5 Tips to Avoid Legal Trouble in the Commercial Real Estate Game

By: Matt Faustman

58802249_379deb1330There is one reason and one reason alone that most corporate real estate gurus avoid lawyering up – litigation slows your momentum and drains profits. While legal resources are easier to find than ever, and clients have far more control over when, why and how they hire a lawyer, avoiding the legal problems that cause you to seek legal protection is your first and best defense.

Some of the legal problems corporate real estate investors and managers face include:

  • Poor legal forms (usually an attempt to save money that backfires)

  • Disputes with homeowner’s associations

  • Disagreements over failure to disclose statements

  • Illegal solicitation of money – a mistake made by many novice investors

  • Independent contractor liability

While no one can expect to reduce their risk of getting into legal trouble to zero, everyone can take steps to reduce their risk as much as possible. In any situation where your money is at risk always ask yourself, “Is there a better way to accomplish this?”

The following are some important and useful tips for corporate real estate investors to avoid legal issues that could cause them to have to seek legal protection:

1. Always do your Due Diligence on the Other Party

No matter whether they are a seller, a potential tenant, or a contractor, due diligence is necessary. Many jurisdictions offer online access to court records, so a quick check to see if the other party is particularly litigious (meaning, they like to sue and do it often) is easy protection. A general or subcontractor who is a defendant in more than one case, for example, is suspect. Asking trusted advisors if they have ever dealt with the other party to find out if their experience was good, bad, indifferent is also a quick and easy check. Tenant screening is a critical step too. If you have ever gotten in the position of chasing rent payments, it may have been your own fault for skipping the due diligence step.

2. Always Review the Cost Benefits

Litigation is always more expensive than avoiding the situation that caused you to seek litigation. So if you get into a situation that looks like it could turn litigious, do your best to work it out reasonably and review the cost it. A great example is filing a suit to get back rent out of a tenant who has broken their lease. In some cases, the cost of the lawsuit and filing fees and other expenses isn’t worth what you will ultimately earn back – if you even get the money from the loser. It is always a judgment call, of course, and it depends on whether you or the other side has deep pockets (a downside of our legal system), but it should always involve a careful cost analysis.

3. Decide when You Need Legal Support

When it comes to a commercial real estate deal, a good real estate lawyer can often be worth their weight in gold – particularly if you are moving into the commercial real estate world from single family investing. When it comes to raising private money or group investing, the stakes are higher because it is way too easy to violate securities laws. Working with qualified real estate counsel in this case is often way less expensive than getting yourself out of a legal mess. Either way, commercial real estate is no place for standard form contracts.

4. Practice Win-Win Thinking and Stay Honest

If you negotiate in good faith and stay honest – remember, your word is only as good as your reputation – then you are not likely to see the inside of a courtroom. As long as you can put yourself in the other person’s shoes and look at ways to resolve issues with an eye toward ‘everyone wins’ you’ll nearly always resolve the dispute without bloodshed.

5. Take Advantage of Arbitration Whenever Possible

Outside of residential leases, commercial real estate agreements should always include this requirement. With due respect to the hard-working judges and members of the jury out in the world, they don’t always understand the unique complex issues of commercial real estate. Even worse, it ties up your valuable time when you could be getting back to the business of dealing commercial real estate.

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