Due Diligence Checklist: Reviewing Real Commercial Real Estate Purchase Agreements

Due Diligence Checklist: Reviewing Real Commercial Real Estate Purchase Agreements

Purchasing real commercial real estate represents one of the most significant financial commitments your business will make. Whether you are acquiring an office building, a warehouse, or a retail center, the purchase agreement serves as the foundation for the entire transaction. For HR, operations, and business professionals tasked with reviewing these agreements, understanding what to look for can protect your organization from costly mistakes and unforeseen liabilities.

Real commercial real estate transactions differ substantially from residential purchases. The stakes are higher, the terms more complex, and the potential for hidden risks greater. While you may not have formal legal training, your role in the due diligence process is critical. This guide walks you through the essential elements to examine when reviewing a commercial real estate purchase agreement.

Understanding the Property Description and Title

The first section to scrutinize is the property description. This should include the complete legal description of the property, not just the street address. Verify that the description matches the property your company intends to purchase by cross-referencing it with survey documents and title reports. Any discrepancy, no matter how minor it appears, can create significant problems at closing or later when you attempt to sell or refinance.

Title review is equally important. The agreement should specify that the seller will deliver clear and marketable title, free from liens, encumbrances, and claims. Request a preliminary title report early in the process and review it carefully for any recorded easements, covenants, or restrictions that might limit how your business can use the property. If the property is held in a trust arrangement, you may need to review documents such as a Land Trust Deed to understand the ownership structure and ensure the seller has authority to convey title.

Purchase Price and Payment Terms

The financial terms deserve careful attention. Beyond the stated purchase price, examine how and when payments will be made. Commercial transactions often involve earnest money deposits, which demonstrate your commitment but also put your funds at risk if the deal falls through under circumstances not covered by contingencies. Understand the conditions under which this deposit becomes non-refundable.

If your company plans to finance the purchase, the agreement should include a financing contingency that protects you if acceptable financing cannot be obtained. This contingency should specify the loan amount, interest rate range, and timeframe for securing financing. Without this protection, you could lose your deposit if financing falls through. Some transactions may involve seller financing or require a bank guarantee, in which case reviewing an Open Bank Guarantee template can help you understand the commitments involved.

Due Diligence and Inspection Periods

Real commercial real estate purchases should always include a due diligence period during which your company can investigate the property thoroughly. This timeframe, typically ranging from 30 to 90 days, allows you to conduct inspections, review financial records, examine leases if the property has tenants, and assess environmental conditions.

The agreement should clearly state the length of the due diligence period and your right to terminate the contract if you discover material defects or issues. Pay attention to whether you need to provide specific reasons for terminating or if you have an unrestricted right to walk away during this period. Some agreements require that you identify specific objections and give the seller an opportunity to cure them before you can terminate.

Environmental assessments are particularly important for commercial properties. A Phase I environmental site assessment should be conducted to identify potential contamination issues. If problems are discovered, you may need a Phase II assessment involving soil and groundwater testing. The purchase agreement should address who bears the cost of these assessments and what happens if contamination is found.

Existing Leases and Tenant Rights

If you are purchasing an income-producing property with existing tenants, the agreement must address how leases will be handled. You will typically receive an assignment of all leases, along with security deposits and any prepaid rent. Review the rent roll and request copies of all lease agreements to verify the terms, rental rates, and expiration dates.

Check whether any tenants have options to purchase the property, rights of first refusal, or expansion rights that could limit your future flexibility. Some leases may include subordination agreements, and understanding these arrangements is important. A Landlord Subordination Agreement can affect the priority of your lender's mortgage versus tenant rights, which becomes critical if foreclosure ever becomes a possibility.

Examine the estoppel certificates that tenants provide. These documents confirm the terms of their leases, the amount of rent paid, and whether the landlord is in default on any obligations. Discrepancies between estoppel certificates and the actual lease documents should be resolved before closing.

Representations and Warranties

The seller's representations and warranties are promises about the property's condition and legal status. Common representations include confirmation that the seller owns the property, that there are no undisclosed liabilities, that the property complies with zoning laws, and that all building systems are in working order.

These representations matter because they provide grounds for legal recourse if they prove false. However, many commercial real estate agreements include an "as is" clause that limits the seller's liability for property conditions. If the agreement includes such language, your inspection and due diligence become even more critical because you may have limited recourse after closing for problems you failed to discover.

Closing Conditions and Contingencies

The agreement should list all conditions that must be satisfied before closing can occur. Beyond financing and due diligence contingencies, these might include obtaining necessary permits or approvals, the seller completing agreed-upon repairs, or the property being vacant by a certain date.

Review the timeline carefully. Commercial closings often take 60 to 120 days, and the agreement should specify deadlines for each contingency and for closing itself. Understand what happens if deadlines are missed and whether extensions are automatic or require mutual agreement.

Closing Costs and Prorations

Commercial real estate transactions involve substantial closing costs, and the purchase agreement should specify which party pays for each item. Common costs include title insurance, escrow fees, recording fees, transfer taxes, and attorney fees. In some markets, customs dictate how these costs are divided, but everything is negotiable.

Prorations address how ongoing expenses like property taxes, utilities, and insurance are divided between buyer and seller based on the closing date. The agreement should specify the proration date an

What environmental disclosures should you require in a commercial property purchase agreement?

Environmental disclosures are critical when acquiring real commercial real estate. You should require the seller to disclose any known contamination, hazardous materials, underground storage tanks, or prior environmental violations. Request copies of Phase I and Phase II environmental site assessments, if available, along with any remediation records or ongoing compliance obligations. The purchase agreement should include seller representations regarding environmental compliance and allocate responsibility for pre-existing contamination. Consider requiring soil and groundwater testing if the property previously housed industrial operations, gas stations, or dry cleaners. These disclosures protect your organization from unexpected cleanup costs and potential liability under federal and state environmental laws.

How do you structure earnest money deposits in commercial real estate transactions?

Structuring earnest money deposits in real commercial real estate deals requires careful attention to timing, amounts, and release conditions. Typically, buyers deposit one to five percent of the purchase price into an escrow account upon contract execution, with additional deposits due after completing due diligence milestones. The purchase agreement should clearly specify whether deposits are refundable or non-refundable, under what circumstances they can be returned, and how disputes over release will be resolved. Many contracts tie earnest money forfeiture to specific buyer defaults, protecting sellers while giving buyers reasonable exit options during inspection periods. Consider using an Open Bank Guarantee for larger transactions to provide additional security. Always ensure your escrow agent is a neutral third party and that all deposit terms align with your financing contingencies and closing timeline.

What title insurance requirements should your commercial property purchase contract include?

Your real commercial real estate purchase agreement should specify that the seller must provide a title insurance policy from a reputable underwriter, protecting you against defects in title, liens, and encumbrances. The contract should state the policy amount, typically matching the purchase price, and clarify whether the buyer or seller pays the premium. Include a deadline for the seller to deliver a preliminary title report, usually within 10 to 15 days, and ensure you have time to review and object to any title exceptions. Require that the policy includes standard coverage and consider negotiating for extended coverage that protects against survey errors, unrecorded easements, and access issues. Finally, confirm that the title company will issue an owner's policy at closing, giving you long-term protection for your investment.

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