SELLING COMMERCIAL PROPERTY?

YOU MAY HAVE A DUTY TO TELL THE BUYER ABOUT THAT DELINQUENT TENANT

If you are selling income or commercial property that has a tenant who is in arrearages on its rent, that information may have to be disclosed to the buyer to avoid being sued for breach of contract or misrepresentation.

In a 2002 decision of the Wisconsin Court of Appeals¹, the parties entered into a commercial offer to purchase a commercial property with eight tenants--one who was three months delinquent in rent at the time of the offer, and had more than $13,000 in arrearages by closing. Before the closing, the buyer apparently never asked about the status of the rents, and the seller didn't tell.

The purchase agreement contained "standard" disclosure language about conditions affecting the property, which included a representation by the seller about lack of knowledge of "other conditions or occurrences which would significantly reduce the value of the Property to a reasonable person with knowledge of the nature and scope of the condition or occurrence."

The Buyers' Complaint

After closing, the buyers discovered the details about the delinquent tenant -- whose rents constituted more than one-third of the total rents for the property.

The tenant eventually vacated and the buyers were left with the prospect of empty space worth about a third of the total rentable space. They sued the seller for breach of contract, false advertising, and common law misrepresentation. In short, they argued that the seller's failure to disclose this was a "condition affecting the property" under the contract.

What the Court Said

The trial court threw out the buyers claims. The court of appeals reversed the trial court and held that the buyers could pursue all of their claims against the seller. However, the court did limit the buyers claims for false advertising and misrepresentation to misrepresentations only made before the offer was accepted. Thus the case goes back to the trial court to be heard.

What it Means

Although the facts of this case involved commercial tenants, the argument could be extended to include any income tenants, if the undisclosed delinquency constitutes a significant portion of the rental value of the total property.

This means that both buyers and sellers of income properties need to be sure they address "conditions affecting the property" with more diligence. Sellers either have to disclose such information if it is reasonable that a buyer would be influenced in its purchase terms, or sellers have to avoid or amend the boilerplate forms that are so often used without giving them serious consideration.

Likewise, buyers should be on notice to obtain written representations from sellers about the status of tenants and rent histories. Buyer should also make sure that the contract puts a continuing duty on the seller to disclose such information up until the closing when ownership changes hands.

Needless to say, commercial and rental buyers and sellers should have experienced attorneys helping them with the contract terms. Relying on "one-size-fits-all" standard forms, without at least customizing them to the particular circumstances, is asking for trouble, and bigger legal bills later. Protect your investment by investing in it with solid agreements!

¹Kailin v. Armstrong, 2002 WI App 70, 252 Wis. 2d 676, 643 N.W.2d 132