Commercial Real Estate Blog

This is part three of my six part series to help guide commercial real estate investors through all of the steps of selling their commercial property privately.

Disclosing known issues with a property, finance terms, relationships between the parties and other material facts are a mandatory requirement when buying and selling commercial real estate.  There are different disclosure requirements depending on what role you are playing in the transaction.  Additionally, there are different disclosure requirements for every state and jurisdiction.  Add to this there are additional  real estate disclosures for commercial residential properties then for commercial office/warehouse properties and you can see why there is so much confusion surrounding this topic.  Here are a list of the most common real estate disclosures pertaining to a seller of commercial residential property like an apartment complex.

What needs to be disclosed?

You normally have an obligation to disclose any known potential problems a property may have to a prospective buyer that affect or could affect the value of the property.  These could be a leaky roof, a broken appliance, flooding issues, or anything else that is known by you about the property.  It is considered illegal to purposely hide major defects on a property you are selling.  This begs the question, “What is a major defect?”  This varies from state to state.  If you are not sure, disclose it.  Some states like California require a laundry list of disclosures. 

California sellers must fill out and give the buyers a disclosure form listing a broad range of defects -- such as a leaky roof, deaths that occurred within three years on the property, neighborhood nuisances such as a dog that barks every night, and more. In addition, California sellers must disclose potential hazards from floods, earthquakes, fires, environmental hazards, and other problems, in a Natural Hazard Disclosure Statement. California sellers must also alert buyers to the availability of a database maintained by law enforcement authorities on the location of registered sex offenders.

If you have the slightest doubt about whether you are required to disclose something to potential buyer, avoid the chance for liability and list it. Full disclosure will help protect you from a future lawsuit from a buyer who falsely claims damages or is just trying to get out of the deal.

Am I required to find defects on my property?

No, you do not have an obligation to hunt for problems that may be on your property.  You don't need to hire a contractor or building inspector to comb through the property looking for hidden defects.  You must only disclose things that you know or should have known through a reasonable inspection of the property.  For example, if there is a crack in the foundation that could only have been found by digging around the property then you are not responsible for disclosing it.  But if there is a leak in a bathroom fixture that floods every time you turn on the faucet, then you must disclose this even if you never used that faucet because it is a defect that you should have known about.

Hiring a building inspector even if you are not required to can be a good idea and save you money down the road if something were to go wrong with the property.  If a buyer comes to you six months after a sale and says the air conditioning unit started leaking and you have a professional building inspection report that was given to the buyer showing at the time of purchase the air conditioner was working fine, it could save you thousands of dollars in repairs and/or legal fees.

However, once again, every state is different. Some states will require you to do a termite inspection on the property even if there is no visible signs of a termite infestation. To be safe you should consult with a real estate attorney in your area about your obligations to disclose.

Do I have a duty to repair defects?

Not at all, your duty is to disclose, not repair unless it is specifically stated in the contract.  However you may choose to repair these items before putting the house on the market simply because it will increase the value of the property.  The less items listed on your disclosures, the less room for haggling a buyer will have when negotiating a price with you for the property.

What about Federal Disclosure Laws?

If the property you are selling was built before 1978, the Lead-Based Paint Hazard Reduction Act of 1992 requires you to:

• Tell the buyers about any lead-based paint or related hazards in the property
• Give buyers 10 days to test the property for lead
• Provide buyers with a the Environmental Protection Agency (EPA) pamphlet entitled Protect Your Family from Lead in Your Home
• Include warnings set forth in the law in the sale contract
• Obtain signed statements from all parties involved verifying compliance with all legal requirements
• Keep the signed acknowledgments for three years as proof that you followed the law

Commercial Office/Warehouse/Residential Disclosures.

The disclosures required when dealing with these types of commercial properties include many of the ones listed above as well as an entire other series of potential disclosures. This is very subject to the laws of the jurisdiction the property is located and the terms of the contract. Most contracts give a buyer a “due diligence” period of anywhere from 30 to 60 days. During this period it is the buyer's responsibility to have the property and financial records examined and determine whether they wish to proceed with the contract or not.

However more and more states are not allowing sellers to claim “the buyer had the obligation to perform due diligence” as a means of avoiding disclosure. Just because the buyer did not find it during their due diligence period does not necessarily mean you did not have a duty to disclose it. Many states now require you to disclose environmental issues, land use issues, zoning issues, water/septic issues, etc.  Here is a link to a sample form adopted by the Washington State Legislature to be used by sellers of commercial real estate.  Notice the level of detail that must be disclosed.

Because this is an area that is so jurisdiction dependent it is critical you speak with a knowledgeable real estate attorney to determine what your specific disclosure requirements are.

Final Notes

Most states require you to give real estate disclosures in written form, often on special forms that both the buyer and seller must sign and date. Even if your state doesn't require you to, it is still the best practice to make your disclosures in writing and get a signed written statement from the buyers that they received them.

Don’t miss part four of this series where I will discuss basic essentials of negotiating a contract for commercial real estate. Please leave your questions or comments!

Disclaimer: Nothing stated in this article should be taken as the giving of legal advice.  As always, you should check with a licensed, competent real estate attorney who specializes in your field when unsure of how to proceed.