Rights Relating to Problems Discovered After the Purchase of a Business

William B. Hanley Jan. 4, 2019

Finding the right property for your business is a painstaking endeavor — one that becomes incredibly rewarding once you’ve gotten that perfect piece of real estate up and running. That is, assuming everything goes according to plan.

But, as revealed by countless post-purchase real estate stories, business owners don’t always find their new property to be all they thought it was. They run into property defects, surprise environmental hazards, zoning issues, operational limitations, and other such complications. Before they know it, they’re locked into a less-than-ideal real estate deal with no idea how to get out of it.

So now for the big question: Can you get out of a bad commercial real estate deal?

During the Contingency Period

In California, most commercial real estate purchases call for a contingency period of at least 30 days. In other words, you have an allotted amount of time (which should be specified in your contract) to get your property inspected.

If, during that time, you discover an issue that may be counterintuitive to your business goals, you can still pull out of the real estate deal without facing any penalties or having to jump through a lot of legal hoops. That is your right as a commercial real estate buyer safely planted within the contingency period of your agreement.

What to Inspect

If the phrase “real estate inspection” makes your mind jump straight to termite inspections and checking for signs of mold, you’re on the right track. But for the sake of your business, you’ll want your inspection to go a little deeper. Specifically, you should work with both a building inspector and a seasoned commercial real estate lawyer to help you identify red flags like these:

  • Property defects. Whether structural, electrical, plumbing-related, drainage-related, ventilation-related, or of another nature, you deserve to have a clear idea of what needs fixing before your buy-sell agreement goes through.

  • Environmental hazards. For instance, it’s better to know now whether your new property rests in a known flood zone, fire hazard area, earthquake fault zone, or seismic zone.

  • Building code violations. Are your smoke alarms set up correctly? Do you have proper emergency exits? Is the building up to current disability access codes? A thorough home inspection can answer these and similar questions, saving you from a lot of legal and financial trouble in the future.

  • Health hazards. These include issues like mold, asbestos, and harmful chemicals, toxins, and/or minerals.

  • Legal issues. While the home inspector examines the physical property, it’s crucial that you allow a real estate attorney to scour through all your legal paperwork. Otherwise, you may discover (too late!) that your property is tied into a zoning issue, ongoing lawsuit, encroachment, easement, boundary dispute, land limitation, or other undesirable legal complication.

While I sincerely hope that your new commercial property is problem-free, please know that any issues you’ve caught during the contingency period are still a blessing in the long run. You can use that knowledge to renegotiate the price of your purchase or withdraw from the buy-sell agreement altogether.

Unsurprisingly, getting out of a deal after signing your buy-sell agreement can get much more complicated.

After the Contingency Period

Once that initial contingency period is over, holding the seller accountable becomes a bit more difficult — but not necessarily impossible. Really, it all hinges on the answer to one simple question: Did the seller know about the problem before selling you the property?

Seller’s Duty to Disclose

California real estate law states that sellers of commercial real estate must disclose any and all known facts “materially affecting the value or desirability of the property.” This means that, if the seller knew about the health hazard, environmental issue, building code violation, or other issue affecting your new property, you are well within your rights to take legal action against them.

In the event that you and your attorney file a lawsuit against the seller and win your case, the court may award you any combination of the following:

  • A full refund of what you paid for the property

  • The difference between the originally agreed upon price of the property and its current, actual value

  • Out-of-pocket costs for property inspections, legal paperwork, and related expenses

  • Interest

  • Other damages caused by the fraudulent behavior of the seller

Although sellers are almost always the defendants in California buy-sell disputes, there are some rare cases in which a property buyer may be able to hold another party accountable, such as the property builder, either party’s broker, or the home inspector.

If you suspect that the seller (or another party involved in your transaction) did in fact fail to disclose known property issues, please do not hesitate to contact my law firm today. As a real estate and business litigation attorney with more than four decades of experience, I am more than prepared to handle all aspects of your commercial real estate dispute.