In a commercial real estate transaction, it is natural to focus on a few core issues such as the property to be acquired, pricing, and mortgage terms. However, there are many more issues that must be addressed in order to ensure a smooth transfer and avoid disputes or unexpected consequences later. Purchase and sale agreements may become even more complex if the sale involves more than real property, such as equipment that may be transferred with a manufacturing facility.
This is not a circumstance in which a business can safely default to a form contract or repurpose an agreement used in connection with an earlier real estate transaction. In negotiating and drafting a commercial real estate purchase and sale agreement, each party should be represented by an experienced counsel to ensure that all key issues are addressed and that each party fully understands the ramifications of the agreement.
Commencing the Purchase and Sale Process
Often, a commercial real estate transaction will commence with a Letter of Intent. A Letter of Intent typically contains the key aspects of the agreement, and is sometimes described as an “agreement to agree.” The legal effect of a Letter of Intent depends on the terms set forth in the letter and the degree to which one party may have reasonably relied upon the letter.
Working with an attorney to draft a Letter of Intent will help ensure that you adequately express your intentions and keep the transaction moving forward without inadvertently binding yourself.
Purchase and Sale Agreements
Whether or not a Letter of Intent is issued, a full contract will ultimately be required, and must satisfy the Statute of Frauds. Often, these contracts are so detailed as to include various conditions precedent to closing, closing procedures and other details unrelated to the property itself.
The parties must also agree as to:
- Conditions precedent, such as inspection, title search and other measures to insure the condition of the premises and the quality of title
- The precise description of the premises, including any easements, improvements, fixtures, and other property to be included in the sale
- The type of deed to be delivered at closing
- Whether the property is being transferred “as is” or the seller is making representations as to the condition of the property
- Not only the total purchase price, but how that purchase price is allocated among real property, equipment and any other property being transferred
- Whether the contract is contingent upon financing, and the parameters of that contingency
- Procedures for notification of tenants, if applicable
- Escrow instructions
- Risk of loss prior to closing
Each of these decisions may have significance or legal ramifications that an experienced commercial real estate attorney can explain before or during negotiations. For example, it may not seem important to specify a breakdown of the purchase price since the buyer will pay and the seller will receive the aggregate amount. However, this allocation may have significant tax consequences.
Of course, there are many other issues to be considered, some standard and some specific to a particular transaction. Some most common include adjustments for real estate taxes, insurance, rental income, existing security deposits, or other items.
The Risks of Form or Copycat Real Estate Contracts
A valid contract requires a meeting of the minds. That means that if a contract is worded in such a way that it is reasonable for each party to construe a key provision differently, the resulting conflict could lead to voiding or termination of the contract.
While termination of the contract is an extreme outcome, failure to clearly address a key issue may lead to costly litigation, delayed closing and other frustrating and expensive effects. When each party works with an experienced commercial real estate lawyer, negotiations will be better balanced, the likelihood of overlooking an element or failing to achieve a true meeting of the minds will be greatly reduced, and the transaction is likely to proceed with greater ease and certainty.
Get Help from a Commercial Real Estate Lawyer
The attorneys in our firm have extensive experience with commercial real estate, including the negotiation and drafting of Commercial Real Estate Purchase and Sale agreements. When you are taking a step as significant as purchasing commercial real estate for your business, get the help you need to ensure that your interests are fully protected and you have a clear understanding of the details of your commitment and what you are receiving in return. Contact KPPB LAW for more information.
