Three Differences Between Commercial and Residential Transactions

Agents looking to become involved in commercial transactions should be aware of and should consider the differences from a residential transaction.

COMMERCIAL VS. RESIDENTIAL TRANSACTIONS

This article is intended to provide a brief overview of what I believe are the main differences between a commercial transaction and a residential transaction:

1. The duty to disclose;
2. Due diligence; and
3. Tax matters

IMPORTANCE OF DUE DILIGENCE

The most significant difference between a residential and commercial deal is that commercial sellers do not have an affirmative duty to disclose any defects with the property.* Thus, a prudent commercial buyer will include a list of desired representations and warranties it would like a seller to make. Commercial buyers will rely heavily on these representations and warranties to gain valuable information about the property. In negotiating the contract, if a seller is unwilling to make a certain representation or warranty, this should raise a red flag for the buyer and, if the buyer proceeds with signing the contract, should be thoroughly investigated during the due diligence period.

Accordingly, due diligence is a critical time period in a commercial transaction. Commercial buyers will usually perform numerous tests and analysis of the property, such as a Phase I or II environmental assessment, geotechnical studies, zoning analysis, and other inspections. For commercial property with tenants, due diligence is the time to assess the financial viability and desirability of the tenants and the leases, which will survive the purchase. Due diligence is also the time for the buyer to determine which aspects of the deal it will be able to achieve. For example, can the property be used how buyer intends, will the buyer be able to obtain needed governmental approvals or permits, or are there easements or other resections preventing development? If the buyer cannot satisfy itself that it will be able to ultimately develop or use the property as it intends prior to closing, it should terminate the contract. Additionally, to protect the parties after the expiration of the due diligence period from pre-closing uncertainties and to ensure the parties dutifully work towards closing (which may not occur for several months), commercial contracts generally have a list of specified conditions that must be satisfied or occur prior to closing. If these enumerated conditions are not satisfied, the buyer generally (unless it is in breach) will be entitled to terminate the contract and receive a return of the deposit.

TAX CONCERNS

Lastly, commercial transactions frequently involve federal and state tax matters. For example, the Internal Revenue Code may require an allocation of the purchase price to items such as goodwill, tangible personal property, land improvements, and non-compete agreements. The allocation will have implications for ad valorum tax and documentary stamp tax matters as well.

For more information on this subject, join us at RASM North on March 18 for Breaking It Down: How Commercial Contracts Differ from Residential.

*“Although the doctrine of caveat emptor was abolished in residential real estate transactions, Johnson v. Davis, 480 So.2d 625 (Fla. 1985), this court has specifically found that Johnson did not extend a duty to disclose to commercial transactions, and thus did not change the long line of case law establishing caveat emptor as the rule in the sale of commercial property.” Wasser v. Sasoni, 652 So. 2d 411, 412 (Fla. 3d DCA 1995).