Commercial real estate law isn’t an easy thing to wrap your head around. There are laws at the federal level, laws at the state level, and regulations at the local level. In addition, real estate law encompasses everything from property law to insurance law and even contract law. In short, there is no one-stop-source to find everything you need to know about real estate law as a commercial property owner.
It’s always best in cases like this to seek professional help so you don’t find yourself in hot water after the fact—especially when there is a sizable investment at stake. However, the primer below will give 5 groups or areas of law that every commercial real estate owner needs to know about as well as a general overview of just how tangled the web can be.
Robert Freedman, senior editor and videographer for REALTOR magazine, says that any interested party should always consult a qualified real estate attorney if they have any questions about the laws that govern property ownership, sale, and usage in their state.
Landlord/Tennant laws vary greatly by state, but generally they’re designed to protect the rights of both parties involved in any sort of rental or leasing agreement. Clauses in such laws often govern:
- Payment of rental fees
- Rights of privacy
- Necessary disclosures
- Duration of tenancy
- Rights to termination of tenancy
And much more.
Basically, these laws are a finely crafted legal definition of the relationship that exists between the commercial property owner and the individual or entity habituating the space. Understanding the laws within the state you’re operating in is an essential part of making sure you don’t violate your tenant’s rights. It’s also helpful to educate yourself on the laws should your tenants violate your contractual agreements.
To get an idea of how much an unwanted eviction case can cost a landlord, read this case study.
Disclosure laws are another set of laws that generally vary by state. These laws deal with the condition, location, and restrictions placed on the property itself. Generally, disclosure laws exist so that property renters understand what they’re getting into.
For instance, in many cases, owners are required to disclose the presence of known (or even unknown) toxic substances such as asbestos, lead paint, and radioactive materials. However, other less-shocking disclosures may also be required depending on the state in which you operate.
For instance, California just enacted two new disclosure laws that apply to commercial properties. These require that renters be informed of the necessity of accessibility inspections and aspects pertaining to the energy use of the property.
These laws are important for commercial property owners to understand—especially if they opt not to go through a realtor to facilitate the rental transaction.
Zoning and Land Use Laws
Local or state legislation often dictates how the zoning and land use regulations are enforced. In addition to determining taxation, these regulations determine how a property (commercial or otherwise) can be used. Zoning regulations dictate whether a property can be used for retail operations and sometimes even what sort of retail operations can take place. For example, something as simple as a hot dog cart is covered under zoning laws, and the operator can be shut down if he or she infringes on the property rights of established businesses.
State legislation often dictates the process for changing any such zoning. Generally, the landowner must apply for rezoning and have the local board meet on the issue. However, it may be more complicated than that depending on local law.
Understanding your local regulations will prevent you from renting a commercial property to a business only to find out that the business can’t operate there without getting the property rezoned.
Leases and rental agreements are legally binding contracts drafted by one party or the other and accepted by both. As such, these documents must be specifically structured and contain very rigid verbiage in order to stand up to any challenges (either from one of the parties involved or outside entities).
Whereas the majority of contracts in the United States fall under the Uniform Commercial Code, generally, the sale of real estate is covered by the Common Law of Contracts. The common law is quite different to the UCC and as such, Brad Denton notes, “the common law follows the “Mirror Image Rule,” requiring an acceptance to be an exact mirror image of the terms of the offer for it to be a legally recognized acceptance. If any changes are made to the offer, there can be no acceptance because the offer has been changed. It then becomes a rejection and a counteroffer.”
You’ll want your investment covered—that’s why you’ll have insurance on the commercial property you’re leasing out. It covers your property and (to some extent) the property of your tenant should certain accidents occur. However, that same insurance policy is not intended to protect your tenant or the vast majority of their property. Indeed, they will need business insurance of their own in order to ensure that their property (such as equipment) is covered and to protect them against liability lawsuits.
Again, insurance laws vary greatly from state to state and there aren’t many overarching federal commandments. Therefore, it’s essential that you educate yourself and contact a qualified attorney to answer any questions you might have about commercial insurance law.
When In Doubt, Ask a Professional
You should never attempt to navigate the tricky laws and local regulations that govern commercial property leasing. There are simply far too many variables on the federal, state, and local levels for a novice to keep track of. That last thing you want to do is enter into what you think is a legally binding contract only to find that you’re the victim of some legal loophole that ultimately leads to you losing your investment. Worse yet, illegal transactions could put you in a bad place with local and federal law enforcement. Always seek advice.