Differences Between Commercial & Residential Real Estate: A Brief Introduction

By Peter H. Cass

Disclaimer: This article is not a substitute for legal advice. No action in regards to your particular matter should be taken until you have first sought full legal or professional advice from a lawyer fully retained to act on your behalf. 

Transactions in the investment, commercial, or industrial world are often quite different from other real estate and business deals. Their unique set of characteristics begins with the Agreement of Purchase and Sale. Almost every commercial real estate agent I have met wants the buyer’s offer reviewed carefully and amended after a client meeting, before it goes to the seller. This process is different from the typical residential transaction, because, normally, there are not multiple offers, which means that the buyer has time to consider their position. While what follows is mostly from the point of view of a buyer, sellers can use that time to better understand how it can work for them. 

Even with that larger time window, the Agreement of Purchase and Sale should generate confidence in the seller that the buyer knows their own business and is likely to perform and close the deal. Confidence is important because, unlike a routine house sale, there is often a much longer conditional period, that is generally for satisfactory due diligence. There are also representations and warranties that the seller has to give, so that the purchaser is comfortable that nothing is being held back. Then you have deliveries (records relating to income, expenses, reports, leases, operating statements, surveys, etc.) which should be complete so that, again, the purchaser has as much knowledge as possible. We have often seen clauses allowing access by the buyer to interview engineers, planners, and other experts who have been working for the seller.  

Another common and unique characteristic of these transactions is that the seller is asked to provide financing—usually short term—so that the buyer has time to obtain planning and development permission that will lead to more conventional financing. 

The bottom line is that the Agreement of Purchase and Sale is extensive and more carefully considered by lawyers than it is in a residential transaction. 

There is a further unique feature. Often there are negotiations related to an extension of the dates for firming up the offer and closing. Price and other terms can also be up for review, based upon the results of the buyer’s due diligence and what institutional lenders want.

In commercial transactions, the buyer does not wait for the transaction to firm up to do searches and investigations, both on and off title. Typically, negotiation does not seem to work very well after the conditional period has elapsed. If the property is subject to rights of way, leases, or has the benefits of certain rights of way, or is subject to restrictive covenants, economic significance to the buyer is greater than it is in a residential transaction.

There are various subsets that change the approach with each transaction. Land for development has its own characteristics, as do commercial properties rented to business tenants. Multi-residential rentals also have major differences in approach, starting with the Agreement of Purchase and Sale, all the way through to the end of the conditional period. Just one of many examples is that, in investment properties that are generating income, the seller is normally not providing financing and negotiations are driven by the requirements of a bank, insurance, or trust company.

Once the transaction is firm, there can be a lot of work involved if the client’s financing is being done through a third-party law firm. That adds to the complications because third-party law firms are not seen in residential transactions for single-family homes.

Financial adjustments in a transaction for income generating property are also usually more complex than they are for a single-family residential property. There are lease terms to be considered, security deposits, and, in many cases, common area costs such as maintenance, real estate taxes, and insurance, which are charged separately to tenants who are not residential ones.

For development property, it is important to know whether or not servicing is available, and what  the cost is of that servicing. Municipal agreements on title (or pending) are very important to know before closing.

Finally, there is post-closing. In a residential transaction, the client gets the key, moves in, and enjoys the house with minimal post-closing discussion. In a commercial transaction, there is always follow up and, as the buyer learns about the property, surprises may mean that the buyer goes back to the seller on representations and warranties.