Tennessee Commercial Disclosures: Escrow & Due Diligence

Unlike residential tenancy in Tennessee—which requires extensive consumer-protection disclosures regarding lead paint, owner contact information under the 2024 Residential Tenant Transparency Act (HB 1814 / Public Chapter 674), and habitability standards—commercial leasing operates primarily under the common law doctrine of "caveat emptor" (buyer beware). This framework dictates that extensive due diligence drives the transaction. However, Tennessee law provides critical exceptions for small commercial spaces and the mandatory disclosure of known latent defects.

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 (a requirement limited by T.C.A. § 66-28-102 to counties with populations exceeding 75,000), commercial leases are governed strictly by the lease contract.

• 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. Mandated Disclosures for Small Spaces

Under T.C.A. § 66-7-108, owners of smaller commercial or industrial properties have specific statutory disclosure obligations:

• Applicability: This applies to commercial spaces of 1,500 sq. ft. or less and industrial spaces of 5,000 sq. ft. or less.
• Disclosure Requirement: Upon request by a prospective tenant, the owner must furnish a signed disclosure statement detailing the property's compliance with local and state fire, plumbing, and electrical codes.

3. Environmental Liability and Latent Defects

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.

Latent Defects Exception

Despite the general rule of caveat emptor, Tennessee common law requires landlords to disclose known "latent defects." These are material facts or conditions affecting the property's safety or suitability that are not discoverable by a reasonable inspection (Hines v. Wilcox, 96 Tenn. 148; Simmons v. Evans, 185 Tenn. 282). Failure to disclose known latent defects can lead to severe fraud or misrepresentation litigation.

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 must disclose any known prior environmental contamination, underground storage tanks (USTs), or ongoing remediation efforts.
• 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.

4. 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).

5. 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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