Commercial Real Estate Purchase Agreement
Commercial real estate transactions occur regularly, but most real estate regulations and statutory protections apply in residential real estate, and not commercial real estate. For example, the Real Estate Settlement Procedures Act (RESPA) provides guidance and consistency for residential transactions to ensure both buyers and sellers operate on equal footing. However, it is presumed commercial actors are more familiar and capable in the real estate transaction, and thus, these regulations do not apply. While purchasing commercial real estate requires significant diligence, a primary concern is the purchase agreement. The purchase agreement identifies all the actions the buyer and seller are required to take in order to complete the property transfer.
The purchase agreement is used to define the legal obligations of a transaction, and unlike residential transactions, one is more likely to find a unique purchase agreement. The buyer and seller have the option to custom create the purchase agreement, and each may vary significantly. Generally, a purchase agreement will be in writing, signed by the parties to be bound, include the property description, and include the purchase price. The remainder of the document, generally, can be categorized into five distinct groups, customized for each transaction. These groups should be carefully examined prior to signing a commercial real estate purchase agreement.
Payment: The purchase agreement should specify the responsibility of each party as it pertains to payment. Although the purchase price is charged to the purchaser, the cost of utilities, taxes, closing documents, preparation fees, and licensing fees should be clearly stated and assigned to a responsible party. Failing to assign one of these payments to a party may result in the buyer being responsible for them after closing. As an example, if taxes are not delineated and pro-rated based on occupancy, the new owner will be become liable for the entire previous year, regardless of when the purchaser possessed the real estate.
Procedures: Both parties need to know what steps will be taken and when they should expect them to happen. Moreover, a party to the agreement may accidentally waive certain rights by not following the timelines in the purchase agreement. The procedural steps are everything from inspections, to repairs, to final signatures. Procedural considerations should include a dispute and complaint resolution process, closing and escrow details, personal property present but excluded from the transaction, and procedures to modify or add to the purchase agreement.
Buyer’s responsibilities: Identifying the actions a buyer must complete pre-closing ensures an execution process that both parties can follow, which allows the transaction to incrementally progress towards a successful closing. The buyer’s responsibilities should include financing, inspections, resolution of tax liability, termination ability, due diligence, insurance, and allowable uses or modifications to the property during the closing period.
Seller’s responsibilities: It is important to identify the actions the seller must complete prior to closing. If the buyer discovers defects during the inspection, with the right to demand repair, the duty must be included in the purchase agreement. Other important considerations include ensuring the seller provides reasonable access to the property for inspection or modification, maintaining property insurance through closing date, maintaining the property in current condition or repairing defects, tax liabilities, current contracts or encumbrances on the property, timeframe for acceptance or lapse of the offer, and date all responsibilities must be accomplished in order for the contract to be effective.
Inspections: As the buyer is presumed to have knowledge with commercial real estate, the due diligence requirement is assigned to the buyer to identify problems with the property. The failure of a buyer to identify a problem, defect, or issue will not be imputed to the seller. While it is important to conduct thorough inspections, specifically including the items to be inspected in the purchase agreement will help the transaction progress forward. If the property is designed to be a source of revenue, an inspection of final records and operating statements is also appropriate, and should be included. This may require execution of a wide variety of other documents, including subordination agreements, tenant estoppel, and similar agreements. The purchase agreement, typically, will include clauses for the buyer to be released from the contract if an inspection uncovers a major issue within an inspected area.