Common Due Diligence Negotiation Points in Commercial Real Estate Sales
There are many possible points of negotiation when it comes to a commercial real estate sale transaction. One of the most commonly negotiated portions of any commercial real estate sales contract is the due diligence period (often also referred to as the study period or inspection period). The study period is significant because it is the period allotted for the purchaser to conduct inspections and tests on the property to determine whether the purchaser wants to move forward with the purchase. The significance of the study period is that the purchaser’s deposit typically becomes non-refundable when the study period expires, subject to a few exceptions.
Accordingly, sellers usually want a shorter study period, while purchasers prefer a longer study period. Sometimes the parties negotiate to have multiple deposits, with the initial deposit being at contract execution, and the additional deposit(s) not coming due until the study period ends. Purchasers will often lobby for the initial deposit to be the smaller of the deposits, therefore mitigating their risk until the study period is over.
Many other factors can impact the terms of the due diligence period, such as environmental issues on the property, the purchaser’s intended use of the property, zoning laws, and/or an existing business operating on the property. For example, if environmental issues are present, a longer study period may be necessary to deal with cleanup and governmental approvals. If the seller currently operates a business on the property (one it plans on shutting down), especially a seasonal business, the length of the due diligence period can be crucial because seller needs to know whether the deal is going forward or whether they need to plan on continuing operation of their existing business. Additionally, sellers usually want to delay alerting existing employees or tenants of the sale until they are assured it will close, and will therefore request discretion from the purchaser as to when and how purchaser conducts its inspections.
The study period is just one of many possible points of contention when selling or purchasing commercial real estate. Even the savviest real estate professionals need trusted counsel to help navigate the negotiation of a commercial real estate sale.
If you are contemplating selling or purchasing commercial real estate, contact one of our experienced attorneys to help ease your mind and negotiate on your behalf. For additional information contact Alex Ward or any other member of the firm’s Real Estate practice group.