Commercial lull: Orlando builders slow down in October

From Orlando Business Journal – Nov 25, 2013

Central Florida commercial construction values fell in October, but residential values were up significantly.Jim Carchidi

Central Florida commercial construction values fell in October, but residential values were up significantly.

, Senior Staff Writer- Orlando Business Journal

After several strong months, metro Orlando’s commercial construction values were down 32 percent in October when compared to the previous year, according to a new report by McGraw-Hill Construction.

Builders in the Orlando region pulled $29.8 million worth of permits for commercial construction projects last month, down from $43.5 million in October 2012. But homebuilders’ residential construction permits were 68 percent higher last month, from $205.5 million in October 2012 to $344.4 million last month.

In all, total building permit values were up 50 percent last month, from $249.1 million last year to $374.2 million this year.

Increased construction activity signals continued job growth and recovery among construction companies, which make up one of Central Florida’s most dominant industries and are making a comeback from being one of the hardest hit during the Great Recession.

For the first 10 months of this year, residential and commercial permit values hit the $4 billion mark, a 53 percent jump from $2.6 billion in January-October 2012. Commercial construction values were 40 percent higher, from $876.6 million last year to $1.2 billion this year, while residential values grew 60 percent, from $1.7 billion last year to $2.8 billion this year.

Construction values were up 52 percent year-to-date in September.

Here’s some more future construction activity coming down the pike:

Exclusive: Expedia inks lease for Orlando welcome center

3 quick facts about AV Homes’ new Kissimmee project

Exclusive: 10 new projects in Orlando’s construction pipeline

Make sure to read Orlando Business Journal’s Nov. 29-Dec. 5 weekly edition for a closer look.

SNDA Basics for Commercial Lenders … Why sign one?

For two consecutive days I’ve advised different clients, both commercial lenders, on exactly the same issue:  An existing lender holds a mortgage on commercial property and a new tenant requests that the lender execute a Subordination and Non-Disturbance Agreement (an “SNDA”).  Here’s my basic answer to each of them:
 
SNDAs are used to modify or confirm the relative priority of a lender’s mortgage lien on real property and a tenant’s rights under its leasehold interest in that property. Typically, SNDAs are required by a lender when the lender makes a loan and records a mortgage as security for the loan and there is an existing tenant with a lease already in place. The lender would want the SNDA from the tenant because the tenant would be agreeing to subordinate its leasehold interest in the property to the lender’s mortgage and because the tenant would be also be agreeing to make its lease payments direclty to the lender if the borrower goes into default (i.e. to “attorn” to the lender.) So, the SNDA in that situation protects the lender.
 
In this case, since the lender’s mortgage was recorded before the lease was executed, the tenant’s leasehold interest is already subordinate to the mortgage by virtue of having arisen later in time, so the lender is really gaining nothing from executing the SNDA.  In fact, in the absence of the SNDA, if the lender foreclosed on the property, it could wipe out the lease entirely if it wanted to get rid of this tenant for any reason (i.e. the rent is lower than market rent, it’s a troublesome tenant, the property is more valuable or more marketable without the tenant, etc.) Therefore, in this case, the tenant wants the SNDA because it wants to know that, if the lender forecloses and takes ownership of the property, the tenant won’t be evicted by the lender as long as it keeps making its rent payments directly to the lender. So, the SNDA in this situation protects the tenant.
 
Unless it has agreed to do so in its prior loan documents, the lender is under no obligation to execute this SNDA, although it may decide to do so as an accommodation to its borrower and its borrower’s tenant.  A possible benefit to the lender of signing it is that the lender would be obtaining the tenant’s written agreement to attorn to the lender if the the borrower defaults and the lender steps in as landlord and that the lease will remain in full force and effect even if the lender becomes landlord, so it might be worth signing for that purpose from the lender’s perspective. However, even if the lender decides to execute the SNDA the lender should be aware that in this situation the SNDA primarily benefits the tenant because the effect of it is that the lender is giving up its right to wipe out their lease in the event of a foreclosure.
 
As always, thanks for reading. BH

Due Diligence – Survey Review

In a previous post in this series on “Due Diligence” I explained, generally, the types of physical investigations a buyer of commercial real estate should undertake to learn more about the property he or she is buying. In another, I explained the format and content of a typical title insurance commitment and the basic process of the legal investigation of the legal status of the property, otherwise know as “title review.” An important component of due diligence that combines both an investigation of the physical properties of a site and its legal status is the “survey review.”  I hope that after reading this post you will understand how important the survey review is to the due diligence process.

If I can teach you nothing else about surveys, please learn that you need to GET ONE!

People ask me all the time, “do I need a survey?” In almost every situtation, residential or commercial, the answer is “YES!” If you are buying real estate, get a survey. It’s the only way to know what piece of land you are actually buying. Surveys are usually not all that expensive, relative to the other transaction costs, they’re usually not difficult to obtain, they convey a great deal of information very quickly (remember, a picture is worth a thousand words) and … from a legal perspective … they give you another party to hold accountable (the surveyor) if down the road you find that the property was described incorrectly or some other error occurred. So, just plan on getting a survey and get it early in the due diligence process, please! It will make all our jobs easier.

“Isn’t the description of the property already on the property appraiser’s website?” “Can’t I just use that appraiser’s parcel number or something?”

These are common follow-up questions I hear. “Well, it might be there,” I say, “at least some description will be there, but you can’t rely on it.” The property descriptions found on county property appraisers’ websites are often abbreviated versions of the full legal description of the property and they are notoriously incomplete, indecipherable or just plain wrong. They are a shorthand description of the property as made up by the staff person responsible for inputting that information on the appraisers’ website. The parcel identification number of a property is merely a reference number tying it to the tax information in the appraiser’s and tax collector’s database, including that potentially incorrect legal description, nothing more! It is just not appropriate to rely on that information as the basis for the conveyance of real property. So, no, you can’t just use that description or that ID number. Get a survey.

When the survey is ordered, or as soon thereafter as possible, you or your commercial real estate attorney should give the surveyor as much information as possible about the property and very clear instructions as to what is required for your transaction, including any specific requirements the lender may have. If available, the surveyor should be provided with the legal description of the property, a copy of the title commitment and copies of all title exception instruments, a copy of a prior survey, if one is available, and the names of all parties to whom the survey should be certified. The surveyor should be instructed to show all title exceptions (such as easements) that can be plotted on the drawing or, if they aren’t plottable, to explain why. The surveyor should also be instructed to provide a preliminary copy of the survey so it can be reviewed prior to the surveyor signing and sealing the final version. The more information that is provided early on and the clearer the survey instructions, the more time (and, potentially, money) that is saved by all parties involved. An experienced attorney should be well-versed in communicating with your surveyor so the process is as efficient as possible.

OK, I’ve got my survey (finally!) – What’s it telling me and how do I read this thing?

A typical survey contains several important categories of information, including (1) the legal description of the property, (2) the surveyor’s notes and survey legend, (3) the surveyor’s certifications and (4) the actual drawing of the land. These are also the primary areas to focus on when reviewing a survey so we’ll go through them one at a time, as we did earlier when we discussed the various sections of a title commitment.

(1) Legal Description

When I review a survey, I generally start by reviewing the written legal description of the property. The legal description might be very short or very long, simple or complicated. If a property consists of a platted lot, for example, the description might be as simple as “Lot 6, Riverview Acres, according to the Plat thereof …” and then cite the plat book and page where the plat was recorded. At the other end of the spectrum, the description could be paragraph after paragraph of confusing metes and bounds measurements and angles and distances and degrees and minutes and seconds and directions and weird language like “thence proceed … ” and “from the point of commencement” and what-not. No matter what, a careful review of the legal description is critical. Ideally, the survey legal description will be identical to both the description found in the prior deed by which the seller took title to the property and the legal description shown in the title commitment. And when I say “identical” I mean “identical.” As in, “identical,” down to every last degree, minute, second, measurement, comma, semi-colon, and so on. If those three descriptions are not identical, it is important to ask why and do further investigation to make sure you are getting the property you think you are getting. Primarily, though, the legal description should be reviewed for accuracy and consistency. All errors or typos must be corrected.

(2) Surveyor’s Notes and Legend

The surveyor’s notes contain informational and explanatory statements by the surveyor about the property or the drawing. For example, there should be a note stating whether the surveyor was provided with the title commitment and whether the survey depicts all items shown in the commitment. There should be a note about the surveying standard followed by the surveyor and that the survey complies with that standard. There may be a note confirming that all above-ground improvements, utilities and apparent uses of the property are depicted on the survey, and so on. The notes convey information from the surveyor that isn’t readily shown in the drawing itself and help explain and interpret what is drawn. Likewise, the surveyor’s legend is a list of symbols or abbreviations used by the surveyor in the drawing and their definitions or meanings. All of this is valuable information in understanding the content of the survey (both what is included and what is not included) and the manner in which the survey was prepared.

(3) Surveyor’s Certifications

The Surveyor’s Certifications may be contained in the surveyor’s notes or may be stated separately and they are a series of statements by the surveyor regarding the content of the survey and a list of the parties to whom the survey is “certified,” meaning the parties who are entitled to rely on the survey as being an accurate depiction of the property. Typically, the survey should be certified to the purchaser of the property, the purchaser’s lender, if any, the title company issuing the purchaser’s title insurance policy and the title agent. Sometimes the seller will ask to be a certified party, as well. Certified parties have standing to sue the surveyor if they rely on the survey and it is later discovered that it contained errors that caused that party to suffer a loss of some kind, so it’s important to provide the surveyor with a proper list of the parties to whom the survey should be certified. Often, a commercial lender will have a standard form of survey certification that it requires to be on the face of the survey or executed by the surveyor as a separate instrument.

(4) The Drawing

After reviewing the legal description, the notes and the certifications, the survey drawing itself can be reviewed and understood. Following the written legal description of the property, the property boundary as drawm should be traced to make sure the written and drawn descriptions are identical. Any discrepancies should be corrected or explained. This is like math, there’s only one right answer (usually.) It’s either right or it’s not. Your attorney shouldn’t be bashful about telling the surveyor to fix typos or to explain any discrepancies.

All title exceptions listed in the commitment should be shown on the drawing or, if they can’t be plotted, the surveyor should provide an explanation as to why not. Often the surveyor will confirm that certain title exception items do not affect the property at all and those items can then be deleted from the title policy.

The drawing should also be reviewed to confirm that there is legal access to the property (i.e. that there is some connection, either physical or legal, to a public right of way by which the property can be accessed,) that any easements do not adversely affect the proposed use of the property, that any beneficial easements necessary for utilities or any other purpose are in place, and whether any of the improvements located on the property encroach onto adjacent property, or vice versa. At the most basic level, the survey should be reviewed for signs of anything that impacts the title to the property, access to the property or the future use of the property. Your attorney should be experienced at identifying such things and have the ability to work with the surveyor or other affected parties to resolve any issues that are identified.

Signed and Sealed! 

After the preliminary survey has been reviewed and it is confirmed as meeting all of the requirements provided to the surveyor, the surveyor can be instructed to sign it and seal it with his official seal and to provide as many signed and sealed originals as are required by the various parties to the transaction. This final survey is an important instrument that will be valuable to you, as the buyer, likely for the entire period that you own the property. It may serve as the basis for future improvements to the property, future loans that may be secured by a mortgage on the property, the future sale of all or any portion of the property or even to resolve possible boundary disputes, and it will be well worth the time and money invested in it’s preparation and review.

Both the title commitment and survey provide a great deal of information about the property in their own right, but they are most valuable when reviewed and understood together. When reviewed by an experienced commercial real estate attorney, together they provide almost “3D” level of information about the property with respect to both its physical and legal characteristics. Involving your attorney early in the process and obtaining the title commitment and survey as quickly as possible during your due diligence period will greatly improve your knowledge and understanding of the real estate you are buying and will help ensure that your decision to purchase the property is a well-informed one.

As always, thanks for reading.  BH

2014 Florida Trend Legal Elite

Voting for the 2014 Florida Trend Legal Elite is underway. If you are a Florida attorney, please vote here:  http://lnkd.in/bBgwFTV

Contracts, Leases, Easements and Legal Stuff in general: Attorney review, first! Sign, second. Not vice versa!!

From time to time I’m going to post quick thoughts as they occur to me that I think are worth saying, and worth repeating, perhaps over and over, because as events happen throughout the day here in the law office I’m continually reminded of general rules that seem basic to attorneys yet aren’t understood by non-attorney folk, even those who, although they’re very smart, maybe even well educated, are just not well versed in legal matters.

One of these is this: When presented with a commercial real estate (“CRE”) contract, a residential real estate contract, a lease, an easement or, for that matter, just about any significant legal document, please have it reviewed by your attorney before you sign it! I can’t tell you how often people contact me and say “I just signed this contract. Will you look it over?” I can tell you already the answer is going to be “Sure, but no matter what it says you’re stuck with it because you already signed it. I’m glad to tell you what it says but I doubt we can change it at this point.” Sigh. Remember, attorney review, first, then sign. Not vice versa!

In the area of CRE leases, in particular, some prospective tenants don’t understand the impact of signing the Letter of Intent (the “LOI”) when negotiating with the landlord. Unlike most other types of transactions in which the LOI is just the beginning point of negotiations and is non-binding on the parties, the LOI in a CRE leasing situation is commonly understood to be, basically, the “contract” between the landlord and tenant, at least with regard to the business terms. After the LOI is signed in a CRE leasing situation, the tenant is generally stuck with the business terms stated in the LOI, which will be inserted directly in the lease. In commercial leasing situations, then, don’t even sign the LOI before you get attorney input unless you are a sophisticated commercial tenant and know what you’re doing.

So, if you learn nothing else from this blog, please remember: Attorney review, first! Sign, second. Please.

BH

Due Diligence – Title Review

In my last post I provided a broad overview of the types of things you should investigate during your due diligence period as the buyer under a commercial real estate contract. Now I’d like to start breaking that down into more specific topics. Typically, the due diligence to be performed can be broken down into at least three basic parts: (1) Title review, (2) Survey review, and (3) Analysis of the physical condition of the property, including the uses permitted on the property and its ecological and environmental status. Your transactional commercial real estate attorney will typically address the title and survey review, in particular, while the buyer and the buyer’s engineers, land use attorney, environmental professionals or others address the physical condition and land use matters. Therefore, in this article and future articles on this topic, I am going to focus on title and survey review … because that’s what I do. Although I do get involved in land use and environmental matters to some extent, I am not a land use or environmental attorney and shouldn’t be opining on those subjects as if I were.  So, to get started on our discussion of title review, then, lets just focus on the “title commitment” for the time being because the process starts with delivery of the title commitment to the buyer.

The Title Commitment

Within the time period required under your contract, you will either receive from the seller or obtain yourself (depending on who is paying for it under the terms of the contract) a title commitment. The title commitment is the title insurance company’s commitment to insure your ownership interest in the property provided certain requirements are met. The title commitment consists of three parts: (1) Schedule A, the first page of the commitment, which details the date through which the title has been searched, the identity of the proposed insured party (i.e. the buyer,) the current owner of the property and the legal description of the property, (2) Schedule B-I, which lists the requirements the title agent must satisfy in order to close the transaction and issue the title policy, and (3) Schedule B-II, which lists all matters against which the title company is unwilling or unable to insure, known as the “title exceptions.” In other words, your title insurance policy will  insure your ownership interest in the propery “except for” those items listed on Schedule B-II.

Title Commitment – Schedule A

Typically, Schedule A just needs to be reviewed for accuracy. Is the name of the proposed insured correct? Is the proposed amount of insurance correct (i.e. the purchase price of the property)? Is the legal description of the property correct? A close review of the legal description can be tedious but is critical. The legal description of the property as shown in the seller’s vesting deed, the survey of the property and the title commitment should, in almost all circumstances, be identical. No mistakes, typos or discrepancies allowed!

Title Commitment – Schedule B-I

Schedule B-I can be thought of as providing a road map for the title agent to follow in that it lists certain requirements that must be satisfied in order for the agent to issue the title insurance policy. For example, the first thing listed is always “payment of the consideration.” Obviously, the buyer has to pay for the property. In addition, all closing costs must be paid, including the title insurance premium. The second thing listed is always a description of the conveyance document(s) that are required to be recorded to convey title to the property. Usually, this is a deed from the seller to the buyer. If a loan title policy is being issued, a mortgage from the buyer to its lender will be listed. Other requirements that may be listed include things such as satisfying existing mortgages and liens, obtaining dismissal of any law suits or judgments affecting the property, obtaining a current survey of the property, terminating notices of commencement for previously performed or ongoing work and so on. In addition, if the seller is an entity, the title agent will be required to confirm the good standing of the entity and review its corporate, LLC or partnership documents, as the case may be, to ensure that it has the ability to lawfully convey the property and that the person executing the documents has the authority to execute documents on behalf of the entity. While it isn’t unusual to have to deal with more unusual requirements, such as completing the probate of an estate, for example, ideally all of the requirements would fall within the categories of (1) paying the consideration, (2) recording the deed and/or mortgage, (3) obtaining a current survey and (4) obtaining evidence of good standing and authority.

Title Commitment – Schedule B-II

Schedule B-II lists all of the title exceptions, meaning all of the things your title policy will NOT insure against. There are two kinds of title exceptions: (1) standard title exceptions, which are general in nature in that they are not specific to any particular matter or document and include vague statements like “[anything] that would be shown by a current survey,” and “rights or claims of parties in possession,” and (2) specific title exceptions, which are specific items affecting the title, such as recorded easements, current leases, taxes for the year of closing that aren’t yet due, recorded restrictions and other matters of record. This is one area where your real estate attorney, as title agent, can earn his or her keep. If you think about it, the standard exceptions, if not deleted, are very broad descriptions of matters that could adversely affect your ownership interest in the property. In fact, they’re just plain vague. Therefore, if you accept a policy containing all of the standard exceptions you have essentially purchased a title policy in which the title company says, in basic terms, “we are insuring the title to your property against everything … well, except for all of these broad categories that include almost everything we don’t want to insure against.” Keep in mind, your attorney’s/title agent’s duty is to provide you with the broadest possible coverage. The way to do that is to do the work necessary to eliminate all or most of the standard exceptions and to meticulously review all of the specific items listed to see if they can be deleted, as well. The more exceptions that are deleted, the more your title policy insures against and the more valuable the title policy is to you, the insured. Even aside from the title insurance aspect, the more exception items that can be deleted or resolved the greater your comfort level with respect to your ownership and use of the property, so a diligent effort to remove as many title exceptions as possible is a worthwhile endeavor.

The title exceptions in Schedule B-II must be read very closely to determine their effect on the property or its use. Attention to detail is important. For example, the plat of the property may contain setbacks or easements that affect where improvements can be located, easements may exist that give third parties rights to enter onto your property, property associations’ covenants and restrictions may impose rules, fees and obligations you may or may not be able to live with, leases may exist that should be assigned to the buyer or terminated, and so on. It takes an experienced commercial real estate attorney to properly assess and decide how to resolve these types of title issues so that you get the most insurance coverage for your money. An experienced Florida commercial real estate attorney can help you with the title review processes to make sure you get the most out of your new property and your title insurance policy. As always, get legal input early in the process!!  Thanks for reading, BH

Due Diligence in Florida Commercial Real Estate

What you should actually be doing during a due diligence period.

As a potential Buyer of Florida commercial real estate, you know that you should include a “due diligence” period in your contract so you can analyze the condition of the property and its adequacy and feasibility for your intended use. But you may have questions, such as:magnifyloan

  • What are “best practices” for due diligence?
  • How long should the due diligence period last?
  • What protections should you include?
  • What specific types of investigations should you conduct?

Look Before You Leap: Why Due Diligence Is Important

Buying commercial property in Florida exposes you to certain risks. For instance, if you purchase a property that is contaminated by environmental waste either due to prior uses on the property, potentially even uses on other property resulting in the migration of environmental waste to your property, you may be liable for cleanup and damages, even though you didn’t cause that spill or even know about it before you bought the property. The potential costs could be staggering.

The moral is: Conduct due diligence to find out as much as you can about the property you intend to buy to identify potential risks and make an informed decision to buy or not to buy the property.

Timeframe

You and the Seller must negotiate the timeframes for the Seller to disclose any information that have and are willing to turn over to the Buyer and for the Buyer to conduct their due diligence. Typically, the commercial contract will require the Seller to turn over all prior surveys, reports, environmental assessments, plans and other key documents within five (5) days after the effective date of the contract. These documents will usually give the Buyer as basis on which to begin analyzing the property. How long the Buyer’s due diligence period should be depends entirely on the existing and proposed use of the property, the Buyer and Seller’s comfort level with each other and other factors. For example, the due diligence period for a vacant parcel of agricultural land that has never been developed and for which the Buyer has no particular development plans may be as short as thirty (30) days, if there is one at all. However, if the Buyer intends to develop that land into a residential subdivision, the Buyer may require a months-long due diligence period, and perhaps a year or year and a half before closing in order to obtain all their development approvals, permits, and other necessary precursors to development. Likewise, if the property is already being used for some industrial use or is in close proximity to industrial uses, the Buyer may require a long due diligence period in order to conduct extensive environmental assessments and other investigations.

What to Do

During due diligence period, depending on your intended use of the property, you may need to investigate the following, just for starters:

  • Current and Future Zoning;
  • Availability of Permits;
  • Availability of Utilities;
  • Status of Current Leases, if income producing;
  • Boundary Disputes, Encroachments and other matters of survey;
  • Flood Zones;
  • Setbacks;
  • Usable Acreage;
  • Availability of Casualty and Flood Insurance;
  • Termite/Wood Destroying Organisms Damage;
  • Environmental Problems and Remediation;
  • Restrictions on the Possible Uses of the Property;
  • Other specific concerns about the property.

An experienced Florida commercial real estate lawyer can help you understand what tests and inspections to conduct to help you make an informed decision and minimize your risks.

What If You Can’t Complete Due Diligence in Time?

If your due diligence period is expiring and you have not finished all investigations you believe to be necessary or desirable, it is often possible to negotiate an extension with the Seller. Even if doing so means having to pay an additional deposit or allowing all or a portion of your deposit to become non-refundable, it is generally wiser to err on the side of caution rather than rushing to make a decision without complete information. Avoid pulling the trigger on the deal unless you’re convinced of its merits or, at minimum, are comfortable with the potential risks involved and be prepared to walk away if necessary. Letting what appears to be a promising deal go may be better than proceeding to closing only to find out later that the property isn’t suitable for your proposed use or that you are responsible for cleaning up a decades’ old fuel spill or dry cleaning fluid leak, or removing a long-buried fuel tank, that you had no idea existed.

Reps and Warranties in Orlando Real Estate Contracts

warranty

What are Reps and warranties in real estate contracts

The “Reps and Warranties,” as they’re commonly referred to, are a more important part of a commercial real estate contract than most Buyers and Sellers realize. Many Buyers and Sellers regard the reps and warranties merely as part of the “boilerplate” legalese inserted by attorneys (a) to justify their fee, and (b) to complicate things for the sake of complicating things. That’s just not true. A large part of what your attorney should be doing for his or her client when drafting a contract (or reviewing a contract prepared by someone else) is to include provisions that protect the client from unnecessary risk and that benefit the client by putting him or her in a more advantageous position. The Reps and Warranties section is one place in the contract where the attorney can make these things happen.

First, some explanation on how reps and warranties differ and whether that even matters. A “representation” is a statement of present or past fact made to induce someone to enter into a contract. For example, “the Seller is not in default under any indenture, mortgage, deed of trust, loan agreement, or other agreement to which Seller is a party and which would have an adverse effect on any portion of the Property.” A “warranty” is a promise that a particular fact is true. For example, “the Property is and will continue to be, from the date hereof through the time of closing hereunder, free from all mechanics’ liens and any rights to mechanics’ liens.”

The difference between representations and warranties

Now, what’s the difference? Case law and legal articles about reps and warranties that are directed at attorneys do distinguish between the two, in a legal sense, because the remedies available for fraudulent misrepresentation versus a breach of a warranty differ significantly. If a representation is made that the representing party (usually the Seller) knows to be false that the receiving party (usually the Buyer), believing it to be true, relies upon to their detriment, a claim can be made for fraudulent misrepresentation and the damaged party may be able to sue to rescind the contract, obtain restitution and possibly even receive punitive damages. Pretty serious stuff. In our example above, if the Buyer incurs due diligence and other costs in reliance on the Seller’s statement before learning that the Seller is actually in default under their mortgage and the Seller’s lender is foreclosing on the property, the Buyer could potentially sue to recover their costs and terminate the contract. In our other example, however, if it is discovered that there is a mechanics’ lien on the property the Seller likely would just have to take whatever action necessary to remove the lien, such as paying the contractor in full. In other words, they would have to make the warranty true but would not necessarily be at risk of the Buyer terminating the contract or suing for damages.

From a practical perspective, however, I’m not sure this all matters a lot to Sellers and Buyers entering into a real estate contract. For one, the representations and warranties are usually lumped together as the “Representations and Warranties” rather than being specifically identified as one or the other, and sometimes they are even grouped together in a long list of items that may be identified as “Representations, Warranties, Covenants and Conditions.” It can be hard to decide what is what and, depending on how they are worded, many of the statements could be interpreted to be more than one thing – a representation, a warranty and maybe even a covenant. In other words, it may ultimately depend on a court’s ruling as to whether a particular statement is a rep or a warranty or whatever and to determine the appropriate remedy.

Risk allocation in real estate contracts

More importantly, as far as Buyers and Sellers are concerned, this is really all about (a) risk allocation (more so from the Seller’s perspective,) and (b) information gathering (more so from the Buyer’s perspective.) Typically, a sophisticated Seller will want to limit their risk by making as few representations and warranties as possible and, instead, forcing the Buyer to bear the burden of learning all they can about the property on their own. An extreme example of this would be an absolute, “as-is, where is” contract in which the Seller makes no representations or warranties about the property. On the other hand, a sophisticated Buyer will want to have as much assurance as possible that the Seller really does own the property and that the contract is enforceable against the Seller. The Buyer will also want to get a jump-start on their due diligence by gathering as much information as possible about the property from the Seller and limit their risk by availing themselves of certain remedies if they are misled or if the Seller fails to make good on their warranties.

Boilerplate reps and warranties

Most often, as in most things, the end-result is something in the middle. The Seller will make the reps and warranties it can truthfully and comfortably make within their own risk tolerance, while the Buyer will require certain basic representations that, if false, would be “deal-killers” from the their perspective and will also seek to gain as much information about the condition of the property as it can before expending funds on its own due diligence. Achieving this type of risk allocation while protecting the client, be it the Buyer or Seller, is one of the attorney’s primary roles in drafting the commercial real estate contract or reviewing any contract prepared by the other party. Don’t disregard the reps and warranties as mere “boilerplate.” There’s a lot more going on there than you may realize.

Exclusive Use and Non-Compete Clauses in Commercial Leases

Orlando Real Estate Lawyer Offers Caution When Using Exclusive Use Clauses

Picture of a commercial lease signingWhether you’re a shopping center landlord or a would-be commercial tenant, consider – but use caution – adding an “exclusive use” clause or a “non-compete” clause to your commercial property lease in Orlando. These terms are sometimes used interchangeably but make more sense to me defined as follows:

“Exclusive use”

Exclusive use provisions are typically requested by the tenant and are intended to prohibit the landlord from leasing space in the shopping center to businesses similar to the tenant’s. The obvious reason is that the tenant wants to limit to the greatest extent it can competition from competing businesses. Thus, the landlord grants to the tenant the right to some “exclusive use” within the shopping center.

“Non-compete” clause

A non-compete provision is typically requested by the landlord and can limit the activities of the tenant in at least two ways. First, the provision can be used to prevent the tenant from selling products or services that compete with other tenants in the shopping center who may have exclusive use provisions in their leases that would be violated if such activities were allowed. Second, particularly where the tenant is going to be paying percentage rent (i.e. a portion of the rent is based on the amount of the tenant’s sales), the provision can be used to prevent the tenant from establishing a competing business or franchise within a certain geographic area that may cannibalize sales from the subject property, thereby reducing the percentage rent payable to the landlord. Thus, the tenant agrees that it will forego certain activities so as not to compete with other tenant’s sales or, in the percentage rent scenario, its own sales.

These provisions are sometimes difficult to negotiate (depending on the relative bargaining power of the parties) and are difficult to enforce in the event of a violation unless they are very clearly drafted by an Orlando real estate lawyer. For example, the use or service that is at issue is often hard to define, making it the subject of a potentially protracted negotiation on the front end or a potentially disputed matter later on. For instance, let’s say that you want to lease space to operate a cupcake shop. You certainly wouldn’t want a competing cupcake shop next door, but what about a chocolate shop? An ice cream store? Do you have the negotiating power to require the landlord to exclude all businesses selling desserts of any kind? Probably not, but you get the idea. The important point is that it’s an issue that has to be addressed when the lease is negotiated and the more clearly the use or service is defined the easier it is to categorize excluded or permitted competing uses.

The same issue arises in the context of non-compete provisions. Suppose you enter into a lease for the operation of a yogurt shop, you are paying percentage rent and your lease prohibits you from opening a competing store within two miles. The landlord certainly wouldn’t want you to open a competing yogurt shop close by, but could you open an ice cream shop? Snow cones? Italian ice? The same analysis could apply to electronics (which could include computers, computer games, computer parts, computer accessories, etc.), spa services (which could include spa treatments, skin treatments, manicures, pedicures, massages, maybe even a hair salon that offered some of these services) or any other broad category of uses or services. The answer depends on what was negotiated before the lease was signed. In the event of a violation and resulting litigation, the Court may ultimately have to decide what was intended to be excluded and what was intended to be permitted. Not a position you want to be in.

Another difficult issue to address is what happens when a violation occurs. How do you calculate damages if the damages are the amount of sales lost to a competing business if sales are also dependent on numerous other factors? If the landlord violates the exclusive use provision and allows a competing use, should the tenant’s rent be reduced? By how much? Should the tenant be entitled to terminate the lease and move elsewhere? Could the tenant obtain an injunction against the other tenant to stop the competing use? Could that tenant then sue the landlord? Sure they could. Almost anybody can sue almost anybody!

These and other concerns should be addressed and negotiated before the lease is ever signed. By involving your attorney early in the lease negotiation process you can improve your chances of obtaining an exclusive use provision or non-compete clause that you can live with, at minimum, or that protects your interests and maximizes your business prospects long term, at best. In addition, a clearly drafted exclusive use provision minimizes confusion and conflict when the question arises as to whether a particular use is excluded or permitted or an alleged violation occurs.

Historic Orlando Office Building For Sale

I didn’t realize this building was for sale until I drove by it the other day.  I’ve always liked the vibe of this retro style building from the 1940’s.  Great location and proximity to Orange County Courthouse as well.

The CNL Commercial Real Estate group has listed 141 N. Magnolia Avenue.  Built in 1940, this building boasts approximately 15,000 sq/ft with a fully ADA compliant first floor restroom.  It has been renovated twice in the last decade: 2003 and 2005.  The roof was replaced in 2012 and windows in 2005.

The most recent tenants of this building was a law firm, and there is a full basement currently used for file storage but can host five to six cars.  Land to the east has an additional 4-5 parking spaces for customers or employees.

Composed of two floors, the building is block concrete exterior with hardwood floors, recently upgraded millwork and a complete sprinkler and alarm system that is up to current industry building code.  A shower facility is available as is an elevator that is routinely inspected and certified.

The building is zoned AC/3A by the city and sits on approximately .375 acres.  Hotels, restaurants, banks and other institutions are located within a short drive or walking distance.

The building is for sale for $1,860,250.00($125.00 sq/ft) or lease at $11.50 NNN.  To see this property or to make an offer, contact Nick Poole or Jason Schrago at CNL Commercial Real Estate in Orlando.