The language or terminology of commercial real estate contracts is different in many ways than what you may be used to seeing in a residential deal. Some of these terms are listed below. You should familiarize yourself with these terms, what they mean, and how and why they are used in a commercial real estate contract.
- Representations and warranties
In a residential closing, everyone buys homeowners insurance because the seller’s representations and warranties expire at closing, unless you insist they don’t. These are the facts of the property that the Seller alleges in the sale, such as a solid roof or that no illegal actions, including legal cases, threaten the property. Always include a representations and warranties clause in your contract that the seller must adhere to even after closing.
Although most commercial vendors do not guarantee the roof, sometimes they do guarantee the structure. For example, they could say that although there are cracks in a certain wall, tests were done. They would give you a copy of that proof and agree to stand behind the wall security. Any warranty the Seller gives you must survive closing.
- Business closings
The closing, like the inspection period, is based on a formula. It starts at the end of the inspection period, so it is like a moving window.
- Brokerage
Your contract should contain language about any brokerage involved. If this inclusion is not applicable, each of you wants to hold the other party harmless. This protects both the Buyer and the Seller if a finder’s fee pops up suddenly or a broker pops up at the close, making unexpected claims.
If any broker is involved in the deal, the contract must include the name of each broker and indicate the form of payment. Often times, they can be paid based on a separate agreement between the Seller and the Broker.
Key point: many people write contracts on their own without middleman language. Even if the broker clause is not applicable, include the broker’s language in your contract.
- Assign a contract
Many contracts will either have no verified allocation capabilities or will not include any allocation capabilities. If there is a specific paragraph that says the Buyer can assign the contract, the Buyer can assign it freely. However, if the signed contract does not have an assignment clause, it is assignable. You do not need to include an assignment clause. Tip: To be safe, always include the assignment clause and specify if it can be assigned.
These were some additional terms of the commercial real estate contract, I felt it was important to list them in addition to the list I provided in another previously published article. If you like what you read or learned here, be sure to check out the other article for a continuation on the language of commercial real estate contracts and how to use or interpret these elements as you move into the business realm of investing.