The Commercial Real Estate Sale and Purchase Agreement is a document all CRE brokers must master. Whether you use a template or a unique form, this contract signals the end of negotiations. Keep reading to learn more about this important agreement.
In this article:
- What Is a Property Purchase Agreement?
- Why Do Buyers, Sellers, and Brokers Need a CRE Purchase Agreement?
- A Primer on the CRE Purchase Agreement as a Contract
- The Anatomy of a Commercial Real Estate Purchase and Sales Agreement
- What Are Other Accompanying Documents for the Agreement?
- Are There Any Duties for the Buying Party in the Agreement?
- What about the Duties of the Seller?
- For the CRE Broker
Commercial Real Estate Purchase Agreement 101
What Is a Property Purchase Agreement?
A property purchase agreement spells out the details between a buyer and seller regarding a property. It is a legal contract that binds all the parties, including the broker, to fulfill their duties.
The CRE Sale and Purchase Agreement signal that negotiations have ended and that money and properties have exchanged hands. However, the agreement still has power even after the deal through the provisions written in the contract.
The power of this legal contract comes from the UK’s 1677 Statute of Frauds, from which a lot of US property law takes inspiration.
Why Do Buyers, Sellers, and Brokers Need a CRE Purchase Agreement?
The legal contract makes the CRE deal enforceable. For all parties, the purchase agreement functions both as a record and a legal safeguard for their rights.
An enforceable contract means that any party can ask the government to step in when a party does not fulfill his or her duty. Some CRE contracts go as far as detailing the escrow agent and seller-financing to prevent confusion.
All the parties need the purchase agreement if they want protection from fraud.
In addition to legal protection, the contract also has the so-called recitals. Recitals usually start with “whereas” and provide the enumeration of details necessary for the transaction.
A buyer asks for a CRE purchase agreement since the contract has the useful recitals that give a bird’s eye view of the property and the conditions. Other than the protection and the data summary for deliberation, a CRE purchase agreement also gives the buyer the rundown of financial responsibilities, like the commission costs and maybe the current year’s prorated taxes.
Sellers need the CRE purchase agreement not only for records and financial consideration but also to show goodwill to the buyer. Laying out all the cards on the table in the form of a contract can provide transparency to all parties involved.
Lastly, brokers love the CRE purchase agreement as the paperwork breaks down all the details. The law places a fiduciary duty on the broker towards the client, and having a CRE sales and purchase agreement can prove due diligence.
A Primer on the CRE Purchase Agreement as a Contract
Under the law, a legally binding contract has six elements.
- The seller must offer a property or service,
- The buyer agrees to show legal acceptance,
- Both parties mutually oblige to the terms,
- The buyer gives something of value legally called a consideration,
- The buyer, seller, and broker have the legal capacity to perform such actions,
- Lastly, the contract conforms to the Uniform Commercial Code (UCC).
The CRE contract can take many forms. The UCC does not prescribe a specific flow of sections and parts.
While there are differing state regulations, especially on who and where to submit, the law gives contracts a lot of leeway regarding the form.
What the parties and the CRE broker should look at vigilantly are the restrictive covenants and the indemnities and warranties. Restrictive covenants are conditions that narrow down what the seller is selling.
Usually, these conditions start with the legal phrase “including without limitation” to state that everything related to the items enumerated is for sale. However, the section also follows with excluding clauses, like changing the name of the property if the seller wants to protect his or her brand.
Warranties state the current conditions of the real estate property that warrant description, like having solar panels to receive state subsidies or not having any encumbrances attached to the land.
Indemnities state how much the seller pays as a penalty if the warranties stated do not match reality.
The buyer and seller can typically find these sections inside disclosures. However, there are no prescribed formats for a CRE purchase agreement, so the positions may vary.
The important thing to note is that the broker performs due diligence for their respective clients.
Knowing the parts and sections of a CRE sale and purchase agreement can help brokers provide valuable service to clients.
The Anatomy of a Commercial Real Estate Purchase and Sales Agreement
Recitals – Generally speaking, a commercial real estate purchase and sales agreement start with the recital section. The recital, usually prefaced with “whereas”, states who the buyer, seller, and broker are, as well as information about the description, location, and title policy of the property.
Consideration – Also known as the purchase price. It can state the total costs, financing, mode of payment, and other financial considerations.
Earnest Money – Interchangeable with the consideration. This part details how much money the buyer paid first to reserve the property, which is usually non-refundable.
Glossary – This is what parties also call the exhibits and addenda. This section is where the parties enumerate other important documents and paperwork, like the title and promissory notes.
Financial Responsibilities of the Seller – Here CRE brokers can find whether or not there will be an encumbrance or financing to pay for the property.
Feasibility Contingency – This enumerates the conditions of the buyer and seller. Due to their complex legal nature, the readers can find an in-depth section later for both the buyer and the seller in this article.
Seller’s Disclosure – Some CRE purchase agreement contracts do not have this, but it is a good practice to include it. Some lawyers have the closing section or contingency section absorb the disclosures, and this can cause unnecessary confusion to the buyer.
Closing Section – It contains information about the closing agent, the schedule of payments as well as the expenses required by the state. The buyer and seller can find the schedule of payments and the necessary actions, like sending of a written notice, in this section.
Closing Costs – Also known as the prorations section, this talks about ongoing expenses and the assumption of obligations. Here, the buyer and seller can agree who pays for the utility bills, insurance, and other miscellaneous expenses.
Seller’s Representation – This discusses when the risk of loss ends with whom, as well as other important information like encumbrances. The time and dates for operations and ongoing projects may have deadlines, and the seller has to state the schedule for ease of conveyance.
Boilerplate Clauses – There are other sections with more specific provisions, like the attorney fees, confidentiality clause, and other miscellaneous sections.
Lastly, the identification of parties and their signatures signal the end of the purchase agreement.
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What Are Other Accompanying Documents for the Agreement?
Documents that prove ownership, as well as the warranties stated in the contract, must be in the exhibit and addenda.
The buyer wants to see the document showing the title and encumbrances. Not only is this in place to prevent fraud, but it’s also to make the transfer of ownership fast and convenient.
The buyer can also attach any proof of payment for the earnest money. This proof can take the form of a check, a separate contract, or even a promissory note.
Some buyers will want a risk survey with an environmental review and other important preliminary investigations. If these conditions are part of the deal, attaching the results of the surveys is necessary.
To prove ROI and other projections, the seller can attach previous income statements, as well as cash balances and a list of expenses.
The buyer can also request receipts for payment of taxes. Any addendum, like a financing addendum, may help make the agreement easier to understand.
If you are hesitating to add a document, it is better to err in the side of caution and just attach the paperwork.
Are There Any Duties for the Buying Party in the Agreement?
The buyer has to perform due diligence, together with their representative. The law goes with the legal principle of caveat emptor, buyer beware, so doing homework is a must.
Most CRE purchase agreements allow the buyer access to inspect the property in depth. The buyer has to act on this privilege.
If the buyer did not take advantage of this privilege, he or she could not object due to observations after closing the deal.
The buyer has to send the money to the seller according to the contract. Whether the seller pays electronically or through a cashier’s check, the payment of the consideration is a primary duty of the buyer.
Generally, the parties prorate utility bills and other expenses. This means that the buyer starts paying these bills once ownership transfers.
Most of the taxes usually go to the buyer, but stipulations can change. Parties can assign said expenses to just one side or even divide among themselves.
Remember, most of the property transactions are on an as-is basis, so doing legwork is necessary.
What about the Duties of the Seller?
The seller must ensure that the property is what the seller claims it is. If it has an encumbrance, the buyer must know all the details.
All permits necessary for the construction and operation of the property must be in order. The seller must also make sure that there are no state or federal laws violated by the property.
The seller can receive a penalty from the state even if the property is transferred. The penalties apply if the previous owner did not tell the buyer or, even if he does not have previous knowledge of the violation, did not do due diligence to find out and inform the buyer.
The seller also has the responsibility of maintaining the property until conveyance of ownership. Some buyers want the seller to continue providing warranties even after ownership has transferred.
The seller has the responsibility to fact-check the accuracy of all documents, like existing leases and contracts that provide income from the property.
As long as the seller showed due diligence and acted in good faith, the real estate purchase agreement should have validity.
For the CRE Broker
A lot of times, there is only one broker on record. However, some parties have several brokers, and the contract should identify which broker serves which party.
In rare cases, there is no broker for both parties. If such is the case, the purchase agreement must state that there are no brokers involved.
Commercial real estate loans affect profitability and convenience for all parties involved, and the broker can give suggestions on how to finance the property.
Most parties get a CRE broker to understand commercial real estate financing. Mastery of how CRE financing works make CRE brokers add more value to the deal.
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