9 Items to Request in the Purchase of an Office Building
By: Craig Watrous
The commercial real estate market in Colorado continues to be hot. We thought this list of 9 items a Buyer should request when purchasing an office building might be useful to potential buyers. Some of these are conceptual contract terms vs. physical documents. The acquisition of an office building is a complicated and nuanced transaction. This list is certainly not exhaustive and covers some items that occasionally get overlooked in these transactions.
1. Existing Leases:
The Buyer should have the right to examine the existing leases on the property. The Buyer needs ample time to review these leases and, in some circumstances, may want to request the ability to speak with some of the tenants. If these leases contain unacceptable terms, retain the ability to back out of the deal.
2. Verification of Rent Roll:
The Seller should provided a signed verification of the existing rent roll on the property verifying that the rent actually collected is consistent with the terms of the leases.
3. Assignment of Leases
All of the leases, as well as the related security deposits, and guarantees, should be assigned by the Seller to the Buyer.
4. Credit for Prepaid Rent:
The Seller should provide the Buyer with a credit for any prepaid rent and other expenses paid by the tenants on the property.
5. Estoppel Certificates:
The Seller should provide estoppel certificates from each of the tenants on the property. This should verify/reveal existing disputes with the tenants.
6. Service Contracts:
Request copies of all existing service contracts related to the property. Review the terms and conditions to determine if such service contracts can be assigned and if the Buyer actually wants them assigned.
7. Description of the Property:
The Seller should provide a detailed description of the property including all leasehold improvements and personal property.
8. Early Title Work:
It’s always a good idea to run title work early in the process of negotiating the purchase of an office property. Clearly a title policy will be issued in connection with the purchase (which is a topic for future blog posts), but prior to the issuance of the title policy, request and O&E on the property. An O&E can highlight certain red flags that may need to be addressed prior to closing like easements and other encumbrances on the property.
9. Right to Sue Seller for Prior Lease Breaches:
Always retain the right to sue the Seller for damages resulting from the Seller’s failure to comply with the terms of the property’s leases prior to the date of closing.
These are just a few of the key areas that a Buyer should consider when purchasing an office building. Don’t allow the negotiation to become a Buyer beware situation. Become as informed about the property as possible prior to closing. I hope they’ve provided some food for thought.
(Mallon Lonnquist Morris & Watrous, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado real estate attorney and partner at MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of real estate purchases. Craig can be reached at firstname.lastname@example.org.)