- When a buyer acquires commercial real estate, he or she takes it subject to any leases or encumbrances on the property.
- It is very important, therefore, to have a title search done prior to acquisition to know what encumbrances are present.
- And to have a plan to deal with the lienholders after the purchase.
During my work week, I sometimes get reminded of interesting issues that commercial real estate owners may face. And I think – this would make a good blog idea. This happened to me recently when I was reminded of the challenges that owners face when dealing with leases and other encumbrances on properties they are purchasing. Obviously these can significantly impact a project, and it is important for owners to understand their rights and obligations under these agreements.
So that’s what we are going to talk about this week.
Leases can be a Burden to an Acquisition
Clouds on title can come in many forms. And one of those, of course, is a lease. A lease is a contract between a landlord and a tenant that gives the tenant the right to occupy and use the landlord’s property for a specified period in exchange for rent.
When a buyer purchases a property that is currently leased to tenants, the buyer is required to honor the terms of any existing leases. He or she takes the property subject to the leases. This means that the buyer cannot evict the tenants or change the terms of the leases without the tenant’s consent.
If the buyer wants to terminate a lease early, he or she will need to negotiate with the tenant to reach an agreement. This may involve paying the tenant a buyout fee or offering them a new lease on different terms. This can, therefore, increase the cost of the project for the buyer.
Buyers Should be Aware of Other Encumbrances Also
But leases are not the only type of encumbrance that can cloud title. There are also easements, liens, and restrictive covenants, etc. All of these will limit the owner’s rights in the property.
Easements are the right of one party to use another party’s property for a specific purpose. For example, a utility company may have an easement on a property to lay underground pipes.
Liens are claims against a property to secure a debt. For example, a construction company may have a lien on a property to secure payment for work that it has done.
Restrictive covenants are limitations on the use of a property. For example, a restrictive covenant may prohibit the construction of certain types of buildings on a property.
When a buyer purchases a property with encumbrances, it is also required to take the property subject to those encumbrances. So once again, to get title cleared, the buyer could have to negotiate with the lienholders.
Negotiating with Tenants and Encumbrance Holders
Negotiating with tenants and encumbrance holders can be a complex and challenging process. It is important for owners to have a clear understanding of their rights and obligations under the existing encumbrances.
This shows why title insurance is so important when acquiring commercial real estate. A title commitment will highlight any clouds on title and your lawyer can make sure they are dealt with before closing. And if the encumbrances do not show up, then the title company is responsible for it post-closing.
We recommend, therefore, that before purchasing a commercial real estate property, you:
- Conduct a thorough title search to identify all of the leases and encumbrances on the property.
- Have an experienced commercial real estate attorney review all of the leases and encumbrances identified.
- Develop a plan for negotiating with tenants and encumbrance holders.
- Be prepared to offer tenants and encumbrance holders fair compensation in exchange for their consent to terminate or modify the leases or encumbrances.
- Be patient and persistent. Negotiating with tenants and encumbrance holders can take time and effort.
Leases and encumbrances can be a challenge for commercial real estate owners, but they can be overcome with careful planning and negotiation. By working with an experienced commercial real estate lawyer, developers can minimize the risks associated with leases and encumbrances and maximize their chances of success.