Commercial Reasonableness and Expert Testimony in Real Estate Litigation

Real estate purchase and sale agreements often require a party to use commercially reasonable efforts. This standard is most appropriate when one of the parties to the contract needs the cooperation of a third party in order to satisfy a contractual requirement. For example, the delivery of tenant estoppel certificates is typically a condition precedent to the obligation of a buyer to close the purchase of a commercial property. Savvy sellers will not obligate themselves to deliver tenant estoppel certificates, since a tenant estoppel certificate must be signed by the tenant, who is not a party to the contract. Instead, the seller may agree to use commercially reasonable efforts to obtain the requisite tenant estoppel certificates. Similarly, if the property is encumbered by a mortgage and the seller and buyer wish to obtain the lender’s consent to the buyer’s assumption of such mortgage, the parties may agree to use commercially reasonable efforts to obtain the lender’s consent to such assumption.

The term “commercially reasonable” refers to the “commonly accepted commercial practices” of similarly situated businesses.[1] As explained by one commentator, “commercial reasonableness…depends on the juror’s ability to place herself in the position of a ‘man-in-the-trade.’”[2] As a result, in order to establish (or refute) commercial reasonableness, experts witnesses often “testify as to the standard of conduct in the relevant trade, thus equipping the juror with the knowledge that would enable her to pretend to be a “man-in-the-trade’”.[3] In other words, “the proper application of the term ‘commercial reasonableness’ requires the use of expert testimony to provide the fact-finder with … the prevailing standards of conduct in a particular commercial community.”[4]

The courts generally admit expert testimony on the issue of commercial reasonableness.[5] In certain cases, expert witness testimony is required in order to establish commercial reasonableness.[6] As in other jurisdictions, under California law, in order to provide expert testimony, the witness must have “special knowledge, skill, experience, training, or education sufficient to qualify him as an expert on the subject to which his testimony relates.”[7] Similarly, in federal court, the party offering expert witness testimony must show, among other things, that “the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue.”[8] As a result, when selecting an expert witness to testify as to commercial reasonableness, it is important to choose an expert with specialized knowledge of, and substantial experience with, the type of transaction at issue in the lawsuit.

Ken Miller has qualified as an expert witness on the issue of commercial reasonableness in real estate litigation, most recently in a federal court jury trial in August 2023, which trial resulted in a favorable settlement to the client.

[1] Citri-Lite Company v. Cott Beverages, Inc., 721 F. Supp 2d 912, 924 (E.D. Cal. 2010).

[2] “Commercial Reasonableness in Karl Llewellyn’s Uniform Commercial Code Jurisprudence”, 83 Va. L. Rev. 429, 447 (1997).

[3] Id.

[4] Id. at 451.

[5] United States v. Terrey, 554 F. 2d 685 (5th Cir. 1977) (accepting expert testimony on whether particular acts were commercially reasonable); Inventory Locator Service, Inc. v. Dunn, 776 S.W.2d 523 (Tenn. Ct. App. 1989) (considering expert testimony by both sides as to whether bank acted in commercially reasonable manner in cashing stolen checks).

[6] ITT Commercial Finance Corp. v. Riehn, 796 S.W.2d 248 (Tex. App. 1990) (expert testimony is required to establish the commercial reasonableness of a sale).

[7] Cal. Evid. Code §720(a).

[8] Fed. Rules of Evidence Rule 702(a).