Understanding Commercial Real Estate Contracts of Purchase and Sale

What Exactly is a Purchase and Sale Contract

What is a contract of purchase and sale you may ask? It is the document between the vendor (vendor is the terminology for a seller) and the purchaser whereby the vendor agrees to sell the property and the purchaser agrees to purchase the property. The premise behind a contract of purchase and sale is simple. I will convey title to my house to you for the price that we agree is appropriate and you are willing to pay.
The contract will be completed to ensure that all relevant terms such as purchase price , adjustments, conditions, closing date, all the important items affecting title (title insurance policy, easements and encumbrances including notice of leases) and anything else that may detract from someone’s ability to close the transaction. However, once the contract is signed, it is a binding contract to buy and sell and the draft of the contract should not be any different than the final approved version save and except for typos.

Essential Components of a Commercial Deal

As with all contracts, the terms of a commercial real estate contract can quite literally be anything the parties want. In practical terms, however, there are certain elements that every contract of purchase and sale should contain for it to be considered complete, and enforceable. All contracts must have parties. In commercial real estate transactions the parties will likely include an individual buyer and seller and their business entities. Dealing with parties who are non-existent, or can not be located, or who simply refuse to perform as promised in the contract can be very difficult, if not impossible, and will almost certainly result in significant expense and delay. A contract for the purchase and sale of real estate must reference the land to be purchased. In Florida, it is common to specifically identify each parcel, condo unit, etc., to be conveyed using a legal description. A legal description will usually be in the form of a metes and bounds description or by using a plat book and page (e.g. Lot 5 in Block 64 of Autumn Place as recorded in Plat Book 78, Page 43, of the Public Records of Palm Beach County, Florida). There is certainly a place for parcels not described until closing such as for commercial shopping centers which have multiple parcels. However, in my experience it is best to include at least the parcels to be conveyed in a typical transaction, even if they are conveyed together under a single instrument. The property cannot be conveyed unless it has been adequately identified in the contract. The price to be paid for the property is often the most heavily negotiated term of the parties’ contract. Buyer may offer to pay cash contemporaneously with closing, or may request that payment be made through a mortgage loan or over the term of a lease. In either case the price must be clear and free from doubt or ambiguity as to amount or payment obligation. A closing, where the parties will tender good title and money, requires some degree of assurance about what will occur day of closing, and when. Therefore, every contract should require a closing date and provide for what happens should the parties not close on that date. Closing conditions, e.g. what must occur prior to closing, and conditions after closing, e.g. surviving obligations, are important, and frequently omitted provisions. Necessary third party approvals, satisfactory title and environmental conditions, and unfilled contingencies should also be addressed.

Legal Responsibilities of Both Parties

The contract of purchase and sale is an agreement between a vendor (seller) and purchaser in a commercial real estate transaction which governs the relationship between them. Once signed, the parties are legally bound to its terms. Failure or refusal to comply with the terms of the contract can lead to legal action and be very costly.
First, the vendor must transfer title to the purchaser on the date specified in the contract. The purchaser is supposed to pay the purchase price out of escrow, as stipulated under the terms of the contract.
The purchaser is obligated to do a number of things including:
The purchaser must also deposit the balance of the purchase price in accordance with the contract within the specified period of time and the vendor is obliged to use those funds immediately in its own rules and cannot "play around" with it for even one day after receipt. Having funds received out of escrow invested in GICs or the like makes it difficult for the vendor to argue that expenses have been incurred from the sale etc. It is not unusual for the purchaser to make a portion of the deposit non refundable or for the deposit to be paid as liquidated damages for certain defaults. The purchaser’s deposit is intended to act as liquidated damages if the vendor breaches the contract.
However, if the conditions in the contract cannot be satisfied before the closing date, the purchaser’s deposit should be returned without any deductions, because the vendor has broken the contract. Never counter sign the trust agreement if receipt of deposit and receipt of holdback are not being handled in the same way. If an agreement has been reached concerning any such arrangement, a chain of trust agreements must be established showing the final disposition of the deposit and holdback money.
The purchaser must be given a reasonable opportunity to review the vendor’s documents before closing. If the vendor does not give the purchaser access to its legal counsel’s opinion as to title, the purchaser will be able to back out of the deal without penalty. On occasion, the purchaser will want to know before closing what compensation the vendor must pay to its suppliers on closing. If the vendor refuses to disclose and does not protect the purchaser’s right to inspect the invoices, advising that since the purchaser could request invoices at any time, the purchaser will not be allowed to back out of the deal.
The vendor has a duty to give full disclosure as to the facts known to it. A failure to disclose may give rise to rescission or damages. A very useful clause in a purchase and sale agreement is the Vendor’s Representation clause which indicates that none of the representations of the vendor are misleading based on the knowledge of the vendor.
The vendor is responsible for paying all fees and costs reasonably incurred in complying with the completion of the work described in the documents. The vendor must pay the following types of fees and costs:
The purchaser must pay all other fees and costs associated with the work performed in respect of the lands. This includes:
If the purchaser fails to obtain the necessary permits, the vendor only has to pay the additional cost to obtain permits not contemplated by the contract. If the vendor knew that there was any significant problem with the existing infrastructure and conceals it from the purchaser resulting in repairs to the property being more extensive than the purchaser reasonably expected, the vendor will likely have to contribute to the expense of repairs.
The Environmental Protection Act, the Fisheries Act, the Water Act and the Water Resources Act are enacted and enforced by inspectors who have the power to seize or recover from the land owner money spent to clean up contaminated lands. If a purchaser considers the provisions of these statutes tilt too much in favour of the authorities and is unduly burdensome, it may make good sense to negotiate more favourable clauses into the contract. Even a vendor cannot get around these statutes.
In conclusion key concepts to understand regarding contracts of purchase and sale:

Common Clauses in Commercial Contracts

Contracts of purchase and sale typically include a number of important clauses which govern the relationship between the purchaser and the vendor and which are intended to protect the rights and interests of the purchaser. These clauses may include "contingencies", "warranties", "indemnities" and what are known as "conditions precedent".
Contingencies
A contingency is a clause in a contract which provides that the contract is conditional on a certain event happening or not happening within a certain period of time. Usually, the conditions are required to be satisfied by the time fixed for the completion of the purchase pursuant to the contract. However, sometimes, contracting parties provide for a contingency which does not have to be performed by the completion date of the purchase, but, rather, on or before some other date. For example, where a purchaser has entered into a contract of purchase of a commercial property, the sale can be made conditional on the purchaser obtaining financing (or in the case of the sale of an asset purchase, on the purchaser obtaining financing which is satisfactory to the purchaser in its discretion). In that case, the condition to purchaser’s obligation to complete the purchase is that the purchaser has received a commitment from its lender at least 2 business days prior to the scheduled completion date.
Warranties
A warranty is a statement or representation made by one party that something is true. In a contract of purchase and sale, warranties are generally made by the vendor in favour of the purchaser. For example, a vendor will warrant to provide the purchaser with good and marketable title to the purchased property free and clear of all encumbrances, liens or other defects. A warranty is merely a statement by the vendor that a provided fact is true. If it is proven later that it is not true, then a claim can lie for damages against the vendor.
Indemnities
An indemnity is a provision in a contract that provides that if one party makes a claim against another party, that other party will reimburse or compensate the first party for damages in connection with the claim. For example, in a contract for the sale of a commercial property, the vendor agrees to indemnify the purchaser for any losses or damages which the purchaser suffers as a result of a breach of any vendor’s representations and warranties.
Conditions Precedent
Sometimes, the parties have to satisfy certain requirements on or before a defined date in order for the purchase and sale transaction to complete. For example, if the sale of the assets of a business is being sold pursuant to a sale agreement which is conditional upon approval by the purchaser’s board of directors, that condition must be satisfied before the sale can complete. Failure to satisfy the condition will result in the agreement becoming null and void.

How to Negotiate a Sales Agreement

Whether you are the seller or the purchaser, negotiating the terms of a Sale Agreement can be a tricky process. The purpose of these negotiations is to take the terms of the Offer and make them mutually acceptable to the parties. The manner in which you attempt to achieve this objective is often a matter of style. The two styles of negotiating are "hard bargaining" and "principled bargaining".
They are as follows:
Hard Bargaining
This method involves making "take it or leave it" offers and making minimal concessions. It relies upon the guile or experienced negotiating style of even the most unresponsive party to move the process to the desired result. It is not a very nice way to do business. Also, it is not very effective with people who are not familiar with it and therefore, do not teach people how to behave properly in a negotiation. Thus , it is difficult to use as a basis for negotiations with first time purchasers or sellers who do not understand what is going on.
Principled Bargaining
This method is aimed at finding a solution that is satisfactory to all the parties. It is rooted in the concept that each of the parties has needs and objectives and that some if not all can be satisfied by the various parties making adjustments in their proposals and positions. The structure is similar to a more democratic one as the parties work together to find the best common solution to their problem. Skills in this method can be learned through practice and are best used when there is some prior relationship between the people involved and where the parties are fairly equal in ability and experience.
What appears to be an advantage to one party can be used as a disadvantage to the other. If you have more bargaining power than your opponent, do not establish a hard bargaining position. You may well lose the deal through rejection or even by carrying the deal to a point where the other person is either completely frustrated or convinced that their "hard bargaining position" is working and they give in to your requirements.
Therefore, while it might be initially attractive to a buyer to make one or more of the following requests, doing so may prove to be counterproductive:
Again, if you are the seller, it is equally important to understand where you are in the hierarchy of power. You may well find yourself in the position of being a distressed seller with little to offer in return for the buyer’s concessions unless you have something they really want.

The Role of an Attorney

Although a contract of purchase and sale is a non-negotiable document, such a document often contains an attached exhibit known as the "seller’s disclosure." Based on a "form" of seller’s disclosure, sellers can fill-in-the-blanks to disclose property characteristics to prospective buyers. Many of these disclosure characteristics, however, are obscure as compared to "typical" real estate transactions. As you might imagine, a myriad of legal issues can arise because of the unique nature of the proposed real estate transaction. Whether contracted by the seller, the buyer or both, it is wise to consult the services of an attorney. An attorney will be able to advise all parties concerning their rights and obligations with respect to the proposed transaction. In addition, an attorney can provide peace of mind that everyone will have their interests adequately protected. Similarly, although there is no "negotiation" aspect to the finalization of the contract of purchase and sale itself, negotiation with respect to other aspects of the transaction can be commonplace. Negotiations concerning financing, rezoning, site plan approval, tenant leases and permitting are very real possibilities in commercial real estate transactions. Often, multiple parties are involved in these types of negotiations, which may result in a myriad of "issues" to be ironed-out prior to closing. For example, who is responsible for remediation of environmental hazards? Who will indemnify the parties against loss in the event something is uncovered two years after the real estate transaction is finalized? The only way to know that you have properly covered yourself in such negotiations is if you consult with an attorney. It is a simple fact that what the parties agree to concerning such issues may not be finalized until . . . well . . . until the paperwork is signed. An attorney will ensure that the proper documentation is prepared and finalized to satisfy the individual needs of all parties involved.

Where Things Can Go Wrong

When purchasing commercial real estate, buyers or sellers may run into potential pitfalls and mistakes if they do not carry out due diligence or seek proper advice. For example, issues with the legal description of the property and/or zoning can lead to problems or even a complete loss of the transaction itself. It is therefore very important to ensure that all descriptions used in the Contract are precise and up to date.
Another common pitfall involves falling victim to fraud. This is especially true when it comes to deposits and wiring funds. To avoid fraud, it is recommended that the deposit is given to a legal professional for safekeeping. But it is not enough that the lawyer holds the money . It is crucial that all conditions have been met prior to the lawyer providing the deposit to the Seller’s lawyer. Otherwise, the money is at risk of being misappropriated.
One of the most important aspects of a good contract is ensuring that it has clear and accurate wording. Take for instance a simple typographical error. What could be a harmless mistake on the surface may actually completely change the meaning of the statement. The Contract may contain clauses that allow one party to take advantage of the other, so if you are signing a contract as the buyer or the seller, it’s vital to have an experienced lawyer review the wording of the document before you sign.