Commercial real estate professionals can minimize litigation risks to ensure successful deals.
Litigation is expensive, disruptive, incredibly stressful, and inherently unpredictable. To avoid litigation arising from a commercial real estate transaction, commercial real estate investors and professionals should consider the following risk-minimizing best practices.
Doing business with a difficult or dishonest counterparty substantially increases the risk of litigation. Conduct thorough due diligence before the transaction is inked.
Here are some questions to consider:
- Does the counterparty have a history of litigation?
- What is its reputation in the relevant community?
- Does the individual or organization have the financial resources to perform its contractual obligations, or are there indications of cash-flow problems?
If these considerations indicate a problem, consider whether the deal is worth the risk. Sometimes it is better to abandon a transaction than to close.
If the deal is worth the risks a difficult counterparty presents, take extra care with the transaction documents. Make sure all foreseeable problem areas are addressed clearly in writing.
If there are any indications of financial weakness, request a personal guaranty, letter of credit, or other security-ensuring performance. Be careful, however, about real property security. In many states, including California, the creditor's remedies will be restricted severely when the financial obligation is secured real estate.
Poorly drafted, incomplete, or ambiguous deal documents can lead to disputes over the parties' obligations, which often result in litigation. Documents that do not clearly or accurately reflect the transaction terms may lead to an undesirable litigation result, such as a loss.
Since real estate law is intensely specialized, it would be prudent to use an attorney with the right expertise. A lawyer who is not familiar with the relevant subject matter may miss critical issues, creating a ticking time-bomb in the deal documents.
Ask the prospective attorney how many similar transactions he or she has handled in the past three years. Do not use an attorney who lacks experience specific to the deal; do not use a form downloaded from the internet; and do not attempt to save legal fees by cutting and pasting from documents used in previous transactions. Consider the money spent on competent, qualified counsel as insurance against the exponentially greater cost of litigation, which may result if the documents are legally deficient.
Binding and Nonbinding Agreements
If not properly drafted, letters of intent, commitment letters, options, and similar documents may create uncertainty as to the existence of a binding contract, which could result in litigation.
If there is no intention to create a legally enforceable obligation, make sure the documents state that no such obligation is created. Conversely, if the intent is to bind the parties to basic terms, with a more-detailed agreement to follow, clearly express that intention. To avoid disputes over whether a binding contract exists, consider using language such as: “This agreement shall not be binding until executed by all parties.”
Buyers or lessees who believe they have been misled frequently sue. Cases of buyer's remorse are particularly prevalent following a real estate market peak, when buyers find their property worth less than they paid.
Ensure against a fraud suit by erring on the side of disclosure. If the commercial real estate professional asks whether a particular fact ought to be disclosed, the answer is probably yes. Disclose in writing, with the receipt confirmed by the buyer.
If a dispute arises, the buyer likely will deny any oral disclosures were made. Keep a detailed record of the files that were made available during due diligence and have the buyer confirm in writing that these files were made available.
A high percentage of lawsuits trace back to a failure to adhere to one of these recommendations. By keeping this advice in mind, commercial real estate professionals will substantially reduce the risk of being dragged into the dark abyss of litigation.