8 purchase agreement terms you need to know before buying commercial real estate
Buying the right commercial property for your business operations can be one of the most challenging and pivotal transactions you’ll ever make as an entrepreneur.
That’s why negotiating an effective purchase agreement that takes into account all of your interests–those of your employees, your company’s growth, and your bottom line–is not only important, but crucial.
While a good commercial real estate lawyer can help you navigate the main issues, it’s helpful to familiarize yourself with some of the key terms that can most typically become deal breakers, if not properly addressed.
Here are eight terms in your purchase agreement that Brett Prikker, a BDC Business Centre Manager who has financed numerous commercial real estate transactions, says you’ll want to pay close attention to.
1. Building condition assessment
An inspection of a property’s condition and needed repairs, usually done during due diligence, before the purchase is finalized. The assessment generally looks at structural components, the roof, windows, walls, as well as mechanical, electrical and plumbing systems.
2. Due diligence
A purchaser’s review of a commercial real estate property before the transaction is completed. The due diligence process is usually spelled out in the buyer’s purchase offer. The process can include a building condition assessment, an environmental site assessment, a title search, a survey, and a review of the owner’s major expenditures on the property (such as fees for structural repairs) and other records (such as bills for utilities, taxes and maintenance).
3. Easement
The right to use or access part of a neighbour’s property. This right may be based on a verbal or written agreement. Easements are usually identified during the due diligence process, before the property is purchased.
4. Encroachment
A structure that uses the property of a neighbour without permission. Examples include bushes intruding on the next-door property, an overhanging roof or a septic tank extending underground past a property line. Encroachments are usually identified during the due diligence process, before the property is purchased.
5. Encumbrance
An undischarged claim against a property, such as a mortgage or tax liability.
6. Environmental site assessment
An inspection of a property’s environmental liabilities, usually done during due diligence. The assessment usually focuses on factors such as site contamination, hazardous building materials, indoor air quality and any clean-up needs.
7. Survey
A description of a property’s legal address and dimensions, the location of structures and their dimensions, and any easements or encroachments. A survey is sometimes done during due diligence, but because of the high cost of getting a survey, many purchasers obtain title insurance instead, to protect themselves in case of title issues.
8. Title search
A review of documents related to a property to identify issues that could affect its value. Such issues may include disputed ownership of the property, easements and encumbrances. A title search is usually done during due diligence.