Automotive real estate (such as automobile dealerships, agricultural equipment dealers and service centers) straddles retail and industrial uses. This unique characteristic means that buyers and sellers of automotive real estate should consider carefully various terms when entering into a purchase or sale transaction. Purchases and sales of automotive real estate typically also involve the purchase and sale of the business that operates on such real estate, with the result that such transactions often involve both an asset purchase and sale agreement relating to the operating business and a real estate purchase and sale agreement relating to the underlying real estate and improvements. This blog post examines the underlying real estate transaction and explores a few terms to keep in mind when dealing in these types of transactions.
Environmental
The environmental condition of the property is important for both buyers and sellers to understand given the increased risk of environmental contamination because of handling of gasoline, storage tanks and other hazardous materials at automotive sites. It is fairly common to see environmental concerns arise during the course of due diligence of automotive real estate, whether it is an oil separator issue, spillage at the site or an issue with fuel storage tanks. As a result, it is important to have an environmental engineer and environmental counsel involved early in the transaction to advise on practical next steps for dealing with those aspects. Almost all buyers will start with a Phase I environmental assessment of the property to determine if there are any indications of environmental conditions that require attention. In many cases, the Phase I environmental assessment will recommend that a Phase II environmental site assessment (Phase II) be conducted. A Phase II requires sampling of portions of the real estate with subsequent lab analysis. The mere fact that real estate has been used for automotive sales, leasing, and/or repair and maintenance of automotive vehicles sometimes means that an environmental consultant will recommend a Phase II. In some transactions, however, a Phase II may not be appropriate if all other aspects of the site show no concerns. If a Phase II is conducted, the sampling should be carefully reviewed to determine how to allocate liability and costs between the seller and buyer.
During the course of negotiations of purchase and sale agreements, it is common to see buyers and sellers acknowledge the somewhat inevitable requirement for a Phase II in the purchase and sale agreement by including proactive terms to address environmental conditions that may need to be cured. Such terms may include a provision requiring the seller to cure an environmental condition up to a specific dollar amount or percentage of the purchase price. In addition, if there are known environmental concerns, the purchase and sale agreement may allocate risk and responsibility for such concerns by addressing them in the seller's environmental representations and warranties and disclosure schedules and expressly allocating risk for such preexisting environmental conditions as between the parties.
Zoning
Compliance with zoning ordinances is another important aspect of an automotive real estate transaction that should be evaluated. It is important to consider all uses at the real estate to ensure that they comply with zoning laws and applicable permits or other governmental authorizations. For example, automobile dealerships may include service and repair of automobiles and outdoor inventory storage, which many jurisdictions treat differently than simply dealership use. Outdoor storage of inventory in particular may require special use permitting or a variance.
It is important to keep in mind that compliance with zoning is more than just use as an automotive dealership. Zoning compliance also relates to compliance with setback, height, parking and other surface requirements, In addition, many jurisdictions may require new certificates of occupancy upon a change in ownership and, in some jurisdictions, new site inspections are required to issue such new certificates of occupancy. It is important to account for all these steps of evaluation and abiding by the jurisdiction's specific requirements prior to closing.
Remedies
When an automotive real estate purchase and sale transaction is occurring in connection with a merger/acquisition transaction, one of the most negotiated provisions is the remedies provision. In the event there is a breach of a representation or warranty, the purchase and sale agreement will frequently describe what will happen between the parties. The agreement usually includes a defined period of time during which the seller remains liable for breaches of representations and warranties. Liability baskets and caps are often negotiated for the scope of the seller's liability following breach of representations and warranties, which are regularly tied to requirements in the merger/acquisition documents.
Further, a typical commercial real estate transaction often includes a remedy for specific performance in the event that a seller does not close a transaction. Though very typical in most commercial real estate transactions, it is less common to see specific performance as a remedy in automotive real estate purchase and sale agreements that are closing simultaneously with corporate transactions – or, if specific performance is included, it is very narrowly drafted to address specific circumstances in which it can be exercised.
Impact of Tariffs
As with many industries, there is a lot of uncertainty relating to the impact tariffs will have on auto dealerships. Depending on how tariffs end up being implemented, there may be supply chain delays and/or higher or unanticipated costs that could impact both inventory and construction of automotive sites. The increased cost of inventory owing to tariffs can impact valuations of goodwill for businesses. Any deadlines related to construction of improvements and alterations should address how the parties will adapt to the impacts of the tariffs. Some parties are claiming the impacts of the tariffs are in effect a "government shutdown" under force majeure provisions or arguing impracticality/impossibility doctrines. Other parties are allocating the risk of the tariffs to one party or the other or using a sliding scale. For example, a developer may accept the risk of a certain amount of delays and costs up to a certain threshold, with the owner accepting the remaining risk. In any event, the impact of tariffs is a growing reality, and many buyers and sellers of automotive real estate are finding it necessary to address such impact in their purchase and sale agreements.
Conclusion
The unique aspects of automotive real estate mean that such transactions should be considered carefully.
