Commercial Real Estate - Legal Red Flags

[Ryan Briggs]

Hi all,

I am a real estate and corporate transactional attorney. Just wanted to pass along a short article I recently posted on legal red flags to look for in commercial real estate deals. 

Commercial real estate deals move quickly, but that doesn’t mean you should rush through the fine print. An experienced legal advisor can help you surface issues before they become liabilities.

Here are some of the most common legal issues I see arise in commercial real estate deals.

Unclear or Clouded Title

Issues like old liens, unrecorded easements, unresolved probate claims, or missing releases can kill momentum fast. Always insist on a full title commitment and conduct a legal title review, not just a policy review by the title company. Pay particular attention to:
- Blanket easements
- Unreleased deeds of trust
- Mechanic’s liens or litigation pending

Zoning and Use Conflicts

Don’t assume current or intended use is compliant. Zoning restrictions and special use permits vary widely and change over time. A "grandfathered" use may not transfer, and conditional approvals may expire.
Tip: Have zoning verified in writing and confirm any change-of-use or development plans with the local planning department before closing.

Ambiguous Lease or Tenant Obligations

If you're buying an income-producing property, tenant leases are your revenue stream. Leases with inconsistent terms, missing exhibits, or tenant improvement obligations that aren’t documented can lead to disputes or rent shortfalls.

Look for:
- Verbal side agreements or concessions
- Unsecured security deposits
- Unrecorded tenant options or rights of first refusal

Inadequate Entity Structuring

Using the wrong entity or failing to document internal ownership or authority can create tax exposure, personal liability, or future conflict among investors. It’s not just about forming an LLC — it’s about how it’s formed and governed.
Ensure:
- Proper operating agreements
- Signatory authority is clearly documented
- Investors’ contributions and rights are legally memorialized

Financing Terms That Outpace the Legal Review

Lenders are moving faster than ever — but moving too fast can be risky. Ensure the loan documents reflect what was promised in the term sheet, including prepayment rights, carve-outs, and guarantees.
Pay attention to:
- Hidden covenants
- Personal recourse carve-outs (“bad boy” provisions)
- Cross-collateralization language across unrelated properties

Environmental Exposure

Phase I reports often raise “recognized environmental conditions” (RECs), but buyers ignore them at their peril. Even if contamination was caused by a prior user, liability can still fall on you under CERCLA or similar state laws.
Get legal advice on:
- Scope of further testing (Phase II)
- Escrow holdbacks or indemnities
- Insurance alternatives if risk can't be fully resolved pre-closing

Wrapping Up: Don’t Only Rely on the Broker or Title Company

A solid legal review isn’t just a formality — it’s a deal-protecting strategy.

Reach out and let's talk through any questions or concerns.