commercial core law 3 hours ce florida realtors® copyright © 2015

Commercial Core Law3 Hours CE

Florida Realtors® Copyright© 2015

Objectives• To recognize and distinguish between a

commercial transaction and a residential transaction

• To understand the basic premise of the license law as it pertains to the brokerage of commercial real estate

Objectives

• To understand the contents of an industry listing agreement for either a lease or purchase

• To understand the purpose of a Letter of Intent and Confidentiality Agreements

Objectives• To understand the contents of an industry

purchase contract for either a lease or purchase

• To understand why there is not an industry commercial lease form

Objectives• To understand the disclosure requirements in a commercial transaction

• To appreciate and apply general concerns in a commercial real estate transaction that do not occur in residential transactions: ADA, commercial tax, long term agreements, assignments, the role of an attorney in a commercial transaction, income/expense reports, rent rolls, sub leases.

Brief Overview• There is a fundamental difference in the legal

aspects of commercial transactions and residential ones.

• Article 11 of the REALTOR® Code of Ethics is devoted to the concept of competence and how a REALTOR® must ensure they are skilled enough at a particular kind of real estate before undertaking to practice it.

Brief Overview

• From listing to closing the entire transaction is different in practice as well as how the courts view them legally.

Lease(s)• A residential lease agreement is a contract

between an individual tenant and the landlord to use property for living arrangements

• Where a commercial lease is a contract between a business tenant and landlord for use of commercial property with the purpose being to generate a profit or a tax write off to the owner

Purchase(s)

A residential contract is not usually appropriate to use for commercial purposes, because there are certain things commercial buyers and sellers want to do that the standard residential contract does not cover, such as:

Purchase(s)• Delayed or second deposit• Particular documents from the Seller• Extended inspection periods• Specific representatives and warranties• Commercial Closing Considerations• Brokerage fees and other closing costs such as

attorney’s fees

Chapter 475

Chapter 475 applies to all Residential and Commercial Licensees. Specifically, 475-61J2 as follows:

• 61J2-1.011 License and Examination Fees

• 61J2-2.027 Applications by Individual

Disclosure Requirements in a Commercial Transaction

Scenario: You own a commercial building which has been on the

market for over two years. After anxiously waiting, a potential

buyer shows interest in the property. There is just one problem

you know that the building needs a new roof based on the leaks

you have discovered a few days ago. Do you, as the commercial

property owner, have a duty to disclose this problem to the

potential buyer?


There is no affirmative duty to disclose material

facts which impact the value of the property

however, you cannot actively conceal the alleged

problem in order to prevent the purchaser from

discovering it through independent inquiries or

investigation


The buyer must have an equal opportunity to become aware of the problem

If you disclose part of the problem, you must disclose the full extent of the issue


Florida law will generally impose a duty to disclose the issue if there is a fiduciary relationship between the parties

Cooperative Compensation Agreements

There are some distinct differences between

commercial and residential transactions that

practitioners need to observe to ensure they

are paid their commission.

Cooperative Compensation Agreement

There is no standard cooperative commission for

any commercial transaction. Separate

commission agreements between brokers are

recommended to ensure the terms of

compensation are clear.

Broker Lien Law

Florida Statutes § 475.705(3) (2012)

•Does not permit a lien on title, only on the

proceeds.

•A licensee can’t opt out of adhering to this law in

order to get a listing

Broker Lien Law

Broker is required, within 30 days after a commission

is earned, and at least one day prior to the closing, to

deliver a statutorily proscribed commission notice to:

1. The property owner

2. The closing agent

Broker Lien Law

Should a broker fail to deliver a copy of a commission

notice within the required time period the law calls for;

then the broker shall not be entitled to enforce the

broker’s lien. There is an exception to this provision if

the broker’s failure to deliver the notice is because the

owner entered into a contract for the sale/lease of the

property without the knowledge of the broker.

Broker Lien LawException to the provision:

If the broker did not have notice then the broker

may then enforce the lien for a commission if (1) a

copy of the commission notice is delivered to the

owner and the closing agent before the closing

agent disburses the owner’s net proceeds; and

Broker Lien Law

(2) the broker executes and delivers to the closing

agent a sworn affidavit stating that the copy of the

commission notice was not delivered within the time

period specified in the Act because the owner entered

into a contract for the sale/lease of the commercial

real estate without the broker’s knowledge.

Commercial Listing Agreements

To be entitled to a commission you must have an

“employment” contract which may be a listing

agreement with a seller or an employment

agreement with a buyer.

Commercial Listing AgreementsTraditionally brokers use one of three types of listing agreements:1.Exclusive Right of Sale2.Exclusive Agency3.Non-Exclusive or Open Listings

Exclusive Right of Sale• Most widely used

• Seller agrees to pay the listing broker a commission

• The listing agreement should spell out whether the listing will be placed in either an MLS or Commercial Exchange

Exclusive Agency• Allows the seller to sell the property without owing a

commission to the broker

• Potential prospects may circumvent the listing broker

which results in procuring cause disputes

Exclusive AgencyPossible procuring cause “fix”:

This property is listed with a broker under an agreement that the

broker will be paid a commission for procuring a buyer for the

property. Buyer warrants to the seller that he or she has not been

shown or made aware of this property by any real estate broker or

sales associate. Buyer agrees that if information to the contrary is

proven by a broker claiming a commission, the buyer will reimburse

the seller for commissions due to said real estate broker, as well as

legal fees.

Non-Exclusive or Open Listing• Broker finds a ready, willing and able buyer

• The seller may enter this type of agreement with several brokers

• Broker that brings the offer that is accepted by the seller is entitled to the commission

• Either party may terminate an open listing

Activity:Review the Exclusive Right of Sale Listing Agreement

Terms and ConditionsCommercial listing agreements vary in their scope and intent. Items to consider in the listing agreement:

•Identified Prospects•Price•Services Broker Shall Provide

Terms and ConditionsItems to consider continued:•Compensation Agreement•Owner’s Covenants•Termination Rights•Indemnification

All terms of any listing agreement are negotiable

and may differ depending on the nature of the

property. An office building’s listing agreement

may look very different than a listing agreement

for an industrial factory.

Commercial Purchase ContractPreparation of the commercial real estate purchase

agreement provides an essential outlet for

negotiation and clarification of terms of the

transaction that your client may not have considered

when they began the transaction. Attention to detail

is vital. Some things to consider are:

Commercial Purchase Contract• Escrow Deposit• Due Diligence Period• Existing Liens, Taxes, FIRPTA, Zoning• Assignability• Legal Proceedings

Activity Review the article:All Appropriate Inquiries in Commercial Real Estate Due

Diligence: What Inquiring Minds Need to Know

Role of the AttorneyAn experienced attorney can help navigate the process by ensuring:

1. Legally Binding Contract2. Clear Title3. No Encroachments and Clear Surveys4. Tenant Rights and Assignment5. Delayed Closing6. Options

Preliminary AgreementsLetters of IntentA letter of intent has many other names:

1. Term Sheet2. Memorandum or Understanding3. Agreement in Principle4. Binder5. Commitment Letter

Letters of Intent

Regardless of the name, the function is the same. To outline the basic terms of the transaction. What differs is the intended use, binding or non-binding.

Letters of Intent

• Is the letter of intent binding or non-binding?

• How would you decide on binding or non-binding?

• What should be included in the letter?

• What harm can happen from a simple letter of intent?

ActivityScenario:A commercial broker who was new, but not a rookie. A Letter of intent for commercial building was executed between the parties without a confidentiality agreement. The buyer broker was surprised at the level of detail the listing broker wanted included, but thought it would make the contract that much easier.

Scenario continued:Their offer, although accepted through the execution of a letter of intent, was 20% below list price. The letter specifically stated that the letter of intent was not binding unless the parties executed a full purchase contract by a date certain.

How Did This Go Wrong?

The Listing broker took the letter of intent and shopped it

around to other investors. When the buyer asked for an

extension of due diligence the seller said “no, not unless

you want to renegotiate the price.” The buyer declined

and came to find out that a competing offer was

immediately accepted when they cancelled. The offer was

based on the comparison to buyer # 1’s letter of intent.

Scenario continued:

Discussion

• How could this have been prevented?

• What are the dangers?

• How could this be solved?

Confidentiality/Non-Disclosure• A confidentiality agreement is often the first

step in a commercial transaction• These agreements are rarely “one size fits all”• Two Major Pitfalls

– List everything but the kitchen sink as confidential– Fail to provide any procedures for identifying the

confidential information

Confidentiality Agreement akaNon-Disclosure Agreement

Often is the first step in a commercial real estate transaction.

Florida Realtors forms library contains a sample form.

These agreements are rarely “one size fits all.”


Two Major Pitfalls:1.List everything but the kitchen sink as confidential, and2.Fail to provide any procedures for identifying and handling the confidential information.


The primary purpose behind a non-disclosure agreement is to protect the disclosing party’s valuable secrets, ideas and sometimes their identity.

A “one size fits all” non-disclosure agreement may prevent a court from enforcing that very agreement.

Activity

Review the Florida Realtors Confidentiality/Non-Disclosure Agreement

Scenario:

A buyer and seller begin negotiating on the purchase of a strip mall with

an anchor store that is vacant and seven smaller stores, six of which have

current leases but three are set to expire in less than three months.

Scenario:

The buyer is a large discount chain store that does

volume rather than quality. Some of the tenants are

high end merchants who sell specialty items like art and

clothing. As the parties begin to negotiate will the

Florida Realtors CNA agreement work for them? Why

or why not?

Analysis:

The Confidentiality and Non-Disclosure

Agreement does not bind the seller. That's not

what it was designed for. So if buyer wanted to

bind seller to a confidentiality agreement, buyer

would need to negotiate that with seller.

Analysis:

At a minimum, before agreeing to buyer's

demands for a mutual confidentiality agreement, I

would want the seller to review its leases with the

smaller stores to ensure that such non-disclosure

would not be a breach of any of those leases.

Commercial Leases and the Unauthorized Practice of Law

The Standing Committee on the Unlicensed

Practice of Law recommended that the Supreme

Court of Florida adopt a residential lease from

that could be completed by nonlawyers.

Commercial Leases and the Unauthorized Practice of Law

The approved forms applied to residential leases of up

to one year in duration. However, when approving the

forms, the Court further stated that “[t]he approval of

these forms in no way authorizes a non-lawyer to give

legal advice, to draft leases or to prepare addenda to an

approved lease form.”

Common Provisions in a Commercial Lease

“Common” doesn’t really apply to commercial leases. Things to consider:•Expense Stop Provision•Legal Representation•Damage and Destruction

Financial Information Exchange in a Commercial Transaction

Buyers are inclined to view all of the current financial

statements surrounding the operating of the business

and what income the property will derive. This

information, sometimes known as a rent roll or income

statement, is usually part of the confidential

information that is provided as part of due diligence.

Financial Information Exchange in a Commercial Transaction

Documents:•Rent Roll•Income Statement•Square Footage Usage•Tax Payments•Assignment

Activity:Refresher on Sales Tax on Commercial Leases

from The Florida Bar Journal

MLS Inclusion

Two Types of Commercial Property Services:1. Commercial MLS2. Commercial Information Exchange

Commercial MLS

Authorized participants make unilateral offers of

compensation to other participants acting as

subagents, buyer agents or in other capacities as

defined by law.

Commercial MLS

Offers are unconditional except that entitlement

to the compensation is determined by the

cooperating broker’s performance as the

procuring cause of the sale/lease.

Commercial MLS

Any REALTOR® (principal) is eligible to

participate in the Service upon agreeing in

writing to conform to the rules and regulations

of the Service and to pay the costs associated

with participation.

Commercial MLS

Eligible property types (depending on local

rules) include: subdivided vacant land; land and

ranch; business opportunity including some

interest in real property; hotel/motel mobile

home parks; commercial income industrial;

investment; and office space.

Commercial MLS

The participant agrees to arbitrate disputes

involving contractual issues as well as specific

non-contractual issues as defined by Standard of

Practice 17-4 of the REALTOR® Code of Ethics.

Brokers can agree not to arbitrate.

Commercial Information ExchangeA CIE is an information exchange that participants

who have been retained by sellers of commercial

property can market those properties. The CIE is also

available for participants that have been retained by

buyers of commercial property to submit information

on the type of property being sought.

Commercial Information Exchange

With no offers of compensation or cooperation,

the CIE is not an MLS. Any agreement to

compensate would be made on an individual

basis outside of the CIE by the participants

involved in the transaction.


Like the Commercial MLS, the Commercial

Information Exchange is available to any

REALTOR® (principal) upon agreeing in writing to

conform to the rules and regulations of the CIE

as well as paying the costs involved with

membership.


Participants working with a buyer looking for

property may submit information describing

what the buyer is looking for even though the

participant may not be the exclusive agent.


Types of properties eligible for submission are

the same as for the Commercial MLS. These

may include: subdivided vacant land; land and

ranch; business opportunity; motel/hotel;

industrial; investment and office space.


Each Participant agrees to arbitrate disputes

involving contractual issues and questions, and

specific non-contractual issues and questions as

defined in Standard of Practice 17-4 of the

REALTOR® Code of Ethics. Brokers can agree not

to arbitrate.

Individual Compensation Agreements• Compensation, like everything else in real estate is

negotiable

• The type of compensation you receive depends on the market, your company and what you negotiate for yourself

• The compensation structure in a commercial transaction is more complicated than in a residential transaction

Individual Compensation Agreements

ActivityScenario: A commercial broker lists a large office building for rent. A tenant representative presents a tenant, a confidentiality agreement is executed and negotiations begin. A compensation agreement between the brokers was executed that offered X% for a tenant representative over the first five years.


Scenario continued: If the deal is for ten years, however, that drops to Y%. Renewals would be half the amount of the original payment. There was no mention of the timing of payments. At the time a ten year lease was executed for the entire building by the tenant and landlord the tenant representative asked for the full amount of the commission.


Scenario continued: The landlord disagreed and said “no, my agreement with the landlord is that all commissions are paid by the landlord over the course of the lease and broken into two separate payments, one at lease signing and one at the end of two years.


Scenario continued: A check for the first five years was presented to the tenant representative. The full commission was over $60,000, so the tenant representative feels he has been shorted a full $30,000.


• What went wrong in this scenario?

• How could it have been prevented?

• Is there any question the tenant representative will not get the additional $30,000?

• What are some options to solve this dispute?

Legal Issues Unique to Commercial Transactions

Property Condition Disclosure• Caveat Emptor still applies to commercial

transactions• Purchasers are assuming the risk• The sales contract should address issues that may

arise and the options for relief• The buyer should use due diligence to discover

latent defects


According to Florida License Law: real estate brokers and salespersons duties include “[d]isclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer.” FS§475.278 However, there has been no line between commercial and residential property provided by the courts for guidance.

Activity:Review the article Return of the Pink Panther

from The Florida Bar Journal


Americans with Disabilities Act

Public Accommodations and Commercial Facilities

(Title III) prohibits discrimination on the basis of

disability in the activities of places of public

accommodations and requires newly constructed or

altered place of public accommodation to comply with

the ADA Standards

Public Accommodations and Commercial Facilities

Fall into one of 12 categories listed in the ADA,

such as restaurants, movie theatres, schools and

privately owned non-residential facilities such as

factories, warehouses and office buildings

DiscussionScenario:Your office is in a home built in 1935 and it is not ADA compliant.

Are we doing wrong?

Many commercial offices are in older homes, how do you answer questions like this if they come up?

§ 36.201 General Requirements

Prohibition of discrimination. No individual shall be

discriminated against on the basis of disability in the full and

equal enjoyment of the goods, services, facilities, privileges,

advantages, or accommodations of any place of public

accommodation by any private entity who owns, leases (or

leases to), or operates a place of public accommodation.

§ 36.201 General Requirements

Landlord and tenant responsibilities. Both the landlord who

owns the building that houses a place of public accommodation

and the tenant who owns or operates the place of public

accommodation are public accommodations subject to the

requirements of this part. As between the parties, allocation of

responsibility for complying with the obligations of this part may

be determined by lease or other contract.

The following links contain helpful information for licensees to share with prospective owners, buyers, landlords and tenants:

http://www.ada.gov/regs2010/smallbusiness/smallbusprimer2010.htm#compliance

http://www.realtor.org/field-guides/field-guide-to-complying-with-the-americans-with-disabilities-act-ada

http://www.ada.gov/regs2010/smallbusiness/smallbusprimer2010.htm#compliance



Record KeepingChapter 475 subsection 475.5015 clearly states that records:for at least 5 years from the date of execution by any party of any listing agreement, offer to purchase, rental property management agreement, rental or lease agreement, or any other written or verbal agreement which engages the services of the broker.

Conclusion

Comparing commercial real estate transactions to residential real estate transactions is like comparing apples to oranges. They are in a similar genre and have the same licensing requirements, but that is where the similarities end

Conclusion

• Commercial Real Estate transactions are business focused. It involves property that is sold, leased or used to achieve a predetermined business objective

• The selling process often hinges on numbers and return on investment

Conclusion

• Residential Real Estate transactions traditionally involve clients looking for home for themselves

• For the most part is an emotional purchase with little thought about the return on investment

Conclusion

For consumers considering investing in commercial real estate, it is best for them to work with a trained, experienced commercial real estate agent

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