A commercial property transaction is a major undertaking and parties may lose important rights and assets if they only use boilerplate forms. A well-drafted sale and purchase agreement for commercial real estate addresses the specific transaction, contains common provisions and is well worth its cost and time if a conflict arises.
Depending on the sale, the contract will describe the property as real, personal and other. The other property interests may include lease and contract rights, licenses, intellectual property and warranties.
Real property descriptions contain specific descriptions of the land and improvements being transferred. Any existing legal description should be used, or it should state that the description will be amended after a survey.
For personal property, the contract will contain those items. A thorough list should be in the contract because the seller may want to keep some personal property.
If the agreement states that the property is being transferred as is, the seller makes no representations concerning the property’s condition. This limitation should reflect that seller’s representation or warranty in the agreement. But it will not protect a seller from fraud claims if they materially concealed or misrepresented property features.
Price, adjustments and earnest deposits
The purchase price is usually a set amount which may be adjusted at closing. It sometimes depends on the amount of square footage which may change after the survey.
The contract should specify adjustments to the purchase price that may occur at closing such as apportioning expenses for closing property taxes, rent and security deposits.
The contract will set forth who holds the security deposit, such as a title insurance company, and what happens to the deposit at the time the deal closes. It should also state whether return or keeping the deposit from a default prevents the non-defaulting party from seeking damages in a breach of contract action.
When the contract is signed, the buyer is unlikely to know everything about the property so they will receive some time to review its important aspects. If any of these are unsatisfactory, the buyer may grant the seller time to correct these items, accept the property as is and waive the right to terminate the contract, or terminate the contract.
The most common contingencies are the buyer’s ability to secure financing, satisfactory title and survey, acceptable conditions after inspections, lease reviews, property income and expenses, land use approvals and acceptable environmental conditions.
The agreement should define a default, how parties receive default notification, whether they can remedy it, the time for remedy and what happens if a default is not fixed and contract termination. It should also contain a conflict resolution process.
Representations and warranties
A seller will make certain representations that should be specific and indicate whether they are within the seller’s knowledge as well as whether these representations and warranties survive closing and how long these survive.
The common representations and warranties include:
- Property is free of encumbrances
- Property has no zoning or building code violations
- Property has all necessary permits
- Property has no environmental contaminations or violations
- Seller discloses all claims
- Only identified tenants have occupancy rights
- Seller has the authority to sign the contract
- Improvements have no material defects and are suitable for intended uses
- Contracts and financial documents provided to the purchaser are complete and accurate
To ensure that the property remains in the same condition at closing, the seller must operate or lease the property in a reasonable manner, keep it insured and may not encumber the property without the buyer’s approval. It should also describe the payment of damages before and after closing.
Contracts should contain the identity of any brokers in the sale and which party pays their fees. Assignment clauses state whether the buyer can assign their right under the purchase agreement.
Typical boilerplate terms address notice, attorneys’ fees, governing law, intervening events making contract unenforceable and dispute resolution, among other things.
The closing date, its location and who will conduct must be detailed along with the transfer documents that will be provided.
An attorney can help draft effective documents. Legal assistance may assure that the transaction meets a party’s needs.