Legal Issues With Commercial Real Estate Deals

Author

Ken Wimberly

In May of 2010, the Wall Street Journal recognized that even in the midst of the slow economic recovery following the financial collapse of 2008, one real estate sector was surging, producing rates of return unmatched by most every other sector. Triple Net (NNN) asset leases, long-term contracts with an individual creditworthy company like Walgreen’s or Starbucks, were outperforming other real estate investment opportunities often by as much as 5 percent annually.

An impressive return on investment (ROI) paired with what appears to be a headache-free property ownership, there are many who want to know how they can “get in on” this aspect of the real estate market. But there is far more to consider than just the significant ‘pros’ of this segment of commercial real estate.

Pros & Cons of NNN Property Ownership

In choosing a property to purchase, the most important task before you is identifying your target tenant. Companies like Walgreen’s, Dollar General, and Starbucks may seem like the perfect lessee. It is important, however, to recognize that a company that maintains a prime credit rating is not devoid of risk. Consider the misfortune of those property holders who found their leases cancelled by tenants like Rite-Aid and Barnes & Noble in 2009 and through to today.

Another important consideration centers on the typical lease structure for an NNN asset. As the property holder, you are guaranteed long term lease profit, often over a term of up to 25 years. While that security may sound great at the outset, the lease payment remains locked in despite any changes to the rate of inflation.

On the plus side, legal precedent has shown that courts will typically defer to the exact contract language when reaching judgments in commercial real estate disputes. The presumption that both parties sought competent legal advice prior to enacting the lease has been key to this fact.

Barring any wording or clauses that directly contradict established law or policy, the courts will interpret the contract as literal. This means the contract can, and likely should, be written in plain English. Both you and the potential tenant are expected to state their expectations explicitly. If there is any ambiguity at all in the language or even grammar, you leave to chance that the presiding jurist will read an interpretation that is contrary to your original intent.

This point was excellently made in a blog post earlier this year at Crain’s Cleveland Business by guest blogger Stephen D. Richman. In it, he detailed a case where the landlord had written into the contract “Tenant shall repair and maintain in good and safe condition, the following items: roof; HVAC…“.

As Richman points out, the intent of the landlord was that the tenant would be responsible for all repairs and replacements on the property. The wording chosen for the contract was interpreted by the court differently, however. “An express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace.“

With any endeavor, particularly where the initial investment amount is significant, it is important to do a fair amount of legwork before making a commitment. Once due diligence has been completed, you can contact the professionals at KW Net Lease Advisors to assist you in the purchase and/or sale of your net lease investment real estate.

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