Law Firm Retainer Agreements

People generally place a higher value on what they own than what someone else will pay for it. Real estate is no different. With commercial real estate, rents and rental cash-flow play a critical role in the determination of the value of a commercial property. However, the mere statement in the lease of the annual rent or rent per square foot payable should not be sufficient to satisfy a buyer/lender as to the expected cash-flow under the lease as other lease clauses will likely be present that will affect it.

When buyers/lenders turn their focus to lease review in the due diligence period, it should be with a view to identifying issues that may reasonably affect rental cash-flow. If clauses are identified with potential to affect the income stream, then the following options can arise: A. termination of the deal; B. reduced purchase price/loan amount; C. in the case of a loan, the requirement for additional loan security over and above what was expected.

As a result, during the due diligence stage of a purchase or a loan commitment it is vital to have proper lease due diligence carried out by experienced persons (i.e. internal or external counsel, property managers, or leasing professionals) in order to identify hidden risks to the buyer/lender. Once identified, they would be raised with the buyer/vendor/borrower and methods of eliminating/minimizing those risks can be discussed in order to avoid changes to the purchase price, loan amount, or loan security.

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