Lawyers, Leases and Agreements

Posted: January 12, 2012 in Uncategorized

Commercial real estate is tough. Better have your “A” game on or it could cost you hundreds or thousands of dollars. Knowledge is power when approaching a commercial real estate deal and if you do not know the ropes, you will pay a higher premium or possibly lose all you have brought to the deal.

But with anything you do for the first time, there is a learning curve. Even with the internet to help with the mechanics and processes of commercial real estate, a well place action or call can make or break a deal, or save you thousands or cost you thousands. If your new in commercial real estate as an real estate agent or business owner, it is easily determined. There is a language all its own in commercial real estate. The questions you ask,, or don’t ask, the comments you make or don’t make tell how seasoned you are in the commercial arena. Determining how experienced you are sets in motion how the other agent is going to move forward with a commercial lease or purchase.

In most transactions, you cannot expect the opposing seller or buyer to educate you on what you have left out as far as due diligence. Each player has there own process of determining if a commercial property will perform for the specific use of the buyer or seller. Zoning, occupancy, lease rates, city moratoriums, variances, new regulations that affect your business use is not the concern of the opposing party. Agreements are made and contracts are drawn up to accommodate what has been agreed to and ONLY what is in writing. Lawyers are summoned to write the lease or purchase contracts covering what was agreed. Additional information in contracts is added by lawyers or property owners  to cover the “what ifs”  and if these “what ifs” are not scrutinized, they become the basis to settle disagreements in the future.

Commercial Lease and Purchase contracts are pretty standard and there are many but in the Denver metro area, there are about 4 or 5 versions of these contracts used in some form or other. One lease form is about 8 to 10 pages, there is another that is 20 pages, and another that is about 26 pages long. Although the content can vary, the size of the lease can tell you a lot about an owner or commercial real estate firm. Longer leases attempt to spell out about every scenario that can occur and the long length of the lease is usually due to all the legal things that can be done to you for breaking your lease. Shorter leases generally have arbitration clauses which outline how disagreements will be mitigated. Spelling everything out in a lease can be good or bad. Short leases or purchase contracts can be just as powerful as a larger lease. What I trying to explain here is when you are reviewing the lease, get a feel for what type of person would tender a lease of this type and compare it to the owner’s personality to get an overview of what type of person you are working with.

My experiences in the Denver commercial real estate forum has been from one end of the spectrum to the other. Great feel good deals where both sides have a win-win to the little deals that are a pain in the ass and you leave shaking your head saying “REALLY?”. The one common denominator in all deals is the communication and knowledge of both parties. If you are going to take on a commercial real estate transaction and depend on a lawyer to cover your ass,, your new diet program will yield short term results! (you’ll end up losing your ass and paying for it!). For the most part, commercial real estate transactions that end up in court or arbitration are due to one side of the transaction not completing proper due diligence and forgetting or leaving something out that was critical. LAWYERS CAN CATCH THE LEGAL FANDANGO, but it is the responsibility of the buyer, seller or their agent to research the incidentals, zoning, new regs AND THEN include them in the lease or purchase contract.

When you forget or chose to ignore important tenets in a commercial transaction, the lease or purchase contract is a document that can remind you of items you may have forgotten but you need to read this agreement! Leaving the contract to a lawyer as your due diligence is a recipe for disaster! Most times the lawyer is not involve in the negotiations of a commercial deal, or any deal for that matter, and after negotiating you would tell your lawyer all that you have agreed to. Most commercial contracts are final at signing and unless there are provisions for “outs” once you sign, its yours.

Lawyers can alter a preliminary contract so that the wording of the contract reflects what you have negotiated. Next a lawyer will review the full contract to change any wording in the lease that could be in deference or could compromise your specific requests. For example, if you agreed to have exclusive use of a public bathroom in a commercial building, this agreement might an exception you negotiated and some clauses in the lease agreement might need to be amended to reflect your exclusive use, that the costs will not be access, that others in the building will not be able to use these bathrooms. You may need to also have wording that you could use the other bathrooms in addition, etc.

It is when you forget to address or negotiated something that you could find yourself in hot water. Reading the full lease agreement will alert you and protect you from making a mistake. You or your agent is reading the lease NOT AS A LAWYER, but to look for items you forgot to address. The longer leases are very good at reminding you of things you may have forgot, shorter leases may not help you with finding forgotten items. Lawyers look over contract and change wording to match the changes you made and enforce them so there is no question of your intent. BUT if you forget an item, the contract cannot be amended to protect you and you will be at the mercy of the other party.

This is why it is advisable to have BOTH a lawyer or legal council AND a commercial real estate agent when pursuing a commercial real estate transaction. For most, commercial real estate is not their field of endeavor. Those that have bought, sold or leased commercial real estate, usually do not have the time to do proper due diligence since they have their regular job or career. Others that do not have experience can get a quick education from the internet, but will not have the experience to understand all the variable to address and NOT to address. MANY commercial real estate agents will not work with a client that is not represented by an agent! This is not because they are rude (although most commercial agents are), it is because they are covering their butts from mitigation after the deal. Having someone whose field of endeavor is commercial real estate work with you just makes more sense than relying on your brother’s wife’s father’s cousin who sold a home last week.

Ultimately its all on you and you will be the one who gains or fails from a commercial transaction. If you are one of the blockers, you cannot see the whole field of play. If you are the quarterback, you can see more of the playing field and adjust the play to best fit the situation. The offensive coach sits above the field and sees the full playing field. Be the coach. Sit back and watch how all the players are performing without involving yourself in the plays. Then make your decision.

Kenny D

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