When it comes to contracts for commercial real estate, there is no one size fits all. In fact, everything is up for negotiation. And contracts can be any length and go into any level of detail, not to mention have any number of revisions, so it’s vital that both the seller and buyer of commercial real estate understand the terms and provisions included in that contract.
Of course, the purpose of a CRE purchase and sale agreement is multi-fold. It details the property specs, defines stakeholder rights and responsibilities and walks through the necessary steps for the transaction to be completed. The initial document is usually developed by the seller’s legal team, after which the buyer’s input is gathered and the two can begin making changes until they come to an agreement.
With so much at stake, it should be no surprise that commercial real estate sale and purchase agreements can be long and complex. But here are the essentials you should know.
Recitals, or “whereas” clauses
Whereas clauses generally address what led up to the contract. Overall they are not considered to be binding provisions; if they are, they must be included in the body of the agreement instead.
Contracts will describe the property that is being conveyed, whether it is real property, personal property and/or property interests.
Documents for property transfer
Different types of property transfers require different documentation. Deeds such as a general warranty deed, special/limited warranty deed, fiduciary deed or quitclaim deed will be described in the contract. If a buyer is assuming interest in leases, intellectual property or other permits and such, this will be detailed in the contract as assignments. Personal property that is being conveyed will be done so through a bill of sale.
Details on the purchase price, adjustments to it and earnest money
In addition to the purchase price of the property, the contract should also contain any adjustments made for things like closing costs and taxes, who is holding the earnest deposit and what will happen with that money if the deal does or does not close.
Contingencies for the buyer
Buyers are given a period of time to examine important aspects of the property. Contingencies in the contract vary but can be related to financing, the property title review and survey, allowable land use, property conditions, inspections, existing tenant leases and more.
What constitutes default
Contracts must spell out what amounts to a default, and the necessary and allowed follow up in the case of default. The contract should also address conflict resolution and how a breach of contract will be handled.
Representations, warranties and duties of the seller
Any representations and warranties related to the sale of the property must be detailed in the contract. This typically can include that the property has no encumbrances or land use violations, that all necessary permits are secured and much more
Duties of the seller as far as continuing to care for the property and maintaining it through the sale will typically also be explained. This ensures that the buyer gets a property that is in comparable condition to when they entered the contract. The purchase agreement should also explain the expectations if damage occurs to the property in the interim.
Involvement of brokers
If brokers are involved in the transaction, the contract will detail who they are and who is covering their fees. If a broker is not listed who later bills a fee, the party who worked with them must cover the expense.
Assignment and boilerplate provisions
An assignment provision offers specifics about the buyer’s ability to assign its purchase agreement rights to another party. Boilerplate clauses are included in nearly every commercial real estate sale. They typically address additional rights and responsibilities of both parties, and although this is a standard section, the particulars are important and should be fully reviewed and understood.
Details of the closing, such as where it will be, when it is scheduled and who will conduct it, will be listed here.
Letter of intent and confidentiality agreements
A letter of intent is often drafted early on to spell out the particulars of the transaction. Also, a confidentiality agreement often is drafted to protect sensitive information that the buyer must review, but which should not be released publicly. Both of these items are typically included when the contract is drawn up or attached as an exhibit to the contract.
Understanding CRE sale and purchase agreements
Knowing the many different aspects of a CRE sale and purchase agreement is an important step in the process of buying or selling commercial real estate. Use this primer for an overview and you’ll have a better understanding of what to expect and how you will play a role in the development of the agreement.