Top 5 Legal Pitfalls to Avoid When Buying Commercial Real Estate

Investing in commercial real estate can be an excellent way to grow your portfolio and generate income. However, commercial transactions are complex and come with numerous legal considerations. Failing to properly vet properties from a legal standpoint could expose you to significant risks down the road. Here are the top 5 legal pitfalls to avoid:

1. Zoning and Land Use Violations Before purchasing any commercial property, you must ensure the current use is properly zoned and permissible by local regulations. Zoning laws dictate what types of businesses can operate in designated areas. Using the property for an unauthorized purpose could result in fines, forced closure, or even reversal of the sale. Review zoning classifications, permitted use certificates, special use permits, and any applicable zoning overlays.
2. Environmental Contamination Issues Environmental due diligence is critical, as your company could be liable for cleaning up any existing soil, water, hazardous materials or other contamination on the site from past operations -- even if your business didn't cause it. A Phase 1 Environmental Site Assessment is baseline testing, but further inspection or sampling may be needed depending on the results.
3. Unclear Property Rights and Boundary Disputes Carefully examine title reports, land surveys, recorded documents, and property lines to verify what interests, rights, and ownership you are truly acquiring. Encroachments, undisclosed easements, boundary overlaps, and other property rights issues can diminish the value of your investment and lead to legal headaches.
4. Unfavorable Terms in Existing Tenant Leases For any leased commercial property, you must thoroughly review all tenant lease agreements inherited from the previous owner. Objectionable terms for rent calculations, operating expenses, renewal periods, permitted uses, and more could undermine your future profits or intended use of the space.
5. Lack of Contingencies in the Purchase Contract The backbone of any commercial acquisition is the purchase and sale agreement. Work closely with legal counsel to negotiate appropriate contingencies that allow you to back out if issues arise with financing, inspections, zoning approvals, environmental clearances and other key areas. Properly drafted contingencies minimize your risk.

Buying commercial property is a major investment that requires careful legal vetting for pitfalls like these. Having an experienced real estate attorney on your side is crucial for conducting proper due diligence and negotiating favorable terms to protect your business interests.