Mistakes to Avoid When Signing A Commercial Real Estate Purchase Agreement

Signing a commercial real estate purchase agreement is one of the most significant decisions a business owner or investor can make. A well-structured agreement secures the property and protects the buyer’s financial and operational interests.

However, overlooking key legal terms or hidden liabilities can lead to costly mistakes and long-term complications. For example, unclear zoning laws, adverse registrations or restrictions on title, financing issues, and environmental problems can disrupt business operations or result in expensive legal disputes.

Many buyers assume that standard contracts cover all potential risks, but commercial real estate agreements often favour the seller unless carefully negotiated. Terms related to deposits, closing costs, and property use must be clearly defined to avoid future conflicts.

Working with a commercial real estate lawyer ensures that all terms are transparent and legally enforceable, protecting the buyer from hidden liabilities and unfavourable conditions.

This guide highlights the most common mistakes buyers make when signing a commercial real estate purchase agreement and explains how expert legal guidance can help avoid them. Understanding the legal risks involved allows buyers to make informed decisions and secure a smooth and successful transaction.

1. Failing to Conduct Proper Due Diligence

Due diligence is one of the most critical steps in any commercial real estate transaction. Before signing a commercial real estate purchase agreement, buyers must confirm that the property meets all legal, structural, and environmental requirements.

Skipping this step or relying solely on the seller’s representations can result in unexpected liabilities and operational challenges down the road.

Without proper due diligence, buyers may unknowingly purchase a property that violates zoning laws, has hidden structural issues, or carries outstanding tax debts.

For example, discovering an environmental violation after closing could require the buyer to pay for expensive remediation work or face fines from local authorities.

A thorough due diligence process should cover the following areas:

• Title Search and Ownership Verification
  Confirm that the seller has clear ownership of the property and that the title is free of liens, legal disputes, or other encumbrances. A title search will reveal any outstanding mortgages, easements, or claims on the property.
• Zoning Compliance and Land Use Restrictions
  Buyers must confirm that the property’s zoning classification allows for the intended business use. Zoning laws can restrict building modifications, signage, business hours, and parking availability.
• Environmental Assessments
  Environmental risks like soil contamination, underground storage tanks, or asbestos can create financial and legal liabilities. Environmental reports (e.g., Phase I and Phase II environmental site assessments) help identify these risks before closing.
• Outstanding Property Taxes or Liens
  Unpaid property taxes, construction liens (Builders’ Liens), or other financial claims can become the responsibility of the new owner. Buyers must confirm that all financial obligations are cleared before closing. This is accomplished by the buyers lawyer obtaining appropriate undertakings from the Sellers lawyer at the time of closing.

How a Real Estate Contract Lawyer Helps You with Due Diligence

A real estate contract lawyer conducts comprehensive due diligence to identify potential legal and financial issues before closing. A lawyer will:

• Review title documents and ownership history.
• Confirm zoning compliance and permitted uses.
• Analyze environmental reports and recommend protective clauses.
• Ensure that all outstanding property taxes and liens are settled.

By addressing these issues before closing, buyers can avoid unexpected liabilities and protect their investment.

1. Overlooking Financing Contingencies

Financing is a crucial part of any commercial real estate transaction. A commercial real estate purchase agreement should protect the buyer if the loan falls through or if the lender imposes unfavorable terms.

Without financing contingencies, buyers could be forced to complete the transaction even if they can’t secure financing, which can lead to significant financial losses.

Commercial financing is more complex than residential financing, often involving higher down payments, shorter loan terms, and variable interest rates. Buyers must ensure that the financing terms align with their business goals and financial capacity.

Some of the most common financing issues include:

• No Contingency for Loan Approval
  Without a financing contingency, the buyer may be legally obligated to complete the purchase even if financing falls through. This could force the buyer to seek high-interest loans or liquidate assets to close the deal.
• High Prepayment Penalties
  Some commercial loans impose large penalties for early repayment. If the buyer wants to refinance or sell the property early, these penalties can create a significant financial burden. It is sometimes worth opting for an open term, albeit at a higher interest rate, if planning to pay off the loan early.
• Variable Interest Rates
  Fluctuating interest rates can make long-term financial planning difficult. If the rate increases substantially, the monthly loan payments may become unmanageable.

A real estate contract lawyer can protect the buyer by:

• Including a financing contingency that allows the buyer to back out if financing terms are not secured.
• Negotiating caps on prepayment penalties.
• Recommending fixed-rate financing options to protect against rising interest rates.
• Clarifying the buyer’s right to cancel the agreement if the loan terms become unfavorable.

By securing strong financing terms, buyers reduce financial uncertainty and protect their long-term investment.

• Misunderstanding Property Use and Zoning Restrictions

Zoning laws dictate how a commercial property can be used and what types of businesses can operate within it. Misalignment between the property’s zoning classification and the buyer’s intended use can result in fines, business interruptions, or even forced relocation.

For example, purchasing a property zoned for industrial use to open a retail store would violate zoning laws and could result in legal action or denial of an operating license.

Buyers must confirm that the property’s zoning classification supports their intended business operations.

Common zoning and property use mistakes include:

• Assuming Office or Retail Use is Allowed
  Just because similar businesses operate in the area doesn’t mean the property is zoned for the same type of use. Zoning classifications can vary from one property to another, even within the same neighborhood. Always check with the municipality.
• Restrictions on Business Hours or Noise Levels
  Zoning laws often include restrictions on business hours, noise levels, and signage. Violating these restrictions can lead to fines or forced modifications to business operations.
• Parking and Signage Limitations
  Some zoning classifications impose strict requirements on parking spaces and signage. A property without adequate parking or with restrictive signage rules may limit the business’s ability to attract customers.

A commercial real estate lawyer in Edmonton helps buyers navigate zoning laws by:

• Confirming the property’s zoning classification and any restrictions.
• Negotiating with local authorities to secure zoning variances or special use permits.
• Ensuring that the purchase agreement includes provisions for resolving zoning conflicts.
• Advising on potential zoning changes that may affect the property’s future value.

By securing clear and accurate zoning terms, buyers can avoid operational conflicts and ensure that the property supports their business objectives.

• Ignoring Environmental and Structural Issues

Environmental issues can pose serious financial and operational challenges for commercial property buyers. Some properties may have a history of industrial use or environmental contamination that isn’t immediately visible. Common environmental risks include:

• Soil Contamination – Hazardous chemicals or industrial waste can seep into the soil, requiring costly remediation to meet environmental safety standards.
• Asbestos – Older commercial properties may have asbestos in insulation, flooring, or ceiling tiles, which requires specialized removal to comply with health regulations.
• Underground Storage Tanks (USTs) – Leaking fuel or chemical storage tanks can lead to groundwater contamination and require expensive cleanup efforts.

Beyond environmental risks, structural problems can result in high maintenance costs and operational disruptions. Common structural issues include:

• Foundation Problems – Cracks or shifting foundations can compromise the building’s stability and lead to expensive repairs.
• Roofing Issues – Leaking or deteriorating roofs can cause water damage and require immediate replacement.
• Plumbing and Electrical Failures – Outdated or damaged systems can increase utility costs and lead to business interruptions.

Buyers often make the following mistakes when it comes to environmental and structural issues:

• Waiving Environmental Inspections – Some buyers try to close quickly by skipping environmental assessments, which can lead to unexpected cleanup costs later.
• Failing to Include Repair Clauses – If structural issues are discovered after closing, the buyer may be forced to cover repair costs if the purchase agreement doesn’t specify seller responsibility.
• Overlooking Municipal Code Violations – Structural modifications made without permits may violate local building codes and result in fines or forced repairs.

A commercial real estate lawyer protects the buyer’s interests by:

• Requiring environmental and structural inspections as a condition of sale.
• Ensuring the seller is responsible for repairing or disclosing structural and environmental defects before closing.
• Confirming that the property complies with local building codes and zoning regulations.
• Including clauses that allow the buyer to back out if serious environmental or structural issues are discovered.

• Not Clarifying Closing Costs and Adjustments

Closing costs are the fees and expenses associated with finalizing a commercial real estate transaction. These costs are typically divided between the buyer and seller, but the terms must be clearly defined in the purchase agreement. Closing costs include:

• Legal Fees – Fees for the buyer’s and seller’s legal representation.
• Land Transfer Taxes – A provincial tax based on the purchase price of the property. Thankfully, there is no provincial tax on land transfers in Alberta. However, the Alberta Land Titles Office charges a fee for the registration of the transfer of land and mortgage for a property when purchased.
• Title Search and Registration Fees – Fees for verifying and transferring property ownership.
• Utility and Property Tax Adjustments – Adjustments for prepaid property taxes and utility costs.

Unclear closing terms can result in disputes and unexpected costs. Common issues include:

• Unspecified Responsibility for Closing Costs – If the purchase agreement doesn’t clarify who is responsible for specific fees, the buyer may be forced to cover additional costs.
• Property Tax Adjustments that Favour the Seller – If the seller prepaid property taxes, the buyer may be required to reimburse the seller at closing.
• Hidden Fees for Title Transfers or Municipal Charges – Some municipalities charge unexpected fees for zoning certificates, inspections, or property transfer.

A real estate contract lawyer can protect the buyer by:

• Specifying which party is responsible for each closing cost.
• Ensuring property tax adjustments are fairly calculated.
• Negotiating caps on additional fees or adjustments.
• Confirming that municipal fees are disclosed before closing.

• Accepting Unfavorable Deposit Terms

A deposit confirms the buyer’s commitment to the purchase and secures the property under contract. However, unclear or unfavorable deposit terms can lead to financial loss if the transaction falls through. As a buyer, it is essential to have terms in the agreement that allow the deposit to be returned if certain conditions are not met. One of our lawyers can help with the wording of such terms.

Common Mistakes

• Non-Refundable Deposits with No Conditions – If the deal collapses due to financing issues or inspection failures, a non-refundable deposit can result in a financial loss.
• Inadequate Protection if the Seller Defaults – If the seller backs out of the deal, the buyer may lose the deposit unless the agreement includes clear protections. It is always advisable to have the deposit be held in trust, rather than paid directly to the seller.
• Lack of a Refund Clause – Without a refund clause, the buyer may struggle to recover the deposit if the contract is terminated due to unforeseen issues or if the conditions are not met

A commercial real estate lawyer can negotiate deposit terms that protect the buyer’s financial interests by:

• Ensuring the deposit is held in a trust account or in escrow until closing.
• Including refund clauses if financing, inspection, or zoning issues prevent the deal from closing.
• Requiring the seller to refund the deposit if they default on the agreement.

• Overlooking Assignment and Transfer Rights

An assignment clause allows the buyer to transfer the purchase agreement to another party if business needs change before closing. Without assignment rights, the buyer may be forced to close even if business circumstances shift.

Potential Pitfalls

• No Right to Assign the Contract Without the Seller’s Consent – Some contracts prohibit assignment or require the seller’s approval, limiting the buyer’s flexibility.
• Transfer Fees or Penalties Imposed by the Seller – Some sellers impose fees or penalties for assignment, reducing the buyer’s profit margin.
• Restrictions on Lease Transfers for Tenant-Occupied Properties – If the property includes rental units, the buyer may face restrictions on transferring tenant leases.

A real estate contract lawyer can protect the buyer by:

• Securing the right to assign the contract without the seller’s approval.
• Negotiating reasonable transfer fees or waiving penalties.
• Clarifying how existing leases are transferred to the new owner.

1. Accepting Unfair Seller Representations and Warranties

Seller representations and warranties confirm the property’s condition and legal status at the time of sale. Buyers rely on these assurances to avoid future disputes.

Common Risks

• Vague or Incomplete Seller Warranties – General statements about the property’s condition may not hold up legally.
• No Recourse for Undisclosed Defects or Legal Issues – If problems arise after closing, the buyer may have no legal protection.
• No Protection Against Future Title Disputes – If another party challenges the title after closing, the buyer may face legal action.

A commercial real estate contract lawyer can protect the buyer by:

• Ensuring seller warranties are specific and enforceable.
• Requiring the seller to disclose all known defects.
• Including indemnification clauses that hold the seller liable for undisclosed issues.

How a Commercial Real Estate Lawyer Helps

A commercial real estate lawyer in Edmonton like those at Nexus Legal helps buyers avoid common mistakes by:

• Conducting title searches and verifying property ownership.
• Negotiating fair deposit and closing cost terms.
• Ensuring financing and inspection contingencies are included in the agreement.
• Reviewing zoning and property use restrictions.
• Protecting the buyer from hidden liabilities and unfavourable contract terms.

Protect Your Investment with Expert Legal Support

Signing a commercial real estate purchase agreement is a complex process with significant financial and legal risks. Overlooking key terms or hidden liabilities can result in costly disputes and operational challenges.

Working with an experienced real estate contract lawyer ensures that all terms are clear, fair, and legally enforceable. A lawyer helps protect the buyer’s financial interests, negotiates favourable terms, and ensures that the property meets all legal requirements before closing.

Need help reviewing a commercial real estate purchase agreement in Edmonton? Contact Nexus Legal for expert legal guidance and contract review today.