There are many common title challenges in commercial real estate. A critical part of any commercial real estate transaction is anything that could cloud the title to a property, such as liens, easements, or encroachments. If a title challenge is not discovered and resolved before closing, it could delay or even derail the transaction or result in financial losses for the buyer.
Seasoned commercial real estate investors know it is essential to carefully review the title report for potential challenges before closing. They also know it is crucial to work with an experienced commercial real estate attorney who can help them navigate any title challenges.
Here are some of the most common title challenges in commercial real estate and how to navigate them:
This type of encumbrance on a property gives a creditor the right to foreclose if the debt is not repaid. In fact, liens get filed for various reasons, such as unpaid taxes, contractor bills, or judgments.
If there is a lien on a commercial property, the buyer will need to satisfy the lien before closing. This is done by paying off the debt or negotiating a settlement with the creditor. In some cases, the seller may be willing to pay off the lien as a condition of the sale.
An easement is a legal right to use another person’s property for a specific purpose. For example, a utility company may have an easement on a commercial property to install and maintain power lines.
Suppose there is an easement on a commercial property. In that case, the buyer will need to understand the scope of the easement and how it will affect the use of the property. In some cases, the buyer may be able to negotiate with the easement holder to modify the easement terms.
An encroachment is a situation where a structure or improvement on one property extends onto another. Encroachments can be intentional or unintentional. For example, a neighbor may have built a fence encroaching on the buyer’s property line.
Suppose there is an encroachment on a commercial property. In that case, the buyer will need to determine whether the encroachment is material and how it will affect the use of the property. In some cases, the buyer may be able to negotiate with the encroaching neighbor to resolve the issue. If the encroachment is material, the buyer may need to seek legal action to have the encroachment removed.
Other Title Challenges
In addition to liens, easements, and encroachments, there are a variety of other title challenges that can arise in commercial real estate transactions. These can include:
- Title defects: Title defects are errors or omissions in the public records that could cloud the title to a property. For example, a previous deed may have been incorrectly executed or recorded.
- Boundary disputes: Boundary disputes can arise when there is disagreement about the exact location of the property lines.
- Zoning violations: Zoning violations can occur if the property has a purpose that the local zoning ordinance does not permit.
- Environmental hazards: Environmental hazards include contamination from underground storage tanks, asbestos, or other hazardous materials.
How to navigate title challenges in commercial real estate
The best way to navigate title challenges in commercial real estate is to work with an experienced commercial real estate attorney. A commercial real estate attorney can review the title report and identify any potential title challenges. They can also help the buyer negotiate with creditors, easement holders, or encroaching neighbors to resolve any title challenges.
Here are some additional tips for navigating title challenges in commercial real estate:
- Start early. The sooner you start the due diligence process, the more time you will have to identify and resolve title challenges.
- Be thorough. An experienced commercial real estate attorney should review the title report carefully.
- Be prepared to negotiate. Sometimes, the buyer must deal with creditors, easement holders, or encroaching neighbors to resolve title challenges.
- Be willing to walk away. Suppose the title challenges are too complex or costly to resolve. In that case, the buyer may need to leave the transaction.
Title challenges can be complex and time-consuming to resolve. However, by working with an experienced commercial real estate attorney, buyers can navigate the process and achieve a successful closing.