How to Unwind a Commercial Real Estate Deal

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?[email protected] ?or 714.564.7104. His website is?allencbuchanan.blogspot.com .

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