Hiring an Attorney When Selling Commercial Real Estate

Hiring an Attorney When Selling Commercial Real Estate

When selling commercial real estate, making use of an attorney’s services is a very good idea.

Based on their experiences when selling residential real estate, many sellers believe that it’s good enough to rely on a real estate broker or the buyer’s attorney in commercial real estate transactions. Although it’s common for buyers’ lawyers to prepare deeds and other documents for sellers in residential transactions, it’s highly recommended that when selling commercial real estate you hire an attorney. Commercial real estate transactions involve many complex steps, and if a seller hires an attorney from the start of the process, they can assist the seller with protecting their proceeds from the sale and avoiding liability from unexpected issues.

Selling Commercial Real Estate

Property Listing

Brokers are often used when selling commercial real estate. A broker will provide a Listing Agreement to the seller. As Listing Agreements are generally prepared by associations representing brokers, the terms of Listing Agreements are normally very “broker-friendly.”

Most sellers, even those that do hire attorneys to assist with the closing documents, don’t involve an attorney while listing their property. This may be detrimental to the seller as even though a Listing Agreement may seem to be standard and cast in stone, brokers are often willing to negotiate the details. A standard Listing Agreement may for example state that the broker earns commission when a seller accepts the buyer’s unconditional offer. This means that there is no requirement for the transaction to be finalized before the commission becomes due. In these cases, a seller could negotiate that commission is only due when the deal is closed and the seller has received the sale’s money.

Purchase and Sale (P & S) Agreements

A buyer will typically present the seller with a Purchase and Sale Agreement. P & S Agreements are however often “standard forms” that have been revised and vetted by New York Association of Realtors members and, in some cases, New York Bar Association members. If a buyer uses such a form, their broker will help the buyer to complete the form and present the offer (brokers for buyers and sellers in New York aren’t permitted by law to alter written P & S Agreement’s terms and conditions). A buyer may also use the services of an attorney to draft a unique P & S Agreement.

Irrespective of how the buyer obtains the P & S Agreement, it will be beneficial for the seller to hire a lawyer to check the agreement before signing to limit their risk. A seller’s attorney in New York may alter a P & S Agreement’s terms and conditions once it has been presented by the buyer, something a real estate broker may not do. A seller may for example prefer to limit the warranties and representations the P & S Agreement specifies the seller should give to a buyer, as well as the remedies that may be used by a buyer if the seller defaults. The P & S Agreement’s terms also dictate what a seller should deliver to a buyer, including the deed type that must be presented when closing. Some deeds use broad language regarding the title warranty which could expose the seller to title issue liabilities long after the sale, even though the seller may not have known about a problem with the title, the seller did not cause the problem, or it happened before the seller owned the property. Other types of deeds however contain no warranties or limited warranties. Limiting warranties are especially important when the seller has little to no information about the title, like with properties that have been inherited, or properties for which a complete title search hadn’t been done previously. A seller’s attorney can negotiate the type of conveyance deed.

P & S Agreements also describe the property to be sold. The buyer has often put this description together, and it may not accurately describe the property that is to be sold. A seller needs to make sure that they are only obligated to deliver the title to properties they own and are allowed to sell. Very few properties don’t have any title problems (known as “exceptions”), and P & S agreements must include title warranty exceptions which both parties are willing to agree on when the agreement is signed. An attorney can help the seller clarify those issues while the P & S Agreement is being negotiated to make sure that the seller doesn’t contract to sell more than what they own.

Closing When Selling Commercial Real Estate

When selling commercial real estate, you must deliver specific documents at closing, including the deed, to a buyer. It often happens that a buyer’s attorney prepares a seller’s closing documents to facilitate the transaction closing as fast as possible. A seller should however be aware that the buyer’s attorney will always act in their best interest, and not that of the seller.

A P & S Agreement for example often states the title warranties’ exceptions in a deed. The buyer’s attorney will often use a type of deed that uses broader warranty language. Title insurance companies also need seller affidavits relating to mechanics and construction liens. Dependent on the actual scenario, there may be various types of waivers and affidavits required. Sellers should never execute sworn statements, such as affidavits, that haven’t been approved by their attorney as that attorney can make sure that the form only contains accurate facts and that the correct form is used. Sellers risk certifying and assuming responsibility for inappropriate statements if they don’t have legal representation.

Conclusion

Just like buyers, you should hire an attorney early in the process of selling commercial real estate to make sure their best interests are safeguarded throughout the complete transaction.

Selling a Business

When selling a business, ownership of the business can be transferred to another party in various ways. Depending on the type of business ownership, there may be different tax implications, i.e. whether it is a partnership, sole proprietorship, limited liability company, or corporation. Lawyers and accountants can assist in deciding which way to transfer a business’ ownership is best, and when the best time would be to sell a business.

Methods of Transferring Ownership When Selling Commercial Real Estate

Outright Sale. The easiest, fastest, and most often used way to transfer ownership of a business is to sell it outright to another party. If the business is sold all at once, ownership can be transferred payment received immediately. This may be the best option if quick cash and is needed, or you want to exit the business fast without any further involvement.

Lease Agreement. With this type of agreement, you still own the business, but you get someone else to run it and make monthly payments. Leasing a business is a great option if the owner is not sure that they want to be selling the business, but they are prevented from running the daily operations by circumstances.

This option is a good fit if a buyer wants the current owner to be their mentor and help show them how to run the business over a period. Lease Agreements normally specify a term or period. The lease may also normally be extended or renewed. When the lease expires, the business will revert to the owner.

Gradual Sale. With a gradual sale, the daily operations of the business are turned over to another party, but the owner still receives income from the business over a period. This option is good if you prefer or need a steady income from the business but prefer not to, or are no longer able to run the business.

This may also be a good option for a buyer, as the buyer may not be able to pay a big amount of money, or may not be able to get a loan for the lump sum. In that scenario, the owner helps the buyer finance the purchase. A gradual sale may also be a good fit for a buyer that wants the current owner to be a consultant and help show them how to run the business over a period. The last two options could also be made available as part of an outright sale of the business.

Selling Commercial Real Estate

Valuation. When selling commercial real estate, the first step is determining its value as this will help the owner set a fair price. A business can be valued in various ways. The purchase price can be set using the value of the assets in the business, added to the reputational value and the customer base’s value of the business. This is known as the business’ “Goodwill”.

Another way is to evaluate the price at which a similar business at the location and within the industry has recently been sold for. The valuation of a business is crucial. If the business is priced too high, potential buyers won’t be interested, while if it’s too low, you won’t get a fair financial reward for the hard work you’ve put into the business.

Getting the Business in Order. After setting the purchase price, you need to ensure that the business is being run as well as it can be before starting to advertise it as being for sale. Once a business is put up for sale, potential buyers will scrutinize business operations very closely.

It’s important to look at the business’ operations closely. If there are any flaws, these need to be fixed. Some areas that should be evaluated include:

• Ongoing lawsuits, disputes, and claims against the business. These should be addressed before putting the business up for sale.
• The condition of the business premises. All outstanding repairs should be addressed, and trade fixtures and equipment updated.
• The corporate books for the last three years should be reviewed or audited by an accountant. Any outstanding judgments or taxes should also be paid.

Attracting Buyers. Once the business is running well with no outstanding issues, it’s time to let potential buyers know the business is for sale. Depending on the popularity and how successful the business is, you may not even have to officially advertise that you are selling, as word-of-mouth may already draw in potential buyers.

Many sellers will however have to advertise that their business is for sale on business sale websites, in trade publications, and in newspapers. You may also consider hiring a business broker that will market the business to bigger groups of potential buyers.

Due Diligence. Prospective buyers wanting to buy the business will evaluate the business’ operations before they take the next step of actually purchasing the business. This evaluation process is known as “Due Diligence.”

When to Do Your Due Diligence

This step can be performed at different times. Some potential buyers only want to do due diligence once the basic purchase terms have been agreed upon, while others will want to do it before starting serious negotiations. Others may even want to wait until all parties have signed a Purchase Agreement. When doing Due Diligence, prospective buyers might ask several questions, including:

• Financial information and corporate books, including past tax returns and financial statements.
• Corporate formation documents.
• Intellectual property portfolio.
• Important agreements, including equipment and real estate leases.
• Information regarding ongoing or past litigation and disputes.
• Applicable permits and licenses.
• Employment arrangements and agreements.
• Information regarding current or past environmental issues.

To ensure that the information provided to prospective buyers will only be used to help them in deciding whether they still want to buy the business, you should ask them to sign an agreement in which they undertake not to disclose any of the business’ private information or secrets, before turning over any documents. This is known as a Confidentiality or Non-disclosure Agreement.

Negotiating When Selling Commercial Real Estate

Sale Condition Negotiations. After completing the Due Diligence, a potential buyer may decide that they don’t want to purchase the business. If a buyer is however still interested, the next step is to negotiate the conditions of the sale, including terms and price. Several key points have to be included during the negotiations, including:

• Which assets (if any) you will keep.
• How and when the purchase price will be paid.
• What is being sold – the business entity, or all or a part of the business’ assets.

You’ll also have to decide whether or not to use the services of an attorney to help you with the negotiations. Although some business owners prefer to negotiate for themselves, others will first work with an attorney to develop a strategy for negotiation, and then do the negotiating themselves. Others prefer to hire an attorney to represent them during the negotiations. You should decide on which option will be the most suitable for you.

Letter of Intent

The next step in the process is normally to prepare a document that details how the transaction will be done. This is often known as a “Letter of Intent” or “Deal Memo.” This document spells out the terms and conditions of the purchase, the purchase price, and other important business points relating to the sale of the business. It is also used as the basis for a Purchase Agreement. The Deal Memo normally doesn’t bind the buyer or the seller, which means either party may still change their mind later.

Purchase Agreement. The Purchase Agreement is drafted next and it specifies the terms and conditions of the sale of the business in a binding contract. A Purchase Agreement generally includes:

• A list of contracts the buyer will take over.
• What happens if the buyer doesn’t pay the full purchase price?
• Details of which parts of the business are being sold, such as Goodwill, inventory, equipment, intellectual property, and customer lists.

If you have completed the preceding steps and haven’t yet hired an attorney, you may consider hiring one at this stage as the Purchase Agreement is generally drafted by the seller’s lawyer. An attorney can help ensure that you haven’t missed anything while making sure that the deal’s details have been worded correctly. This will ensure that what is contained in the contract you sign will match what was agreed on when you negotiated or signed the Deal Memo.

Final Steps of Selling Commercial Real Estate

Purchase Agreements generally allow for a down payment to be paid by the buyer upon signing (often from 5% to 10% of the sale price), while the balance should be paid to the seller at closing. The buyer will sometimes have the option to pay the balance over a set period. If this is the case, you should also get the buyer to sign a Security Agreement and/or a Promissory Note at the closing.

Closing. This is the final step of the process and is where the business is turned over to the buyer. Both parties will appear at the Closing with their attorneys. Other parties may also need to be present at the closing. These include the landlord to ensure that the lease is transferred to the buyer properly. Your bank’s attorney may also be present if there are outstanding loans on the property. The buyer’s bank may also send their attorney to the closing if the buyer is buying the business by taking out a loan.

Once all the documents have been signed and exchanged, there are still several tasks to perform. These include winding up the business entity’s operations, canceling general liability insurance, closing business bank accounts, etc. If the business assets have been sold, but not the “entity,” the entity has to be dissolved and the applicable documents need to be filed with appropriate state agencies.