Once the purchase agreement is finalized and executed, parties may think that the deal is a sure thing. The purchase agreement sets forth the expectations and responsibilities of each party and the key terms, such as the types of diligence and inspections that will be conducted and, arguably most importantly, when and how much the seller will be paid for property. However, regardless of how clear the expectations and terms are, there are any number of things that can go wrong before closing day. With a bit of planning and problem-solving, parties can work through these items quickly to get to closing. Below, we outline a few of the common obstacles on the legal side of the transaction that parties can face and tips for overcoming them.

Title insurance

One of the first legal diligence items that a purchaser will order is a title report or title commitment. It is common for the purchaser of a property to obtain title insurance at closing, which requires engaging a title company to do a comprehensive title search of the subject property. Often, matters crop up on the title search that the seller did not expect. For example, there may be mechanic’s, tax, or other third-party liens filed against the property that may be costly for the seller to remove. Third parties may also have rights in the property that the purchaser might want more information about, requiring the seller to obtain an estoppel. In addition to providing all of the documents that affect the property, the title company will set forth any state or local requirements for the transfer of the property. Some municipalities may require certain inspections to be conducted which can reveal property defects that will cost time and money to correct. We suggest that the parties order and review the title commitment as soon as possible so that issues can be adequately addressed far in advance of closing. Sellers can assist by responding to title inquiries as quickly as practical and resolving curable title defects ahead of closing. Parties should also communicate the tentative closing date to the title company often, so that the title company is able to run appropriate bringdown title searches near closing to ensure that no surprises show up at the closing table. 

Survey and zoning report

A title search shows only half of the legal diligence picture of a property. In order for the purchaser to understand exactly what property they are purchasing and assess any risk items on title, a survey and zoning report must be completed. The survey is intended to show the parties an accurate depiction of the property boundaries and any improvements thereon. It will also provide critical information, such as whether the property has access to a public roadway, whether the property’s improvements encroach on any neighboring properties and comply with zoning regulations, and confirm that the record legal description of the property is accurate. A zoning report may disclose that the intended use of the property requires special permitting or a change in zoning. Unfortunately, the results of a survey and zoning report can drastically change the value of a property and the issues do not always have a quick or simple fix. Similar to the title report, we recommend obtaining a survey and verifying a property’s zoning compliance as soon as possible after the purchase agreement is executed. 

Property condition report

Commonly in commercial real estate transactions, it is not the dirt the purchaser is interested in, but the building located on the property. Therefore, a purchaser should consider obtaining a property condition report. A property condition report is more thorough than an appraisal and will contain estimates of the remaining usable life on the building, improvements, and systems. For instance, a property condition report may reveal that an HVAC system or sidewalk will likely need to be replaced within a period of time or that a roof requires immediate repairs. The results of the title search, survey, zoning report, and property condition report will provide the purchaser with a complete picture of the property and will help the purchaser to make an informed decision on whether the price agreed to in the purchase agreement is fair. The results of the reports also give the seller a complete and accurate picture of its asset and what the seller must do to make the property marketable. If the parties are motivated to close the deal on time, they can consider a variety of solutions that may be appropriate to mitigate financial risks for the purchaser, such as an adjustment in the purchase price, an indemnity for possible future costs, or an escrow for post-closing clean-up items. 

Financing considerations

Whether or not the parties agree upon a financing contingency in the purchase agreement, financing is often a hurdle that must be overcome at closing. Prior to entering into a purchase agreement, the purchaser should determine its financing needs for the transaction, and if financing is necessary, include customary lender requirements as closing deliverables in the purchase agreement. Some examples of such items are third-party estoppels as described above, tenant estoppels, subordination, nondisturbance and attornment agreements, and updated property financials. 

In addition to the more obvious lead time items, such as the lender completing its own diligence of the property and negotiating loan documents, lenders may have internal approval processes and regulatory compliance obligations that need to be completed as soon as possible after a term sheet is executed. On the other hand, certain documents may need to be provided closer to closing, such as tenant estoppels and borrower searches, which typically must be dated within 30 days of closing. Therefore, as a purchaser, it is important to identify lender requirements and the timing of such items early in the transaction timeline and coordinate with the seller appropriately. We recommend working closely with the lender to track closing requirements through a checklist and regular status calls. 

In summary, the key to a successful closing is planning, identifying lead time items and key risks early, and determining the most efficient and effective method of resolving such risks. Parties should start planning and identifying lead time items before even entering into the purchase agreement when possible, considering the common issues described above. Sellers can assist by quickly responding to diligence inquiries and coordinating with the seller on timelines for closing deliverables. Purchasers should review diligence materials and communicate with key parties often, and if motivated to close, consider flexible resolutions to issues that come up along the way.