Commercial real estate contract language or terminology is different in many ways from what you may be used to seeing in a residential deal. Listed below are a few of these terms. You should become familiar 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 homeowner's insurance because the Seller's representations and warranties expire at the closing, unless you insist that they do not. These are the property facts to which the Seller alleges in the sale, such as a solid roof or that no illegal action, including legal cases, are threatening against the property. Always include a representations and warranties clause in your contract that the Seller must live up to even after closing.
Although most commercial sellers will not warrant the roof, sometimes they'll warrant the structure. For instance, they might say that although there are cracks in a certain wall, they had testing done. They would give you a copy of that test, and agree to stand behind the safety of the wall. Any warranty that the Seller makes to you should survive the closing.
- Commercial Closings
The closing, like the inspection period, is based on a formula. It starts at the end of the inspection period, so it's like a moving window.
Your contract must contain language regarding any brokerages involved. If this inclusion is not applicable, each of you wants to hold the other side harmless. This protects both Buyer and Seller if a finder's fee suddenly appears or a broker shows up at the closing, making unexpected claims.
If any brokers are involved in the deal, the contract should list each broker's name and indicate the manner of payment. Often, they may be paid based on a separate agreement between Seller and Broker.
Key Point: Many people write contracts for themselves with no broker language. Even if the broker clause is not applicable, include the broker language in your contract.
- Assigning a Contract
Many contracts will either not have any assigning ability checked or include no assigning ability at all. If there's a specific paragraph that says the Buyer may assign the contract, the Buyer may freely assign it. However, if the signed contract has no assignment clause, then it is assignable. You do not have to include an assignment clause. Tip: To be safe, always include the assignment clause and specify whether it can be assigned.
These were a few extra commercial real estate contract terms, I felt were important to list in addition to the list I provided in another article posted earlier. If you like what you read or learned here, be sure to review the other article for a continuation of sorts about commercial real estate contract language and how to use it or interpret these items as you move into the commercial realm of investing.