Buying and selling commercial real estate is an excellent investment and something of particular interest now as we enter the post-pandemic world and return to the office. Before you sign on the dotted line, it is crucial to understand what needs to be in a purchase agreement for commercial real estate. If terms are left out or ambiguous, it can pave the way for litigation or a failed transaction.
The Names of the Buyer and Seller
One of the first items in an agreement for the purchase and sale of commercial real estate should be the parties’ names. While this may seem small, having the parties’ names spelled out and specified correctly is imperative.
As a recent event reminds us, there is a big difference between Elon Musk purchasing Twitter versus Tesla purchasing Twitter. When drafting and reviewing the purchase agreement, make sure it is clear if a person or business is buying the property. Further, ensure that the name on the contract matches the legal name of the person or entity.
The Purchase Price
In terms of what needs to be in a purchase agreement for commercial real estate, the purchase price is a very important and hotly contested item. You and the other party often spend considerable time going back and forth in negotiations about the price.
Because there are often many versions of a contract in circulation before the parties sign the final one, it is critical to make sure the deal you agree to is for the price you want.
The Description of the Commercial Real Estate
You need to know what you’re buying or selling. But the description of commercial real estate includes more than just the street address. Other parts of the description encompass the following:
- The legal description of the property,
- The structures on the property,
- Whether parking is included, and
- The tangible property that is being sold to the buyer along with the land and building.
The contract should specify everything sold to the buyer in exchange for the purchase price. Any inconsistencies or omissions can cause delays or confusion down the road, so it is vital to be as specific as possible.
The Closing Date
The purchase agreement should also indicate when the parties intend to close the transaction. Often, the initial closing date will change to accommodate scheduling conflicts or give the parties additional time to meet the contingencies in the contract. You and the other party should always have a closing date on the books. The agreement may be invalid without a closing date, and the other party may use this to back out of the deal.
How the Buyer Will Finance the Purchase
The contract will also detail how the buyer intends to procure the funds to purchase the property. In numerous instances, this will be part of the negotiation process when forming the contract. After all, the seller wants to ensure that the buyer will have the money to buy the property when it comes time to pay.
Because of this, the buyer and seller frequently agree on the financing terms to give both parties confidence that the transaction will successfully close. Another reason the parties should be transparent about how the buyer will pay for the transaction is that each financing option involves different steps and contingencies. When the parties know what to expect on this front, it can limit the opportunity for frustration and disputes later if everyone is on the same page.
What Inspections Will Be Performed and When
Another essential provision is what inspections will be performed on the property, when they will take place, and who will pay for them. The seller may order and pay for some examinations, while others are the buyer’s responsibility.
Included in this category are what rights the buyer has to request repairs. The contract’s language determines whether the buyer can ask the seller to repair the property and what the buyer’s rights are if the seller refuses.
Additionally, the contract typically includes deadlines for when the parties are to perform the inspections. These can be modified if properly requested and agreed to by both parties.
The Conditions to Close
The contract will also specify what conditions must be met for the parties to close the transaction. Often, this includes:
- Clearance from the seller’s lender that the purchase price will pay off the existing loan;
- The all-clear from the buyer’s lender that the financial conditions have been met to issue the loan;
- Acceptable title work indicating that the seller owns the property and that there are not any chain of title issues;
- An appraisal that values the property within the price point for the contract and the lender;
- A resolution or other permission from management consenting to the purchase of the property, if needed;
- Documentation that the inspection did not turn up any irreparable damage; and
- Proof that the seller completed and paid for agreed-upon repairs to the property.
Often, the contract also includes deadlines for each circumstance. The deadlines are either a calendar date or number of days after or before a specific event (such as the acceptance date of the contract or before the closing date).
The Seller’s Warranties and Representations About the Property
The agreement also contains a host of warranties and representations made by the seller about the property. This includes promises about the property’s physical, legal, and financial condition. For example, the seller might promise that they do not know about any pending or imminent legal disputes regarding the property. Further, they might indicate there are no significant issues with the property, such as a broken sewer system, which may render the property unusable.
What Happens if Someone Breaches the Contract
Finally, the contract typically indicates what happens if there is a breach. For example, the buyer usually deposits earnest money with the seller or the seller’s representative. The deposit goes toward the purchase price at closing if everything goes to plan.
If the buyer breaks one or more of their promises under the contract, they may forfeit their right to receive this earnest money. The contract may also outline other scenarios and the parties’ remedies.
The Hunnicutt Law Group—We Can Draft and Review Your Commercial Real Estate Purchase Agreement
For over 25 years, Steve Hunnicutt has served as a zealous advocate for Texans. He began his legal career working for a Fortune 500 energy company, then he transitioned to private practice. He leverages his big law and in-house experience to benefit various Texas businesses of all sizes.
If you have questions about what to look for in a commercial real estate purchase agreement, call us today at 214-361-6740 or contact us online to schedule your consultation. For your convenience, we also provide video conferencing appointments.