How to Navigate Texas Commercial Real Estate - Top 5 Critical Legal Risks in Your Contract
- Chris Johnsen
- Mar 11
- 6 min read
Investing in commercial real estate in Texas is a fantastic way to grow your business, but the journey to closing a successful transaction can be filled with hidden hazards, which, without proper legal safeguards, can turn a profitable venture into a financial disaster.
Unlike residential property sales, where there is an implied warranty by the seller that the property is free and clear of any issues, commercial real estate sales are governed by the principle of caveat emptor, or "let the buyer beware."
Therefore, it is crucial that buyers of commercial properties have effective legal protection in place in order to avoid unintentionally purchasing their properties with unintended environmental hazards, title burdens, or zoning restrictions that will prevent the intended use of the property.
Knowing the potential hazards and properly addressing them in a Texas commercial real estate purchase agreement is more than just a formality for buyers: it is a matter of preserving the value of their investment and protecting themselves from potential future liability.
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Introduction: The High Stakes of Commercial Real Estate Contracts
TIL: Failure to have a Commercial Real Estate Deal in Texas Properly Documented by a Real Estate Attorney Can Be Costly. Expect surprises, including financial losses in the hundreds of thousands of dollars. A deal that could have made you and your business hundreds of thousands of dollars can be destroyed for life. Life-long litigation can be the additional payoff. Be sure to have a real estate attorney who specializes in Commercial Real Estate Deals work on every document associated with the deal.
1. Title and Survey Objections: Preserving Your Rights
The Importance of Objection Letters
Many issues regarding a title and survey are ignored in a hurry to complete a transaction, often by the real estate agent, to complete the sale. As with all contractual issues, it is very important that any concerns are addressed formally in writing and by the buyer. What can happen if these issues are ignored is that a buyer may end up purchasing a property with known defects in the title and/or serious issues with the condition of the property, as determined by a survey, which can cause future problems.
Managing Deadlines and Negotiations
Commercial contracts almost always have title review and approval timeframes. It is crucial to negotiate and establish sufficient time to allow us to adequately review and analyze the commitment and to work with the title company in order to remove any future exceptions. If not properly negotiated, you could end up with a piece of property from which you can't get away.
2. Zoning, Use Restrictions, and Flood Zones
Houston’s Unique Regulatory Environment
Houston is famously "unzoned," but there are many regulations governing land use, including building code and architectural design standards and covenants. Even if your property is zoned for commercial use, a private covenant can prevent the use you have in mind. A violation of a covenant can be an impediment to carrying out the commercial use you have planned for your property.
Mitigating Risk via Indemnification
Use restriction violations can sometimes be the source of litigation between buyers and sellers. Buyers might seek a judicial declaration of the violation that could take years. Sellers often agree to an indemnification to protect buyers against the costs of defending any future litigation, or against any judgments or verdicts that may be entered against them. An indemnification is only as good as the person providing it.
Zoning and Environmental Hazards in Other Texas Regions
Outside of Houston, zoning is typically a formal process, and we will verify the zoning for any property for the intended use. Also, zoning and land use regulations can vary by location, and Texas's geography makes zoning and floodplain regulations an important part of any due diligence process.
3. Environmental Liability: Protecting the Chain of Title
The "Nasty" Reality of Environmental Issues
When you hear about environmental problems – think contaminated soil and groundwater, an overpopulation of invasive species and trees in the wrong place, removal of shorelines of lakes, and the reduction in habitat and diversity of local plants and animals – make this one to worry about, because your exposure to liability often extends far beyond the original cause. One does not have to be at fault, even if proven the source, to be included in the broad terms of the “chain of title,” thus being considered fully responsible to pay for remediation estimated to run into millions of dollars!
Beefy Indemnifications and Assessments
Companies will also need to consider another environmental factor arising from older buildings: The presence of asbestos. To protect themselves from potential losses due to the rising risks of asbestos-related diseases, buyers will have to carry out extensive environmental site assessments. Also, to reduce the chances of any successful claim in the future, contract clauses must include watertight indemnifications or "beefy warranties".
4. Earnest Money and Contingencies
Refundable vs. Non-Refundable Terms
It's normally refundable to the buyer in the event the sale does not consummate through the buyer's fault, however this can vary. Either way, you need to take care when entering into this type of contract and make sure you protect your earnest money deposit.
Structuring Financing and Custom Contingencies
A financing contingency is a crucial term to be included in any purchase and sale agreement. Its purpose is to protect a buyer who enters into a contract to purchase a piece of real estate with the understanding that they have the opportunity to get financing for the acquisition at reasonable and prevailing market rates. It is also typical and usually expected to have commercial contingencies added to the contract that pertain to the specific type of property involved and the proposed use of that property.
5. Assignment Limitations and Entity Structuring
The Need for Flexible Assignment Clauses
We must verify with the wholesaler or seller that the contract allows for assignment. If it does not, we might not be able to assign the contract to another buyer or even to our own company.
Using Series LLCs for Real Estate Investment
Typically, the first step is to personally enter into the contractual arrangement and later assign that contract to a newly established Series LLC. This method allows for the advantage of segregation of ownership for each asset and mitigation of cross liability, which is a key benefit of having a Series LLC.
Frequently Asked Questions (FAQs)
What happens if I miss the title objection deadline?
If the deadline is not met with a written objection to the title, the buyer “waives” any right to object to the matters set forth on the title commitment. This means the property will close with all of the liens and easements set forth on the commitment, which may impact the business use of the property.
Can I rely on the fact that a neighbor is operating a business to assume the zoning is commercial?
No. It is possible a neighbor could be doing something that is prohibited by the restrictive covenants in your neighborhood, especially here in Houston. Maybe they have a variance or are "grandfathered" in some way that would not allow you to do the same thing on your property. The best way to make sure is to research your own chain of title.
What is an Environmental Site Assessment (ESA), and do I need one?
An ESA (Phase I) is an evaluation of a property with respect to any known or potential contamination liabilities. Commercial lenders generally require an ESA Phase I report to be prepared. An ESA Phase I is an important step in establishing an innocent landowner defence under the federal environmental legislation.
Is earnest money always refundable during the feasibility period?
Generally, yes, assuming the contract was properly written. In Texas, the buyer generally has a “free look” during the due diligence or feasibility period, provided they have adequate justification for withdrawing the commitment and they receive a full refund of their earnest money (unless an independent option fee was paid).
What's Next: Consult a Real Estate Attorney Before You Sign
Addressing these five landmines—title, zoning, environmental, earnest money, and assignments—requires a professional legal eye. Before signing any commercial contract in Texas, ensure these issues are addressed to secure your investment.
Don’t let a hidden "landmine" sink your next deal. Contact the experts at Johnsen Law today to protect your capital and close with confidence.
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