Legal Checklist for buying a building

Oct 1, 1997 12:00 PM, Fred S. Steingold

Murphy said it best: "If something can go wrong, it will go wrong!" Murphy's Law applies with full force when a business purchases a building. And, sad to say, much can go wrong. You may, for example, sign a contract to buy a building but then learn that:

Your bank won't approve the mortgage loan you were counting on to cover 90% of the purchase price.

The seller is just leasing and doesn't own the next-door parking lot that you thought went with the building.

The local zoning ordinance doesn't allow your kind of business at that location.

Toxic chemicals have contaminated the ground outside the back door and you, as the buyer, have to pay for the environmental clean-up.

The air-conditioning system is just limping along and will have to be replaced within six months.

The list could go on and on. Obviously, you need to protect your business legally so that you don't wind up with a pile of nightmares instead of the building of your dreams. There are two main ways to get the protection you need. The first is to get an option to buy the building. You pay an option fee - say $2,000 - for the right to buy the building at a specified price during the next 90 days (or during whatever time period you and the seller agree upon).

During the option period, you carefully check on the possible problems listed below. If you decide not to go ahead, then you forfeit your option fee. A word of advice: Try for a clause in the option agreement stating that if you do buy the building, then the option fee will be applied toward the purchase price.

The second and more common way to buy a building is to sign a sales contract - one that lets you cancel the deal if the details don't work out to your satisfaction. If that happens, then you should have the right to get back your earnest money deposit.

Your protection here comes in the form of contingency clauses - escape hatches that let you walk away from the deal with no obligation to the seller. A lawyer can help you craft the precise wording of the contingency clauses. For now, we'll concentrate on some concepts worth considering.

The contract should allow you to cancel the purchase and get back your earnest money deposit if you don't get the following items within stated time limits:

A mortgage loan for a designated percent of the purchase price at no higher an interest rate than what you've specified.

A satisfactory survey (at the seller's expense) showing exactly what you're buying. You want to be sure that the building doesn't encroach on someone else's land and that the adjoining parking spaces are within property boundaries.

A contractor's inspection (at your expense) resulting in a report that's acceptable to you. If it turns out the building needs a new roof or major plumbing work, you can cancel the sale - or try to negotiate a lower price.

An environmental review so that you won't be faced with an expensive clean-up because of a leaking oil tank or chemical spill.

A certificate of occupancy from the local building department stating that the building meets all city requirements - no problems with the electrical, plumbing and heating systems, for example. You don't want to be closed down because some part of the building code hasn't been satisfied.

Zoning clearance confirming that your business use will comply with the local zoning ordinance. A retail business may not be allowed in an office zone. A manufacturing operation may not be allowed in a retail zone. You need to know that you can use the building the way you want to.

Assurance that private building and use restrictions, sometimes called covenants, conditions and restrictions, won't prevent your intended use.

Your lawyer's approval of the title insurance commitment. You want to be sure you're getting a clear title to the building - no construction liens or unpaid mortgages.

So much for contingencies. What else should go in sales agreements? Consider covering these topics:

Personal Property. Generally, the seller has the legal right to remove personal property, which basically is anything that's not nailed down. To avoid surprises, list the stuff that's going to stay - display counters in a retail store, for example, or window air-conditioners in an office.

Property Taxes. Provide a formula for how real estate taxes will be apportioned. Typically, the seller will have paid property taxes in advance. This means that you'll have to rebate some portion to the seller. There may, however, be different formulae for doing this - some favorable to you and some favorable to the seller. Avoid misunderstandings by specifying the method in the sales agreement.

Utility Bills. As with taxes, you may have to apportion utility bills because the closing date may fall in the middle of a billing period. Plan ahead for how to deal with all utility bills: electric, natural gas and water.

Repairs by Seller. If the seller is going to repair or renovate the building before closing, list in detail everything that the seller will be doing and provide for final approval by an architect or contractor selected by you.

Existing Tenants. If there are existing tenants or occupants in the building and you plan to move in right after closing, make it clear in the contract that you'll get possession at closing and that "time is of the essence" - a legal phrase that sets a firm deadline for the seller to turn over to you an empty building.

Damage to Building. State that any damage to the building before closing (such as damage caused by fire, windstorm or flooding) is the seller's responsibility.

Condition of Building. Specify that the building will be "broom clean" at closing. That way, you won't have to haul a truckload of debris to the city dump.

With a carefully worded contract in hand, your building purchase should proceed smoothly -- and free of legal hassles.