Real Estate Law: The Difference Between Commercial and Residential Real Estate Transactions in NJ

A commercial real estate transaction usually starts with a letter of intent. This is a non-binding preliminary offer which states the basic terms of the anticipated contract and may include a non-disclosure agreement to give the parties security in the knowledge that the information provided will remain private. Under New Jersey real estate law, commercial real estate contracts are not subject to the three-day attorney review requirements which control residential real estate transactions. Therefore, the contract will be prepared by one of the real estate attorneys and then negotiated and finalized before it is executed. Once it is executed, all parties are bound by its terms.

The Contract of Sale will usually include a "due diligence" provision during which the purchaser is permitted to conduct inspections of the property and the records related to it. These Inspections can be quite complicated, particularly for a commercial or industrial property, and can include structural and system inspections, environmental contamination inspections, reviewing the history of the property, including the environmental history, investigating the zoning rules and regulations against the purchasers’ intended use of the property, performing title searches and searches with the New Jersey Division of Taxation to insure that the Seller is paid current on taxes, and examining records of income and expenses related to the property and/or its leases and tenants. Once due diligence has been completed and the purchaser accepts the property in its current condition, or the parties agrees on repairs, remediation or credits in lieu thereof, the next step is purchaser obtaining approval of any financing, if financing is involved.

The financing process begins with an application to the purchaser’s chosen lender. If the purchaser qualifies for the loan sought, that lender will issue mortgage commitment, which will include various conditions which the purchaser must satisfy in order to receive final clearance to close. Typically, the lender will have its own attorney representing it who will provide and extensive list of items which must be satisfied prior to closing. The purchaser’s attorney will work with the lender’s attorney and the lender to provide all the information and documentation necessary to satisfy their requirements. Those requirements often include hazard insurance, financial records, satisfactory environmental inspections, documentation that any corporate entities involved in the transaction are in good standing and properly organized. Once the lender is satisfied that all of its conditions have been met, the lender will issue the “clear to close.”

While a New Jersey residential real estate closing is almost always conducted at the buyer’s attorney’s office, the commercial real estate closing can take place either at the office of the purchaser’s attorney or if the lender requires it at the office of the attorney for the lender. The many documents which the purchaser will be required to executed, which can include a note, loan agreement, mortgage, security agreement, personal guarantees, environmental indemnifications, assignments of rent, UCC financing statements, resolutions, affidavits, and various other documents for the protection of the lender and/or the parties to the transaction which will have been drafted by the lender’s attorney and reviewed and approved by the purchaser’s attorney prior to the closing. A commercial real estate closing can be quite lengthy as there are many documents involved.

For more information, please contact our office for a free consultation.