The basics of a commercial property agreement
Commercial property purchase and sale agreements, also referred to as commercial real estate purchase and sale agreements or commercial property purchase and sale agreements (collectively, "PSAs"), govern how the sale and purchase of commercial property will occur. These agreements are negotiated between the buyer and seller of a commercial property and become legally binding documents that memorialize the terms of the sale. Most PSAs are complex agreements that include many contingencies for the sale. That being said, even simple PSAs should be reviewed by a commercial real estate solicitor to ensure that all terms have been clearly spelled out in the agreement and the interests of both parties have been adequately protected. Properly drafted PSAs avoid future disputes between the parties and reduce the risk of litigation.
PSAs for commercial real estate typically contain terms establishing the purchase and sale price, deposit (down payment), closing date, financings and financing assurances, representations and warranties, conditions for closing and remedies for breach of contract. The terms of a commercial PSA are often more complicated than terms for residential properties. Each party should understand their obligations after signing a PSA, which is different from the mere obligation to buy or sell the property. The parties are also obligated to be aware of terms that do not impose obligations. Terms such as conditions, representations and warranties can create liability for the parties despite the fact that it does not evoke an obligation for the parties to act or refrain from acting. Each of the foregoing is discussed in more detail below.
A condition is typically a phrase that generally begins with the words "if" or "as long as." Conditions must be satisfied for parties to successfully close on a commercial property. There are two categories of conditions that must be satisfied: (a) a condition precedent; and (b) a condition subsequent. A condition precedent is a condition that must occur before the parties are obligated to act or before the parties are obligated to do anything under the PSA. A condition precedent will delay the parties’ obligations until the condition has been satisfied. A common example of a condition precedent is a financing condition. For example , the buyer may require a financing condition in the PSA, which would require that the buyer receive financing satisfactory to the buyer from a lender prior to closing on the property. A condition subsequent, on the other hand, allows the parties to take action or require the parties to do something if the condition occurs. Common examples of conditions subsequent are environmental and title disclosure conditions or representations. For example, the PSA may contain the following language: Buyer acknowledges and agrees that if it is discovered at any time that there is a reduction in or damage to the property, the buyer, at its option, may terminate the agreement by written notice to the seller within three days of receiving notice of the reduction in or damage to the property and return to the seller all deposits paid under the agreement without further recourse to the seller.
Representations are often verbal or written statements about a past or existing fact made by one party to the other. These statements are typically made during negotiations or included in the PSA. Representations are used to induce the other party to enter into the PSA. For example, the PSA may contain the following language: The seller represents and warrants that: (a) the seller is the registered owner of the [commercial property]; (b) the commercial property is not subject to any easement or covenant except as disclosed to the buyer herein; and (c) the seller is a [corporate entity]. Generally, the seller’s representations survive closing, and the seller is liable for the truth of its representations and warranties if later shown to be false. A breach of its representations and warranties may provide the buyer with the right to obtain either specific performance or monetary damages from the seller. A specific performance award would obtain the relief requested by the non-breaching party. A monetary damages award would compensate the buyer for its losses.
In contrast to representations, warranties are typically promises by the warrantor that an event will occur or that statement is true. A warranty is a hedge against loss or injury caused by an event or state of affairs that may exist. Often, warranties are expressed in the same evidence that the warrantor has made representations, but also includes promises of performance in the future.
The essential elements of the agreement
The key components of a commercial property purchase and sale agreement include, among others, the following:
- the purchase price, including any adjustments to the price at closing relating to the amount of cash on hand or other closing adjustments;
- contingencies which are events, generally of a terminating nature, which must occur for the purchase and sale to proceed to closing, such as satisfactory financing or completion of due diligence relating to the property;
- the date set for closing under the agreement (when title will be transferred and funds paid);
- representations and warranties made by the seller relating to the property or other matters; and
- post-closing covenants relating to operations or similar matters.
Legal issues for the buyer and the seller
Both buyers and sellers should consult with a real estate lawyer, and when necessary a commercial litigator, about their rights and obligations under the Purchase and Sale Agreement before signing it. In the event of a dispute, the rules governing the agreement are set out in statute and at common law. You need to know your rights and obligations under the law, as they may be different from the rights and obligations set out in the purchase and sale agreement.
It is common for commercial property purchase and sale agreements "stand still" in drafting until the parties have completed their due diligence inspections or the seller has completed the repairs required under its obligations in the purchase and sale agreement. This results in uncertainies for the parties as to what the document looks like when completed, and when it will be completed. However, a well drafted purchase and sale agreement will have mechanisms in it to avoid uncertainties that can arise in the time between when the seller accepts the offer and when the agreement is completed.
The deal: negotiating terms and conditions
When it comes to commercial properties, negotiation is key to securing a deal that is favorable for you. For purchase and sale agreements in Commercial Real Estate in Vancouver, some of the things you should focus on during negotiations are:
- Price – Obviously, the price at which you are willing to buy or sell is one of the most defining moments of the negotiation process. Showing your opponent your cards too early in the negotiation can be a detriment: you must understand the circumstances under which you are buying or selling and how badly the other party wants you to make the transaction.
- Possession – There are numerous ways to structure possession to your benefit under a Commercial Real Property Purchase and Sale Agreement. You can hold possession to structure a deal that is favorable to you, or include other clauses in the purchase and sale so that you obtain an advantage over the other party in your agreement(s).
- Due diligence – There are countless ways to structure your due diligence case by case. Specifically, commercial real estate in the Lower Mainland is often unique in its own right, and so you should cover your bases when it comes to due diligence in a purchase and sale agreement.
The most important thing to remember is to never rush into a purchase and sale contract without careful forethought.
Common pitfalls and how to avoid them
One of the most significant issues in any commercial property purchase and sale is the length of time between contract signing and closing. In that time, many different unexpected issues can come up, and it is important to understand what the risks are and how to deal with them.
Survey Issues
Survey issues often come up after the deal has already closed, in which case there is no recourse under the contract itself. For that reason, it is important to fully address survey issues in the contract. While surveys are not typically obtained until the diligence period following a contract signing, due to timing and scheduling issues, we usually try to include a preliminary survey with the contract. Some people think they know how their property is located by looking at zoning records. While those records may indicate the zoning designation as well as some parcel dimensions, the actual lot line, reviewed by a licensed surveyor, can differ significantly. Even after obtaining a survey, there is still much to be addressed, including easements, whether the building is actually located in the zoning district, and a host of other questions. We have had many clients who have thought they were purchasing a property with access to the road through a shared driveway only to find out the next day that no access actually existed.
Reparations
Reparations is another common pitfall we have encountered. If a property is within certain areas of the state , its use may be restricted by Louisiana Revised Statute 38:351, which governs "reparations." Unless otherwise excepted or exempted by law, all construction of buildings, excavating, filling, grading, destroying or placing of permanent structures or other things so as to affect the waterways or water bottoms of the state require the permission of the commissioner of conservation. When purchasing property that is subject to Louisiana Revised Statute 38:351, it is imperative to obtain a surety bond prior to advancing any funds toward construction or development activities. Failure to do so can lead to forfeiture of the property without recourse and cost the buyer significant sums of money.
Environmental Liabilities
Environmental issues can also be common difficult areas. Before purchasing property, it is important to have a thorough understanding of the environmental liabilities it may present. Cercla (Superfund), RCRA (Resource Conservation and Recovery Act), and other environmental regulations may require significant monitoring, investigative, and remediation work. The purchaser may be responsible for this liability even if the property is not contaminated and even if the contamination happened prior to the purchaser acquiring the property. This is even more prevalent in commercial property matters where many of the properties are presumed to be contaminated and require extensive monitoring.
The professionals: roles and responsibilities
The role of professionals also plays a pivotal role in the successful purchase and sale of commercial property. Often, commercial transactions are complex and involve a range of contractual documentation and extensive negotiations with respect to the transaction. In this regard, the assistance of a skilled commercial real estate agent and commercial real estate and commercial leasing lawyer is invaluable in successfully navigating the entire process. These two professionals will guide you through the complex aspects of any particular commercial real estate transaction, provide you with critical advice on the various terms and conditions of the transaction and may point out solution to problem aspects you may not have considered.
It is important to remember that (in Ontario) it is not acceptable for a real estate agent to give legal advice, i.e. legal advice must be provided by a lawyer. In addition to working for you with respect to the transactional aspects of the purchase and/or sale of your commercial property, a commercial real estate lawyer will work for you to: 1. review the contractual documentation with you, 2. advise you with respect to the negotiation of such contractual documentation including by way of example, the Agreement of Purchase and Sale, exclusive listing or lease agreements, in conjunction with your real estate agent, 3. on the procurement of financing including commercial mortgages, 4. on title issues, 5. where applicable, the construction and or renovation of the commercial premises to meet the needs of your business, 6. obtaining Zoning and site plan approvals, on construction financing issues including by way of example, advances under a construction mortgage, and / or 7. review your obligations and responsibilities with respect to the purchase and/or sale of fixtures, machinery and equipment and inventory, 8. coordinate the closing process in conjunction with your real estate agent and an Appraisal and Environmental consultant.
Finalizing and settling the deal
Once the commercial property purchase and sale agreement has been negotiated and signed by both parties (known as "executed"), it still needs to be finalized before the property can formally change hands. A good portion of this process should go on behind the scenes, with the buyer’s agent communicating with relevant parties the progress of due diligence, inspections, appraisals, financing, insurance, etc., while a lawyer prepares the necessary documents and organizes the closing. The more thorough the work done prior to closing, the less likely there will be any unforseen hiccups. The timeline for closing is typically laid out as part of the purchase and sale agreement, and it varies depending on the circumstances. In Massachusetts, closing often takes place within 45-60 days of an agreement and typically involves a meeting of all parties, their representatives, and both real estate agents in order to finalize the transaction. Before the closing meeting, the buyer should get a title insurance policy and a title opinion letter from their attorney (purchased from a title company) and schedule an inspection of the property . The seller should make sure any prepaid taxes, condo or HOA fees, and assessments are accounted for. The buyer should also schedule their homeowner’s or commercial insurance policy and arrange for the transfer of billboard licenses and permits, transferring bank drafts or letters of credit, and lease assignments, if applicable. On closing day, the buyer will need to finalize their mortgage and pay the balance of their down payment, and the seller should prepare to hand over the property deed, along with all specific documents, keys, or files relevant to the property. The buyer will sign a variety of closing documents during the closing meeting and will be required to provide a cashier’s check or proof of wire transfer to pay the remainder of the down payment and other fees and costs. They will then receive the deed from the seller. If there are any mortgages or liens on the property, the seller will need a payoff letter from their lender in order to pay off the existing loan and clear the title. The seller will also need to sign an authority to record the documents in order to clear the title to the property. Once payment is finalized and the deed and other documents have been duly recorded, the transaction is complete!