A commercial purchase agreement allows for a seller to make a deal with an eligible buyer to transfer ownership of their real estate in exchange for cash or other trade. The buyer will commonly be required to deposit earnest money, known as “consideration”, for the contract to be valid.
The first draft of agreements is typically done by the seller’s attorney and then sent to the buyer for their input. The two parties exchange revisions until both accept a final document. The agreement will likely contain the common provisions discussed below, but it will be tailored to address the specific deal, including the specific type of property.
Purchase Contract Provisions
· “Whereas” Clauses
Often sale contracts start with a series of “whereas” clauses, also referred to as “recitals.” “Whereas” means literally “given the fact that,” and is a sort of introduction to the transaction, explaining the facts that led up to the contract. It’s generally accepted that recitals aren’t a part of a contract’s operative provisions. Accordingly, if a party views the language in a “whereas” clause to be a binding right or duty, it has to be taken out of the contract’s recitals and included in the body.
· Description of Property & “As-Is” Term
Depending on what is being conveyed, a contract will describe three types of property: real, personal, and other. Real property descriptions detail the land and improvements to be transferred with as much specificity as possible. If a legal description exists, it should be used, and if not, the contract should provide that the description will be amended following a survey.
If the personal property will be conveyed, the contract spells out those particular items. Because the seller may intend to keep some of the personal property, an exhaustive list of the items to remain is ideal to avoid confusion.
Other property interests can include such things as lease and contract rights, licenses, intellectual property, and warranties.
· Transfer Documents (Deeds, Assignments, and Bills of Sale)
Real, personal, and other property are transferred by different instruments, so let’s take a look at possible issues with each.
Because there is more than one type of deed, and they differ in the amount of protection given to the buyer, the contract must describe the type of deed to be used. The types, in order of the most protective of buyers to the least, are:
A general warranty deed, which “not only conveys to the grantee all of the grantor’s interest in and title to the property but also guarantees that if the title is defective or has a ‘cloud’ on it, such as a mortgage claim, tax lien, title claim, judgment, or mechanic’s lien, the grantee may hold the grantor liable.”
A special warranty deed (also called a limited warranty deed), “conveys the grantor’s title to the grantee and promises to protect the grantee against title defects or claims asserted by the grantor and any persons whose right to assert a claim against the title arose during the period in which the grantor held title to the property. In a special warranty deed, the grantor guarantees to the grantee that the grantor has done nothing during the time he held title to the property that might in the future impair the grantee’s title.”
A fiduciary deed is “used to transfer property when the grantor is acting in his official capacity as a trustee, guardian, conservator, or executor, etc. A fiduciary deed typically only warrants that the fiduciary is acting in his appointed capacity and the scope of his/her authority and doesn’t guarantee the title of the property.”
And lastly, a quitclaim deed is a “release by the grantor, or conveyor of the deed, of any interest the grantor may have in the property described in the deed. Generally, a quitclaim deed relieves the grantor of liability regarding the ownership of the property. … The holder of a quitclaim deed receives only the interest owned by the person conveying the deed. If the grantee of a quitclaim deed learns after accepting the deed that the grantor did not own the property, the grantee may lose the property to the true owner. If it turns out that the grantor had only a partial interest in the property, the quitclaim deedholder holds only that partial interest.”
As discussed below, a seller may be conveying its interests in leases, property-related contracts, licenses, permits, intellectual property, and other items. Generally, the buyer must determine whether the specific items to be conveyed are assignable and if it wants to assume them. If they can, and it does, the seller will transfer its interest in each of my assignments delivered at closing.
· Bills of Sale
A bill of sale is the usual method to convey the persona of the l property, and, like the contract itself, should identify the items transferred with as much specificity as possible.
· Purchase Price, Adjustments, and Earnest Deposit
The purchase price is typically a set amount, subject to adjustments at closing. However, sometimes the amount will be based on square footage and the property’s actual size won’t be determined until a survey has been done. If personal or other property is included in the sale, the parties may, generally for tax purposes, allocate what portions of the purchase price are attributable to the land, the personal property, and the other property interests conveyed.
Additionally, the contract should detail what adjustments to the purchase price will be made at closing. Generally, these relate to apportioning property expenses to each party for items such as closing expenses, real and personal property taxes, assessments, rents, and security deposits.
Further, the contract will dictate who holds the deposit (typically a title insurance company or another neutral third party) and what happens to the deposit if the deal closes or not. Typically, if (i) the transaction closes, the deposit is credited towards the purchase price, (ii) the deal didn’t close because the buyer exercised one of its rights to terminate (e.g., one or more of the buyer’s contingencies weren’t satisfied or waived), the deposit is returned to the buyer, (iii) the sale didn’t close because the buyer defaulted, the deposit is kept by seller, and (iv) if the sale didn’t close because seller defaulted, the deposit returned to buyer.
Additionally, the contract should state whether the return or retention of the deposit resulting from default will prevent the non-defaulting party from seeking damages under a breach of contract action.
· Buyer’s Contingencies
Because a buyer won’t know everything he needs to know about the property at the time the contract is signed, they will be given a certain amount of time to review those aspects of the property he believes important. If following the buyer’s review it determines that any one of these items is not satisfactory (as defined for each contingency), it may (i) allow the seller to act to make the item satisfactory, (ii) accept the item as it is and waive its right to terminate the contract, or (iii) terminate the contract.
To determine if contingency items are satisfactory, it needs access to certain information in the seller’s possession, including, for example, leases, property-related contracts, permits, licenses, notices of land use or environmental violations or issues, and financial information such as income and expense statements and tax returns. Accordingly, the contract will require the seller to provide all such property-related documents, as well as the obligation to provide any updates or new documents through closing.
· Default Provisions
The agreement should clearly define what constitutes a default, how parties must be notified of the default, whether they are permitted to attempt to cure, how long they have to cure, and what happens upon an uncured default and termination of the contract. For example, the contract may require the buyer to return to the seller all materials provided as a part of the buyer’s due diligence.
· Seller Representations and Warranties
A seller will make certain representations and warranties relating to the property. They should be spelled out explicitly, note whether some or all are limited to the seller’s knowledge, and state whether each survives closing, and if so, for how long.
· Other Seller Duties – Continuing Management, Insurance, Damage to Property
Buyers want to ensure that the property at closing is in virtually the same condition as when they entered into the contract. To ensure this happens, a buyer will obligate the seller to continue (i) to operate and reasonably maintain the property, (ii) reasonably lease the property (if there is an important tenant, the buyer may want to lithe mit seller’s ability to modify or terminate that lease without the buyer’s prior approval), (iii) keep the property insured, and (iv) not encumber the property without the buyer’s consent.
Your commercial broker should have the standard government-approved contract form that is commonly used for the purchase and sale of commercial properties.
On this form, which is many pages long, you will find all kinds of clauses to cover all possible situations that could never come with your agreement.
· Broker Involvement
Where one or more brokers are involved in the sale, the contract should identify those brokers and which party is responsible for their fees. It should also note that no other brokers were used, but if any unnamed brokers claim fees, the party that dealt with them is responsible for their fees. Where there were no brokers, the contract should state this.
Assignment provisions determine whether the buyer can assign its rights under the purchase agreement to another party. While the parties may disagree on whether an assignment should be permitted, a compromise may allow for limited assignments to (i) specifically identified assignees, or (ii) any other party if the seller first consents.
· Boilerplate Provisions
At the end of almost every CRE purchase contract are several pages of so-called “boilerplate clauses,” or clauses that supposedly are near-identical for all contracts, and thus less important. This is of course not true. Not only is every commercial real estate sale agreement different, but also these clauses can significantly impact the parties’ rights and obligations.
The contract should detail when and where closing will occur, and who will conduct it. Often parties will include the clause that “time is of the essence” as to the closing date, meaning there is no flexibility in the date. If closing doesn’t occur on that date the buyer can terminate the contract.