Whether inexperienced or seasoned, a commercial real estate investor’s main focus is usually on their bottom line. In order to minimize costs, investors commonly use standard FR/BAR agreements, the most recent version of a Florida real estate form issued and approved by the joint committee of Florida Realtors and The Florida Bar, for the purchase and sale of commercial property.
Typically provided by brokers, the appeal to standard agreements, beyond cost, is usability. The broker is able to fill in the parties’ names, check a couple of boxes and move on to the next transaction. Before you pull out your pen to sign the standard agreement, there are numerous pitfalls to keep in mind. In the era of mixed-use, where many South Florida commercial real estate transactions involve properties with multiple kinds of tenants and use, a one-size-fits-all approach to contract execution can be problematic.
While certain concepts are present in every deal, keep in mind that commercial properties are unique due to their various uses (e.g., retail, restaurant, multi-family), and at the time of acquisition the state of the property may vary (e.g,. vacant land, tenant occupied or improved). Such variety indicates the agreement should differ to adequately address specific issues or minimize certain risks depending on the use/type of the property.Thus, you need a customized agreement specific to this individual transaction. You cannot use broad brush strokes to fill in the small details.
Standard agreements also limit the parties’ remedies following a breach of contract. For example, the standard agreement limits buyers to either receive a refund of any deposits or the ability to seek specific performance (meaning to proceed with the contract as if a breach never occurred). Keep in mind, depending on when a breach occurs, a buyer might have incurred substantial costs for items like surveys, environmental testing or inspections, all of which may not be recovered.
On the flipside, a remedy often overlooked and omitted from standard agreements is the seller’s ability to seek specific performance following a buyer’s breach. Considering how diverse commercial transactions can be, standard agreements may fall short in making the nonbreaching party feel whole again. Thus, a tailored agreement might afford greater remedies should a dispute arise.
Finally, beware of the minimal representations and warranties found in standard agreements. Typically, the parties to an agreement make certain representations or promises to induce commitment and close a deal. These inducements vary from the condition of the property to income potential. It is best practice to take these verbal inducements and memorialize them into the agreement because if either party misrepresents any facts or inducements, whether intentionally or unintentionally, such misrepresentation could give rise to additional contractual remedies.
For example, in a tenant-occupied transaction, a buyer may require the seller to represent and warrant that the seller has not received any rent payments in advance. This representation and warranty is vitally important to prospective buyers wanting assurance that they will receive all anticipated income from their investment. While the lack of representations and warranties does not eliminate a party’s ability to seek remedies, having them incorporated into the agreement expedites resolution should there be a dispute.
As you consider the aforementioned pitfalls, realize that sometimes “quick and easy” standard agreements, albeit convenient, are not drafted with your investment in mind. Commercial real estate investments require sizable capital, and it is best practice to equip yourself with tailored agreements that afford expanded remedies and additional protection through representations and warranties. If budget is a concern and the use of a standard agreement is mandatory, at the very least consider having legal counsel include protections within the additional provisions section.
Gerardo Ortega is an associate at Palm Beach Gardens-based Nason Yeager. He is a member of the firm’s real estate practice group, specializing in commercial real estate transactions, leasing and financing.