Commercial real estate transactions are infinitely more varied and complex than their residential counterparts. When buying or selling a house, you are generally dealing with individuals, not corporations. Federal law largely dictates the closing process in home sales, particularly with respect to mortgages and required disclosures by both sides. In contrast, commercial real estate closings are largely unregulated and left for the parties to sort out for themselves. While this affords commercial transactions greater flexibility, it also involves a lot more responsibility.
The Importance of Escrow
In most commercial real estate closings, a neutral third party will hold funds provided by the buyer until the transaction is complete. This is known as escrow. The idea is that the escrow agent will not release the funds until both sides agree that certain conditions have been met. It is common practice to have a separate escrow agreement spelling out all of these conditions.
The escrow agreement should specify the exact duties of the escrow agent–who in many cases is also the title insurance agent–and how any funds should be managed pending completion of the closing. The escrow agent is usually not responsible for verifying the buyer or seller’s compliance. Rather, the escrow agent is simply there to release funds when instructed.
Who Are the Real Parties to the Transaction?
As noted above, commercial real estate transactions differ significantly from the average residential home sale. The buyer and seller in a commercial agreement are often corporate entities, who in turn may be subsidiaries of larger corporations. It is not uncommon for the buyer to create a separate entity–e.g., a corporation, limited liability company, or limited liability partnership–to actually take possession of the subject property.
The main reason for using corporate entities in a commercial real estate transaction is to limit potential financial losses. The individual owners of a corporation, LLC, or LLP are only liable for their investment in the entity; a creditor cannot pursue the individual owners or their assets. This same principle applies for a newly created subsidiary of an existing corporate entity.
In terms of the real estate closing process, an individual with “signing authority” must act on behalf of the corporation, LLC, or LLP. After all, the buyer or seller needs to know the person signing for the other party has the legal authority to bind the entity to the terms of the deal. Proof of signing authority can be ascertained in many ways, including a corporate charter that expressly designates an individual, or a letter of authorization from the entity’s chief executive officer or board of directors.
Performing Due Diligence
Due diligence refers to conducting a proper investigation of a proposed real estate transaction prior to the completion of closing. If you are the buyer, you want to look for any potential physical, financial, and legal issues surrounding the subject property. If you are the seller, you want to make sure the buyer is ready and capable of financing the purchase and does not try to back out of the deal.
Among the tasks that are typically performed as part of due diligence:
- both sides ensure the sales contract has been duly signed and properly executed;
- a final title report is received from the title insurance company, and the seller has an opportunity to file a response to any objections raised by the buyer;
- the buyer receives and reviews the seller’s financial records related to the property;
- the buyer receives copies of any leases that may be in effect for the property;
- the buyer receives confirmation that the property is in compliance with any applicable local zoning laws;
- the parties obtain an environmental report, i.e. a document detailing any known environmental issues on the property such as water pollution;
- the seller makes sure the buyer has delivered the agreed-upon down payment to the escrow agent; and
- both parties confirm the escrow agent is holding the funds in a segregated, interest-bearing account.
The Final Closing Paperwork
Once due diligence is complete, the parties are ready to conduct the actual closing. The closing date is generally set forth in the sales contract. On the closing date, the parties will sign any previously prepared closing documents, including a deed legally transferring title, assignments and assumption of any leases, and the various reports and disclosures mentioned above.
No two commercial real estate closings are the same. Each transaction has its own unique requirements. That is why if you are looking to buy or sell any commercial property, you need to work with an experienced Dallas real estate transaction lawyer who can guide you through the process. Contact the offices of Lindquist Wood Edwards LLP at 214-382-9789 to talk to a lawyer now.