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 contractto 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 thatyou thought went with the building.
The local zoning ordinance doesn’t allow your kind of business at thatlocation.
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 bereplaced within six months.
The list could go on and on. Obviously, you need to protect your businesslegally so that you don’t wind up with a pile of nightmares instead of thebuilding of your dreams. There are two main ways to get the protection youneed. The first is to get an option to buy the building. You pay an optionfee – say $2,000 – for the right to buy the building at a specified priceduring the next 90 days (or during whatever time period you and the selleragree upon).
During the option period, you carefully check on the possible problemslisted below. If you decide not to go ahead, then you forfeit your optionfee. A word of advice: Try for a clause in the option agreement statingthat if you do buy the building, then the option fee will be applied towardthe purchase price.
The second and more common way to buy a building is to sign a salescontract – one that lets you cancel the deal if the details don’t work outto your satisfaction. If that happens, then you should have the right toget back your earnest money deposit.
Your protection here comes in the form of contingency clauses – escapehatches that let you walk away from the deal with no obligation to theseller. A lawyer can help you craft the precise wording of the contingencyclauses. For now, we’ll concentrate on some concepts worth considering.
The contract should allow you to cancel the purchase and get back yourearnest money deposit if you don’t get the following items within statedtime limits:
A mortgage loan for a designated percent of the purchase price at no higheran interest rate than what you’ve specified.
A satisfactory survey (at the seller’s expense) showing exactly what you’rebuying. You want to be sure that the building doesn’t encroach on someoneelse’s land and that the adjoining parking spaces are within propertyboundaries.
A contractor’s inspection (at your expense) resulting in a report that’sacceptable to you. If it turns out the building needs a new roof or majorplumbing 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 expensiveclean-up because of a leaking oil tank or chemical spill.
A certificate of occupancy from the local building department stating thatthe building meets all city requirements – no problems with the electrical,plumbing and heating systems, for example. You don’t want to be closed downbecause some part of the building code hasn’t been satisfied.
Zoning clearance confirming that your business use will comply with thelocal zoning ordinance. A retail business may not be allowed in an officezone. A manufacturing operation may not be allowed in a retail zone. Youneed to know that you can use the building the way you want to.
Assurance that private building and use restrictions, sometimes calledcovenants, conditions and restrictions, won’t prevent your intended use.
Your lawyer’s approval of the title insurance commitment. You want to besure you’re getting a clear title to the building – no construction liensor 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 removepersonal property, which basically is anything that’s not nailed down. Toavoid surprises, list the stuff that’s going to stay – display counters ina retail store, for example, or window air-conditioners in an office.
Property Taxes. Provide a formula for how real estate taxes will beapportioned. Typically, the seller will have paid property taxes inadvance. This means that you’ll have to rebate some portion to the seller.There may, however, be different formulae for doing this – some favorableto you and some favorable to the seller. Avoid misunderstandings byspecifying the method in the sales agreement.
Utility Bills. As with taxes, you may have to apportion utility billsbecause the closing date may fall in the middle of a billing period. Planahead for how to deal with all utility bills: electric, natural gas andwater.
Repairs by Seller. If the seller is going to repair or renovate thebuilding before closing, list in detail everything that the seller will bedoing and provide for final approval by an architect or contractor selectedby you.
Existing Tenants. If there are existing tenants or occupants in thebuilding and you plan to move in right after closing, make it clear in thecontract that you’ll get possession at closing and that “time is of theessence” – a legal phrase that sets a firm deadline for the seller to turnover 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’sresponsibility.
Condition of Building. Specify that the building will be “broom clean” atclosing. That way, you won’t have to haul a truckload of debris to the citydump.
With a carefully worded contract in hand, your building purchase shouldproceed smoothly — and free of legal hassles.