What kinds of insurance should I buy for my commercial building?

Property damage insurance will help protect your investment if your building is damaged or destroyed by fire or other causes. Public liability coverage will protect you if someone is hurt in the building or on your property and sues you. If the property is occupied by tenants, also consider rent interruption (rental income) insurance to make sure you do not lose rental income while you are repairing damage caused by a fire or severe weather.

What are 'Fixtures'?

They are the parts of the building that are permanently in place and cannot be removed without damage to the building. The plumbing system is an example. Usually, fixtures are included when you buy a building.
Tests to determine whether an item is a fixture may include: The intent of the parties (was the item intended to remain within the building

• How is the item fixed to the building?
• Does the item form an essential part of the tenant or seller's business? If so, it may be considered a "trade fixture" and it may be permissible to remove the item at the end of a lease or sale of property .i.e. cranes, manufacturing equipment, etc.
• Is the item an essential part of the building?

On the other hand, items that are not attached or are easily removed are considered to be personal property. Office equipment is an example. Usually, personal property is not included when you buy a building, unless specifically listed in the sales contract.

Some items (like a window air conditioner) might fall into either category. To avoid disputes, it is a good idea to specify in the sales contract how such items are to be dealt with.

If I am buying commercial real estate, what should go into my contract?

Since every real estate deal is different, you will need to get advice from lawyer on how best to protect your interests in the contract. Typically, however, your contract should address at least the following issues:

• An exact legal description of the property you are buying, including the land surrounding the building.
• The purchase price and whether it is all due at closing or in installments.
• A list of any equipment or personal property that is included in your purchase.
• Any contingencies that must be met before you are obligated to complete the purchase, for example, you can make the deal contingent on your ability to get a mortgage loan.
• How property taxes and utility bills will be allocated between you and the seller.
• The type of title evidence or title insurance the seller must provide.
• The date for closing and delivery of possession.
• What legal recourse a party has if the other party defaults.

Your lawyer may advise you to include several other provisions such as representations and warranties of the Seller.

I am looking at a small shopping centre that I may want to buy. How do shopping centre leases work?

Quite commonly, the tenant pays a base also referred to as Net or Minimum rent - often tied to the amount of square feet the store occupies. In addition, the lease may require the tenant to pay a certain percentage of gross sales.

Shopping tenants often contribute a portion of the expenses of maintaining the common areas of the shopping center and pay for part of the property taxes.

Who is a Landlord?

A landlord is the owner of rental property, who leases it to another person. The landlord is also referred to as the "lessor" of rental property. The landlord lets permits or surrenders the use of its property to permit a tenant use and occupy his/her rental property for a specific length of time in exchange for the monthly payment of or receipt of rent.

Who is a Tenant?

A tenant is a person who has the right to use and occupy rental property in accordance with a rental agreement or lease. The tenant is also referred to as the "lessee" of rental property. The tenant may use and occupy the rental property, for a specific length of time as long as s/he complies with the terms and conditions of the rental agreement, including, but not limited to, the payment of rent.

Who is a Subtenant?

A subtenant is a person who has the right to use and occupy rental property or a portion of rental property leased by a tenant from a landlord. A subtenant has responsibilities to both the landlord and the tenant, Head-Tenant/Lessee. A tenant can sublet rental property to a subtenant, but often must obtain the prior agreement of the landlord; the tenant still remains responsible for the payment of rent to the landlord and any damages to the property caused by the subtenant. The sub-tenant often must agree to abide by the terms and conditions of the Head-Lease before being permitted occupancy by the Landlord.

What is a lease or rental agreement?

A lease, sometimes also referred to as a rental agreement, is an agreement between a landlord and a tenant which gives the tenant the right to use and occupy rental property for a specific period of time. When a tenant turns over the right to use and occupy rental property to a subtenant, the agreement is sometimes referred to as a sublease or assignment of lease.

A lease can be an oral agreement, or it can be in writing. If the lease extends beyond one year, there is usually a requirement that it be in writing. An oral lease has the disadvantage of future misunderstandings over terms of the agreement, and potential problems for enforcement of terms between the landlord and the tenant. At the end of the lease, use and possession of rental property must be returned to the landlord. In addition to other responsibilities, a lease requires the tenant to pay the landlord a specified amount of money each month; this payment is called rent.

What should a lease or rental agreement include?

• The name of the landlord and the name of the tenant (and often the names of others who will occupy the rental property), as well as a description of the rental property subject to the lease. The term of the lease (month-to-month, 1 year lease, 5 year lease, etc.).
• The amount of rent that the tenant must pay the landlord, and when that rent is due. The particulars on the security deposit (how much, whether it is held at interest, and when it will be returned at the end of the lease.
• What can happen in the event of "default" - the failure of either party to live up to the terms of the agreement (such as the failure of the tenant to pay rent or the landlord to keep the rental property in habitable condition)?
• Whether the tenant must pay the landlord a late fee if the rent is not paid on time.
• Whether the tenant may operate a business out of the rental property (where local zoning ordinances at the particular rental property allow such activities - Permitted Use).
• Whether the tenant will be in default in the event that the tenant disturbs other tenants' "right of quiet enjoyment".
• The respective duties of the landlord and tenant regarding the maintenance of the rental property.
• What happens at the end of the term of the lease (option to renew, conversion of lease to a lesser term, notice of termination by the tenant to the landlord).
  Under what conditions may the landlord enter the rental property?
• Whether the tenant must pay the lawyer fees and costs incurred in a lawsuit, in the event that a lawsuit is filed and the tenant loses (and conversely whether the landlord must pay the tenant's attorney fees and costs of a lawsuit that the landlord loses).
• Whether the tenant may have a pet, and if so, what kind and how many.
• Whether an additional deposit is required.

Although there are many pre-printed lease forms, both the landlord and the tenant have the right to change the particular terms and conditions of the pre-printed lease before the lease is fully executed. Lease forms, like all contracts, may be subject to negotiation between a prospective tenant and a landlord.

Is there a difference between a residential and a commercial lease?

When a person leases rental property from a landlord for use as a residence, the arrangement is called a residential lease. When a business leases rental property, the arrangement is called a commercial lease.

While there are many similarities between residential and commercial leases, provincial and local law often regulates the relationship between a tenant and a landlord under a residential lease. These laws are designed to provide basic requirements for the condition of rental property, and to protect tenants from unscrupulous "slumlords." Since commercial leases are viewed as being contracts between knowledgeable business people, less governmental protection is needed, as knowledgeable business people should be able to negotiate the terms of the lease to their respective satisfaction.

What is zoning?

Zoning is the way the governments control the physical development of land and the kinds of uses to which each individual property may be put.

Zoning laws typically specify the areas in which residential, industrial, recreational or commercial activities may take place. For example, an R-1 residential zone might allow only single-family detached homes as opposed to duplexes or apartment complexes. On the other hand, a C-1 commercial zone might be zoned to permit only certain commercial or industrial uses in one jurisdiction, but permit a mix of housing and businesses in another jurisdiction.

What else do zoning laws regulate?

Besides restricting the uses that can be made of land and buildings, zoning laws also may regulate the dimensional requirements for lots and for buildings on property located within the town, the density of development, and whether you can have pigeons, dogs, sheep or llamas. Some zoning ordinances also regulate the extraction of natural resources from land within the zoned area, others provide space for hospitals, parks, schools, and open space and still others protect places of historical significance within the community.

What is a Purchase Option?

It is a right a seller grants a buyer to buy real estate within a certain period of time. For example, suppose you are interested in buying an office building but want more time to investigate the cash flow and compare this building to others in your area. You might offer to pay the owner an option fee to tie up the property. In return, the owner might be willing to grant you the right to buy the building within a certain period (say, six months) at a stated price. The owner would not be able to sell to anyone else in meantime.

You could agree that all or part of the option fee would apply toward the purchase if you decided to actually purchase the property. If you did not exercise your option, you would forfeit your option fee.

A building I am considering is occupied by several commercial tenants. If I buy the building, can I evict them?

Generally not. If a tenant has a legally valid tenancy and is current on the rent and all other lease obligations, the law usually lets the tenant remain in possession until the end of the lease, regardless of who owns a "leasehold interest".

Your best bet is to ask the owner for the legal status of each tenant since your ownership of the building will be subject to those leases. You may need a lawyer's help in evaluating how to deal with the tenants.

I have heard the term "build-out". What does it mean?

Every business has its own jargon and the commercial real estate business is no exception. Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door. The idea is that the spaces will be finished to meet the specific needs of each tenant.

The process of finishing this raw space is known as the "build-out." There can be extensive negotiations between the building owner (landlord) and the tenant over:

What improvements will be made?

• Who will pay for these improvements?
• Who will be in charge of getting the work done?
• What will the tenant be permitted (or required) to remove at the end of the lease?

What is a "nuisance"?

Legally speaking, it is some condition on your property or some use of your property that interferes with a neighbouring owner's ability to enjoy their property. For example, if dense smoke or loud noises are emitted from your property, a neighbouring owner can claim it is a nuisance.

A judge may require you to stop creating the nuisance and to compensate the other owner for any losses.

A lawyer's role in a commercial transaction

If you are buying commercial property, your lawyer can help you draft or revise the sales contract so your rights are fully protected. In addition, your lawyer can review the title evidence - typically, the title insurance commitment - and can look over the closing documents.

If you are selling commercial property, your lawyer can help you with the sales contract, help you order the title insurance commitment and solve any title problems, and either draft or review the deed or other closing papers.

Contracts for the Sale or Purchase of Commercial Real Estate

Contracts for the sale or purchase of commercial estate must be in writing. A real estate agreement that consists only of an oral understanding and a handshake will not be enforced by a court. An ancient law called the Statute of Fraud requires that real estate sales contracts be in writing.

A contract does not have to very fancy to be valid. If it describes the property and the price, it usually will be enforceable in court. Obviously, however, it is not a good idea to rely on a bare-bones contract when you purchase commercial real estate. You need much more detail.

Escrow

Escrow is an arrangement where a third party - such as a title insurance company or a lawyer - holds money or documents and distributes them according to instructions from both parties.

How should I take legal title to commercial property?

You can, of course, take title in your own name. But you may want to consider forming a corporation or limited liability company (LLC) and putting the legal title in the name of the business entity. This requires more paperwork and a bit more expense, but you limit your personal liability if someone gets hurt on your property.

By limiting personal liability, you decrease the risk that you could lose your other assets such as your home and personal bank accounts if there is a big verdict in favor of an injured person.

Your lawyer can help you decide if putting your commercial real estate into a separate legal entity is the best thing for you to do.

Can a deal go ahead even if there is a defect in the legal title?

Yes, the buyer is always free to accept the risk of a title defect, but should first consult with a lawyer to make sure the risk is minimal. There often are ways to reduce the risk to manageable proportions. For example, the title insurance may be willing to insure over the risk if appropriate affidavits are signed or if money is placed in escrow to cover the risk. In some cases, the seller may be willing to put money in escrow so there are funds on hand to pay off a construction lien if the lien holder goes to court during the statutory period and wins.

Or if there is a boundary line dispute, you as the buyer may decide to buy the property anyway if only a small piece of the property is involved in the dispute. Your reasoning may be that even if you lose the disputed area, the remaining land that you are buying is well worth what you are paying.

Similarly, if there is some problem with the building itself - say, a defective heating and air conditioning system - and the seller is not willing to fix it, you may decide that you are getting such a good deal on the building that you will proceed with the purchase despite the defect.

What is "eminent domain"?

It is another word for condemnation - the right of the government to take private property for a public purpose, for example, to make way for a road. The Constitution requires the government to pay you fair compensation if it takes your property.