Repairs During Escrow - Who Pays?

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Buying a commercial building for your business to occupy is similar to acquiring a residence from which to raise your family. After all - your business will “live there” and grow for many years to come.

Most commercial deals are structured with a time frame to conduct due diligence - a fancy way of saying - figuring out if you want to complete the purchase. Generally - if something untoward is discovered during this contingency period - you can cancel the deal without penalty.

Some sellers are very organized and greet you with all manner of reports, studies, and opinions on the condition of title, roof, HVAC, office improvements, and environmental history. Others will simply allow you - as the buyer - access to snoop around on your own. By the way - the organized seller - the one with all the provided documents - has typically priced his offering in accordance with the report’s findings. Therefore - if you confirm the building needs a new roof - chances are the seller won’t pay. More on that in a bit.

A word here about purchasing a building in its “as is” condition. Normally a buyer relies upon his own investigation of the property’s condition - and commercial contracts are worded this way. So does this mean you must close a deal with a faulty wiring system? No. It just means the seller is not representing or warranting it or agreeing to mend.

So what happens if you realize the air conditioning has eclipsed its cooling life and blows about as hard as a defeated politician? Or - you discover - the roof is akin to a slice of Swiss cheese? Clearly, you have three choices - buy the building with all its faults and deal with the issues later, ask the seller to remedy, or walk away.

Let’s presume you love everything about the property and have decided you want to proceed - but feel its incumbent to ask for some repairs. Plan on the seller responding in one of the following ways.

He will tell you no. Certainly in the case of the organized seller - he preempted your request for repairs by investing in condition reports. He knew deficiencies existed and alerted you. Slim are your chances of convincing this seller otherwise. Conversely - if your seller was unaware - you may be able to extract some repair money. Make sure you fashion your ask with copies of your findings along with a reasonable dollar amount. What is unreasonable? Asking for a new roof on a forty year old building.

He will tell you yes. Bingo! However - the way in which the request is fulfilled is as important as the seller agreeing. A reduction in price is common. This makes a lender happy although he must re-work the loan percentages. Credits through escrow used to be the norm. Lenders now frown upon this as buyers supplemented their down payment - a no-no. Finally, a seller may simply offer to make the repairs. I’ve seen this approach work well when the dollar amounts are small or quick fixes are possible. Most sellers will not opt to do the refurbishments - however - as they don’t want the liability or the timing delays.

He will not respond. Similar to saying no - but akin to your parents answering “we will see.” So why would a seller not respond? Because a no is final. A non-response could be one of the following. He believes you’ll proceed anyway if he waits. Or - other parties to the transaction - IE the real estate professionals - might kick in. Maybe the seller wants to gauge the interest of bridesmaid buyers. Our AIR CRE Purchase and Sale Agreements allow for this “maybe” period with a ten day response requirement.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.