Many people have at least a cursory understanding of real estate laws as they apply to residential properties, either from a purchase or sale or even from leasing a residential property. While it may seem logical that these same basic legal principles would apply to commercial property transactions, in many ways the law treats these types of real estate very differently.
Let’s dive into what the term “commercial property” refers to so we can get a better understanding of the key legal differences between commercial and residential real estate laws. But first, let’s look at commercial real estate properties.
What is Commercial Real Estate?
Commercial property is real estate that is used solely for business purposes. The commercial property covers a wide array of real estate – shopping centers, hotels, manufacturing plants, apartments, agricultural property, land slated for development, office and retail spaces, etc. Generally, if a piece of real estate is not a private residence, it is a commercial property (although if a private residence is purchased as an investment to be rented, it would also be considered commercial real estate). Transactions involving commercial property can be very complicated because they are regulated by laws at the federal, state, and local levels, and can involve property laws, and also insurance, tax, and contract laws.
What are some key differences in commercial and residential property law? I’ve summarized four major differences below.
1) Disclosure Requirements
Disclosure laws vary by state, but, in general, sellers have an obligation to disclose any major defects that could affect the value of the property. The definition of a “major defect” differs by state and the extent of this duty often depends on the type of property.
In Colorado, while sellers of residential property have an affirmative obligation to disclose known defects that are both readily and not readily visible, sellers of commercial real estate generally have no such duty so long as the buyers are able to thoroughly inspect the property. Although sellers may not fraudulently hide material facts about the property, buyers in a commercial transaction are expected to conduct their due diligence and evaluate the property and transactions terms for any potential issues and liabilities.
Under federal law, commercial properties are required to disclose any knowledge of asbestos, lead paint, and other environmental hazards.
Although the foreclosure procedures for residential and commercial properties are similar, most commercial foreclosures necessitate an additional process due to their loan terms. Because commercial property generally generates income in the form of rent, commercial loans are often structured to assign that income to the lender in the case of default.
Therefore, in a commercial real estate foreclosure proceeding, a judge will appoint an independent receiver to take over management and rent collection of the property pending its sale.
3) Zoning Laws
Zoning is how local governments communicate what type of development is allowed on a particular parcel of land. In Colorado, land-use and development regulations are enacted by county governments in an effort to balance the safety and well-being of the community with private property owners’ rights. Zoning ordinances apply to both residential and commercial properties, but makes distinctions between different types of property and by the way they are going to be used. Generally, zoning divides parcels of land for use as residential, commercial/industrial, and agricultural.
4) Landlord/Tenant Laws
As opposed to a residential landlord/tenant relationship where the tenant is afforded many protections, the law views a commercial lease as between two business entities to that is intended to generate profit. The law assumes that a commercial tenant is sophisticated and on equal footing to negotiate lease terms. In Colorado, for commercial properties, there are no laws pertaining to maximum term of a lease, the amount of rent that can be charged, the rate of and/or timing of rental increases, or allowances for tenants to terminate the commercial lease early. For residential leases, where the security deposit is held and when it must be returned to the tenant is governed by statute. However there is no parallel statutory scheme governing the obligations of commercial landlords to return security deposits.
Commercial and residential property laws are considerably complex and should be clearly understood by landlords, property owners and managers, tenants, and all other parties involved. For more education on commercial real estate, learn about common areas of law that can affect real estate transactions.