Post-Closing Issues in CRE & How to Avoid Them
Summary: We all want to avoid CRE issues, right? Legal, financial, or construction concerns can arise after commercial property closing. Commercial property post-closing concerns can be avoided by planning early. Here’s how to avoid post-closing issues.
The majority of the most typical problems that arise after the closure of a commercial property transaction can be prevented with careful ahead planning, precise commercial due diligence, and efficient follow-up. Post-closing difficulties can often be broken down into three categories: legal, financial, and practical.
Caveat Emptor, which translates to “let the buyer beware,” is a potent phrase that should be used in any commercial real estate transaction. When a buyer acquires title to a piece of commercial real estate, they also assume all of the post-closing authority, obligations, and constraints that come along with it. As a result, it’s critical to be aware of the potential issues listed below and understand how they could be prevented.
Legal Concerns after the Deal Has Closed
It is imperative to have a clean title to the commercial property and complete ownership control if the goals of the development plans and the expected revenue streams are to be realized. As a result of the title search performed on the commercial property, you will obtain information regarding the chain of title, any existing liens, and what the title commitment will include or exclude according to the criteria indicated in Schedule B-II. Post-closing legal complications can be caused by several factors, including breaks in the chain of title and indefinite present ownership. In addition, claims for post-closing liens made by previous lenders or contractors, against which the buyer was not protected, have the potential to significantly influence the amount of money made by the project.
Prepare a complete purchase and sale agreement (PSA) that includes major seller representations and warranties. This will help you avoid the problem. Ensure all the required documentation is handed over, including any existing title deeds, zoning disclosures, easements, lease assumptions, liability assignments, encumbrances, liens, warranties, and any mineral or other rights.
The feasibility time needs to be lengthy enough to allow for a proper evaluation and for proper follow-up steps to verify that legal and financial duties are being met in an acceptable manner.
At this stage, simple acts can help reduce the likelihood of future complications; therefore, the present owner should deliver an affidavit stating that the title search revealed no new encumbrances and that the entity holding the title and the entity selling the property is the same. This is of the utmost significance in the event that a new legal corporation has been established for the sole purpose of selling the property.
Post-Closing Issues Regarding Zoning, Easements, and Limitations
Any plans for a change in the property’s use by the new owner could be thwarted by recent or upcoming zoning amendments. This is typically of more concern for a buyer of undeveloped land as opposed to an established piece of commercial real estate. The presence of drainage easements, utility easements, or public access easements on a piece of property may impact building extensions, access for commercial vehicles, parking, or other plans for which the property was purchased. There are some other potential difficulties that could become an issue, such as federal and state protections against claims.
Avoid by carrying out a comprehensive survey and cooperating with the relevant municipalities to determine whether or not existing zoning or upcoming changes may restrict growth plans. A Phase I Environmental Site Assessment may also identify prospective environmental issues that demand attention. The buyer will be able to establish whether or not any concerns could have a negative impact on the development plans for the property if they have this information.
Concerns Regarding Post-Closing Liens and Other Unanticipated Costs
A change in who owns something also brings about a change in who is responsible for it. Unpaid invoices to contractors may be owed by the owner of the property, the tenant of the property, or even a general contractor who is hiring subcontractors or receiving building supplies.
A title search will reveal any liens that are currently attached to the property, but it will not find any other possible liens that may be hiding. The next owner may be responsible for such liens.
Avoid by performing an updated title search at the same time that you transfer ownership of the property. Make sure the title firm will provide a title policy that doesn’t have any stipulations regarding mechanics liens in it.
It is possible that general contractors and/or the owner who is transferring the property may be asked to sign an affidavit verifying that no debt is still unpaid or that the bill is still unpaid at the time of closing. When a property is transferred, the current owner is responsible for protecting the title firm against subsequent liens. For the protection of the buyer, it may be essential in unusual situations (for example, if there is already a lien on the property) to have a lien release bond posted in a commercial escrow.
Reduced Revenues After the Close of Business
The tenant is responsible for paying the rent and any additional occupancy fees, especially in light of the COVID-19 pandemic, tenants who have a history of making late or missed payments run the danger of repeating that behavior. Predicted revenues can be negatively impacted by factors such as renewal choices, fixed, predefined, or flexible rent, and occupancy charge hikes.
To prevent this, before making any judgments regarding how to handle them, make sure you are aware of the terms of the lease and the tenant’s payment history.
Concerns that arise after the sale of commercial property could pertain to the law, the finances, or the construction of the building. Understanding the potential problems that may develop after the closure of a commercial property transaction is the first step in effectively preventing those problems.
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