Due diligence is one of the most important stages of a commercial real estate transaction. Before becoming obligated to close, a buyer may need to investigate title, physical condition, environmental risks, leases, zoning, entitlements, access, utilities, financing, insurance, operating expenses, development feasibility, and numerous other issues affecting the property’s value. When the investigation reveals a problem, the buyer’s rights often depend not only on the seriousness of the condition but also on the specific deadlines and procedures contained in the purchase agreement.
Commercial due diligence disputes frequently arise because the buyer believes material information was withheld, the seller contends the buyer accepted the property as-is, or the parties disagree about whether a contingency was properly exercised or removed. Significant deposits may also be at risk if the buyer refuses to close after the contractual investigation period expires. California buyers should therefore treat due diligence as both a factual investigation and a contractual process in which rights can be preserved or lost through notices, contingency removals, amendments, and closing decisions.
Commercial Due Diligence Is Primarily Contract Driven
Commercial real estate transactions are highly negotiated. The purchase and sale agreement generally establishes what the buyer may investigate and how long the buyer has to decide whether to proceed.
Due diligence provisions may address:
- Physical inspections;
- Environmental investigations;
- Title review;
- Survey review;
- Zoning and land use;
- Existing leases;
- Tenant estoppel certificates;
- Operating statements;
- Service contracts;
- Property taxes;
- Insurance;
- Financing;
- Development feasibility;
- Structural condition;
- Utilities;
- Access;
- Permits;
- Pending litigation; and
- Other property-specific matters.
The agreement should be reviewed before the investigation begins because the buyer may have only a limited period to obtain information, complete inspections, raise objections, and exercise termination rights.
Due Diligence Deadlines Can Determine Whether the Buyer May Walk Away
A buyer may negotiate an investigation contingency allowing termination if the property is unacceptable during a stated period.
The contract may require the buyer to:
- Deliver written notice of disapproval;
- Remove the contingency affirmatively;
- Allow the contingency to expire automatically;
- Provide specific reasons for termination;
- Return seller documents;
- Restore the property after testing; or
- Comply with another negotiated procedure.
Whether a buyer retains an unrestricted termination right depends on the actual language of the agreement.
Missing the contractual deadline can materially alter the buyer’s position. A buyer that could have terminated during due diligence may later face a claim for breach if it refuses to close after the contingency has been removed or expired.
Specific Addenda Can Change Standard Form Due Diligence Rights
Commercial transactions frequently begin with a standard-form purchase agreement and are then modified through negotiated addenda.
An addendum may:
- Shorten the inspection period;
- Eliminate contingencies;
- Make the deposit nonrefundable;
- Expand or reduce seller disclosure obligations;
- Modify financing conditions;
- Change title objection procedures;
- Alter the closing deadline; or
- Confirm that the buyer accepts the property as-is.
California contract disputes generally require the complete agreement to be read together. A specifically negotiated addendum may control over inconsistent standardized language.
Buyers should therefore maintain a complete closing set containing every amendment and addendum rather than relying on the original purchase agreement alone.
Removing Due Diligence Contingencies Can Significantly Increase Buyer Risk
Once a buyer removes an investigation contingency, the buyer may lose the contractual right to terminate simply because it later becomes dissatisfied with the property’s condition.
Before removing contingencies, buyers should confirm whether they have completed the investigations necessary to make an informed decision.
Potential unresolved issues may include:
- Pending environmental testing;
- Incomplete lease review;
- Unresolved title objections;
- Missing tenant estoppels;
- Uncertain insurance pricing;
- Incomplete lender underwriting;
- Outstanding zoning questions;
- Survey discrepancies;
- Unverified income information; and
- Pending structural or building inspections.
A buyer that removes contingencies while these matters remain open may later have fewer contractual options if the transaction becomes economically unattractive.
Financing Contingencies Should Be Distinguished From Due Diligence Contingencies
A buyer may complete its physical and legal investigation but still be unable to obtain acceptable financing.
Whether that circumstance permits termination depends on the purchase agreement.
A financing contingency may address:
- Loan amount;
- Interest rate;
- Loan-to-value requirements;
- Appraisal;
- Loan approval;
- Environmental conditions;
- Insurance requirements;
- Debt service coverage;
- Recourse obligations; and
- The deadline for obtaining financing.
A cash transaction or agreement expressly made without a financing contingency presents a materially different risk. Difficulty obtaining financing does not necessarily excuse performance when the buyer agreed to close regardless of financing availability.
Insurance Availability Has Become an Important Due Diligence Issue
Commercial buyers should evaluate insurability before becoming unconditionally obligated to close.
Insurance availability and pricing can affect both the operating economics of a property and the buyer’s ability to satisfy lender requirements.
Relevant issues may include:
- Wildfire exposure;
- Flood risk;
- Earthquake exposure;
- Prior claims;
- Building age;
- Roof condition;
- Electrical systems;
- Property use;
- Tenant operations;
- Required deductibles;
- Policy exclusions; and
- Cost of replacement coverage.
A property may otherwise satisfy the buyer’s investment criteria while becoming financially impractical because insurance cannot be obtained on expected terms.
The Deposit Can Become the Focus of the Dispute
Commercial buyers often deposit substantial funds into escrow when the purchase agreement is signed.
The agreement may provide that the deposit is refundable during the due diligence period but becomes nonrefundable after contingencies are removed.
If the buyer later refuses to close, the seller may seek to retain the deposit under a liquidated damages clause.
Important questions can include:
- Whether the contingency was actually removed;
- Whether the seller was in default;
- Whether closing conditions were satisfied;
- Whether the deposit became nonrefundable;
- Whether the liquidated damages provision was properly executed;
- Whether the clause is enforceable; and
- Whether subsequent deposits were also properly brought within the liquidated damages provision.
California Commercial Liquidated Damages Provisions Are Generally Evaluated for Reasonableness
California Civil Code Section 1671 generally provides that a contractual liquidated damages provision outside specified consumer contexts is valid unless the party challenging it establishes that the provision was unreasonable under the circumstances existing when the contract was made.
California law also contains specific formal requirements for liquidated damages provisions in contracts for the purchase and sale of real property.
Among other requirements, a provision liquidating the seller’s damages if the buyer fails to complete the purchase generally must be separately signed or initialed by each party and satisfy applicable formatting requirements when included in a printed agreement.
Commercial buyers should therefore review the deposit provisions carefully before assuming either that the seller automatically receives the deposit or that the buyer can automatically recover it.
Seller Default Can Change the Deposit Analysis
A seller may not be entitled to treat a buyer’s refusal to close as an actionable default if the seller failed to satisfy its own contractual obligations.
Potential seller defaults may include:
- Failure to deliver required title;
- Failure to satisfy mandatory closing conditions;
- Breach of representations;
- Failure to provide required documents;
- Unauthorized changes to the property;
- Failure to cure agreed title matters;
- Failure to obtain required third-party consents; or
- Failure to comply with negotiated closing obligations.
A deposit dispute should therefore include analysis of both parties’ performance rather than focusing only on the buyer’s decision not to close.
As-Is Provisions Can Shift Significant Due Diligence Risk to the Buyer
Commercial purchase agreements frequently state that the buyer is acquiring the property in its existing condition, often described as “as is, where is.”
These provisions may confirm that the buyer:
- Has conducted its own investigation;
- Is not relying on unstated seller representations;
- Accepts observable physical conditions;
- Accepts specified economic risks;
- Will rely on its own consultants; and
- Understands that the seller is making only specifically identified representations.
For sophisticated commercial parties, carefully negotiated as-is provisions can materially affect post-closing claims.
An As-Is Clause Does Not Necessarily Protect Fraud or Concealment
California law has long distinguished acceptance of property in its observable condition from fraudulent misrepresentation or concealment.
An as-is clause generally does not give a party unrestricted authority to actively misrepresent material facts or conceal information that it has a legal duty to disclose.
A post-closing dispute may therefore focus on whether:
- The seller actually knew about the condition;
- The buyer knew about it;
- The information was reasonably discoverable;
- The seller made an affirmative representation;
- The seller concealed the condition;
- A contractual disclosure obligation existed;
- The buyer reasonably relied on the representation or omission; and
- The alleged nondisclosure caused measurable damages.
The presence of an as-is clause can still be important, but it does not automatically dispose of every fraud-based claim.
Commercial Buyers Should Not Rely on Residential Disclosure Practices
California’s statutory residential transfer disclosure framework does not apply to purely commercial transactions in the same manner as ordinary residential sales.
Commercial buyers should therefore identify exactly what disclosures the seller has contractually agreed to provide.
Those disclosures may involve:
- Pending litigation;
- Environmental matters;
- Government notices;
- Existing leases;
- Service contracts;
- Property defects;
- Code violations;
- Condemnation;
- Tenant disputes;
- Unrecorded agreements;
- Insurance claims; and
- Other specifically negotiated matters.
Mixed-use properties containing residential units can present different statutory issues and should be evaluated according to the actual property configuration and applicable law.
Fraudulent Concealment Claims Require More Than a Bad Investment Outcome
A buyer that discovers an unexpected condition after closing may believe the seller should have disclosed it. That does not automatically establish fraudulent concealment.
Depending on the circumstances, the buyer may need to establish matters including:
- A material fact existed;
- The seller knew the fact;
- The seller had a duty to disclose it or actively concealed it;
- The buyer did not know the truth;
- The information was not otherwise within the buyer’s reasonably diligent reach;
- The buyer relied on the incomplete or misleading information; and
- The concealment caused damages.
The seller may defend the claim by showing that the condition was disclosed, observable, contained in documents available to the buyer, or discovered by the buyer before closing.
The Buyer’s Own Knowledge Can Be a Major Defense
Due diligence litigation frequently turns on what the buyer actually knew before closing.
Evidence may show that the buyer:
- Received an inspection report identifying the condition;
- Received environmental documents;
- Discussed the issue with consultants;
- Received tenant correspondence;
- Reviewed a title exception;
- Obtained a survey;
- Received government notices;
- Observed the condition during inspection; or
- Negotiated a price adjustment because of the issue.
A buyer that knowingly closes after learning of a condition may face substantial difficulty claiming later that the same condition was concealed.
Document Rooms Can Become Important Evidence
Commercial sellers increasingly provide due diligence materials through electronic data rooms.
When litigation develops, the parties may disagree about:
- Which files were uploaded;
- When they became available;
- Whether documents were later removed;
- Who accessed particular files;
- Whether the documents were complete;
- Whether later versions replaced earlier versions; and
- Whether important information was hidden within large document productions.
Buyers should consider maintaining copies of the documents reviewed during diligence, along with indexes or download records showing what was actually provided.
Seller Delay in Providing Documents Can Create Contingency Disputes
A due diligence period may be difficult to complete if the seller does not provide requested information until shortly before the contingency deadline.
The buyer may request an extension based on delayed document production.
Whether the buyer is automatically entitled to more time depends on the contract.
A buyer facing incomplete production should consider documenting:
- When information was requested;
- What documents remain missing;
- Why those materials are material;
- When the seller responded;
- Whether the contract extends deadlines for late delivery; and
- Whether a written extension was obtained.
Continuing to investigate after the original deadline should not be assumed to extend a contingency unless the parties’ agreement supports that conclusion.
Physical Property Condition Should Be Independently Investigated
Commercial buildings can contain substantial deferred maintenance and hidden capital costs.
A physical property assessment may evaluate:
- Roofing;
- Structure;
- Building envelope;
- Foundation;
- HVAC;
- Plumbing;
- Electrical systems;
- Fire protection;
- Elevators;
- Paving;
- Parking structures;
- Drainage;
- Accessibility conditions; and
- Expected replacement costs.
The buyer should determine whether consultant reports identify immediate repairs, long-term capital expenditures, or conditions requiring specialist investigation.
Inspection Limitations Should Be Understood
A standard property condition assessment may not include destructive testing or detailed engineering of every building system.
A report may recommend additional investigation by:
- Structural engineers;
- Roof consultants;
- Electrical specialists;
- Mechanical engineers;
- Plumbing specialists;
- Accessibility consultants;
- Geotechnical engineers;
- Building envelope experts; or
- Other specialized professionals.
If a report identifies a potential serious problem, a buyer should consider whether further investigation can be completed before the contingency expires.
Environmental Due Diligence Can Affect Liability and Financing
Environmental risk can materially affect commercial property value and redevelopment costs.
Commercial buyers frequently obtain a Phase I environmental site assessment to investigate potential environmental conditions.
Depending on the findings, additional investigation may include:
- Phase II testing;
- Soil sampling;
- Groundwater investigation;
- Vapor intrusion evaluation;
- Underground storage tank review;
- Historical property use research;
- Regulatory database review;
- Hazardous building material surveys; and
- Agency file review.
Environmental due diligence can also be relevant to potential federal and state liability protections, making the timing and scope of the investigation important.
Environmental Problems Can Create Several Different Disputes
Discovery of contamination may create disagreements concerning:
- Who caused the contamination;
- Whether the seller knew about it;
- Whether the buyer assumed the risk;
- Whether remediation is required;
- Whether regulators have been notified;
- Whether the property can be developed as planned;
- Whether the lender will continue financing;
- Whether insurance applies;
- Whether indemnity provisions cover the condition; and
- Whether the buyer may terminate the transaction.
An environmental problem should therefore be evaluated simultaneously from regulatory, contractual, financial, and development perspectives.
Prior Environmental Reports Should Be Reviewed Carefully
A seller may provide environmental reports prepared years earlier.
Those reports can be useful, but buyers should consider:
- The age of the report;
- The scope of investigation;
- Changes in property use;
- New regulatory information;
- Subsequent spills or releases;
- Whether recommendations were followed;
- Who may legally rely on the report; and
- Whether the buyer’s lender requires a new assessment.
A prior report should not automatically substitute for transaction-specific environmental diligence.
Zoning Due Diligence Is Essential When the Buyer Plans a Specific Use
A buyer should confirm that its intended business or development is permitted rather than relying solely on the seller’s existing use.
Zoning review may address:
- Permitted uses;
- Conditional uses;
- Nonconforming uses;
- Density;
- Floor area;
- Height;
- Setbacks;
- Parking;
- Loading;
- Signage;
- Outdoor operations;
- Operating hours; and
- Development standards.
A property that works for the seller’s existing operation may not legally support the buyer’s intended use without additional approvals.
Existing Use Does Not Necessarily Establish Current Zoning Compliance
An existing building or operation may have been established under older regulations, special approvals, variances, conditional use permits, or nonconforming-use rules.
A buyer should consider investigating:
- Certificates of occupancy;
- Conditional use permits;
- Variances;
- Planning approvals;
- Development agreements;
- Building permits;
- Code enforcement history;
- Prior zoning determinations; and
- Conditions of approval.
A change in ownership, operation, intensity, or use may affect rights that the seller previously enjoyed.
Development Feasibility Requires More Than Zoning Review
A developer purchasing property for redevelopment may need to investigate additional restrictions beyond base zoning.
Potential issues include:
- General plan requirements;
- Specific plans;
- Historic restrictions;
- Environmental review;
- Subdivision requirements;
- Infrastructure obligations;
- Utility capacity;
- Traffic requirements;
- Development impact fees;
- Affordable housing requirements where applicable;
- Recorded development agreements;
- Private restrictive covenants; and
- Access or easement limitations.
The purchase agreement should clearly allocate entitlement risk when the transaction depends on future governmental approvals.
Title Review Is a Core Part of Commercial Due Diligence
A preliminary title report may reveal interests that materially affect the property’s use or value.
Buyers should evaluate:
- Deeds of trust;
- Easements;
- CC&Rs;
- Judgment liens;
- Tax liens;
- Mechanics liens;
- Lease memoranda;
- Development restrictions;
- Purchase rights;
- Utility rights;
- Access rights; and
- Other recorded exceptions.
It is often necessary to obtain and read the actual recorded documents rather than relying only on the abbreviated exception descriptions appearing in a title report.
Buyers Should Investigate Warning Signs Affecting Title
California property law can place significance on information that gives a purchaser notice of another person’s potential interest.
A buyer should not assume that an absence of a clearly recorded competing deed means no further investigation is necessary.
Warning signs may include:
- Possession by someone other than the seller;
- Unexpected tenants;
- Shared driveways;
- Visible utility use by neighboring parcels;
- Conflicting surveys;
- References to missing agreements;
- Unusual easement use;
- Disputed parking;
- Prior ownership correspondence; and
- Recorded documents containing ambiguous references.
Ignoring facts that reasonably call the state of title into question can create significant risk for a purchaser seeking priority over another interest.
A Survey Can Reveal Problems Not Apparent From the Title Report
A commercial survey may identify:
- Boundary discrepancies;
- Encroachments;
- Buildings crossing easements;
- Access conditions;
- Parking configurations;
- Utility locations;
- Physical occupation by neighbors;
- Setback concerns; and
- Improvements crossing parcel lines.
Survey findings should be compared with title documents, zoning requirements, and the buyer’s development plans.
Legal Access Should Be Confirmed
Physical access does not necessarily establish legal access.
A commercial property may use a driveway crossing neighboring land under:
- An express easement;
- A reciprocal easement agreement;
- A license;
- An implied right;
- A historical informal arrangement; or
- No clearly documented right at all.
An uncertain access arrangement can affect financing, development approvals, tenant operations, and future resale.
Utility Capacity Can Affect Intended Development
Buyers planning expansion or redevelopment should investigate whether adequate utilities are actually available.
Issues may involve:
- Electrical capacity;
- Water availability;
- Sewer capacity;
- Gas service;
- Telecommunications;
- Stormwater infrastructure;
- Connection fees;
- Off-site improvements; and
- Utility easements.
A parcel may be physically served by utilities while lacking capacity for the buyer’s intended project.
Lease Due Diligence Is Critical for Income-Producing Property
When commercial property is purchased based on rental income, the leases may be among the property’s most important assets.
Buyers should consider reviewing:
- Base rent;
- Lease terms;
- Renewal options;
- Termination rights;
- Expansion rights;
- Purchase options;
- Rights of first refusal;
- Expense reimbursements;
- Tenant improvement obligations;
- Security deposits;
- Exclusive use provisions;
- Co-tenancy clauses;
- Assignment provisions;
- Outstanding defaults; and
- Landlord repair obligations.
A rent roll should be compared with the actual leases rather than accepted as conclusive.
Rent Roll Discrepancies Can Lead to Post-Closing Claims
A buyer may discover that the income assumptions used to price the property do not match the underlying lease documents.
Potential discrepancies may concern:
- Incorrect rent;
- Unreported rent abatements;
- Side agreements;
- Tenant defaults;
- Unexercised options;
- Security deposits;
- Free rent;
- Landlord concessions;
- Expense caps; and
- Termination rights.
If the seller expressly represented the accuracy of the rent roll or lease schedule, a material discrepancy may create a contractual claim.
Tenant Estoppel Certificates Can Verify Lease Information
Commercial purchase agreements often require the seller to obtain tenant estoppel certificates before closing.
An estoppel may request confirmation concerning:
- Lease commencement;
- Expiration date;
- Current rent;
- Security deposit;
- Renewal options;
- Amendments;
- Landlord defaults;
- Tenant defaults;
- Outstanding concessions;
- Purchase rights; and
- Other material lease terms.
A tenant response that conflicts with the seller’s records can create a significant due diligence issue shortly before closing.
The Purchase Agreement Should Address Unacceptable Estoppels
A buyer should determine what happens if required estoppels are not obtained or contain material exceptions.
Possible contractual outcomes may include:
- Extension of closing;
- Seller cure obligations;
- Buyer waiver;
- Termination rights;
- Indemnity;
- Escrow holdbacks; or
- Closing despite the discrepancy.
The existence of an estoppel requirement does not necessarily mean every tenant must provide an entirely clean certificate unless the agreement says so.
Operating Statements Should Be Verified
Commercial investment values often depend heavily on net operating income.
Buyers may review:
- Historical income statements;
- Rent collections;
- Common area maintenance recoveries;
- Property taxes;
- Insurance costs;
- Utilities;
- Repairs and maintenance;
- Management fees;
- Capital expenditures;
- Bad debt;
- Tenant concessions; and
- Other operating expenses.
Financial records should be compared with leases, bank records where available, invoices, tax statements, and property management reports.
CAM and Operating Expense Reimbursements Can Be Misleading
Some commercial properties appear to transfer most operating costs to tenants through common area maintenance or other reimbursement provisions.
The actual leases may contain:
- Expense caps;
- Base years;
- Excluded expenses;
- Administrative fee limits;
- Gross-up provisions;
- Audit rights;
- Management fee restrictions; and
- Different formulas for different tenants.
A buyer that values a property based on assumed full expense recovery should confirm those assumptions against the lease language.
Service Contracts Can Survive the Closing
Commercial properties may be subject to ongoing agreements for:
- Property management;
- Security;
- Elevator maintenance;
- HVAC service;
- Landscaping;
- Waste removal;
- Parking management;
- Telecommunications;
- Energy services; and
- Other property operations.
The buyer should determine which contracts will be assigned, which can be terminated, and whether any impose substantial future obligations.
Pending Litigation and Claims Should Be Investigated
Commercial real estate can be affected by litigation involving:
- Tenants;
- Contractors;
- Neighboring owners;
- Former owners;
- Government agencies;
- Lenders;
- Employees;
- Customers;
- Environmental claims; and
- Property damage.
The buyer should determine whether the dispute could continue after closing or affect ownership, operations, insurance, or future development.
Code Violations and Government Notices Can Create Hidden Costs
Due diligence should include appropriate investigation of governmental records.
Potential issues may include:
- Building code violations;
- Fire code violations;
- Unpermitted improvements;
- Zoning violations;
- Accessibility complaints;
- Environmental enforcement;
- Health department issues;
- Pending assessments;
- Unsafe building notices; and
- Other administrative orders.
Responsibility for curing existing violations should be addressed before closing whenever possible.
Permits Should Match Existing Improvements
A building may contain additions, mezzanines, tenant improvements, electrical systems, or other modifications that do not match available permit records.
Potential consequences can include:
- Required permits after closing;
- Corrective construction;
- Inspection delays;
- Code upgrades;
- Reduced usable space;
- Tenant disputes;
- Insurance concerns; and
- Financing problems.
A buyer planning substantial redevelopment may be able to address some conditions through new permitting, but the cost should be understood before pricing the acquisition.
Property Tax Due Diligence Should Consider Post-Acquisition Changes
A commercial property’s historical tax bill may not reflect the buyer’s future tax burden.
Buyers should evaluate:
- Current assessed value;
- Potential reassessment after transfer;
- Special assessments;
- Mello-Roos obligations where applicable;
- Pending appeals;
- Supplemental assessments;
- Parcel configurations; and
- Tax allocation under tenant leases.
Incorrect tax assumptions can materially affect projected net operating income.
Broker Duties Can Become Part of Due Diligence Litigation
Commercial buyers often rely on brokers for transaction information, property access, negotiations, market knowledge, and coordination of diligence.
The precise duties owed by a broker depend on the agency relationship, contractual engagement, circumstances of the transaction, and applicable California law.
A buyer’s broker may owe fiduciary obligations to the buyer, while real estate professionals generally must exercise appropriate professional skill and avoid material misrepresentations.
Disputes may involve whether the broker:
- Failed to communicate material information;
- Misstated property characteristics;
- Failed to disclose a known conflict;
- Failed to investigate an issue within the scope of the engagement;
- Misrepresented financing assumptions;
- Failed to transmit documents;
- Failed to communicate a contingency deadline; or
- Exceeded or failed to perform agreed responsibilities.
The Scope of a Broker’s Engagement Matters
Commercial buyers should not assume that a broker is responsible for every legal, tax, environmental, insurance, financing, or engineering issue associated with an acquisition.
Purchase agreements and brokerage documents frequently direct parties to retain appropriate specialists for matters outside ordinary brokerage services.
Depending on the transaction, buyers may need separate advice from:
- Attorneys;
- Accountants;
- Environmental consultants;
- Engineers;
- Surveyors;
- Insurance professionals;
- Tax professionals;
- Architects;
- Land use consultants; and
- Other specialists.
Entity Authority Should Be Verified
Commercial properties are frequently owned and purchased through LLCs, partnerships, corporations, trusts, and other investment entities.
Due diligence should confirm that the seller has authority to convey the property and that the buyer has authority to complete the acquisition.
Relevant documents may include:
- Operating agreements;
- Manager consents;
- Member approvals;
- Corporate resolutions;
- Partnership agreements;
- Certificates of trust;
- Authority certificates; and
- Other organizational documents.
Authority defects can delay closing and potentially create title disputes after recording.
Existing Financing Can Affect the Transaction
The property may be subject to loans, deeds of trust, assignments of rents, or other lender rights that must be addressed at closing.
Buyers should determine whether:
- Existing debt will be paid off;
- The loan may be assumed;
- Prepayment penalties apply;
- Lender consent is required;
- A deed of trust will be reconveyed;
- Assignments or security interests remain outstanding; and
- Tenant security deposits or other funds are controlled by a lender.
Failure to resolve existing financing can interfere with delivery of the title required by the purchase agreement.
Closing Despite Known Problems Can Affect Later Remedies
A buyer sometimes discovers a problem during due diligence but decides to close anyway because the issue appears manageable.
Before doing so, the buyer should determine whether the issue has been addressed through:
- A price reduction;
- Seller credit;
- Escrow holdback;
- Indemnity;
- Closing condition;
- Written reservation of rights;
- Title insurance endorsement;
- Specific post-closing covenant; or
- Other negotiated protection.
Closing with actual knowledge of a problem without preserving rights can strengthen later defenses based on waiver, acceptance, lack of reliance, or contractual allocation of risk.
Waiver Can Become a Major Post-Closing Defense
A seller may argue that the buyer waived an objection by knowingly proceeding with the transaction.
The buyer may respond that it expressly reserved the claim or relied on a seller promise that the problem would be corrected after closing.
Relevant evidence can include:
- Amendments;
- Closing instructions;
- Reservation letters;
- Escrow holdback agreements;
- Emails;
- Seller covenants;
- Indemnity provisions; and
- Closing statements.
Important unresolved conditions should be documented clearly rather than left to informal discussions immediately before closing.
Survival Provisions Can Restrict Post-Closing Claims
Commercial agreements often state that seller representations survive closing only for a specific period.
The agreement may also impose:
- Notice requirements;
- Claim thresholds;
- Deductibles;
- Liability caps;
- Exclusive remedies;
- Consequential damages waivers; and
- Procedures for asserting claims.
A buyer discovering a post-closing problem should identify these limitations immediately.
Indemnity Provisions Can Allocate Specific Due Diligence Risks
A seller may agree to retain responsibility for identified pre-closing liabilities.
Indemnity provisions may address:
- Pre-closing tenant claims;
- Existing litigation;
- Environmental matters;
- Seller taxes;
- Contract liabilities;
- Breach of representations;
- Employee claims;
- Construction claims; and
- Other specified liabilities.
The indemnity clause should be reviewed for survival periods, procedural requirements, limitations, defense rights, and exclusions.
Rescission May Be Sought in Serious Due Diligence Disputes
A buyer that contends it entered the transaction because of fraud, mistake, or another legally sufficient ground may seek rescission in appropriate circumstances.
Rescission generally attempts to unwind the transaction rather than simply award damages while leaving the sale in place.
Practical complications may arise if:
- The buyer has financed the property;
- New liens have attached;
- Tenants have entered new leases;
- The property has been improved;
- The buyer has transferred part of the property;
- Market value has materially changed; or
- Third-party rights have intervened.
The availability of rescission is highly fact-specific.
Damages Can Be Difficult to Calculate
A buyer that keeps the property may seek damages based on the alleged difference between what was represented and what was actually acquired.
Depending on the claim, disputed damages may involve:
- Diminution in property value;
- Repair costs;
- Environmental remediation;
- Lost rental income;
- Development redesign;
- Additional financing costs;
- Capital improvements;
- Tenant claims;
- Professional fees; and
- Other economic losses.
The seller may dispute causation, argue that claimed costs improve the property beyond its represented condition, or contend that losses arose from market conditions or the buyer’s post-closing decisions.
Specific Performance May Arise When the Seller Refuses to Close
Due diligence disputes do not always involve buyers attempting to escape the transaction.
A buyer may complete its investigation, remove contingencies, and remain ready to close while the seller refuses to convey the property.
In appropriate circumstances, the buyer may seek specific performance compelling the seller to complete the real estate transaction.
The dispute may concern whether:
- The contract is enforceable;
- The buyer satisfied its obligations;
- The buyer was ready, willing, and able to perform;
- The seller properly terminated;
- Closing conditions were satisfied; and
- Equitable relief is appropriate.
A Lis Pendens May Affect Property During Certain Purchase Litigation
When litigation asserts a qualifying real property claim, a party may be able to record a notice of pendency of action, commonly called a lis pendens, subject to California procedural requirements.
A lis pendens can make it significantly more difficult for the seller to transfer or refinance the property while litigation remains pending.
Because improper recording can lead to expungement and other consequences, the remedy should be used only when the claims and procedures support it.
Dispute Resolution Provisions Should Be Reviewed Early
The purchase agreement may require:
- Negotiation;
- Mediation;
- Arbitration;
- Litigation in a designated court;
- Jury trial waiver;
- Attorney’s fee shifting; or
- Other dispute procedures.
Ignoring a contractual pre-litigation procedure can create an unnecessary procedural dispute before the merits are reached.
Due Diligence Records Should Be Preserved When a Dispute Appears Likely
Commercial due diligence produces a large amount of evidence concerning what the buyer knew and when it knew it.
Important records may include:
- The purchase agreement;
- All amendments and addenda;
- Seller disclosures;
- Inspection reports;
- Environmental reports;
- Title documents;
- Surveys;
- Lease files;
- Tenant estoppels;
- Financial statements;
- Insurance quotations;
- Lender correspondence;
- Planning records;
- Emails;
- Text messages;
- Data room downloads; and
- Contingency notices.
The sequence of those records can determine whether a condition was concealed or actually discovered before closing.
A Due Diligence Timeline Can Clarify the Dispute
When litigation develops, creating a chronological record can help identify the parties’ actual rights.
The timeline may include:
- Contract execution;
- Deposit funding;
- Due diligence commencement;
- Seller document delivery;
- Inspections;
- Title report issuance;
- Environmental findings;
- Buyer objections;
- Contingency deadlines;
- Extensions;
- Financing approval;
- Contingency removal;
- Discovery of the disputed condition;
- Closing; and
- Post-closing communications.
This chronology can be especially important when a buyer alleges nondisclosure and the seller contends that the buyer received the information before removing contingencies.
Buyers Can Reduce Due Diligence Litigation Risk Before Signing
A buyer should negotiate the diligence process based on the complexity of the property rather than automatically accepting a standard investigation period.
Before executing the purchase agreement, buyers should consider:
- How much investigation time is realistically necessary;
- Which seller documents must be provided;
- Whether the diligence period begins only after document delivery;
- Whether invasive testing is permitted;
- Whether financing is a contingency;
- Whether insurance is a contingency;
- What title matters the seller must cure;
- What tenant estoppels are required;
- When the deposit becomes nonrefundable;
- Whether extensions are available; and
- What representations survive closing.
Coordination Among Advisors Is Essential
A commercial acquisition can involve separate legal, financial, environmental, engineering, title, insurance, and development workstreams.
The buyer should have a process for bringing those findings together before contingencies are removed.
For example, an environmental consultant may discover a condition affecting lender approval, while the land use consultant separately concludes that remediation would interfere with the buyer’s proposed development schedule.
Reviewing each report independently without considering its effect on the transaction as a whole can cause material risks to be overlooked.
Did You Know?
California courts have long recognized that an “as is” clause generally does not shield a seller from liability for fraudulent misrepresentation or concealment of material facts that the seller had a duty to disclose and that were not within the buyer’s reasonably diligent reach.
Protecting Buyers in Commercial Real Estate Due Diligence Disputes
Commercial real estate due diligence disputes can involve contingency deadlines, deposits, seller disclosures, as-is provisions, title, environmental conditions, leases, financing, insurance, zoning, physical defects, and post-closing representations. The strength of a buyer’s claim or defense often depends on what the buyer discovered, when the information became available, whether contractual procedures were followed, and whether rights were preserved before closing.
Putterman Law represents commercial property buyers, investors, developers, owners, and other businesses in disputes involving real estate acquisitions, due diligence, purchase agreements, title matters, seller representations, deposits, and related commercial real estate litigation.
Learn more about real estate law services at Putterman Law
FAQs
What should a commercial real estate buyer investigate during due diligence?
The scope depends on the property and intended use, but common areas include title, surveys, physical condition, environmental risks, zoning, entitlements, leases, tenant estoppels, operating expenses, taxes, insurance, utilities, access, permits, financing, pending litigation, and development feasibility.
Can a buyer terminate a commercial purchase agreement during due diligence?
Potentially. The buyer’s termination rights depend on the purchase agreement and whether the applicable contingency remains in effect. The contract may require written notice within a specific period, so the precise language and deadlines should be reviewed carefully.
What happens after a buyer removes its due diligence contingency?
The buyer may lose the right to terminate solely because it later becomes dissatisfied with matters that were subject to the investigation contingency. The buyer may still have other rights if another contingency remains, a closing condition fails, the seller breaches the agreement, or legally actionable misrepresentation or concealment occurred.
Can a seller keep the buyer’s deposit if the buyer refuses to close?
Potentially. The answer depends on the purchase agreement, whether the buyer was in default, whether contingencies were removed, whether the seller satisfied its obligations, and whether any liquidated damages provision is enforceable under California law.
Does an as-is clause prevent a buyer from suing over undisclosed defects?
Not necessarily. An as-is provision can allocate substantial condition risk to a buyer, especially in a negotiated commercial transaction, but it does not automatically eliminate claims based on actionable fraud, misrepresentation, or concealment. The buyer’s own knowledge and diligence remain important.
Can a buyer claim fraud when information was available during due diligence?
It may be difficult if the buyer actually knew the relevant facts or they were within the buyer’s diligent attention and observation. Fraud and concealment claims are fact-specific and can depend on what the seller knew, what was disclosed, what the buyer reviewed, and whether the buyer reasonably relied on the alleged omission or representation.
Why are tenant estoppel certificates important when buying commercial property?
Estoppels can help confirm important lease information directly with tenants, including rent, lease terms, amendments, security deposits, defaults, options, concessions, and other rights. Material conflicts between estoppels and the seller’s records may require resolution before closing.
Should a commercial buyer investigate insurance before removing contingencies?
Yes, particularly when insurance cost or availability could affect financing or the economics of the investment. Buyers may need to evaluate property-specific risks, required coverage, deductibles, insurer requirements, and whether the lender will accept the available coverage.
What happens if the seller delays providing due diligence documents?
The buyer’s rights depend on the purchase agreement. Some agreements provide extensions tied to delayed delivery, while others require the buyer to obtain a written amendment. A buyer should document missing information and avoid assuming that ongoing investigation automatically extends the contractual contingency period.
What records are important in a commercial real estate due diligence dispute?
Important records may include the purchase agreement, amendments, seller disclosures, environmental and inspection reports, title documents, surveys, leases, estoppels, operating statements, insurance information, lender correspondence, data room records, contingency notices, escrow communications, and documents showing when the buyer learned of the disputed condition.
