Tennessee Commercial Property Disclosures: The Escrow Rule and Due Diligence

Unlike residential tenancy in Tennessee—which requires extensive consumer-protection disclosures regarding lead paint, owner contact information under the 2025 Transparency Act, and habitability standards—commercial leasing operates under the assumption of "caveat emptor" (buyer beware). Extensive due diligence drives the transaction rather than mandated disclosure forms. However, one specific financial disclosure crosses the residential/commercial divide.

1. Security Deposits in Commercial Leases

Unlike residential tenancies in Tennessee, where T.C.A. § 66-28-301 mandates that security deposits be held in separate accounts and their locations disclosed to tenants, commercial leases are governed by contract law.

• No Statutory Escrow: There is no Tennessee statute requiring commercial landlords to hold security deposits in separate accounts or to disclose the bank's location to the tenant.
• Contractual Freedom: The handling, return, and interest (if any) on a commercial security deposit are determined entirely by the terms of the lease agreement.
• Caveat Emptor: Tenants should negotiate specific protections regarding the return and segregation of their deposit within the lease contract.

2. Environmental Liability and Disclosures

Environmental contamination represents one of the largest hidden risks in commercial real estate. Under state and federal law, a current owner (and in some cases, a tenant) can be held strictly liable for cleaning up hazardous waste on a property, regardless of who originally caused it.

Phase I Environmental Site Assessment (ESA)

To establish an "innocent landowner" defense, prospective commercial tenants routinely commission a Phase I ESA.

• Landlord Obligation: While not legally required to commission the ESA themselves, landlords should fully disclose any known prior environmental contamination, underground storage tanks (USTs), or ongoing remediation efforts. Failure to disclose known material hazards can lead to severe fraud or misrepresentation litigation.
• Asbestos: Older commercial buildings in heritage areas of Nashville or Memphis may contain asbestos-containing materials (ACMs). Landlords should disclose known ACMs, as tenants may disturb them during a tenant build-out.

3. Zoning and Permitted Use

A commercial landlord should ensure the tenant's intended use complies with the local municipal zoning code.

• The Lease Protection: A well-drafted Tennessee commercial lease explicitly states that it is the tenant's sole responsibility to verify that the property is zoned properly for their specific business and to obtain all necessary permits, variances, and licenses.
• If the tenant requires a conditional use permit, the lease should dictate what happens if the local government denies the permit (e.g., the lease becomes void, or the tenant remains fully liable).

4. Americans with Disabilities Act (ADA) Compliance

The ADA requires places of "public accommodation" (retail stores, offices, restaurants) to be accessible.

• Landlord Responsibility: Typically responsible for ensuring common areas (parking lots, building entrances, shared lobbies) meet current ADA standards.
• Tenant Responsibility: Usually responsible for ADA compliance within their specific, leased suite.
• Disclosures: Landlords should disclose any known instances where the building currently fails to meet ADA compliance to properly and contractually allocate the risk and cost of remediation in the lease agreement.

How Landager Helps

Managing Tennessee properties across different URLTA and non-URLTA counties requires precision. Landager helps you maintain organized documentation for commercial due diligence and ensures your residential portfolios strictly adhere to the T.C.A. § 66-28-301 escrow requirements where applicable, keeping you audit-ready and legally protected.

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