Is your business in possession of real estate that it no longer needs? While at first glance a strategy of merely locking the door or fence and waiting for a buyer or other user might seem a prudent solution, this approach can be rife with legal pitfalls.

For many companies, the current economic downturn has caused a broad contraction of operations. A common byproduct of this recession is an increase in the amount of real property that is unoccupied. Whether the surplus real estate in question is owned or leased, businesses in possession of such real estate interests should be mindful of a number of legal issues, including the following:

General Real Estate Issues

  • Many cities require that vacant sites be registered with city agencies and registration fees be paid.
  • The failure of a tenant to occupy or continuously use leased real estate may result in a default under its lease.  
  • Vacant real estate is often subject to theft of building materials and vandalism, which may be ameliorated only by extensive security measures.  
  • Owners of vacant buildings may be better off demolishing the buildings.  

Environmental Issues

  • Properties that are vacated or underutilized may be targets for illegal dumping, which could result in environmental liability and costly litigation.  
  • If underground or above-ground tanks exist at the property, they will likely remain subject to state and federal reporting, removal and remediation requirements, even if the property is otherwise unoccupied.

Tax Issues

  • Many taxing authorities offer property tax reductions and other benefits to owners and long-term lessees of vacant property.  
  • In certain circumstances, conveying, leasing or subleasing surplus real estate to a charity or municipality may result in a significant tax advantage for the owner.  
  • Some jurisdictions offer real estate tax incentives following the demolition of all or portions of abandoned improvements.  

State and Local Government Issues

  • A prolonged failure to occupy or maintain real estate may lead to violations of local building codes or liability of the property owner under state and local laws regarding abandonment and nuisance. This liability could result in costly legal proceedings, temporary restraining orders, fines and penalties.  
  • Many states, counties and municipalities offer economic development incentives to develop shuttered properties, including Recovery Zone Bonds, grants and low interest loan programs, TIF Districts and Enterprise Zones.  

Insurance

  • Damage and liability scenarios such as those mentioned above may not be covered under existing insurance policies, which alternatively may be restructured to provide potential cost savings.
  • A failure by an owner-insured to occupy real estate could jeopardize that party’s insurance coverage, and a failure to maintain required coverage in connection with a leasehold may constitute a default under the lease.