Real Estate Condition Reports in Commercial Real Estate Transactions

Private and public sector clients often inquire about their obligations, if any, to provide a written real estate condition report when selling real estate. Under Wisconsin law, the obligation of a seller to provide a real estate condition report applies to the sale of real estate involving one to four dwelling units and the sale of property that does not include any buildings. It also applies to the sale of a condominium unit or time-share property. However, a buyer may waive, in writing, the right to receive the report. There are exceptions to the completion of the real estate condition report for real estate that has never been inhabited, for persons that are court appointed and who have never occupied the property, such as personal representatives or trustees, as well as for transfers of real estate that are exempt from the real estate transfer fee.

In most cases, a seller of a commercial property is not required to provide a real estate condition report. At times, issues may arise if the seller is working with a broker to list the property for sale, and the listing broker requests that the seller complete a real estate condition report.

In the standard WB-5 Commercial Listing Contract – Exclusive Right to Sell, the document includes language that the seller will complete a disclosure report to the best of the seller’s knowledge and authorizes the broker to distribute the report to parties interested in the property. There is a standard, state approved real estate condition report that can be used in these instances. This language likely relates to the broker’s duty to “inspect the real estate…and…make inquiries of the seller on the condition of the structure, mechanical systems and other relevant aspects of the property, as applicable. The licensee shall request that the seller provide a written response to the licensee’s inquiry.” Wis. Admin. Code § REEB 24.07(1)(b). Another reason for this is, in the standard, state approved commercial offer to purchase form there is language stating that the seller represents to the buyer that as of the date of acceptance the seller has no notice or knowledge of conditions affecting the property or transaction other than those identified in the real estate condition report.  If a real estate condition report is not completed and/or this language is not modified, it may result in an unintended general representation by the seller of no issues relating to the list of conditions affecting the property that are found in the commercial offer to purchase form.

Although completing a real estate condition report may assist the broker with meeting his or her obligations as a broker, it may not be in the best interest of the seller to complete the document. A seller that completes the real estate condition report may be exposing itself to risks related to potential misrepresentation and false advertising claims. Accordingly, a seller should be cautious in determining whether to complete the report and, if it does, the content thereof.

For instance, for school districts and other entities, there may not be a person who possesses the necessary historical information and documents regarding the property in order to fully and accurately complete the report. In addition, with old buildings that are no longer in use or have limited use, there are often legacy issues of which the owner may or may not be aware. Thus, the seller may decline to provide a real estate condition report and instead negotiate with the broker to revise language in the Commercial Listing Contract.

In addition, a seller may be selling the property in an “as is, where is” condition and, in that circumstance, may choose not to provide a real estate condition report. In those situations, it is incumbent upon the buyer to conduct its own due diligence. However, a seller should not conceal adverse facts within its knowledge that are not readily discoverable by the buyer.

There are alternatives that represent a middle ground approach. For instance, a seller may wish to limit the real estate condition report to the knowledge of a specific person, as opposed to the entire entity. Also, it may be advisable to use the standard, state approved real estate condition report, which provides language that the seller is not “aware,” specifically defined as “notice or knowledge” of the condition, as opposed to making broader representations concerning the overall condition of the property.

In summary, when a public or private entity is considering listing real estate for sale, it should carefully consider issues related to making representations and/or omissions regarding the condition of the property. If the entity will be listing the property with a broker, it may need to seek revisions to the Commercial Listing Contract. In addition, if an entity will be handling the sale of the real estate without the assistance of a broker, such as through a proposal process, it may wish to make clear in the request for proposal document that the property will be sold in an “as is, where is” condition. It may also be necessary to address language in the offer to purchase concerning representations regarding the condition of the property. It is advisable to diligently review the purchase documents to avoid the risk of future misrepresentation or false advertising claims.