by Thomas V. Bennett
Whenever someone decides to sell commercial real estate, there is always a financial plan and the timing of the receipt and expenditure of the proceeds of the sale (or refinancing) is often critical, be it a tax free exchange to purchase another property, the purchase of a retirement home or capital for another venture. It is important, therefore, that there be no unforeseen problems which could derail a sale or a purchase. Here are some of the legal issues that should be addressed to insure that the ultimate closing goes smoothly.
The record title. More and more frequently the sale or refinance of a commercial property is delayed because of record title problems. That happens frequently where the property has been owned for a long period of time and most often happens because a discharge of a mortgage has not been recorded. Although, generally, those problems are solvable, it does take time particularly if the holder of the mortgage was an individual or a small corporation. For generally about $300 you can have your title examined to be sure there are no record title issues that need resolution.
Zoning and permitting. When buildings are built there is the need for permits and sign-offs by town agencies. A recurring problem is Conservation Commission approvals which require a Certificate of Compliance after all of the work is completed and the recording of the Certificate of Compliance. Permits granted by town permit-granting boards for variances or special permits generally require that the decisions be recorded at the Registry of Deeds and sometimes there are not. The legal occupancy of a building is always a concern for a buyer or a lender and often times the records of a city or town are incomplete or nonexistent particularly, for older buildings. A request for the local building inspector to issue a certificate of occupancy may trigger some building compliance requirements, but the issuance of a certificate of occupancy will generally satisfy either a buyer or a lender that the uses of the property are in compliance with relevant zoning by-laws. Surveys are expensive but plot plan prepared by a surveyor generally costs about $350 and will uncover any problems that might come up in a survey obtained by a buyer. Smoke detectors and/or carbon monoxide certificates may be required for the sale and, if you check with the local fire department, you can find out what the requirements are and what you need to do in order to bring your property into compliance so that a certificate can be obtained at the appropriate time.
Environment. While the super priority lien under the hazardous waste law in Massachusetts does not apply to buildings where the majority use is residential, most buyers and lenders will require a so-called "Phase 1 Report" on any property that has a commercial use. It would make sense for a building owner to obtain their own Phase 1 Report prior to getting the property ready for sale to insure there are no environmental problems at the property. Generally, the licensed site professional that prepares the environmental report is willing to provide to the buyer and/or the lender a letter indicating that they may rely on the report. It costs some money but ultimately that cost can be reflected in the price. It is important to deal with that issue because if there is a problem it could be a deal breaker. If the property is serviced by a private sewerage disposal system, a Title V report by a licensed inspector will be required at the closing. It would be a good idea to find out if there is a problem in advance of a sale. If the water supply to the building is private, a test to determine that the water is potable would also be a good idea so, if there is a problem, it could be dealt with prior to the time the buyer decides to inspect the well water.
Leases. No buyer of a commercial building (or a buyer's lender) will be thrilled about all of the tenants being tenants at will, unless rents are below market and the building is tired and needs updating with an objective to upgrade the tenant population or convert it to condominiums. If the building has tenants with leases all expiring at the same time, that will raise a concern with the buyer since no one wants a vacant building unless the targeted buyer is a user. In any event, all leases should have a provision that the tenant's rights under the lease will be subordinate to the existing or any future mortgagee and that the tenants will sign a Subordination, Non-disturbance and Attornment Agreement (SNDA) which is an agreement amongst the tenant, the lessor and the lender that says if the bank ever forecloses, the tenant's rights will be honored but that the lease will be subordinate to the mortgage. If it is anticipated that an SNDA will be required, it would be a good idea to let your tenants know that you will expect them to sign one and to make sure they will be available to sign one when the time comes.
Every commercial property is different. The objectives of selling and buying may vary, but making sure that the legal components of the property are in order is as important as the mechanicals and the physical condition of the building and an audit, covering issues like the ones suggested above, may avoid unpleasant and expensive delays in the sale process.