What is Commercial Real Estate?

Commercial real estate is property being operated to generate business revenue through rental income or capital gains. Because it is meant to generate revenue if it is residential property, it must be used as rental housing to still be considered commercial real estate. It is not personal property. 

Commercial real estate may have multiple uses, like stores and offices or stores and residential property. Under California’s Civil Code, commercial real estate is treated separately from residential real estate. Commercial real estate buyers are presumed to be more experienced and sophisticated in their transactions. This is also because they are usually represented by an agent or broker who represents only their interests. (Easton v. Strassburger (1984) 152 Cal.App.3d 90, 103 fn 8.) Generally, a seller via their broker is required to disclose all facts materially affecting the value or desirability of the property to the purchaser (Civ. Code, § 2079.) This is called the transfer disclosure law. However, this only applies buildings with four or fewer dwellings, so the “transfer disclosure law” usually does not apply to commercial real estate. 

With mixed use properties it may apply depending on the “sophistication” of the buyer. (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1189–1190.) There is less protection for commercial tenants, like businesses occupying commercial real estate. Commercial tenants are considered to be “differently situated” than residential tenants. (Civ. Code, § 1993.04) Commercial tenants are more likely to have resources if the need arises to vacate the rental premises.

How does a commercial real estate transaction work?

A transaction for commercial real estate generally follows a process. (Gosfield, G. G. (2000) Real Property, Probate and Trust Journal, 35(1), 129–195.) A broker will usually market the property for the seller. The brokers representing buyers will find property. Buyers may be an owner user, private investor, acquisitions, or private equity firms. The buyer or its agents will assess the property initially. Then, the buyer may signal the intent to move forward with the transaction through a letter of intent. Once it is signed by the buyer and the seller a purchase and sale agreement will be drafted. This acts as a legal agreement setting out the terms of the sale. 

Estoppel certificates are frequently used in commercial real estate transactions where the property has a residential aspect. These certificates inform lenders and buyers of a tenant’s understanding of the lease agreement. This helps ensure buyers will not run into issues with tenants remaining in the property following the sale. (Plaza Freeway Ltd. Partnership v. First Mountain Bank (2000) 81 Cal.App.4th 616, 628–629.) Then the property goes to escrow and there is a detailed assessment done by the buyer. Finally, if the buyer still wants to go through with the sale, the sale will close. 

How is a commercial real estate buyer protected?

Generally, there is a presumption that property is unique and a breach to transfer it cannot be remedied by money. (Civ. Code § 3387) This protects buyers and sellers in real estate transactions, like where a contract for the sale of property is breached or property is destroyed. Where a lis pendens is not disclosed to a buyer, this same principle was also applied. (Code Civ. Proc. § 405.33) Commercial real estate is not presumed to be unique. The legislature expanded on this in the code commentary, stating the presumption that property is unique is inappropriate with respect to commercial real estate. (Code Civ. Proc. § 405.33, comment 6.) The essence of commercial activity is to earn money and the loss of commercial investment can usually be offset by a monetary award. 

But, where a commercial real estate buyer sues for an issue with the property, they are not only left with monetary damages. Depending on the circumstances surrounding the property, the buyer may be entitled to more. The property can be considered unique if it is bigger and unlike any other parcel or property in the general area.  (Stewart Development Co. v. Superior Court (1980) 108 Cal.App.3d 266, 272–273.) Where a buyer has not yet developed land on commercial property, they may be entitled to more than monetary compensation. (Id. at 274-275.)

What is an example of a commercial real estate transaction?

For example, Julie is a potential buyer for Shawn’s building that houses several shops. Julie and Shawn are both represented by their own real estate agents or brokers. Julie plans to buy this space to lease it out to businesses as an investment. As such Shawn’s property is commercial property. Shawn nor his broker are bound by the transfer disclosure law because this is a non-residential commercial property. Julie is presumed to be protected enough as a commercial real estate buyer represented by her own agent. 

The property itself would be marketed by Shawn’s broker. Julie’s broker found the property for Julie. When Julie decides to go through with the purchase, Julie would send Shawn a letter of intent to purchase the property. A legal agreement would be drafted, and Julie and Shawn would enter escrow. After Julie’s broker conducts a detailed assessment, she would state her final decision to purchase the property.

If the building had a residential space above it, the property would be a mixed-use property. In this case Shawn would need to provide an estoppel certificate if the tenant in that residence was staying when the property transferred to Julie. 

If Shawn failed to deliver the property Julie may only have the possibility to collect monetary damages from Shawn. However, if this was the only type of commercial property in the area and Julie was going to develop the property, Julie could try to pursue an action for specific performance from Shawn. This means Shawn would need to deliver the property to Julie. If Shawn had made the property unusable somehow, then monetary damages may be more appropriate.

Conclusion

Commercial real estate is treated differently from residential property like a single-family home. This allows for different legal remedies. Partition is still an available remedy for co-owners wishing to separate themselves from the property. The Underwood Law Firm has a team of experienced lawyers who can help resolve your property interest disputes at trial and help you pursue solutions like partition actions. We are here to help.