater flexibility in negotiating terms. Lease agreements may cover land, retail space, office buildings, warehouses, factories, or even apartments and be for a specified term or one designed to continue indefinitely (though at-will agreements may later be realized as implied contracts).
Commercial purchase agreements, on the other hand, cover the sale of property that is intended to be used for a business or other commercial purpose. In addition to defining the terms of the sale (i.e., price, earnest money, financing, inspections) like any other purchase agreement, commercial real estate agreements of this nature may also dictate what happens to the premises post-sale. For instance, if the buyer intends to convert apartments to commercial space, the seller may wish to include in an agreement protection against potential nuisance claims by other residents or businesses. Likewise, a buyer has the right to protect its own interests by ensuring a lease is transferrable, including the rights necessary to enforce that lease, and clarifying terms such as whether the seller has the right of first offer if more space becomes available.
Joint venture agreements are typically formed between two or more parties to coordinate the construction or development of a specific commercial or residential project. A developer or builder may enter into an agreement with a land owner to share the costs and profit of building a retail store on a vacant piece of property, which would include terms about each party’s obligations for the costs of development, what kind of store will be built, the expected return on investment and how profits will be distributed.
Other forms of commercial real estate agreements include by-laws for planning a board of directors for condo associations or appointment agreements for property management. There are many ways in which commercial real estate agreements can benefit the parties who enter into them. It is always important before entering into any agreement to understand the rights granted, obligations incurred, and whether an agreement affects other agreements with the same parties or any third parties. A failure to do so may lead to problems later.

Legal Considerations With Commercial Real Estate Agreements

Recognizing the complexities of commercial real estate transactions, entering into a commercial real estate agreement requires a thorough understanding of the law. In addition to securing financing and completing due diligence, there are key legal considerations that can impact the use and transferability of commercial real estate. While this section does not include every legal consideration, it does touch on some common issues that arise during commercial real estate transactions.
Zoning Permits – Before entering into a commercial real estate agreement, the parties should understand the local zoning ordinances applicable to the property to ensure that the property is correctly zoned for the intended use. Zoning ordinances set forth specific rules governing how a property can be used and the types of businesses that can operate on the property, including the use of the buildings on the property. If a property is not zoned for a particular use, the buyer can petition the appropriate authorities for a variance or special use application or the ability to use the property for a particular purpose not permitted in the local zoning ordinance.
Building Code Compliance – In addition to zoning ordinances, commercial real estate is also subject to federal and state public safety regulations, including building codes, fire codes, and zoning regulations. Each government authority has its own public safety regulations. Local governments have additional zoning regulations imposing a set of restrictions and obligations on owners and lessees.
Dispute Resolution – A commercial real estate agreement should include a dispute resolution provision addressing any issues that may arise between the parties at a later date. This section can establish the procedures for resolving a dispute, including mediation, arbitration, and litigation.

Common Mistakes With Commercial Real Estate Agreements

The following common mistakes are often overlooked by many new and old users of commercial real estate agreements:

1. Failure to register the agreement against the property

It is vital that your real estate purchase agreement be registered at the local land titles office on the actual land title document and any other relevant documents so that it becomes a burden on the land title. This provides notice to the public that a purchaser (or vendor) obtained an interest in that land.
A critical aspect of real estate transactions is compliance with real estate instruments legislation. If you fail to register a real estate agreement against the land title, you may lose your rights under the agreement. There are many other examples of government legislation that apply to the real estate industry that are not limited to one type of instrument, including the Land Title Act, Builders Lien Act, Freedom of Information and Protection of Privacy Act, Identity Theft and Prescribed Information Act (British Columbia), Act Respecting the Publication of Statutes and Regulations, Agriculturists’ Relief Act etc.

2. Failure to protect the purchaser with a good and marketable title

Purchasers must be aware to obtain a title search and evaluation of the property to ensure that vendor holds the title that he is selling, are either a good and/or marketable title if these terms are of essence to your agreement. You will also need to obtain a land survey of the property to assess any boundary issues that may affect your decision to purchase. A land survey will help you determine whether there are any issues with respect to your property lines or infringement by your neighbours on your land. Purchasers should consider obtaining a title opinion from a lawyer to ascertain whether the agreement will work for them, both in keeping in mind that you will be required to pay property taxes on the land, receiving full and complete market fee simple ownership rights and the possibility of owner-payed underground water well and/or septic tank systems. Further, if a purchaser found a parcel of land to be in violation of the bylaw rules in their municipality, the seller may be forced to reduce the purchase price, just as the seller would be entitled to raise the purchase price if property became rarer as a result of an increase in demand or property scarcity.

3. Failure to account for zoning and land use permits

It is important that your purchase agreement include safeguards for you , the purchaser, to ensure that the use you intend on operating on the land is within the permitted uses allowed by the local zoning bylaws. The purchaser could end up purchasing land that although is an absolute good and marketable title, is not able to operate the intended business or function that they had planned for the property.

4. Misrepresenting the substance of the agreement

One of the most frequently missed pitfalls in real estate purchase and sale agreements is failing to accurately reflect the parties’ intentions of the agreement. Therefore, it is imperative that a purchaser include all the conditions that you require, such as obtaining financing, making inspections of the property and your desired uses, title opinions, and/or zoning approvals in the transaction to protect your interests. Failure to record this information may result in the loss of deposit and/or set-off of additional fees and costs, as determined by a court of law.

5. Misleading legal advice

In some instances, professionals may provide legal advice and obtain legal opinions when they are not really qualified or allowed to do so. Therefore, be cautious in relying on information your family, friends, neighbours, real estate agents and mortgage brokers provide you with, as the authoritative source of your legal information, especially if they are unregistered and/or not members of the Law Society of British Columbia. The information that they provide you may be correct, but they may not have all the relevant facts, context and/or may misinterpret what you are asking the question about. Similarly, you should also be wary of taking a friend or colleague’s recommendation of a solictior/lawyers to you, as we: 1) cannot comment upon the advice and counsel provided to your friend, neighbour or colleague, as you are only receiving a portion of the whole picture; and 2) it is important that you also have a good rapport with the solicitor/lawyers and have compatible personalities and communication styles.

6. Final sale/purchase agreement requirements and conditions

In most instances, you should be cautious in proceeding with completing a deal without the use a formalized purchase/sale agreement as is provided in a commercial real estate purchase and sale agreement, as you may be at risk of losing your deposit or payment of additional fees and costs.

Advice for Drafting and Negotiating Commercial Real Estate Agreements

In order to assert your rights, you should know how to properly draft and negotiate a commercial real estate agreement. Following these strategies will give you the best chance of ensuring that you receive the terms you want or at least something in the ballpark.
Disclosures: When you give disclosures in response to a legal request, do not volunteer information. Make sure your statements are fair and accurate, written in business style.
Name Agreement: Use the word "agreement" (as in agreement to purchase), not "contract." There is a difference: A contract doesn’t have to be written and its terms and conditions have to be agreed to.
Wait on Changes: Don’t allow for changes that are impossible or difficult to accomplish. Don’t give an answer immediately, wait until your attorney has had time to review the proposal. You may be able to help avoid unnecessary work when the changes are going to be difficult but don’t help them do all the heavy lifting when they are incapable of completing the task.
Insurance: Require insurance to be part of the deal. You cannot transfer liability or waiver without insurance in place. Without insurance, you have the potential of taking on a lot of risk.
Obligation or Opportunity: Avoid too much emphasis on the term "obligation to…" The client may have more of an opportunity. Be careful that it’s not perjured. Obligation may be more appropriate if landlord has a duty or responsibility.
Affect sales agreements: When you’re talking about conditional sales, discuss such things as ability to cancel contracts or joint use of space. Again, it’s important that such terms are clear and precise as they will affect any sale agreement. Whatever deals are made can affect drafting of easements or options to purchase.
Common sense: Use common sense, but be careful of common law terms. Do not let courts determine your obligations or rights by what is or is not spelled out in the documents. It is an area where you can get burned.

How Professionals Can Help with Commercial Real Estate Agreements

As you navigate through the intricacies of commercial real estate agreements, the importance of having professional legal and real estate guidance by your side should not be underestimated. These professionals bring a wealth of experience and insight that can prove invaluable during what can be a complex and often stressful process.
A primary benefit of involving legal professionals is their ability to clearly interpret commercial real estate agreements. Their knowledge of the law allows them to break down complex legal terms and jargon into more digestible pieces, ensuring that all parties fully understand what they are committing to. For instance, an attorney can explain important terms like indemnification, covenants, or warranties in the context of the deal, providing assurances and clarifying buyer and seller responsibilities.
Legal professionals also play a key role in negotiations and drafting. A good legal team will not only advise you on the deal’s terms but will also negotiate on your behalf, ensuring favorable terms while protecting your interests. They will then draft legally binding documents that reflect the agreed-upon terms. This is important to minimize the risk of unexpected issues or misunderstandings down the line.
In addition, legal professionals can assist with navigating any relevant regulations and effectively manage the closing process . For example, it is easy to feel overwhelmed when you hear terms like recordation, property taxes, assessments, and encumbrances. An attorney can ensure that every aspect of the process is clearly communicated and in good order.
While commercial real estate agents also provide invaluable services, their expertise differs from those offered by legal professionals. An agent will focus on the evaluation and pricing of the property and help you set realistic expectations for the buying or selling process. They will utilize their local market knowledge and network of contacts to find the best match for your requirements, while leveraging their negotiation skills to secure the right price for you without overextending.
However, it is important to note that real estate agents cannot guarantee accurate interpretations of legal documents. Consequently, it is advisable to have a trusted attorney when navigating the complexities of the process. Working with both an attorney and an agent when engaging in commercial real estate agreements is one of the best ways to secure the best deal for everyone involved.
In conclusion, informed negotiation of commercial real estate agreements can give you a potentially strong bargaining position. Legal and real estate professionals are well-positioned to support you during this time to achieve the best outcome.