Today,
I will delve into the topic of cancel culture. No, not stifling free speech, but
the cancellation of a commercial real estate deal - AKA, how to unwind a
transaction. As
mentioned in this space over the years - commercial real estate agreements come
in two forms - leases and sales. Unlike our residential colleagues,
commercial leases can make up a substantial portion of our practices - in some
cases 100%. Because many businesses opt to lease the premises from which they
ply their professions and the sale market these days has an acute shortage -
more and more leases are originated. Clearly, cancelling either - sale or lease
- have their nuances - so I’ll spend time on both. What
precedes each direction is an identification of needs, a survey of the market,
tours of potentials, negotiation and contracts. Departure occurs at the documentation
stage. When a lease is signed, the deal is done - notwithstanding fit out and
move-in. When a Purchase and Sale Agreement is executed - the deal begins. As
you can gather, unwinding depends upon where you are in the process. Allow me
to dissect. Leases. Until you scratch your John Hancock on that 17 page tome -
you can walk away - even if you’ve signed a Letter of Intent. In some cases,
after you’ve signed a lease and you don’t timely deliver the deposits called
for - the owner can hit eject. But generally, once you and the owner sign,
deposits and insurance are swapped, a lease agreement is affected. Now. Should
circumstances cause a “delay in possession” - meaning you can’t move in -
beyond what’s outlined - a cancellation may occur. Ok.
You’re in and things change. Now what? Typically, you’ve three alternatives -
buy-out, sublease, or default. A
buy-out works like this. With the lease, you have committed to a certain dollar
obligation which is calculated by multiplying your monthly rent by the years
remaining on your term. Let’s say this figure is a million dollars. In order to
achieve a buyout, you would approach the owner of the building and offer her a
fraction of the remaining obligation. She then will analyze whether taking a
buyout is in her best interest. Specifically - with the money offered - can the
costs of sourcing an new occupant be absorbed. Next,
a sublease. You attract a surrogate to live out your lease and do all of the
things you committed to do - like pay the rent, reimburse the property taxes,
mow the lawn, etc. Beware. Subleases must be ok’d by the landlord - but she
can’t be unreasonable. Finally,
you walk away and stiff the owner. Never recommended as all manner of legal
recourse will be unleashed. But. It’s an option. Sales. Recall. When a Purchase and Sale Agreement is signed, the
stopwatch begins ticking. Until a deed is recorded - signaling the race is over
- there are escapes. The
easiest occurs during a due diligence period. Accomplished within 15-60 days from
execution of a contract is a commitment for financing; a review of title;
inspection; forensics of the leases(if any), expenses and income; and an
investigation of environmental conditions. If any don’t pass muster and a
solution compromise can’t be reached - over and out. Once
all of the conditions outlined in a contingency period are waived - some money
is at risk. Meaning, the buyer may bolt - but the deposit is forfeited. Some
may wonder - hmmm. It appears the buyer holds the key. When can a seller
cancel? Simply, if the buyer performs - the seller can’t. My lawyer buddies are
collective saying - uh huh! True. Suffice to say, however, a costly “specific
performance” battle may ensue. Probably, the wackiest example of this occurred
a couple of years ago with a seller we represented. It seemed the seller -
after committing to sell his property - and the buyer waiving contingencies,
discovered a costly pre-payment penalty. I received a call one day from the
seller asking me to cancel the deal. Astonished, I asked - “on what basis”?
‘Because I can’t afford the pre-pay, he replied”. Hmmm. Fortunately, we
persuaded the buyer to walk away. But not without a reimbursement of their
costs and paying their agent. 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.blogspot.com.
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