Tenant Rights During a Commercial Property Sale

When a property owner is selling commercial property currently utilized by tenants, it is crucial that they protect the rights of those tenants throughout the process. This can make the selling process slower, as they may be limited by the tenants’ hours of operation and other use of the space—but failure to uphold those rights may lead to landlord-tenant disputes.

The Terms of the Lease

It’s important to recognize the significant differences between commercial tenants and residential tenants under real estate law. There are numerous legal protections in place for residential tenants, ensuring that they aren’t taken advantage of by shady landlords or those who would put them in unsafe living situations. That is not the case for commercial tenants. In real estate law, commercial tenants and landlords are both engaging in business, and the law views them both as capable of protecting their best interests legally. The onus is on both parties to protect their best interests via the terms of their lease. Because of this, the terms of your lease will dictate what both parties can and cannot do during the selling process.

Lease Assignment or Termination

Note that this extends to what happens after the sale of the property. The lease may allow the lease to be assigned to the new buyer in the event of a sale. However, it may also require termination of the lease should the property be sold. A tenant’s rights depend largely on the language of the lease. In some situations, the tenant has the right to terminate their lease if they do not want to continue renting from the new owner. In others, they can only terminate the lease if very specific requirements are met.

Access Rights

Commercial tenants should still have full access rights throughout the selling process, as any limited access to their premises could negatively impact their business. However, the lease will likely also require them to grant access to the owner of the property for inspections, showings, and repairs. For example, it’s unlikely that the tenant would be forced to give up access to the property for an entire day to allow the buyer to show it, as this would interfere with their business; however, they would almost certainly need to grant limited access during open hours and full access when they close for the day. This is something that prospective commercial tenants should clarify when looking at their lease, as their rights in this area are largely governed by what is written in their lease agreement.

Repairs and Maintenance

If the owner is required to perform repairs and other maintenance work under the lease agreement, they are likely obligated to continue doing so during the selling process. They have the right to property that is safe for employees, visitors, and clients—and that means that the owner must continue fulfilling their obligations under the terms of the lease. If the owner falls behind on these obligations due to the demands of selling the property, the tenant may be owed whatever benefits are allowed under the lease when the owner fails to uphold their side of the contract.

Use of the Property

The tenant of the property has the right to the same use of the property that they enjoyed prior to the owner attempting to sell it. Landlords may try to interfere if the tenants’ use of the property makes it harder for them to sell or market the property to prospective tenants, but in this situation, the rights of the tenant may override the rights of the landlord.

The Intricate Dance: Tenant Rights During a Commercial Property Sale and Selling By Owner in Annapolis, Maryland

Selling commercial real estate is a complex endeavor, fraught with legal intricacies, financial considerations, and strategic decisions. When the property in question is occupied by tenants, an additional layer of complexity emerges: tenant rights.

For owners in Annapolis, Maryland, contemplating selling their commercial property, especially “by owner,” understanding these rights is paramount to a smooth and successful transaction. This article delves into the relationship between tenant rights during a commercial property sale and the unique challenges and opportunities of selling commercial real estate by owner in Annapolis, Maryland.

Tenant Rights During a Commercial Property Sale

The presence of existing tenants significantly impacts a commercial property sale. Unlike residential sales where tenants often have clearer, more standardized protections, commercial tenant rights are primarily governed by the terms of their lease agreements and, to a lesser extent, Maryland state law.

The Lease as the Cornerstone

The commercial lease agreement is the foundational document dictating the rights and obligations of both the landlord (seller) and the tenant during a sale. Key clauses to scrutinize include:

• Assignment and Assumption: Most commercial leases contain clauses outlining what happens to the lease upon a change of ownership. Typically, the new owner (buyer) will assume the rights and obligations of the existing lease. Tenants generally cannot be arbitrarily evicted or have the terms of their lease altered simply because the property has been sold.
• Subordination, Non-Disturbance, and Attornment (SNDA) Agreements: These are critical for both tenants and potential buyers, especially when the property is financed.
  • Subordination: This clause typically states that the tenant’s leasehold interest is subordinate to the landlord’s mortgage. Without a non-disturbance clause, if the landlord defaults on their mortgage, the lender could foreclose and terminate the lease, evicting the tenant.
  • Non-Disturbance: This is the tenant’s protection. It ensures that if the landlord defaults on their mortgage and the lender forecloses, the tenant’s possession of the premises will not be disturbed as long as the tenant continues to perform their obligations under the lease. Buyers often require these to ensure tenants remain in place, preserving income.
  • Attornment: This obligates the tenant to recognize the new owner (whether a buyer or a foreclosing lender) as their new landlord and continue to fulfill their lease obligations to them.
  • For a commercial property sale, buyers will often insist on SNDA agreements being in place or executed prior to closing, as they provide clarity and security regarding the existing tenancy.
• Right of First Refusal (ROFR) or Right of First Offer (ROFO): Some commercial leases grant the tenant a ROFR or ROFO.
  • A ROFR means the tenant has the right to purchase the property on the same terms and conditions as a third-party offer that the landlord intends to accept. This can complicate and prolong a sale process, as the seller must formally offer the property to the tenant first.
  • A ROFO requires the landlord to offer the property to the tenant first, before marketing it to others. The tenant then has a specified period to make an offer.
• Termination Clauses: Rarely, a commercial lease might contain a “landlord’s termination for sale” clause, allowing the landlord to terminate the lease upon sale, often with a specified notice period and sometimes a penalty or relocation assistance. These are uncommon in strong tenant markets but can exist.
• Confidentiality: Leases often contain confidentiality clauses regarding their terms. When marketing a property, especially by owner, care must be taken not to disclose sensitive tenant information without proper consent or non-disclosure agreements (NDAs) from prospective buyers.
• Tenant Cooperation: The lease may also stipulate the tenant’s obligation to cooperate with the landlord during a sale, such as allowing access for showings (with reasonable notice) or providing estoppel certificates.

Estoppel Certificates

A crucial document in a commercial property sale involving tenants is the estoppel certificate. This is a legally binding document signed by the tenant, certifying the current terms of their lease, including rent amount, lease commencement and expiration dates, any outstanding defaults, and whether there are any agreements outside the written lease. Buyers rely heavily on estoppel certificates to verify the lease terms and protect themselves from undisclosed liabilities or disputes. Sellers need to ensure their tenants are willing and able to provide these in a timely manner.

Notice Requirements

While Maryland law doesn’t impose extensive notice requirements on landlords selling commercial property beyond what’s in the lease, it’s good practice to keep tenants informed. The lease itself may specify notice periods for property showings or changes in ownership.

Selling Commercial Real Estate By Owner (FSBO) in Annapolis, Maryland

Selling commercial real estate “by owner” (FSBO) in Annapolis presents both potential cost savings and significant challenges. It requires a deep understanding of the market, legal requirements, and the sales process itself.

Challenges of FSBO Commercial Sales

• Market Reach and Exposure: Commercial real estate is a niche market. Without a broker’s network and marketing resources (e.g., LoopNet, CoStar subscriptions), reaching qualified buyers can be difficult.
• Valuation: Accurately pricing commercial property requires expertise in cap rates, net operating income (NOI), comparable sales, and market trends. Overpricing deters buyers, while underpricing leaves money on the table.
• Legal Complexities: Commercial real estate transactions involve intricate contracts, due diligence, title issues, zoning regulations, and environmental considerations. Maryland-specific laws and Annapolis zoning ordinances must be navigated.
• Time Commitment: Marketing, showing the property, negotiating offers, managing due diligence, and coordinating with attorneys, lenders, and tenants is incredibly time-consuming.
• Negotiation Skills: Professional buyers and their agents are skilled negotiators. An owner selling FSBO may be at a disadvantage without prior experience.
• Confidentiality: Maintaining confidentiality, especially regarding existing tenants and their lease terms, can be challenging when directly fielding inquiries.

Key Considerations for FSBO in Annapolis, Maryland

1. Legal Counsel is Non-Negotiable: Even when selling FSBO, retaining an experienced Maryland commercial real estate attorney is absolutely essential. They will draft and review purchase agreements, advise on disclosures, handle title issues, and ensure compliance with all state and local laws.
2. Disclosure Requirements: While commercial properties have fewer statutory disclosure requirements than residential ones in Maryland, sellers still have obligations. For instance, sellers must disclose known latent defects that are not readily observable. Environmental issues, zoning non-conformities, or structural problems should be disclosed.
3. Marketing Strategy:
   • Professional Photography and Virtual Tours: High-quality visuals are crucial for attracting buyers.
   • Detailed Offering Memorandum: Prepare a comprehensive package including financial statements (rent rolls, operating expenses), property specifications, zoning information, and lease summaries.
   • Online Platforms: Utilize commercial real estate listing sites (some offer FSBO options, though with less exposure than broker-only platforms), social media, and local business networks.
   • “For Sale” Signage: Prominent signage on the property can attract local interest.
4. Due Diligence: Be prepared for buyers to conduct extensive due diligence, including property inspections, environmental assessments, title searches, and review of all financial records and lease agreements. Having all documentation organized and readily available will streamline this process.

The Intersection: Tenant Rights and FSBO in Annapolis

Selling a tenanted commercial property by owner in Annapolis amplifies the importance of understanding tenant rights.

• Proactive Lease Review: Before even listing the property, a FSBO seller must thoroughly review all existing leases. Identify any ROFR/ROFO clauses, SNDA requirements, or specific clauses related to sale or termination. This informs the sales strategy and avoids surprises.
• Tenant Communication: Open and transparent communication with tenants is vital, though careful. While you don’t need to announce your intention to sell immediately, once a decision is made, consider how and when to inform them. Reassure them about the continuity of their lease.
• Managing Showings: Coordinate property showings with tenants, respecting their business operations and lease-stipulated notice periods. A cooperative tenant can be an asset during showings.
• Estoppel Certificate Procurement: As a FSBO seller, you will be responsible for requesting and obtaining estoppel certificates from your tenants. This requires clear communication and potentially follow-up to ensure timely completion.
• Buyer Due Diligence on Leases: Buyers will perform extensive due diligence on the leases. A FSBO seller must be prepared to provide all lease documents, rent rolls, and financial statements related to the tenancies. Any discrepancies or issues will need to be addressed directly by the seller.
• Negotiating with Tenants (if applicable): If a ROFR/ROFO is triggered, the FSBO seller will directly negotiate with the tenant, potentially without the buffer of a broker. Similarly, if there’s a need to terminate a lease (rare, but possible), the seller will handle those negotiations.
• Legal Expertise for Lease Transfers: Your attorney will be crucial in drafting the assignment and assumption of leases, ensuring a seamless transfer of landlord responsibilities to the new owner, and addressing any SNDA requirements.

Call a Real Estate Attorney in Annapolis, MD Today

No matter which side of this transaction you fall on, it’s important to understand your rights and obligations. It’s generally best to do this at the time of the lease signing. Knowing exactly what you are entitled to and what you must do before you sign on the dotted line can make everything run much smoother when a potential sale or transfer pops up down the line. However, if you did not discuss these issues at the time of signing the lease, you may still find it helpful to talk to a real estate attorney; their analysis can help you protect your rights and avoid breaching your contract.