Commercial real estate disputes that end up in litigation tend to share one thing in common: somebody skipped a step before closing. Often, this results from a buyer who avoided the tough questions or who failed to push deeper when a seller was less than forthcoming. But due diligence is not the time to shy away from friction. It is the buyer’s one chance to understand exactly what it is purchasing and what liabilities it may be inheriting.
Yet deals continue to go sideways in the same predictable ways. Here are the areas that deserve the closest attention, and the ones most likely to generate post-closing problems when they don’t get it.
Leases Are the Asset. Read Them Like It
For income-producing property, the leases form the heart of the deal. Leases should be reviewed early in the transaction for any material issues that may require time to resolve. A buyer should review the leases and all related documents to ensure that there are no tenant rights or landlord obligations that may affect the profitability of the property or expose the purchaser to unaccounted for costs.
Buyers should also push to get all tenant estoppel certificates — and demand answers if the seller has difficulty getting an estoppel for any key tenants. An estoppel locks the tenant into confirming the material terms of its lease and prevents the tenant from later claiming the terms were different than represented. It is cheap insurance against post-closing disputes.
Title Is More Than a Policy
All buyers know they need title insurance. Fewer understand what to do with it. A title policy is only as useful as the buyer’s review of its exceptions — every mortgage, easement, covenant and restriction listed on Schedule B. Each needs to be pulled, read and evaluated against the buyer’s intended use. Pair that with an updated ALTA/NSPS survey showing the legal description, easement locations, encroachments and existing improvements, and you have the foundation for understanding what the buyer is actually acquiring.
A practical tip: forward the seller’s existing title policies and surveys, if available, to the title company and surveyor immediately. These third parties need lead time, and giving them a head start avoids the closing delays that can result when these items are ordered too late.
Know Who You’re Buying From
A buyer should analyze and review all existing or threatened litigation, claims, or other proceedings against both the property and the seller. In addition to the items requested, the purchaser should order independent lien and judgment searches against every seller entity or affiliated entity. But buyers often focus on the property and overlook the entity that owns it. If the seller is an LLC owned by other entities, the buyer’s attorney should request formation documents, operating agreements, certificates of good standing and a complete ownership schedule for every entity in the chain. Gaps in entity-level diligence can surface after closing as disputes over authority to convey, undisclosed ownership interests, or competing claims to sale proceeds.
Don’t Overlook Affiliate Agreements and Environmental Risk
Agreements between the seller and its affiliates — management contracts, consulting arrangements, service agreements — deserve heightened scrutiny. These may not reflect arm’s-length terms, and if they survive closing, the buyer inherits obligations that were never fairly negotiated. The better practice is to identify them during diligence, terminate them at closing and replace them on market terms.
Environmental diligence should be calibrated to the property’s actual use. A Phase I is standard, but the buyer should also ask specifically about underground storage tanks, asbestos-containing materials, PCB-containing equipment and any regulatory enforcement history. Environmental problems are among the most expensive post-closing liabilities a buyer can inherit and among the hardest to detect without asking the right questions upfront. If the Phase I flags recognized environmental conditions, a Phase II assessment involving subsurface sampling may be necessary before the buyer can make an informed decision about whether to proceed, renegotiate, or walk away.
Every Shortcut Has A Price
In sum, every shortcut in the diligence process is a potential claim waiting to surface after closing. The title exception that wasn’t read becomes the easement dispute. The lease that wasn’t reviewed becomes the tenant lawsuit. The storage tank that wasn’t disclosed becomes the remediation project. Thorough due diligence is not just good lawyering. It is the most effective form of litigation prevention there is.
Christian P. Foote is a real estate attorney with Merrill O’Sullivan Stewart in Bend. His practice covers the full lifecycle of commercial real estate, including purchases, sales, leasing, entity formation and secured financing, as well as post-closing litigation, landlord-tenant matters and partnership disputes. He can be reached at chris@mosattorneys.com.
