Adaptive Reuse Of Underutilized Real Estate

Cool Projects – A Love Affair Revisited

We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable.

Looking to the Future

What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when?

Make no mistake; it will happen. And it’s likely to happen much more quickly than you think.

While many are just beginning to peak their cautious heads out from under their COVID blankets, value-add developers are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent.

Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably Cool Projects. I can’t wait!

COOL PROJECTS – Real Estate Projects I Love to Work On.

I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.

And by “cool”, I don’t mean in a thermal sense – but rather in a “this project is so cool” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “Wow – what a cool project!”

Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.

Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.

Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.

Cool Projects Test

Here’s a test [call it the “Cool Projects Test”, if you will]:

Which of the following projects is more likely to end up on Kymn Harp’s list of cool projects?

PREDICTION:  Tax rates will rise, and property values will increase.

IRC Section 1031 allows sellers of qualifying real estate to exchange it for like-kind real estate and defer payment of taxes. . . possibly forever.

WHAT IS A TAX-DEFERRED EXCHANGE?

Section 1031 of the Internal Revenue Code allows any real estate in the USA held for investment or for use in the taxpayer’s trade or business to be exchanged for other like-kind property without payment of federal income taxes. Most states tax codes provide likewise. There are technical rules for completing the exchange, but it is a straightforward process with clear-cut rules expressly authorized by law.

Taxes that can be deferred include all capital gains taxes, all depreciation recapture taxes, all passive-investment taxes (so called “Obamacare taxes”), and, in most cases, state income taxes. In many circumstances, these taxes can add up to in excess of 30%. Instead of paying taxes, why not reinvest those funds as equity in another like-kind property instead, and continue to receive an investment return on those funds?

HOW IS LIKE-KIND PROPERTY DEFINED?

• A concept that is often misunderstood is “like-kind” property. The definition is much broader and simpler that some might expect. Basically, any real estate located in the USA and held for investment or for use in the taxpayer’s trade or business can be exchanged for any other USA real estate held for investment or for use in the taxpayer’s trade or business without paying taxes. That means, for example:

The physical use of the real estate is not what makes it like-kind; rather, all real estate located in the USA is like-kind to all other real estate located in the USA. Likewise, foreign real estate is like-kind to other foreign real estate, but it is not like-kind to USA real estate. The condition is that (i) the real estate being sold must have been held for investment or for use in the taxpayer’s trade or business, and not held primarily for resale, and (ii) the real estate being acquired must likewise be acquired for investment purposes or for use in the taxpayer’s trade or business and not primarily for resale.

ARE THERE TIME CONSTRAINTS?

At the time of closing, the taxpayer does not need to know exactly what property will replace the property being sold. The taxpayer has 45 days to identify potential replacement property, and up to 180 days after closing to acquire the replacement property. A key, however, is that the selling taxpayer cannot come into physical or constructive possession of the sale proceeds during the exchange period. To satisfy this condition, the seller will designate a qualified intermediary to hold the funds under an exchange trust agreement. This can be done quickly, often within a day or two before closing if necessary. Although the seller/taxpayer does not have the right to access the funds during the exchange period, the seller/taxpayer does have the right to direct the qualified intermediary to apply the funds toward the taxpayer’s purchase of any replacement property which is identified by the taxpayer during the 45-day identification period.

For all taxes to be deferred, the entire sale proceeds of the real estate being sold must be used to acquire the replacement property. For this purpose, “sale proceeds” includes all cash received at closing and any mortgage indebtedness that was paid off.

INCIDENTAL PERSONAL PROPERTY

Prior to January 1, 2018 tax-deferred exchanges of certain personal property were also permitted. The 2017 Tax Cuts and Jobs Act, effective January 1, 2018, ended this practice and limited tax-deferred like-kind exchanges to only real property. This raised concerns as to whether certain personal property commonly incidental to a sale of commercial property, such as appliances, carpeting, HVAC systems, security systems, Wi-Fi systems, trade fixtures, etc. would disqualify an exchange for tax deferral, or constitute taxable “boot”.

Under Final Regulations published by the Treasury Department effective December 2, 2020, personal property that is incidental to real property acquired in an exchange will be disregarded and may therefore be included as part of the tax-deferred exchange. Personal property is considered “incidental” in commercial transactions if (a) it is the type of personal property typically transferred together with real property, and (b) the aggregate fair market value of the personal property transferred with the real property does not exceed 15% of the aggregate fair market value of the replacement real property received in exchange.   

ADVANTAGES AND DISADVANTAGES

There are many advantages and not many disadvantages to structuring a sale as a tax-deferred exchange. The rules are technical but not very difficult to apply. It has virtually no impact on the buyer and provides extraordinary benefits to the seller.

For a real estate lawyer, besides providing a great service to your clients, an exchange provides a direct lead-in to the next transaction with an opportunity to handle the purchase of replacement property of equal or greater value that must close within 180 days.

Our tax code provides this benefit; it is up to real estate professionals to take advantage.

Thanks for listening . . .

Kymn

Two Things You Need to Know

As my readers know, I often represent real estate investors. When I draft a real estate contract I strive to make each provision absolutely clear in its meaning, and try to have it serve as a workable road map to closing.  Occasionally a client will draft a real estate contract on its own (or have a broker draft it), and sign it without my review or input. The client will then send it to me “to close the transaction“.  Though I counsel clients that this can be a remarkably risky practice, some clients . . . being clients . . .  do as they wish and ignore my advice. Such is life.

When faced with closing a transaction governed by a real estate contract I did not have a hand in preparing, I do my best.  It is usually not a complete disaster, but there are often misunderstandings because of provisions that are not entirely clear.

There are also situations where a provision in a real estate contract may be legally sufficient, but the seller and/or its attorney simply don’t understand the actual meaning of the provision.  With a clearer provision the misunderstanding could be avoided, but the legal ramifications of certain provisions still are what they are, rather that what some imagine them to be. The following are two examples I have run into in the last week that I believe deserve comment and explanation:

NO MORTGAGE CONTINGENCY:     Contrary to the understanding by some Seller’s attorneys and their clients, the fact that a real estate contract does not include a mortgage contingency – and may even expressly state that the transaction is not contingent upon the Buyer obtaining a mortgage – does not mean that the Buyer is not obtaining a loan and using mortgage financing.  It simply means that the Buyer’s obligation to proceed to closing under the real estate contract is not contingent upon the Buyer obtaining a mortgage loan.

Many investor Buyers have strong relationships with their lender. They know what their lender requires, and know that the property they are acquiring will qualify as collateral for a mortgage loan from their lender. Consequently, they do not make obtaining a mortgage a contingency to closing in the real estate contract. Be that as it may, the Buyer may still obtain a mortgage loan, and may fund the property purchase using loan proceeds.

This is the practical equivalent to the situation where a real estate contract does contain a mortgage contingency, but the contingency has been satisfied because the Buyer has been approved for a mortgage loan. At that point the contingency expires and the contract is no longer subject to a mortgage contingency. The Buyer will still be closing using its lender and the proceeds of its mortgage loan. Probably no one disputes that.

Likewise, in a real estate contract where there is no mortgage contingency from the beginning, the absence of a mortgage contingency does not, without more, imply at all that there will be no mortgage lender.  If the parties intend to provide that a contract is to be a cash transaction with no lender, that should be expressly provided in the real estate contract. Otherwise, the mere absence of a mortgage contingency does not mean there will be no lender – it simply means the Buyer is taking the legal and financial risk that a mortgage will be obtained.

2.   AN “AS IS” CLAUSE DOES NOT MEAN NO INSPECTION:  As with the absence of a mortgage contingency clause, as discussed in point 1 above, there seems to be some confusion about what an “AS IS” provision in a real estate contract means.

It has recently been suggested to me by Seller’s counsel that since the Buyer is purchasing property in “AS IS” condition that there is no need for the Buyer to have an inspection period with the right to inspect the condition of the property. To the contrary, where a Buyer has agreed to acquire property in AS IS condition, it is absolutely vital for the Buyer to have an opportunity to inspect the property, with the right to terminate the transaction if the condition of the property is materially worse than the Buyer expected. The AS IS provision in a real estate contract simply means that the Buyer does not expect the Seller to make any repairs to the property, or expect the Seller to provide closing credits for defective conditions in the property, and that the Buyer will not come back to the Buyer after closing seeking recourse for undisclosed defects.

Having a provision in an real estate contract providing for an inspection period during which the Buyer can thoroughly inspect the property and terminate the contract within that period if the property is physically deficient is not at all inconsistent with a provision that the Buyer is agreeing to acquire the property in AS IS condition.  The need to inspect is a matter of due diligence for the Buyer. If the Buyer inspects the property (or fails to inspect the property) and does not  exercise its right to terminate within the inspection period provided in the real estate contract, then the Buyer is bound to close regardless of the condition of the property – with the possible exception of additional damage occurring to the property after the contract date, or at least after expiration of the inspection period.

These are simple points, but they are misunderstood more frequently than one would hope or expect. To avoid needless misunderstandings, careful and meticulous drafting is a solution.  But still . . . this is not rocket science.

Thanks for listening. . .

Kymn

Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.

Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there?  Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.

Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is.  Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski?  It’s our passion. We don’t know exactly why – it comes from within. And we always need more.

Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.

So what’s the problem?

The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog.  People think I’m busy, or that I only handle huge deals. The truth is, I am busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “If you want something done, ask a busy person to do it.” We all loved Lucy!

The most shocking question I get from prospective clients is: “Would you (I) be willing to handle my (their) next business or commercial real estate deal?”  Are they kidding? My answer is always an emphatic “yes”! It’s my passion. It’s my love.  It’s what I live for.

To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog Harp-OnThis.com, or check out my latest book, Illinois Commercial Real Estate on Amazon.com or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?

So back to my initial point:  I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?

I’m happy to announce that the website for my new book, Illinois Commercial Real Estate is now live.  Visit www.Illinois-CRE.com for a book excerpt.

Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists, is intended as a practical handbook for investors, developers, brokers, lenders, attorneys and others interested in commercial real estate projects in Illinois. This book zeros-in on commercial real estate due diligence, and walks the reader through the due diligence process, from conception to closing, with a focus on making sure the commercial real estate project functions as intended after closing.  Checklists are provided as an aid to commercial real estate professionals to assist on evaluation of the property and the transaction on the path toward successful closing. As people in the real estate industry understand, if the deal doesn’t close, it doesn’t count.

I’d like to extend Special Thanks to:

My clients, whose passion for creative commercial development I share;

My partners and staff at Robbins, Salomon and Patt, Ltd., who work with me tirelessly to earn our client’s business every day.

Catherine A. Cooke and Emily C. Kaminski, attorneys at Robbins, Salomon & Patt, Ltd. who provided legal research, advice, counseling, and technical editing;

James M. Mainzer, tax partner at Robbins, Salomon & Patt, Ltd., for his insights and assistance on tax matters;

The editing staff at the Illinois Institute for Continuing Legal Education, for editing early versions of chapters 11, 12, 25, 27 and 28, which were first published in IICLE Practice Handbooks;

Dale V. Weaver, Illinois licensed surveyor, who was kind enough to convert my rough draft drawings into the diagrams included at chapter 25;

. . . and, of course, my friend and valuable resource, Linda Day Harrison, founder of theBrokerList, for her ongoing encouragement and support.

If you are buying, developing, financing, selling, leasing or otherwise dealing with commercial real estate in Illinois, I hope you will find Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists to be a useful resource.

ENJOY!!!

R. Kymn Harp

Commercial Real Estate Closings

Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

I’ve been closing commercial real estate transactions for over 35 years. I grew up in the commercial real estate business.

My father was a “land guy”. He assembled land, put in infrastructure and sold it for a profit. His mantra: “Buy by the acre, sell by the square foot.”  From an early age, he drilled into my head the need to “be a deal maker; not a deal breaker.” This was always coupled with the admonition: “If the deal doesn’t close, no one is happy.” His theory was that attorneys sometimes “kill tough deals” simply because they don’t want to be blamed if something goes wrong.

A key point to understand is that commercial real estate Closings do not “just happen”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below:

RESALE DISCLOSURE CHALLENGES – When the Commercial Condominium Association is “Inactive”

• Section 18.3 of the Illinois Condominium Property Act provides that a unit owners’ association will be responsible for the overall administration of the property through its duly elected board of managers. 765 ILCS 605/18.3.
• Section 19 of the Illinois Condominium Property Act sets forth a specific set of records that the board of managers of every association is required to maintain. 765 ILCS 605/19.
• Section 22.1 of the Illinois Condominium Property Act provides that “in the event of any resale of a condominium unit by a unit owner other than the developer such owner shall obtain from the board of managers and shall make available for inspection to the prospective purchaser, upon demand . . .” a fairly comprehensive list of condominium instruments, and other documents and information, concerning the makeup and financial condition of the owners association, insurance coverage, litigation, reserves, assessments, and the like.  765 ILCS 605/22.1.

Remarkably, perhaps as an aftermath of the Great Recession during which resales of commercial condominiums were infrequent, it is not rare to find that the owners association for a commercial condominium has become inactive or only slightly active. Record keeping and budgeting may have become ‘streamlined”, addressing little more than collecting minimal assessments to pay insurance premiums on common elements. The owner’s association may have no formal budget, no capital reserves, extreme deferred maintenance, scant, if any, record of meetings of the board of managers, and no centralized or organized record keeping system beyond a box in a filing cabinet in the back-office of one of the unit owners.

Because of the infrequency of unit transfers in recent years, and the possible inexperience of a record-keeper who may have gotten the record-keeping job by default – when the last remaining board member left following foreclosure of his or her unit during the Great Recession – obtaining and providing the resale disclosure documents and information required by §22.1 can be a challenge.

This challenge presents practical problems for the unit seller, unit buyer and the unit buyer’s proposed mortgagee when attempting to resell a commercial condominium unit. Not the least of these problems is delay and frustration in moving toward closing – which may ultimately sour a prospective buyer and its lender, and lead the buyer to back away from acquiring the unit at all.

Deferred maintenance of common elements affecting any unit in the condominium association could have an adverse financial impact on all unit owners.  For example, if a commercial or industrial condominium association is comprised of multiple commercial/industrial buildings, a required roof replacement, foundation repair, or other structural repair for any of the buildings, or a recognized environmental condition in the common areas, could be expensive, with the cost shared among all unit owners. Accordingly, when investigating the condition of a commercial/industrial condominium unit being considered for acquisition, due diligence may require having all common elements in the association inspected, rather than merely looking at the unit being considered for acquisition. This may be more expensive and may take more time than might ordinarily be expected when purchasing a stand-alone building that is not a condominium unit.

PRACTICE TIP

Consider when drafting a purchase agreement under these circumstances, who should bear the cost of inspecting all common elements in the association? Ordinarily the cost of “due diligence” is a buyer’s expense. But if extraordinary inspections of association common elements beyond the specific unit being acquired is required in the exercise of due diligence because the selling unit owner did not demand that the owners’ association be operated by a board of managers in compliance with the Illinois Condominium Property Act, should the buyer bear this extraordinary expense, or should the seller?

There is no easy solution for this challenge, especially for a buyer planning to purchase a unit in one of these inactive associations. The best advice may be to become proactive – whether as an existing unit owner or upon becoming a new unit owner, to reactivate and invigorate the owners’ association and its board of managers, and to take steps to run the owners association in a businesslike manner, in compliance with the Illinois Condominium Property Act.

Generally speaking, owners of commercial condominiums are business people. They should demand that the association be run like they would run any business or investment property they invest in, if they expect to be successful.

If you have a viable solution to this challenge, please comment with your insights and practical suggestions.

Thank you in advance for participating in this discussion.

Kymn

 2016 Updat

Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

• Shopping Center
• Office building
• Large Multifamily/Apartments/Condominium Project
• Sports and/or Entertainment Venue
• Mixed-Use Commercial-Residential-Office
• Parking Lot/Parking Garage
• Retail Store
• Lifestyle or Enclosed Mall
• Restaurant/Banquet Facility
• Intermodal logistics/distribution facility
• Medical Building
• Gas Station
• Manufacturing facility
• Pharmacy
• Special Use facility
• Air Rights parcel
• Subterranean parcel
• Infrastructure improvements
• Other commercial (non-single family, non-farm) property

A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.

This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE  directly to purchase the entire volume.

The COVENANT OF QUIET ENJOYMENT
What Is It? — General Principles

It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); 64 East Walton, Inc. v. Chicago Title & Trust Co., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); Berrington v. Casey, 78 Ill. 317, 319 (1875); Wade v. Halligan, 16 Ill. 507, 511 (1855).

A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] Checkers, Simon & Rosner v. Lurie Co., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. Blue Cross Ass’n, supra, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. Checkers, Simon & Rosner, supra, 1987 WL 18930 at *3.

An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980).

If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. 64 East Walton, supra, 387 N.E.2d at 755.

Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. Manzaro v. McCann, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”

HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW

In Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting Great Atlantic & Pacific Tea Co. v. LaSalle National Bank, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).

The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the

I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there.

That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“Let the buyer beware!”]

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars versus when a deal goes bad. It’s like the old Fram® oil filter slogan during the 1970’s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the experienced exercise of due diligence.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”. If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do harp on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

POP QUIZ:

Here’s a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE: