by Dolores R. Kelley, Esq.
In New Jersey, negotiating a commercial real estate contract is very different from a contract for residential property. In residential real estate, the buyer and seller sign a contract and then each have a time period after the contract is signed, typically three days, to have an attorney review and make changes to the contract. In the commercial real estate context, there is no attorney review period, and the parties are bound to the terms agreed upon in the signed contract. It is very important for a purchaser of commercial real estate to consult with an attorney prior to signing a contract, as there are complex issues that need to be evaluated with the advice of counsel.
For instance, in a commercial transaction, a buyer is required by the Bulk Sales Act (N.J.S.A. 54:50-38) to notify the State of New Jersey Division of Taxation of the pending sale of the property. If a buyer fails to properly notify the division of such sale, the buyer could be held liable for any taxes owed to the state by the seller. It is important for the contract of sale to contain specific provisions to protect the buyer from liability under the Bulk Sales Act.
Similarly, a buyer should make sure that it has a due diligence period, during which the buyer can conduct inspections, testing, and investigations of the property, which should specifically include environmental investigations. Moreover, the buyer should have the ability to require repairs be made by the seller or cancel the contract during the due diligence period for any reason. A contract that is not carefully reviewed by buyer’s counsel could limit the ability of a buyer to conduct such inspections or terminate the contract. As a result, the buyer could end up footing the bill for expensive repairs or environmental remediation.
Another important clause for a buyer to include in a commercial real estate contract is the title contingency. A buyer should be permitted an opportunity to obtain a commitment for title insurance. The title commitment will show what exceptions will exist in the title policy that will be issued, which may include items such as mortgages, unpaid taxes, easements, or other liens. If the title commitment raises objectionable defects in title, then the buyer needs to be afforded an opportunity to raise its objections and require the seller to remove the encumbrances.
It is important for a buyer to consult with an attorney when ordering a title commitment to make sure that the proper searches have been conducted. In addition, it is critical for a buyer to have counsel review the title commitment for any objectionable defects in title. Sellers will often try to limit the buyer’s ability to object to title defects, which could result in the conveyance of defective title. If a buyer purchases property with a title defect, it can cause problems not only for the buyer during ownership of the property, but also when the buyer tries to sell the property and a prospective purchaser requires the title defect to be removed.
The foregoing are just a few of the many issues that arise during contract negotiations. A qualified attorney can assist a buyer with navigating these issues, among others, such as financing contingencies, representations of the seller on the condition of title and the property, risk of loss, taxes, and assessments. Do not make the mistake of entering into a commercial real estate contract without consulting an attorney, as this can result in expensive consequences.
Dolores R. Kelley is a commercial real estate attorney at Stark & Stark. Ms. Kelley can be reached at dkelley@stark-stark.