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Navigating Commercial Property Purchases with Existing Leases: Key Considerations for Buyers and Sellers

Posted on August 15, 2023

When purchasing a commercial property that comes with existing leases, there are several crucial factors that buyers and sellers need to consider to ensure a smooth and successful transaction. Obtaining accurate and up-to-date lease information is essential for buyers to make informed decisions and for lenders to decipher current and future income value. One of the essential tools in this process is the estoppel certificate.

An estoppel certificate is a legal document provided by a tenant to a potential buyer or lender, outlining crucial lease-related information. It acts as a snapshot of the tenant’s current obligations, rights, and lease terms. For buyers, obtaining estoppel certificates from existing tenants is a vital step before finalizing a commercial property purchase.

Estoppel certificates typically outline:

  1. Lease Terms: The document provides insight into the current lease agreement, including rental rates, lease duration, renewal options, and any agreed-upon modifications.
  2. Rent Payment Status: Buyers can ascertain whether tenants are up-to-date on rent payments or if there are any outstanding balances.
  3. Security Deposits: Estoppel certificates indicate the amount of security deposits held by landlords, ensuring proper handling during ownership transfer.
  4. Operating Expenses: These certificates may detail the tenant’s responsibility for covering specific operating expenses, such as utilities, maintenance, and property taxes.
  5. Subleases or Assignments: Tenants may provide information about any subleases or assignments of the lease to other parties.
  6. Options or Rights: The document may highlight the tenant’s options or rights, such as first right of refusal on adjacent spaces or lease renewal rights.

First right of refusal clauses are common in commercial leases and grant existing tenants the option to match or exceed a third-party offer to lease or purchase adjacent space or the entire property. Understanding these clauses is vital for both buyers and sellers.

Necessary lease negotiations prior to a sale.

Renegotiation of necessary lease terms prior to a sale can involve sellers, buyers, and tenants. Each party plays a distinct role in shaping lease agreements that align with their interests. Tenants may be reluctant to sign the estoppel certificates when they have legitimate disputes with the current ownership regarding outstanding issues. When a tenant is aware that a property is for sale, the tenant can impose additional obligations on the seller to satisfy the tenant’s outstanding requirements. A seller will work to shield the buyer from tenant issues; however, any new lease negotiations will have to be presented to a vested buyer (contracted to purchase the property).

Purchasing a commercial property with existing leases requires due diligence and attention to detail from both the buyer and the seller. It is important that the seller prepares for their role in transferring the property while accurately reporting all information contained within the leases.  It is important for the buyer to verify all of the data and information provided by the seller.  A proper estoppel certificate will be executed by the seller, buyer, and tenant to confirm that all information relayed is accurate and acceptable.

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