9 Things You Need To Know Before Signing Any Commercial Property Agreement

“A sum given by the buyer to the seller in connection with a contract to sell is regarded to be a deposit on account of the price, unless the parties have expressly provided otherwise. If the parties stipulate that a sum given by the buyer to the seller is earnest money, either party may recede from the contract, but the buyer who chooses to recede must forfeit the earnest money, and the seller who so chooses must return the earnest money plus an equal amount. When earnest money has been given and a party fails to perform for reasons other than a fortuitous event, that party will be regarded as receding from the contract.”

Need To Know #1: After the due diligence period, the earnest money should become non-refundable, but if the purchaser subsequently wants to cancel and the if the deposit is called earnest money in the purchase agreement, the purchaser can get out of the contract by forfeiting the earnest money. If the purchase agreement does not specify earnest money but uses the term deposit, the purchaser not only loses the deposit but can be sued for specific performance. The earnest money is deemed stipulated damages.

“If the terms of the sale provide for a deposit by the purchaser, this deposit shall not be considered earnest money and does not give the purchaser the right to withdraw from the sale by forfeiting the deposit. However, if the property is resold at the risk of the first purchaser, and a loss is occasioned by such resale, the party provoking the sale may proceed by rule against the first purchaser and the officer conducting the sale to have the deposit turned over to the plaintiff in rule, to the extent of such loss. ”

Need To Know #2: If the seller defaults, the penalty is twice the earnest money; if the buyer defaults, they simply lose their earnest money. The Purchase Agreement spells out what a default is.

If the purchaser wants to terminate the contract within the due diligence period and get the earnest money back, the broker or title company holding the earnest money will require a form to be signed by both the seller and the purchaser. The Louisiana Real Estate Commission states that a broker cannot give a deposit back to a purchaser without a signed cancellation of all parties to the contract. If all parties do not sign the cancellation then a dispute situation arises and the Louisiana Real Estate Commission procedure must be followed; however, the Real Estate Commission does not want to be the institution resolving disputes and the deposit is placed with a court and you will have to file a lawsuit to resolve the issue.

Need to Know #3: Make sure your purchase agreement spells out how the purchaser can get his earnest money back and in how many days and who has to authorize it, as well as conditions of a default.

After the title company accepts your earnest money, they provide the following services:

1. Determines taxes due.
2. Determines loan payoffs.
3. Secures a title commitment, which is a promise to issue an insurance policy on the property.
4. Explores all public records to discover all recorded documents relating to chain of title, including a property abstract. The chain of title is the history of ownership of the property and follows the property from one person to the next through each will or deed. In Louisiana, we sometimes research back over 100 years of data to make sure there are no ex-spouses still owning the property. The abstract includes deeds, mortgages, wills, lawsuits, liens, tax sales, and all the names of the owners, how long they owned it, and any recorded price they paid for it. The abstract also shows conveyances and encumbrances which can limit developing or changing the property.
5. Reviews the lender’s requirements and prepares all the paperwork, including the HUD (Housing and Urban Development) closing statement which details the costs for the seller and purchaser.

Need To Know #4: Ask the seller for his title policy. It might provide your closing attorney with information that will save time and will also disclose what the seller paid for the property.

Need to Know #5: In Louisiana, the title insurance is paid by the purchaser, which might be different than other states like Texas where the seller pays the title insurance.

Need To Know #6: In Orleans Parish, property taxes are paid ahead, but in Jefferson Parish, property taxes are paid for the previous year. The taxes are always pro-rated.

Need To Know #7: During the inspection period, secure flood, hazard and general liability insurance that will be required by your lender before closing.

Need To Know #8:New Orleans charges a $325 transfer fee which is normally paid by the purchaser but can be detailed in the purchase agreement as to who will pay. Sometimes purchase agreements are vague as to closing costs so before you sign, revise it to itemize each closing cost and who pays what. Typical closing costs are:

1. Commission-usually 6% of the sale price, paid by seller but may differ per the purchase agreement.
2. Lender origination fee-usually 1% of the loan, paid by the purchaser as a cost of borrowing the funds.
3. Appraisal fee-usually $2,000 to $4,000 for commercial property since it is more complex, paid by the purchaser as a cost from the bank to make the loan.
4. Flood certification-usually $20, paid by the purchaser.
5. Environmental Report-a Phase One costs $2,000 to $4,000, and includes research for a written report such as nearby environmental sites but no actual sampling of soil, air or groundwater. A Phase Two can cost $10,000 to $20,000 because it includes collecting samples and measuring for contaminants. A Phase Three includes remediation and can easily exceed $100,000 and take 1-3 years.
6. Lender’s title insurance-usually $3.50 to $4 per $1,000 of insured value.
7. Closing fee- usually $500 for the time of the closing attorney to prepare the paperwork.

Need To Know #9: There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by every public mortgage lender to protect only the lender against problems, but do not protect a property owner. Buyers must separately purchase an owner’s policy which covers:

1. Sudden appearance of unknown heirs claiming an interest in the property.
2. Forged deeds or impersonations.
3. Incorrect legal descriptions.
4. Improper recording of deeds.

In summary, knowing these 9 things will help you avoid surprises, give you the upper hand in any re-negotiation you may have to undertake, and help you work toward a smooth closing which moves your project forward.