This article, written by Eric Kilchenstein, was originally published by NHBR and can be found here.
As part of my commercial real estate practice, I am often brought into assist with the ancillary real estate components of the sale, acquisition, merger, round of investment or financing on behalf of a business or organization.
While the size and scope of these matters, and organizations involved, varies drastically from quite large to more modest, one often common denominator is the existence of real estate matters that a) could have been addressed beforehand, and b) cause actual delay, or at least heartburn to all and the threat of delay, to the underlying transaction.
While many businesses and organizations undertake regular internal compliance initiatives, internal due diligence of real estate concerns seems too often to be an afterthought.
While most businesses and organizations keep detailed tabs on lease renewal dates, tax data, expenses and other accounting details, no internal real estate due diligence is done until the piper comes calling by way of due diligence of an acquiring company, investor or bank (usually via their attorneys).
Not unlike a regular physical, regular real estate due diligence review by your organization, as a preemptive matter, is an easy way to abate possible problems for your business or organization down the road.
Though avoidable with an occasional title update, unknown encumbrances on title, have in my experience slowed down transactions from modest to hundreds of millions of dollars in size. To that end, businesses and organizations would be well served to take measure of all real estate loans, lines of credit, equipment loans and other loan facilities, present or past, to the business and whether they are secured against your company’s real estate.
Next, make sure any of the old loan facilities that are secured by the real estate have been properly discharged, including a sufficient recording in the correct registry of deeds. Once counsel is hired by the other party to your transaction, any such encumbrances should be caught by a title search and your counsel will get to work on discharging the same.
However, old mortgages and other encumbrances can sometimes take a very long time to properly get discharged, and doing so may slow down the underlying transaction. As to encumbrances from current and existing loan facilities, it is often the case that, due to confidentiality and other concerns, companies do not want to tell their lenders of the possibility of sale, merger or refinance. However, taking measure of what encumbrances on title exist and coming up a with a plan, including payoff information ahead of time, will also speed up the process.
Beyond mortgages and other possible encumbrances on your company’s real estate from lenders, past and present, there are a wide range of title pitfalls that may become apparent when counsel to the other part(ies) reviews the title report(s) to the real estate. Previously unknown rights of right of first refusal, or other purchase rights (particularly common in large office condominium complexes and ground leases among others), may exist.
Easements, never considered or previously an issue, or use restrictions never thought of or known, may be lingering in the title and when discovered may not only slow the sale but also give the buyer reason to terminate the sale or at least ask for a price reduction.
The real estate pitfalls involved with leased properties are often also not caught until a transaction is underfoot. Most obviously, a major issue with leased property is obtaining the landlord’s consent to an assignment of a lease. In general, assignment terms in commercial leases can be particularly onerous and include very strict requirements, though they often can be negotiated.
Moreover, for closely held businesses where the principals are guarantors to a lease, assignment might be granted but the principals will not be released as the current lease is literally being “assigned” and the terms, including the guarantors, do not change. A termination of the current lease and a new lease with a buyer is usually ideal but can be difficult to negotiate.
Another potential pitfall with commercial leases that I find could have often been addressed sooner is the issue of exclusives or use restrictions. In large commercial plazas these can be particularly tricky, as the landlord is beholden to a wide variety of tenants, and the exclusives may narrow what businesses can be located on the premises.
The above is just a snapshot of real estate considerations that can hinder or even kill a transaction and that could be caught ahead of time with some simple and internal real estate due diligence by your business or organization. Avoid problems down the road, and call your friendly real estate counsel to make sure all is in order.