The Commercial Practice Offers Opportunities Unique From The Residential Practice

Kristin E. Rosan

Partner, Madison & Rosan, LLP Attorneys at Law

A practice dealing with commercial real estate comes with opportunities to participate in projects with global reach and significant capital. As a result, licensees entering this line of practice should avail themselves of every opportunity to learn the intricacies of the practice. Trade associations like the CCIM Institute, Institute of Real Estate Management, Building Owners and Managers Association International and Core Net Global are just a few.  Non-profit associations provide opportunities for networking with commercial practitioners and educational offerings and professional development resources.  Beyond understanding the complexities of the industry is an appreciation for the associated legal issues that can develop in a commercial real estate transaction.

Commercial real estate is generally classified as any real estate other than parcels containing one to four residential units. There are many differences between the commercial and residential practice. Below are some of the more common legal issues that may come up in a commercial transaction.

Although property can be zoned as residential, its use may be commercial.  Issues may arise relating to the need to rezone or vary uses intended for a particular parcel. This process can be lengthy, expensive and varies by municipality. Further properties may have restrictive covenants prohibiting certain uses. For example, a grocery chain in a strip mall may have a restriction prohibiting a landlord from renting to any other use that involves the sale of groceries. These restrictions can have a significant impact on a commercial transaction.

Landlords in a commercial lease may require the tenant personally guarantee the payment obligations in a lease or require the tenant to sign a cognovit note.  A cognovit note is used to avoid litigation and is a confession of judgment given to the landlord, such that the tenant waives any defenses to non-payment. A personal guarantee permits the landlord to collect from a tenant’s personal assets any judgment for non-payment of rent or other damages.

An investor acquiring or refinancing a loan on an office building or strip center will want to review estoppel certificates from the current tenants. The estoppel certificate is signed under oath by the tenants to validate the terms of the lease agreement with the landlord. Buyers and lenders rely on these attestations to determine the profitability and security of the contemplated investment.

Depending on the jurisdiction, landlords of commercial tenants may exercise what is called “self-help” upon a tenant’s default. Self-help permits the landlord to simply change the locks to the premises, essentially locking out the tenant.  States that do permit self-help typically also require that it be conducted without any breach of the peace. This is why self-help is usually conducted in the middle of the night, to avoid any confrontations.  Self-help is available without any court or formal eviction proceeding.

Finally, many jurisdictions permit real estate licensees to practice without a license in their jurisdiction if the practice relates to commercial real estate and the licensee affiliates with a broker that is licensed in the jurisdiction. In Arizona, these are referred to as commercial cooperation agreements.  These agreements permit out of state brokers to receive compensation for their services, however in Arizona out of state salespersons are prohibited from entering into commercial cooperation agreements. Also, in Arizona, the out of state broker may not advertise Arizona real estate to Arizona consumers.  When seeking to represent a client in a state other than the state in which you are licensed, it may be useful to determine if you have the opportunity to practice in that jurisdiction without licensure.

There are many resources available to help a commercial real estate practitioner both enter and be successful in a commercial real estate transaction.  Availing yourself of those and the advice of legal and financial professionals will help you to competently participate in these emerging global markets.