Selling commercial real estate in Washington is as much about managing post-closing exposure as it is about price. The representations a seller makes, the disclosure statement it delivers, the way it handles tenant rights and loan payoff, and how the transaction is structured for tax purposes all determine whether the sale is truly finished at closing. Holmes Law works with owners, investors and closely held businesses as a Washington commercial sales attorney, preparing the property for sale, negotiating the purchase and sale agreement, and coordinating the closing with lenders, tenants, the exchange intermediary and the escrow agent.
Several Washington rules shape a commercial sale. The seller disclosure statute, chapter 64.06 RCW, has a commercial form that must be delivered unless the buyer waives it. The real estate excise tax applies to deeds and to transfers of controlling interests in entities. The state’s excise tax successor liability rule affects sales of operating businesses. And because Washington has no personal income tax and its capital gains tax exempts real estate, the tax planning focus is federal. Michael Holmes is admitted in Washington and works remotely with commercial clients statewide. This page is general information, not legal advice for your sale. For the broader practice area, see the Washington real estate page.
Preparing a Commercial Property for Sale With a Washington Commercial Sales Attorney
A seller who organizes the property’s records before marketing it controls the diligence process rather than reacting to it. A typical data room includes the vesting deed and a current title report, the most recent survey, all leases and amendments with a certified rent roll, operating statements, service contracts, property tax statements, environmental reports, permits and certificates of occupancy, warranties and insurance information.
Reviewing the title report early lets the seller clear old deeds of trust, expired easements, judgment liens or mechanics’ liens before a buyer raises them as objections. Reviewing the leases early surfaces tenant rights of first refusal or offer, options, exclusives and relocation rights that could affect the deal. And reviewing the loan documents identifies prepayment premiums, yield maintenance or defeasance requirements that change the net proceeds.
Listing Agreements, Letters of Intent and Confidentiality
Most commercial sales begin with a listing agreement with a commercial broker. Washington’s real estate brokerage relationships law, chapter 18.86 RCW, sets out the duties brokers owe to the parties they represent and to other parties, but the listing agreement itself governs the commission, the term, any tail period after expiration and whether the seller owes a fee for a sale to a buyer the seller found on its own. Sellers should read those terms before signing, particularly if a tenant or neighbor is a likely purchaser.
Serious buyers usually submit a letter of intent before a contract is drafted. A letter of intent is typically non-binding on price and terms, but it may contain binding provisions on confidentiality, exclusivity and access to the property. An exclusivity period takes the property off the market, so the seller should limit its length and tie it to prompt delivery of a draft agreement. Washington courts look to the parties’ objective intent, so a letter of intent should state clearly which paragraphs are binding and which are not.
Before sharing leases, financial statements and tenant information, the seller should have prospective buyers sign a confidentiality agreement that restricts use of the information, prohibits contacting tenants and employees without permission, and requires return or destruction of materials if the deal does not proceed. These steps protect the property’s value if the first buyer walks away.
Seller Representations and the Commercial Disclosure Statement
The commercial disclosure statement
RCW 64.06.013 requires a seller of commercial real estate to deliver a disclosure statement in the statutory form, not later than five business days after mutual acceptance unless otherwise agreed, unless the buyer has expressly waived it or the transfer is exempt. Under RCW 64.06.010(7), if any question in the environmental section would be answered “yes,” the buyer may not waive receipt of that section. Under RCW 64.06.050, a seller is not liable for errors, inaccuracies or omissions in the statement unless the seller had actual knowledge of them. Accurate answers, with reports attached and explanations given, are the seller’s best protection.
Contractual representations and limits on liability
The purchase and sale agreement is where the real risk allocation happens. Sellers should aim to:
- Qualify representations by the seller’s actual knowledge, and define whose knowledge counts.
- Sell “as is, where is,” with an express disclaimer of reliance on anything not written in the agreement.
- Limit the survival period for representations after closing.
- Cap total liability and set a minimum threshold, or basket, before claims can be made.
- Provide that any representation the buyer learns is untrue before closing is deemed modified, or gives the buyer a right to terminate rather than a claim after closing.
- Carve out environmental matters clearly, including whether the seller indemnifies the buyer for pre-closing contamination.
Washington’s Model Toxics Control Act, chapter 70A.305 RCW, makes past owners who owned the site at the time of a release strictly, jointly and severally liable for remedial costs. Selling the property does not end that exposure. A seller with known or suspected contamination should consider remediation, an environmental covenant or a negotiated indemnity rather than relying on the contract’s “as is” language alone.
Earnest Money and Liquidated Damages
Sellers want a meaningful deposit that becomes nonrefundable after the due diligence period. Washington law limits what a seller may keep. Under RCW 64.04.005, if a written purchase and sale agreement provides that forfeiture of earnest money is the seller’s sole and exclusive remedy for the buyer’s failure to close, the amount forfeited as liquidated damages may not exceed five percent of the purchase price. Sellers who want broader remedies, such as actual damages, must preserve them in the agreement and be prepared to prove them. The choice should be made deliberately when the contract is negotiated, because the default in a form agreement may not match the seller’s priorities.
Real Estate Excise Tax and Entity Sales
REET on a deed transfer
Washington’s real estate excise tax under chapter 82.45 RCW applies to the sale of real property and is customarily paid by the seller. The state rate is graduated by bands of the selling price, with thresholds the Department of Revenue adjusts every four years, and local jurisdictions add their own REET. Because the tax is calculated on the full price, it is a significant closing cost on larger commercial sales and should be built into the seller’s net proceeds analysis from the start.
Controlling interest transfers
Selling the membership interests of an LLC that owns the property does not avoid REET. A transfer or acquisition of a controlling interest, fifty percent or more, in an entity that owns Washington real property within a 36-month period is taxable, measured by the true and fair value of the real property. A controlling interest transfer return must be filed with the Department of Revenue, and the sale agreement should say which party files it and bears the tax. Sellers who have admitted new investors or redeemed partners in recent years should review those transfers before a sale, because they can combine with the sale to cross the threshold.
Successor Liability and Sales of an Operating Business
When the sale includes an operating business, not just the building, Washington’s successor liability statute becomes a closing issue. Under RCW 82.32.140, a buyer who acquires a business or its stock of goods must withhold from the purchase price enough to pay the seller’s unpaid state excise taxes. If the seller does not pay within ten days, the buyer becomes liable. The buyer is protected by a Department of Revenue receipt showing payment in full or a certificate that no tax is due. Sellers should expect a sophisticated buyer to require tax clearance or a holdback in escrow, and should request the clearance early to avoid delaying closing.
Employment-related successor rules and assignments of contracts, licenses and permits must also be addressed. Many permits and liquor or other regulatory licenses do not transfer automatically, and the transaction should be sequenced so the business can keep operating.
Section 1031 Exchanges on the Relinquished Side
Many commercial sellers defer federal gain by completing a like-kind exchange under Internal Revenue Code § 1031. The seller must avoid actual or constructive receipt of the sale proceeds, which means a qualified intermediary must be engaged and the exchange agreement signed before the relinquished property closes. The seller then has 45 days after the transfer to identify replacement property and must acquire it by the earlier of 180 days or the due date of the tax return, including extensions. The purchase agreement should allow the seller to assign its rights to the intermediary and require the buyer’s cooperation.
Washington regulates exchange facilitators under chapter 19.310 RCW, including fidelity bond or other security requirements for exchange funds. Because Washington has no personal income tax, and its capital gains tax exempts real estate and gain on interests in privately held entities to the extent directly attributable to real estate the entity owns, a Washington property owner’s exchange planning is mostly about federal tax. The REET is still owed on the relinquished property sale. The Washington commercial purchase page covers the replacement side.
Tenant Rights of First Refusal and First Offer
Commercial leases frequently give tenants a right of first refusal (ROFR) or right of first offer (ROFO) to buy the property.
- A ROFR allows the tenant to match a bona fide third-party offer. The seller must deliver the offer on the terms the lease requires, wait out the response period, and close with the third party only on the terms offered.
- A ROFO requires the seller to offer the property to the tenant first, usually at a stated price, before marketing it. If the tenant declines, the seller can sell to others, often subject to a price floor.
Failing to honor a ROFR or ROFO can expose the seller to claims and cloud the buyer’s title, particularly if a memorandum of lease is recorded. The seller should obtain a written waiver from the tenant before closing, and the buyer and title company will usually require one. Tenant estoppel certificates, which buyers and lenders routinely request, should confirm that no purchase rights remain.
Loan Payoff, Prepayment Premiums and Defeasance
A seller’s lender must be paid off or the loan assumed. Many commercial loans restrict prepayment. Common structures include a fixed prepayment premium, yield maintenance that compensates the lender for lost interest, and defeasance, in which the borrower substitutes a portfolio of government securities for the real property as collateral so the lender continues to receive scheduled payments. Defeasance usually requires a successor borrower entity, a securities intermediary, accountants and counsel, and it takes time to arrange. A loan assumption may be possible instead, but lenders impose approval conditions and fees. The payoff structure should be understood before the price is set, because the cost can be substantial.
Deeds, Closing Documents and Post-Closing Obligations
Washington statutory deeds are set out in chapter 64.04 RCW. Commercial sellers often negotiate to give a bargain and sale deed under RCW 64.04.040 or a special warranty deed rather than a statutory warranty deed, which limits title covenants to the seller’s own period of ownership. The seller also typically delivers an assignment of leases, a bill of sale for personal property, an assignment of contracts and warranties, tenant notice letters, a non-foreign affidavit under FIRPTA, and the REET affidavit. Security deposits and prepaid rents are credited to the buyer. Post-closing obligations, such as rent reconciliations, common area maintenance true-ups and survival of representations, should be spelled out in the agreement. The Washington business law page covers winding up or restructuring the selling entity after the sale.
Frequently Asked Questions
Can a commercial buyer waive the Washington seller disclosure statement?
Yes, by express waiver, except that the buyer may not waive receipt of the environmental section if any environmental question would be answered “yes.”
Does selling my LLC instead of the property avoid REET?
Generally no. A transfer of fifty percent or more of an entity owning Washington real property within a 36-month period is a taxable controlling interest transfer.
How much earnest money can I keep if the buyer defaults?
If forfeiture is your sole and exclusive remedy, RCW 64.04.005 caps the amount at five percent of the purchase price.
Is my gain taxed by Washington?
Washington has no personal income tax, and its capital gains tax exempts real estate. Federal tax applies unless deferred, for example through a § 1031 exchange. REET applies to the sale.
What happens if I sell without offering the property to my tenant under its ROFR?
The tenant may have a claim against the seller and possibly against the property. Obtain a written waiver or follow the lease procedure before closing.
Do I stay liable for environmental problems after I sell?
Potentially. Under MTCA, an owner at the time of a release remains a liable person after the sale. Contract indemnities allocate cost between buyer and seller but do not bind Ecology.
Speak With a Washington Commercial Sales Attorney
A well-prepared seller controls the timeline, limits post-closing exposure and keeps more of the price. Holmes Law can prepare your disclosure and data room, negotiate the purchase agreement, coordinate your exchange and manage tenant and lender issues. If you are selling residential property, see the Washington residential sales page. Contact Holmes Law to schedule a consultation with Michael Holmes about your Washington commercial sale.