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The Importance of Disclosures in Commercial Real Estate Transactions

Commercial real estate disclosures keep sellers honest and ensure that buyers know what they are purchasing. Not only is it good business to provide these disclosures, doing so can help avoid liability issues from cropping up down the road. Certain disclosures may even be required by law in the Commonwealth of Massachusetts. Are you planning to sell commercial real estate in the near future? What should be included in a disclosure?

We asked our Real Estate Team to share some quick thoughts on disclosures:

“When selling commercial property, an owner should be upfront about the condition of the property and anything that might affect its value. Not disclosing this information, or not disclosing it accurately, could result in a material breach of the real estate contract. This means the seller may face litigation and be forced to pay substantial damages.”

“There are some items that must, by law, be disclosed. For instance, if there’s a septic tank on the property, the owner must notify a potential buyer. There are also complex inspection requirements that attend this obligation. Properties built before 1978 may contain lead paint, which has to be disclosed under Massachusetts and federal law. This obligation is met by way of a Property Transfer Lead Paint Notification.”

Other items should be disclosed so the buyer is fully aware of the risks he or she is taking by purchasing commercial property. Our team had this to say about other items that may be relevant:

“Weather-related hazards. If the property in question is located in a flood zone, the buyer should know about it. Flooding is a major concern in certain coastal and inland regions of the state. Properties can see serious storm damage that could destroy or seriously interrupt commercial operations. The state maintains data concerning which areas are considered flood zones.”

“Toxic substances. The presence of any asbestos, radon, mold, and any toxic or hazardous substances (e.g. gasses or chemicals) needs to be disclosed. Failure to do so could cause serious illness or death, on top of devaluing the property.”

“Structural damage. Any sort of damage to the commercial property may not only affect its value, but its safety as well. If tenants or customers are injured or killed because of structural defects that were not properly disclosed, the original owner may face serious legal issues.

Utility problems. Are there any issues with the water, plumbing, heating, air, ventilation, electricity, or other utilities? These problems could violate local building codes. They may also pose a health and safety risk to buyers, customers, and tenants. Major work done to repair or replace utility systems should also be disclosed.

Additions and renovations. Be sure to notify potential buyers of any additions or renovations made to the property. For example, a buyer should know if another room was added to the property. Additions and renovations raise questions of maintenance and may have an effect on the property value.”

Real estate disclosures are only as good as the degree to which they are accurate. They must always be based on facts, including those that a seller would reasonably be aware of. In other words, a seller cannot turn a blind eye to problems with the property that a fair inspection would likely reveal. Additionally, the disclosure cannot mislead a prospective buyer or attempt to hide anything the buyer would want to know.

Before you engage in any sort of commercial real estate transaction, connect with our Real Estate & Land Use team to make sure you are protected.