Transcript Document

Commercial Core Law
3 Hours CE
Florida Realtors®
Copyright© 2015
Objectives
• To recognize and distinguish between a
commercial transaction and a residential
transaction
• To understand the basic premise of the license
law as it pertains to the brokerage of
commercial real estate
Objectives
• To understand the contents of an industry
listing agreement for either a lease or
purchase
• To understand the purpose of a Letter of
Intent and Confidentiality Agreements
Objectives
• To understand the contents of an industry
purchase contract for either a lease or
purchase
• To understand why there is not an industry
commercial lease form
Objectives
• To understand the disclosure requirements in a
commercial transaction
• To appreciate and apply general concerns in a
commercial real estate transaction that do not occur in
residential transactions: ADA, commercial tax, long
term agreements, assignments, the role of an attorney
in a commercial transaction, income/expense reports,
rent rolls, sub leases.
Brief Overview
• There is a fundamental difference in the legal
aspects of commercial transactions and
residential ones.
• Article 11 of the REALTOR® Code of Ethics is
devoted to the concept of competence and
how a REALTOR® must ensure they are skilled
enough at a particular kind of real estate
before undertaking to practice it.
Brief Overview
• From listing to closing the entire transaction is
different in practice as well as how the courts
view them legally.
Lease(s)
• A residential lease agreement is a contract
between an individual tenant and the landlord
to use property for living arrangements
• Where a commercial lease is a contract
between a business tenant and landlord for
use of commercial property with the purpose
being to generate a profit or a tax write off to
the owner
Purchase(s)
A residential contract is not usually appropriate
to use for commercial purposes, because there
are certain things commercial buyers and sellers
want to do that the standard residential contract
does not cover, such as:
Purchase(s)
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Delayed or second deposit
Particular documents from the Seller
Extended inspection periods
Specific representatives and warranties
Commercial Closing Considerations
Brokerage fees and other closing costs such as
attorney’s fees
Chapter 475
Chapter 475 applies to all Residential and
Commercial Licensees. Specifically, 475-61J2 as
follows:
• 61J2-1.011 License and Examination Fees
• 61J2-2.027 Applications by Individual
Disclosure Requirements
in a Commercial Transaction
Scenario: You own a commercial building which has been on the
market for over two years. After anxiously waiting, a potential
buyer shows interest in the property. There is just one problem
you know that the building needs a new roof based on the leaks
you have discovered a few days ago. Do you, as the commercial
property owner, have a duty to disclose this problem to the
potential buyer?
Disclosure Requirements
in a Commercial Transaction
There is no affirmative duty to disclose material
facts which impact the value of the property
however, you cannot actively conceal the
alleged problem in order to prevent the
purchaser
from
discovering
it
independent inquiries or investigation
through
Disclosure Requirements
in a Commercial Transaction
The buyer must have an equal opportunity to
become aware of the problem
If you disclose part of the problem, you must
disclose the full extent of the issue
Disclosure Requirements
in a Commercial Transaction
Florida law will generally impose a duty to
disclose the issue if there is a fiduciary
relationship between the parties
Cooperative Compensation Agreements
There are some distinct differences between
commercial and residential transactions that
practitioners need to observe to ensure they
are paid their commission.
Cooperative Compensation Agreement
There is no standard cooperative commission for
any
commercial
transaction.
Separate
commission agreements between brokers are
recommended
to
ensure
compensation are clear.
the
terms
of
Broker Lien Law
Florida Statutes § 475.705(3) (2012)
• Does not permit a lien on title, only on the
proceeds.
• A licensee can’t opt out of adhering to this
law in order to get a listing
Broker Lien Law
Broker is required, within 30 days after a
commission is earned, and at least one day prior
to the closing, to deliver a statutorily proscribed
commission notice to:
1. The property owner
2. The closing agent
Broker Lien Law
Should a broker fail to deliver a copy of a commission
notice within the required time period the law calls for;
then the broker shall not be entitled to enforce the
broker’s lien. There is an exception to this provision if
the broker’s failure to deliver the notice is because the
owner entered into a contract for the sale/lease of the
property without the knowledge of the broker.
Broker Lien Law
Exception to the provision:
If the broker did not have notice then the broker
may then enforce the lien for a commission if (1)
a copy of the commission notice is delivered to
the owner and the closing agent before the
closing agent disburses the owner’s net
proceeds; and
Broker Lien Law
(2) the broker executes and delivers to the
closing agent a sworn affidavit stating that the
copy of the commission notice was not
delivered within the time period specified in the
Act because the owner entered into a contract
for the sale/lease of the commercial real estate
without the broker’s knowledge.
Commercial Listing Agreements
To be entitled to a commission you must have
an “employment” contract which may be a
listing
agreement
with
a
seller
employment agreement with a buyer.
or
an
Commercial Listing Agreements
Traditionally brokers use one of three types of
listing agreements:
1. Exclusive Right of Sale
2. Exclusive Agency
3. Non-Exclusive or Open Listings
Exclusive Right of Sale
• Most widely used
• Seller agrees to pay the listing broker a
commission
• The listing agreement should spell out
whether the listing will be placed in either an
MLS or Commercial Exchange
Exclusive Agency
• Allows the seller to sell the property without owing a
commission to the broker
• Potential prospects may circumvent the listing broker
which results in procuring cause disputes
Exclusive Agency
Possible procuring cause “fix”:
This property is listed with a broker under an agreement that the
broker will be paid a commission for procuring a buyer for the
property. Buyer warrants to the seller that he or she has not
been shown or made aware of this property by any real estate
broker or sales associate. Buyer agrees that if information to the
contrary is proven by a broker claiming a commission, the buyer
will reimburse the seller for commissions due to said real estate
broker, as well as legal fees.
Non-Exclusive or Open Listing
• Broker finds a ready, willing and able buyer
• The seller may enter this type of agreement with
several brokers
• Broker that brings the offer that is accepted by the
seller is entitled to the commission
• Either party may terminate an open listing
Activity:
Review the Exclusive Right
of Sale Listing Agreement
Terms and Conditions
Commercial listing agreements vary in their
scope and intent. Items to consider in the listing
agreement:
• Identified Prospects
• Price
• Services Broker Shall Provide
Terms and Conditions
Items to consider continued:
• Compensation Agreement
• Owner’s Covenants
• Termination Rights
• Indemnification
All terms of any listing agreement are negotiable
and may differ depending on the nature of the
property. An office building’s listing agreement
may look very different than a listing agreement
for an industrial factory.
Commercial Purchase Contract
Preparation of the commercial real estate
purchase agreement provides an essential outlet
for negotiation and clarification of terms of the
transaction that your client may not have
considered when they began the transaction.
Attention to detail is vital.
consider are:
Some things to
Commercial Purchase Contract
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Escrow Deposit
Due Diligence Period
Existing Liens, Taxes, FIRPTA, Zoning
Assignability
Legal Proceedings
Activity Review the article:
All Appropriate Inquiries in Commercial Real
Estate Due Diligence:
What Inquiring Minds Need to Know
Role of the Attorney
An experienced attorney can help navigate the
process by ensuring:
1. Legally Binding Contract
2. Clear Title
3. No Encroachments and Clear Surveys
4. Tenant Rights and Assignment
5. Delayed Closing
6. Options
Preliminary Agreements
Letters of Intent
A letter of intent has many other names:
1. Term Sheet
2. Memorandum or Understanding
3. Agreement in Principle
4. Binder
5. Commitment Letter
Letters of Intent
Regardless of the name, the function is the
same. To outline the basic terms of the
transaction. What differs is the intended use,
binding or non-binding.
Letters of Intent
• Is the letter of intent binding or non-binding?
• How would you decide on binding or non-binding?
• What should be included in the letter?
• What harm can happen from a simple letter of intent?
Activity
Scenario:
A commercial broker who was new, but
not a rookie. A Letter of intent for
commercial building was executed
between
the
parties
without
a
confidentiality agreement.
The buyer
broker was surprised at the level of detail
the listing broker wanted included, but
thought it would make the contract that
much easier.
Scenario continued:
Their offer, although accepted through the
execution of a letter of intent, was 20% below
list price. The letter specifically stated that the
letter of intent was not binding unless the
parties executed a full purchase contract by a
date certain.
How Did This Go Wrong?
Scenario continued:
The Listing broker took the letter of intent and shopped
it around to other investors. When the buyer asked for
an extension of due diligence the seller said “no, not
unless you want to renegotiate the price.” The buyer
declined and came to find out that a competing offer
was immediately accepted when they cancelled. The
offer was based on the comparison to buyer # 1’s letter
of intent.
Discussion
• How could this have been prevented?
• What are the dangers?
• How could this be solved?
Confidentiality/Non-Disclosure
• A confidentiality agreement is often the first
step in a commercial transaction
• These agreements are rarely “one size fits all”
• Two Major Pitfalls
– List everything but the kitchen sink as confidential
– Fail to provide any procedures for identifying the
confidential information
Confidentiality Agreement aka
Non-Disclosure Agreement
Often is the first step in a commercial real estate
transaction.
Florida Realtors forms library contains a sample
form.
These agreements are rarely “one size fits all.”
Confidentiality Agreement aka
Non-Disclosure Agreement
Two Major Pitfalls:
1. List everything but the kitchen sink as
confidential, and
2. Fail to provide any procedures for identifying
and handling the confidential information.
Confidentiality Agreement aka
Non-Disclosure Agreement
The primary purpose behind a non-disclosure
agreement is to protect the disclosing party’s
valuable secrets, ideas and sometimes their
identity.
A “one size fits all” non-disclosure agreement
may prevent a court from enforcing that very
agreement.
Activity
Review the Florida Realtors
Confidentiality/Non-Disclosure Agreement
Scenario:
A buyer and seller begin negotiating on the
purchase of a strip mall with an anchor store
that is vacant and seven smaller stores, six of
which have current leases but three are set to
expire in less than three months.
Scenario:
The buyer is a large discount chain store that does
volume rather than quality. Some of the tenants are
high end merchants who sell specialty items like art
and clothing. As the parties begin to negotiate will the
Florida Realtors CNA agreement work for them? Why
or why not?
Analysis:
The
Confidentiality
and
Non-Disclosure
Agreement does not bind the seller. That's not
what it was designed for. So if buyer wanted to
bind seller to a confidentiality agreement, buyer
would need to negotiate that with seller.
Analysis:
At a minimum, before agreeing to buyer's
demands
for
a
mutual
confidentiality
agreement, I would want the seller to review its
leases with the smaller stores to ensure that
such non-disclosure would not be a breach of
any of those leases.
Commercial Leases and the
Unauthorized Practice of Law
The Standing Committee on the Unlicensed
Practice of Law recommended that the Supreme
Court of Florida adopt a residential lease from
that could be completed by nonlawyers.
Commercial Leases and the
Unauthorized Practice of Law
The approved forms applied to residential leases of up
to one year in duration. However, when approving the
forms, the Court further stated that “[t]he approval of
these forms in no way authorizes a non-lawyer to give
legal advice, to draft leases or to prepare addenda to
an approved lease form.”
Common Provisions
in a Commercial Lease
“Common” doesn’t really apply to commercial
leases. Things to consider:
• Expense Stop Provision
• Legal Representation
• Damage and Destruction
Financial Information Exchange
in a Commercial Transaction
Buyers are inclined to view all of the current financial
statements surrounding the operating of the business
and what income the property will derive.
This
information, sometimes known as a rent roll or income
statement,
is
usually
part
of
the
confidential
information that is provided as part of due diligence.
Financial Information Exchange
in a Commercial Transaction
Documents:
• Rent Roll
• Income Statement
• Square Footage Usage
• Tax Payments
• Assignment
Activity:
Refresher on Sales Tax on Commercial Leases
from The Florida Bar Journal
MLS Inclusion
Two Types of Commercial Property Services:
1. Commercial MLS
2. Commercial Information Exchange
Commercial MLS
Authorized participants make unilateral offers of
compensation to other participants acting as
subagents, buyer agents or in other capacities as
defined by law.
Commercial MLS
Offers are unconditional except that entitlement
to the compensation is determined by the
cooperating
broker’s
performance
procuring cause of the sale/lease.
as
the
Commercial MLS
Any
REALTOR®
(principal)
is
eligible
to
participate in the Service upon agreeing in
writing to conform to the rules and regulations
of the Service and to pay the costs associated
with participation.
Commercial MLS
Eligible property types (depending on local
rules) include: subdivided vacant land; land and
ranch; business opportunity including some
interest in real property; hotel/motel mobile
home parks; commercial income industrial;
investment; and office space.
Commercial MLS
The participant agrees to arbitrate disputes
involving contractual issues as well as specific
non-contractual issues as defined by Standard of
Practice 17-4 of the REALTOR® Code of Ethics.
Brokers can agree not to arbitrate.
Commercial Information Exchange
A
CIE
is
an
information
exchange
that
participants who have been retained by sellers
of commercial property can market those
properties.
The CIE is also available for
participants that have been retained by buyers
of commercial property to submit information
on the type of property being sought.
Commercial Information Exchange
With no offers of compensation or cooperation,
the CIE is not an MLS.
Any agreement to
compensate would be made on an individual
basis outside of the CIE by the participants
involved in the transaction.
Commercial Information Exchange
Like the Commercial MLS, the Commercial
Information Exchange is available to any
REALTOR® (principal) upon agreeing in writing to
conform to the rules and regulations of the CIE
as well as paying the costs involved with
membership.
Commercial Information Exchange
Participants working with a buyer looking for
property may submit information describing
what the buyer is looking for even though the
participant may not be the exclusive agent.
Commercial Information Exchange
Types of properties eligible for submission are
the same as for the Commercial MLS. These
may include: subdivided vacant land; land and
ranch;
business
opportunity;
motel/hotel;
industrial; investment and office space.
Commercial Information Exchange
Each Participant agrees to arbitrate disputes
involving contractual issues and questions, and
specific non-contractual issues and questions as
defined in Standard of Practice 17-4 of the
REALTOR® Code of Ethics. Brokers can agree not
to arbitrate.
Individual Compensation Agreements
• Compensation, like everything else in real estate is
negotiable
• The type of compensation you receive depends on
the market, your company and what you negotiate
for yourself
• The compensation structure in a commercial
transaction is more complicated than in a residential
transaction
Individual Compensation Agreements
Activity
Scenario: A commercial broker lists a large
office building for rent. A tenant representative
presents a tenant, a confidentiality agreement is
executed and negotiations begin.
A
compensation agreement between the brokers
was executed that offered X% for a tenant
representative over the first five years.
Individual Compensation Agreements
Scenario continued: If the deal is for ten years,
however, that drops to Y%. Renewals would be
half the amount of the original payment. There
was no mention of the timing of payments. At
the time a ten year lease was executed for the
entire building by the tenant and landlord the
tenant representative asked for the full amount
of the commission.
Individual Compensation Agreements
Scenario continued: The landlord disagreed and
said “no, my agreement with the landlord is that
all commissions are paid by the landlord over
the course of the lease and broken into two
separate payments, one at lease signing and one
at the end of two years.
Individual Compensation Agreements
Scenario continued: A check for the first five
years was presented to the tenant
representative. The full commission was over
$60,000, so the tenant representative feels he
has been shorted a full $30,000.
Individual Compensation Agreements
• What went wrong in this scenario?
• How could it have been prevented?
• Is there any question the tenant representative will
not get the additional $30,000?
• What are some options to solve this dispute?
Legal Issues Unique
to Commercial Transactions
Property Condition Disclosure
• Caveat Emptor still applies to commercial
transactions
• Purchasers are assuming the risk
• The sales contract should address issues that may
arise and the options for relief
• The buyer should use due diligence to discover
latent defects
Legal Issues Unique to
Commercial Transactions
According to Florida License Law: real estate
brokers and salespersons duties include
“[d]isclosing all known facts that materially
affect the value of residential real property and
are not readily observable to the buyer.”
FS§475.278 However, there has been no line
between commercial and residential property
provided by the courts for guidance.
Activity:
Review the article Return of the Pink Panther
from The Florida Bar Journal
Legal Issues Unique
to Commercial Transactions
Americans with Disabilities Act
Public Accommodations and Commercial Facilities
(Title III) prohibits discrimination on the basis of
disability in the activities of places of public
accommodations and requires newly constructed or
altered place of public accommodation to comply with
the ADA Standards
Public Accommodations
and Commercial Facilities
Fall into one of 12 categories listed in the ADA,
such as restaurants, movie theatres, schools and
privately owned non-residential facilities such as
factories, warehouses and office buildings
Discussion
Scenario:
Your office is in a home built in 1935 and it is not
ADA compliant.
Are we doing wrong?
Many commercial offices are in older homes,
how do you answer questions like this if they
come up?
§ 36.201 General Requirements
Prohibition
of
discrimination.
No
individual
shall
be
discriminated against on the basis of disability in the full and
equal enjoyment of the goods, services, facilities, privileges,
advantages, or accommodations of any place of public
accommodation by any private entity who owns, leases (or
leases to), or operates a place of public accommodation.
§ 36.201 General Requirements
Landlord and tenant responsibilities. Both the landlord who
owns the building that houses a place of public accommodation
and the tenant who owns or operates the place of public
accommodation are public accommodations subject to the
requirements of this part. As between the parties, allocation of
responsibility for complying with the obligations of this part may
be determined by lease or other contract.
The following links contain helpful information
for licensees to share with prospective owners,
buyers, landlords and tenants:
http://www.ada.gov/regs2010/smallbusiness/smallbusprimer2010.htm#compliance
http://www.realtor.org/field-guides/field-guide-to-complying-with-the-americans-withdisabilities-act-ada
Record Keeping
Chapter 475 subsection 475.5015 clearly states
that records:
for at least 5 years from the date of execution by
any party of any listing agreement, offer to
purchase,
rental property
management
agreement, rental or lease agreement, or any
other written or verbal agreement which
engages the services of the broker.
Conclusion
Comparing commercial real estate transactions
to residential real estate transactions is like
comparing apples to oranges. They are in a
similar genre and have the same licensing
requirements, but that is where the similarities
end
Conclusion
• Commercial Real Estate transactions are
business focused. It involves property that is
sold, leased or used to achieve a
predetermined business objective
• The selling process often hinges on numbers
and return on investment
Conclusion
• Residential
Real
Estate
transactions
traditionally involve clients looking for home
for themselves
• For the most part is an emotional purchase
with little thought about the return on
investment
Conclusion
For consumers considering investing in
commercial real estate, it is best for them to
work with a trained, experienced commercial
real estate agent
Thank You
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