If you’re considering buying commercial property with tenants in Texas, you need to know exactly what to look for when reviewing the lease and other property documents. Failing to perform due diligence when buying property with existing tenants can lead to a variety of issues later on down the road.
So, if you need help reviewing existing commercial leases in Texas, you need to get the help of a commercial real estate attorney. A Texas commercial real estate lawyer will know exactly what to look for so that you can avoid issues long before they happen.
Keep reading to find out what you need to review before buying commercial property with tenants in Texas and why due diligence is so essential.
Review the Existing Commercial Lease Terms
When buying a commercial property with tenants in Texas, the first thing you need to do is review the commercial lease terms they have in their leases.. You need to familiarize yourself with the existing commercial leases and the rights of the existing tenants. These types of lease terms are things that could potentially impact your future plans and how you can use the property.
Here are some examples of what you need to review:
- The term of the lease
- Rent details and any progressions that are present in the lease
- Renewal options
- Expiration dates
- Maintenance duties
- Security deposits
- Third-party rules
- Termination provisions
You also need to keep in mind that every lease may come with different provisions and side agreements, all of which need to be reviewed. This can include things like amendments, provisions for subletting, expansion, construction requirements, etc.
Verify the Property’s Rental Income
Buying leased commercial property in Texas comes with pros and cons, all of which you need to consider before making the purchase. One of the benefits of buying a property with an existing tenant or tenants is the rental income. However, you need to verify the rental income information and history so that you aren’t blindsided by obscure details later on.
Here are some aspects of the property’s rental income you need to check and verify:
Rent payments to include, if applicable, common area expenses and taxes
- Operating expenses
- Payment histories
- Any delinquencies
- Free-rent periods
You should also double-check for any unusual rent arrangements and whether or not the rental income is sustainable after the purchase goes through.
Request and Review Estoppel Certificates
Before moving forward with purchasing leased commercial property, you need to request and review the estoppel certificate. The estoppel certificate is a legally binding real estate document that confirms the facts and terms of the real estate lease agreement or contract with the tenant(s).
The reason you need to request and review this document is that it helps to provide verification for the information you have received from the current property owner. So, if you notice any inconsistencies, you will know that the information in the estoppel certificate is the correct information.
You should be able to request information from the tenant(s) like the rent amounts, lease amendments, defaults, security deposits, expiration dates, and overdue rent.
Evaluate Tenant Defaults and Existing Disputes
When you purchase commercial property that already has tenants, you are taking on the existing tenants, making them your responsibility. So, before you ever agree to this transaction and move forward with the purchase, you need to review any tenant defaults or disputes.
Check to make sure the tenants aren’t currently in default and have maintained their side of the lease agreement. You also need to make sure the current landlord has maintained its landlord obligations as stated in the lease and as you would expect in order to purchase the property..
Additionally, you need to identify whether or not the current landlord and tenants have any pending or threatened disputes or litigation. If not addressed before the sale goes through, these pending or potential disputes could become your problem.
Consider Zoning and Property Use
It is important that you verify how the property is being used and the various zoning factors that could impact your future plans. For example, you need to confirm that the tenants are using the property in a way that complies with applicable zoning requirements. You should also determine how the property’s zoning requirements could impact your redevelopment plans.
Here are some examples of what you should look into:
- Current zoning classification
- Allowed property uses
- Conditional or special use requirements
- Rezoning requirements
- Development standards
- Building height limits
This is an aspect of purchasing commercial real estate that can feel very complex, especially if you don’t have any prior experience. That’s why it is strongly recommended that you get the help of a Texas real estate attorney to ensure you understand the applicable laws and zoning restrictions.
Why Legal Due Diligence Matters
Due diligence is incredibly important before purchasing commercial property in Texas, as it can help you avoid many issues from presenting themselves and surprising you later on. Due diligence allows you to identify potential liabilities as well as any inconsistencies in the information you have been provided with.
You can then negotiate a better purchase agreement that provides protection against potential liabilities and disputes.
However, it’s important that you work with a commercial real estate lawyer in Texas if you want to avoid legal issues when buying tenant-occupied commercial property. A lawyer will have more experience in this area and can help you identify issues that you may have otherwise overlooked.
FAQs
Do existing commercial leases continue after a Texas property is sold?
Usually. However, this often depends on various aspects such as the lease terms and transaction documents.
Should buyers review every tenant’s lease before purchasing a commercial property?
Yes. All existing leases can have a significant impact on the property’s income, your landlord obligations, redevelopment opportunities, etc.
What happens to the tenant ‘s security deposit when commercial property is sold?
This information will be included in the purchase and closing documents, which you should review beforehand. Keep in mind that security deposits are to be returned to the tenant at the expiration of their lease in most instances.
Get the Help of a Commercial Real Estate Lawyer Today
Purchasing tenant-occupied commercial property in Texas can come with some risks, many of which you can avoid by reviewing all of the property’s legal documentation. To ensure you review everything thoroughly, you should consider working with a commercial real estate attorney who can help you spot any potential issues before the sale goes through. Contact us today at Sewell Sewell Beard LLC by calling us directly at 972-777-5390 to discuss your situation with one of our Texas real estate attorneys.