Selling commercial property in California is won or lost before the property goes to market. A buyer’s due diligence will surface every open permit, every lease inconsistency, every unreconciled CAM charge, and every environmental question — and each one discovered mid-escrow becomes a retrade, a price reduction, or a dead deal. A seller who assembles and cleans up the file first controls the process; a seller who does not spends the escrow period defending.
The other half of the work is the contract. Commercial sellers in California can allocate risk far more aggressively than residential sellers — as-is terms are enforceable, liquidated damages are presumed valid, and representations can be narrowed and given short survival periods. But that latitude has limits, and it does not reach fraud or a known hazardous substance release.
The Holmes Law represents California sellers of commercial, industrial, retail, and multifamily property on sale documentation, disclosure strategy, tenant and lender issues, tax and withholding, and closing.
Prepare the File Before You List
Assemble the diligence package as though you were the buyer:
- Leases — every original, every amendment, every side letter, every guaranty. Missing amendments and unrecorded side letters are the most common source of mid-escrow surprises.
- Rent roll reconciled against the leases and against actual deposits. A rent roll that does not tie out invites the buyer to distrust everything else.
- Financials — trailing statements, CAM reconciliations, budget versus actual, capital expenditure history, tax bills, insurance loss runs.
- Title. Order your own preliminary report early and clear what can be cleared — old deeds of trust never reconveyed, expired mechanic’s liens, stale UCC filings, abstracts of judgment against a similarly named party.
- Permits and code. Resolve open permits and code enforcement matters. Locate the certificate of occupancy and permit history for any improvements.
- Environmental. If a prior Phase I exists, know what it says before a buyer’s consultant finds it. A recognized environmental condition disclosed up front is a negotiation; one discovered late is a retrade.
- Service contracts — and check which are terminable on short notice, since buyers will require the ability to cancel.
- Seismic and accessibility. In California, know whether the building is subject to a local mandatory retrofit ordinance, and consider a CASp inspection.
Where financials and tenant information are being released, require a confidentiality agreement before the data room opens. Competitors tour properties.
Disclosure: Less Required, Not Less Risky
California’s Transfer Disclosure Statement regime under Civil Code section 1102 applies to residential property of one to four units, not to commercial property. There is no comparable statutory form for a commercial sale, and the natural hazard disclosure requirements that govern residential transfers do not apply in the same way — though many California sellers provide a hazard report voluntarily because buyers and lenders expect one.
What survives is the common law. A California commercial seller remains exposed to claims for fraud, intentional concealment, and negligent misrepresentation. Actively hiding a known defect, or making a statement that turns out to be false, creates liability no as-is clause reliably defeats.
And one statutory duty applies squarely: under Health and Safety Code section 25359.7, an owner of nonresidential real property who knows or has reasonable cause to believe that a hazardous substance has been released on or beneath the property must give written notice to the buyer before the sale. Failing to do so carries real consequences. This is not a form to file away — it is a disclosure obligation in an otherwise disclosure-light transaction, and it should be addressed deliberately.
The practical strategy mirrors the residential one: disclose in writing, early, and completely, and paper the file. Full disclosure combined with an as-is clause and a waiver and release is far stronger protection than an as-is clause alone.
Contract Terms From the Seller’s Side
The provisions a California commercial seller should negotiate hardest:
- A short due diligence period, and a deposit that goes hard at its end. Consider a structure in which a portion of the deposit is non-refundable from the outset, which filters unserious buyers.
- Liquidated damages. Under Civil Code section 1671(b), a liquidated damages clause in a commercial contract is presumed valid unless the challenging party proves it was unreasonable under the circumstances existing when the contract was made — the opposite of the residential presumption. Sellers should specify liquidated damages as the sole remedy for buyer default and set the amount deliberately.
- As-is, with a waiver and release and an express disclaimer of all representations other than those stated in the agreement, including a disclaimer of reliance on marketing materials, projections, and third-party reports.
- Narrow representations with a knowledge qualifier, a defined knowledge party, a short survival period, and a cap and basket limiting post-closing exposure. A representation that survives indefinitely with no cap is a liability that outlives the sale.
- No financing contingency where the market allows it, and tight limits on the seller’s obligation to cure title objections — typically an obligation to remove only monetary liens the seller created, up to a stated amount.
- Access agreement terms — insurance, indemnity, restoration, restrictions on tenant contact, and a prohibition on invasive testing without written consent.
- Assignment. Buyers routinely ask to assign to an affiliate or to an exchange entity; permit it while keeping the original buyer liable.
Tenant Issues That Can Derail a Sale
Purchase options and rights of first refusal. Check every lease before signing a listing agreement. A tenant with a right of first refusal must be given the opportunity the lease requires, and a sale completed in violation of one can be unwound. Obtain a written waiver, or run the notice process properly and on schedule.
Estoppel certificates. Buyers will make delivery of estoppels a closing condition. Sellers should agree only to commercially reasonable efforts, negotiate the required percentage and which tenants are “major,” attach the agreed form to the purchase agreement, and resist any obligation to deliver an estoppel a tenant simply refuses to sign. Where a seller offers a backstop certificate covering a non-responding tenant, it should carry a short survival period that expires when the tenant later delivers.
Outstanding landlord obligations. Unfunded tenant improvement allowances, unpaid leasing commissions, free rent periods, and unperformed landlord repair obligations will be identified and credited against the price. Know these numbers before pricing the property.
Security deposits must be transferred or credited at closing, with tenants notified. Residential tenants in a multifamily sale bring an entirely different overlay — California’s just cause and relocation requirements, plus any local rent stabilization ordinance — and a seller should never promise vacant delivery without confirming it can lawfully be achieved.
Existing Debt
Pull the loan documents early. A conventional loan may carry a prepayment premium or yield maintenance. A securitized loan frequently cannot be prepaid at all and must be defeased — an expensive, technical process requiring specialized counsel, a defeasance consultant, and several weeks of lead time. Nothing derails a commercial closing faster than discovering a defeasance requirement thirty days out.
Where the buyer will assume the loan, the lender’s consent process, transfer fee, and underwriting of the buyer and any replacement guarantor should begin immediately. Confirm also that the seller’s carve-out guarantor is released at closing — an overlooked release leaves a personal guaranty in place on a property the seller no longer owns.
Tax and Withholding on a California Commercial Sale
The tax analysis should be run before the property is listed, because the answer sometimes changes the transaction.
- Gain and recapture. Depreciation taken over the holding period is recaptured on sale — unrecaptured section 1250 gain is taxed federally at a higher rate than long-term capital gain. On a property held for decades, recapture can be a large share of the total tax.
- California tax. California does not give capital gains a preferential rate; the entire gain is taxed as ordinary income at California rates. The net investment income tax may also apply federally.
- FTB withholding. Escrow must withhold and remit a percentage of the total sale price — 3⅓% by default, or an optional gain-based alternative — unless an exemption is properly certified on Form 593.
- FIRPTA. A foreign seller faces federal withholding on the amount realized, subject to reduction through a withholding certificate, which takes time to obtain.
- 1031 exchange. Deadlines are absolute: 45 days to identify replacement property, 180 days to close. The qualified intermediary must be engaged before the relinquished property closes — a seller who takes the proceeds first has destroyed the exchange. Note California’s clawback: where California property is exchanged for property outside California, the taxpayer must file an annual information return with the Franchise Tax Board (Form 3840) tracking the deferred gain, and California taxes that gain when it is eventually recognized.
- Installment sale treatment can spread gain across years, at the cost of credit risk and complexity.
- Transfer taxes. County documentary transfer tax applies, and a number of California cities impose substantial additional transfer taxes on higher-value commercial sales — a cost that should be identified and allocated in the contract, not discovered on the settlement statement.
Entity sale versus asset sale. Sellers sometimes propose selling the LLC that owns the property rather than the property itself. Buyers resist, because they inherit the entity’s history and liabilities. And it does not reliably avoid California property tax reassessment: under Revenue and Taxation Code section 64, a transfer of more than 50% control of an entity, and certain cumulative transfers of original co-owner interests, constitute a change in ownership, with reporting obligations to the State Board of Equalization and penalties for non-compliance. California courts have also held that documentary transfer tax can apply to entity transfers amounting to a change in ownership even without a recorded deed. Analyze the structure with counsel before proposing it.
Where business assets — inventory, equipment, a going concern — are being conveyed along with the real property, consider whether California’s bulk sale notice requirements apply, and allocate the purchase price among asset classes in the contract, since the allocation drives the tax treatment for both sides.
Selling as a Fiduciary or Co-Owner
Where the seller is a trust, an estate, or a multi-member entity, authority has to be confirmed before marketing. A successor trustee sells with a certification of trust under Probate Code section 18100.5, provided the property was actually deeded into the trust. A personal representative in probate sells either after a Notice of Proposed Action under the Independent Administration of Estates Act, or with court confirmation and the possibility of an overbid at the hearing.
An LLC or partnership seller needs to confirm that the operating or partnership agreement authorizes the sale and identify who must approve it. A co-owner who wants to sell against the wishes of the others faces a partition action unless the agreement provides a buy-sell mechanism — which is the reason those provisions belong in the operating agreement at formation.
Frequently Asked Questions
Do I have to give disclosures when selling commercial property in California?
There is no Transfer Disclosure Statement for commercial property, but you remain liable for fraud and concealment, and Health and Safety Code section 25359.7 requires written notice to the buyer of a known hazardous substance release on nonresidential property.
Will an as-is clause protect me?
Partly. As-is provisions with a waiver and release are enforceable in California commercial transactions, but they do not defeat claims for fraud or intentional concealment. Full written disclosure alongside the as-is clause is what actually protects a seller.
A tenant has a right of first refusal. Can I still sell?
Yes, but the right must be honored — either by running the lease’s notice process correctly or by obtaining a written waiver. Selling in violation of a right of first refusal can result in the sale being unwound.
Can I do a 1031 exchange into property in another state?
Yes, subject to the 45- and 180-day deadlines and engaging a qualified intermediary before closing. California requires an annual information return tracking the deferred gain on California property exchanged out of state, and taxes that gain when recognized.
Can I sell the LLC instead of the building to avoid reassessment?
Usually not. Revenue and Taxation Code section 64 treats a transfer of more than 50% control, and certain cumulative transfers, as a change in ownership triggering reassessment, with reporting requirements and penalties. Documentary transfer tax may apply as well.
Speak With a California Commercial Real Estate Attorney
The Holmes Law represents California sellers of commercial and investment property on pre-listing preparation, purchase and sale agreements and as-is risk allocation, disclosure strategy, tenant estoppels and lease issues, loan payoff and assumption, 1031 exchanges and withholding, entity and fiduciary authority, and closing.
To discuss a commercial sale, contact the office. You may also want to review our pages on California real estate law, CA commercial purchase, and CA residential sales.