Commercial real estate does not have the same rules as residential transactions. While the law offers some protections, commercial buyers also need to take care of themselves and are presumed to know more about their rights than residential buyers. Most sellers want to sell property “AS IS, WHERE IS AND WITH ALL FAULTS.” And everyone likely knows that in most residential real estate sales, the seller must complete a Disclosure of Property Condition form and provide it to the buyer. This form is required by the Texas Property Code for residential sales but not for sales of commercial property. Therefore, when a buyer is considering purchasing a commercial real estate property, it must gather enough information on its own that would allow it to make a decision to buy and how much to pay for the property. Nevertheless, sellers can be held legally responsible for a failure to disclose material facts to buyers in certain situations. Even if commercial real estate buyers are presumed to be more sophisticated than residential real estate buyers, they may not be misled by the seller.
Not every single fact about a property must be disclosed before a sale. However, a buyer has a legal right to recourse for material misrepresentations. This includes both affirmative misrepresentations and concealing facts that a seller should have disclosed but did not. The word “material” is often defined as a fact that, had a buyer known of it, the buyer may not have agreed to the deal, or would have paid less for it. It is the type of fact a seller could withhold to wrongly induce a buyer into a deal. If a seller makes an affirmative misrepresentation in connection with a sale, it can be found liable for fraud.
The Difference Between Fact and Opinion
One of the key questions any court will consider when deciding whether a seller properly disclosed information to a buyer is whether the seller misrepresented a material fact or was just giving its opinion on the property. A 2011 Texas Supreme Court case known as Italian Cowboy v. Prudential Insurance Co. is often referenced for the legal proposition that a seller is liable to a buyer for misrepresentation that induces a buyer to enter into a contract, unless the buyer clearly and unequivocally agrees in writing that it is disclaiming reliance on information provided by the seller including information that could be a fraudulent misrepresentation. In that case, the landlord’s agent told the prospective restaurant tenant that there were no problems whatsoever with the building, as it was practically new. In reality, the agent knew the building had been plagued by a foul sewer smell that had caused problems for previous tenants. The Texas Supreme Court held this statement by the agent was a statement of fact and not of opinion. The Italian Cowboy case, and subsequent cases where a buyer claimed it was fraudulently induced into a contract, also suggest that courts will be likely to give greater credence to disclaimer of reliance language if the contract appears to have been negotiated, as opposed to have been based on boilerplate forms or language.
Notice Disclosures that Must Be Given to Buyers Under Texas Law
Texas law also requires that a commercial real estate seller make certain specific notice disclosures to the buyer before the sale, if the circumstances apply. These statutorily required notices include but are not limited to the following:
Water District
If a seller proposes to sell a property that is located inside a water district, the seller must deliver one of the three statutory notices relating to the tax rate, bonded indebtedness, or standby fees of the water district. The buyer must sign the form. A water district could be a municipal utility district, a water control and improvement district, a special utility district, or a river authority. Buyers can review a recent tax statement from the property in question to see if it is within a water district.
Property Improvement District (PID) Disclosure
A seller must also provide a disclosure to a buyer before closing if the property being purchased is within a Property Improvement District (PID). Knowing that a property is within a PID is important because a city or county can impose a special tax against the property to fund improvements within the district. If the seller does not provide this disclosure, the buyer can either sue for damages or to have the property conveyed back to the seller.
Other Required Disclosures
A seller must make the following additional disclosures in commercial real estate transactions if they are applicable to the sale:
- If the property adjoins or borders tidally influenced submerged lands;
- If the property is located seaward of the Gulf Intracoastal Waterway;
- If the property is located outside the limits of a municipality and may be subject to annexation;
- If apartments or other residential units are on the property and the units were built before 1978, federal law requires a lead-based paint and hazard disclosure statement; and/or
- The seller must provide a buyer with a copy of any mold remediation certificate issued for the property during the five years leading up to the date the seller sells the property.
The Takeaway
Commercial real estate does not have the same rules as residential transactions. While the law offers some protections, commercial buyers also need to take care of themselves and are presumed to know more about their rights than residential buyers. The sales process itself could dictate whether a seller is held liable after the fact. In some cases, based on the language of the contract, buyers may be precluded from coming back and seeking damages after a transaction is completed. Commercial sellers and buyers would be wise to engage an attorney that specializes in commercial real estate transactions when buying or selling commercial property.
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