Avoiding Post-Closing Lawsuits

Seller’s Guide to Dismantling Legal Land Mines in Commercial Real Estate Transactions

As a commercial real estate seller, securing legal representation can protect your interests and mitigate potential risks. Some buyers can be particularly astute in identifying contractual technicalities to negotiate discounts or pursue post-closing legal settlements.

The Importance of Seller’s Property Disclosure

If you use the contract for the sale of commercial property approved by the Colorado Real Estate Commission, you will be required to complete the form Seller’s Property Disclosure. Completing this form should be avoided if possible. Commercial property sellers often neglect the attention to detail
required when filling out seller’s disclosure documents. Litigation often arises as the result of inadvertent inaccuracies that occur when sellers complete the form disclosure. These inaccuracies are often not the result of an intentional misrepresentation, but from an unfamiliarity with the exactness needed in such legal paperwork.

The language employed in the form Seller’s Property Disclosure is precise, demanding the same level of precision in response. Any vagueness can lead to legal claim that must be defended and potential legal liability. As a seller, you should aim to avoid completing these documents without legal guidance.

Navigating the Due Diligence Process

When making representations and warranties, sellers should exercise extreme care. The sales contract should assert that the buyer is relying on its own due diligence rather than the seller’s representations. Innocent but inaccurate representations can spark claims of misrepresentation by the buyer.

While it is important to ensure that the buyer is relying on its own due diligence, if you are required to disclose information as a seller of commercial real property, the disclosure should be complete. As a seller, strive to disclose as much information about the property as possible to reduce risks of misunderstanding or claims of misrepresentation.

Disclosing Leases and Handling Lease Estoppel Documents

The importance of transparency when selling commercial property cannot be overstated. As a seller, it’s crucial to fully disclose all leases, amendments to leases, and even informal agreements with tenants. Any unwritten arrangements with tenants should be documented and presented to the buyer to maintain transparency.

An additional responsibility lies in dealing with estoppel certificates or statements. It’s advisable to refrain from completing these documents on behalf of tenants, as it can potentially lead to discrepancies or misrepresentations, inadvertently impacting the transaction process.

If there are discussions with tenants regarding extending or modifying a lease while under contract, it’s imperative to seek the buyer’s approval prior to agreeing to any such changes. For example, as a seller, you may think that the buyer should want the lease extended, but agreeing to an amendment may be considered a breach of the purchase agreement if not approved by the buyer. Getting the buyer’s approval not only protects your interests but also maintains good faith in dealings, thereby preventing any surprise complications during the closing process.

Title Issues and their Management

Understanding the extent of the title you hold and ensuring it is accurately represented in the deed is crucial for a seller. The deed should reflect all title exceptions so that you do not warrant more than you can convey. For instance, if your commercial property is leased to tenants, those leases constitute title encumbrances. If you warrant title to property and do not make an exception in the deed for leases, you are exposed to a claim for breach of the warranty in the deed.

Risk Mitigation Strategies

To protect your interests, insist that the buyer acknowledge responsibility for all information that a comprehensive property inspection would reveal, including any specific inspections and consultations recommended by the buyer’s property inspector.

Moreover, the sales contract should state that the property is sold “as is, where is”, implying no warranties beyond what is explicitly provided in the contract. The buyer should confirm that they are not relying on any unwritten, informal, or implied seller representations.

©2023 Gregory M. O’Boyle. Greg O’Boyle is a Colorado Springs attorney who practices primarily in the area of commercial litigation. Greg is a partner at Alpern Myers Stuart LLC. He can be contacted at grego@coloradolawyers.net, or an appointment can be made by calling his assistant, Adrienne, at 719-226-7745