Purchasing an existing building or vacant land for commercial use can be riddled with potential pitfalls. As you evaluate potential properties and consider your plans for operations, don’t forget to include legal counsel when negotiating the purchase agreement. You should always have a purchase agreement that effectively protects your ability to conduct thorough due diligence on the real estate and determine the feasibility of your plans for it.
The following represents a non-exhaustive list of items you should consider as part of the due diligence period in your purchase agreement:
1. Title Review
When you buy real estate, the title represents all legal rights related to ownership and some related to use. A title commitment review is a simple way to identify title issues and confirm the rights you will acquire when you purchase the property.
Consider the following:
- Is there a problem preventing the seller from being able to convey title?
- Is the property part of a condominium and subject to any obligations for ongoing financial contribution? Might there be regulations imposed by an association?
- Is the property subject to any building or use restrictions?
- Are there unextinguished rights from prior owners (i.e., rights of first refusal, reserved mineral or gas rights, or reverter rights)?
- Are there easements that would restrict the areas available for buildings and improvements?
- Are deed restrictions limiting potential uses?
- Are there existing liens or mortgages that need to be cleared before closing?
- Is the property included in a qualified forestry program, a historical landmark, or a qualified agricultural program for land preservation?
If not properly addressed, it’s possible to take title to a property that is entirely useless to you as a business owner. Thankfully, if your purchase is financed, most lenders will not proceed with financing if your basic land ownership is somehow compromised.
However, you cannot rely on the lender to ensure you can use the property for your intended business. An attorney is best suited to provide a thorough title review to identify potential issues concerning your intended business model and planned use for the property.
2. Building Inspections
If buying a building, hire qualified professionals to evaluate the property. How well has the building been maintained? Does it need significant repairs, such as mechanical upgrades or a new roof? Are there building code violations that require remediation?
Does a transfer of ownership trigger any required compliance updates? Allowing adequate time to examine the building can flag these issues for you at a time when you are still able to negotiate your final purchase price to account for future known expenses.
Additionally, bringing in specialists – contractors, electricians, roofers – to analyze specific issues can help you better understand their cost, risk, and severity. They can also often estimate the life expectancy of existing infrastructure to help you budget for larger capital improvements and repairs. With this information, you can negotiate a better agreement for your business.
3. Survey and Physical Land Inspections
A survey is a certified document that provides the shape and boundaries of a described piece of land. Expanded versions can also show specific features, such as the relative location of buildings, driveways, utility lines, road right-of-way, railroad tracks, easements, and other impactful land features. It verifies a property’s boundary lines and detects issues on or around them. They also help prevent boundary disputes with neighbors and ensure you have the space required for your plans.
When reviewing a survey, determine whether there are any physical encroachments over the property lines. If there are encroachments, what options are available as a remedy? Are there any violations of local setback requirements? Are there any easements you’re required to honor which might impact your ability to build or develop the land?
Similarly, if you intend to renovate or build on the land, a survey can help you determine whether the property is suitable. Does the property’s location restrict your ability to build (i.e., protected lands or wetlands)? Is there an ideal spot to build based on the topography and other environmental factors?
If your survey reveals issues, a lawyer may offer strategies to resolve them or advise on the potential costs.
4. Suitability for Intended Use
Think about how you plan to use the property – retail, farming, manufacturing, etc. – and the items you need for the most beneficial use of the property. Is it zoned appropriately for your intended use? Will you have to submit zoning appeals or variance requests? An emotional appeal to the local municipality after purchase is usually fruitless due to their required standard of review. Are there restrictive covenants that prohibit necessary buildings or operations for your business?
Failure to deal with these before the purchase could leave you at the mercy of those unwilling to adapt the restrictions to your needs. These issues are often fleshed out as part of the title review but can impact plans for building or use. Is the location appropriate for your business? A civil engineer or similar expert could provide helpful analysis on traffic flow, parking, infrastructure, and more. Their assistance can help you avoid creating a business access point that could endanger your clients, customers, or other business guests. The area zoning administrator can explain zoning ordinances and discuss whether your use will comply with the law.
If you foresee a zoning conflict, consider the time and resources it could take to secure a zoning variance. Is this a risk you can afford?
5. Environmental Hazards
Previous property owners could have created environmental hazards on the property. As the buyer, if you fail to investigate and force the seller to address contamination before taking title, you may assume liability for cleanup. Depending on the scope, this could cost hundreds of thousands of dollars.
Environmental hazards could also make the land unsuitable for your use. Will it cause harm to people? The property? Fortunately, you can order environmental site assessments to clear the property of any concerns. Companies that offer these services work directly with Michigan’s Department of Environment, Great Lakes, and Energy to create reports documenting their findings and assist with remediating contamination and documenting the cleanup.
Due diligence is a critical process for commercial real estate buyers. It eliminates unknowns, empowers you to negotiate the best deal for yourself, and ensures the prospective property will work for you. If you’re buying commercial real estate, Smith Haughey’s lawyers can guide you through the process and help you make the right purchase and business decision.
About the Author
Jenny DeGraves has been practicing business and real estate law in Michigan for 15 years. She has a particular interest in correcting chain of title defects and providing counsel related to real property issues and businesses. Jenny earned her Juris Doctor from the Michigan State University College of Law.
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