Disclosures in a Commercial Real Estate Sale

A discussion about disclosures in real estate often initially elicits an image of a family being tricked into buying a house from a fraudulent seller who neglected to mention the leaky roof and sinking foundation. It is a valuable protection for homebuyers to have some level of security when purchasing a home, but what protections are available when the transaction is a commercial transaction (i.e. the property is being purchased for business or other investment purpose)? This article seeks to answer such a question by highlighting the features of commercial real estate disclosures in Texas.

Legal Structure

Commercial real estate disclosures are largely left to the individual buyer and seller (and their respective legal representatives) to negotiate and work into their land sale contract. There are required disclosures that are applicable to all types of land sales, but they are minimal and don’t by themselves offer much protection. A brief sampling of such disclosures includes the disclosure of potential additional tax liability on vacant land sales and the possibility that the property may become part of a municipality in the future. The Texas Property Code also requires a disclosure stating that the water level at the property fluctuates, followed by reasons why it may fluctuate where the property sits nearby a body of water, such as a reservoir or lake, that has a storage capacity of at least  5,000 acre feet at its normal level. To find additional disclosure requirements required for real estate transactions, additional sources of Texas law must be consulted such as the Texas Occupations Code or the Texas Administrative Code.

Although the law in Texas does generally leave the parties with the primary responsibility to conduct due diligence and negotiate representations and warranties in a commercial real estate transaction, the Texas Association of Realtors has standard base forms for improved and unimproved sales of commercial real estate, and each form has a ‘Commercial Property Condition Statement’. This statement is a representation of the seller’s knowledge of various components of the condition of the property. An exhibit can also be attached listing specific conditions of the property that are known. As a result, the vast majority of commercial real estate sales end up with contractual protections by virtue of these representations built in to the standard forms. However, a seller or their attorney can also always remove these representations or re-word them in an unfavorable manner. Additional disclosures And representations concerning the condition of a property may also be desirable beyond what is in the standard base forms. For instance, if the seller were to retain ownership of an adjacent parcel of land, the buyer might want to consider whether the seller’s use of the adjacent parcel will interfere with the buyer’s intended use of the property that is being purchased.

Interesting Disclosures

Texas law has some interesting disclosures that you may not think about when you negotiate your commercial real estate transaction. Three of these disclosures include disclosure of water fluctuation, providing any applicable certificate of mold remediation, and disclosures of underground tank systems. All three can affect a buyer’s future business on a property.

A disclosure that applies to both residential and commercial property is the requirement of notice of water level fluctuations. Think flood danger with this one. This is a required disclosure notice where the property adjoins an impounded body of water, such as a reservoir or lake, that has been constructed, and is maintained, pursuant to the Texas Water Code. The body of water must also have a storage capacity of at least 5,000 acre feet at its normal level for this particular disclosure to apply.

Another disclosure required for all real property sales is a certificate of mold remediation. A seller of any real property must provide the buyer with a copy of each certificate of mold remediation issued for the property over the previous 5 years. A mold remediation certificate would be issued on the property where a licensed person conducts a mold assessment as part of a mold remediation project where mold has been removed from the property. This is a disclosure that is easier to miss because it is not published in the Texas Property Code.

A seller is also required to provide a written notification to a buyer where as part of a sales transaction, the seller is also selling an underground tank system. This written notification, among other things, must include the registration and compliance obligations for the underground tank system. Although these systems may be easier to spot at commercial real estate locations for gas stations, the presence of these systems may pose an unexpected surprise for some buyers of commercial real estate.

Conclusion

                  For the most part, Texas law leaves disclosures regarding a property up to the seller and buyer in a commercial real estate sales transaction. There are a few disclosure requirements, but these disclosure requirements are nowhere near the level of the disclosure requirements for residential real estate sales transactions. This lack of legal authority places greater importance on the contract drafted between the buyer and seller in a commercial real estate sales transaction. Although the base standard contract forms provided by the Texas Association of Realtors offer a certain level of protection in their base format, these terms can easily be removed, and it may be in the best interests of a buyer to require a larger amount of both disclosures and representations and warranties regarding the property’s condition. For more information on protecting yourself in a commercial property sales transaction, please call us for a consultation at 844-4DODSON.

2018-08-23T11:38:56+00:00August 23rd, 2018|Blog|

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