By: Tamara B. Pow, Esq.
The purchase and sale agreement (PSA) is a critical document in commercial real estate transactions. It serves as the central point of negotiation between the buyer and seller, formalizing the terms of the sale. While the process can be time-consuming and complex, it is crucial for both parties to reach an agreement that satisfies their needs.
Understanding the Basics
The PSA is often preceded by a letter of intent (LOI), a preliminary agreement that outlines the key terms of the sale. It is advisable to use an LOI to ensure alignment before investing extensive time and effort into negotiating the PSA. The LOI typically covers important aspects such as the sale price, deposit amount and timing, identification of the property and parties involved, due diligence timeframes, escrow period length, representations and warranties, required documents, and any special clauses desired by either party.
When reviewing the PSA, it is essential to confirm that the agreed-upon terms from the LOI have been accurately incorporated. This includes aspects such as the sale price, deposit, property identification, and due diligence and escrow periods. If any discrepancies are found, revisions should be made to align the PSA with the LOI.
Conducting Due Diligence
During the due diligence period, the buyer should conduct a thorough investigation of the property's title and other relevant factors. Obtaining a preliminary title report early on allows access to important documents recorded in the title record that may affect the property's value. It is crucial for the buyer's legal counsel to review these exceptions, which are often agreements that run with the land, such as CC&Rs, easements, and use restrictions. The PSA should provide the buyer with the opportunity to request the removal or modification of these exceptions. Additionally, the buyer should have the right to terminate the PSA if they are unsatisfied with the seller's response.
Other due diligence items will vary depending on the buyer's goals for the property. These may include obtaining a survey, conducting soil testing and inspections for hazardous issues, and researching potential changes to zoning and development plans. Experienced buyers looking to redevelop the property often negotiate for an extended due diligence period to ensure they can obtain the necessary permits and approvals. On the other hand, buyers not intending to redevelop the land are typically open to a shorter diligence period.
Buyer's Responsibilities: Representations and Warranties
From a buyer's perspective, representations and warranties (referred to as "reps and warranties") are crucial. These cover various issues such as the seller's authority to sell the property, existence of any lawsuits or threats against the property, environmental and statutory compliance, and more. It is important to ensure that the PSA holds the seller accountable for these specific items.
If the property is occupied by a third-party tenant, the buyer should also request a tenant estoppel as a closing condition. Furthermore, it is important to ascertain whether the lease contains a right of first refusal (ROFR), which grants the tenant the opportunity to purchase the property before others. If an ROFR exists, the buyer should confirm that the tenant has waived this right before proceeding with further due diligence.
Finalizing the Transaction
As the closing of escrow approaches, the buyer's legal counsel should prepare detailed closing instructions. These instructions outline the documents that the seller must provide before the remaining purchase money can be transferred. In certain cases, the buyer may desire the option to extend the close of escrow, and sellers are typically more receptive to this if an additional deposit is required. It is crucial to negotiate and confirm the extension option during the LOI or PSA negotiations to avoid any potential complications or defaults.
Closing costs are another important consideration. While they are generally allocated according to county customs, the parties may agree to an alternative allocation. It is crucial to ensure that the PSA accurately reflects the responsible party for these costs and that the settlement statement aligns with the agreement.
Conclusion
A commercial real estate transaction's success hinges on a well-negotiated and comprehensive purchase and sale agreement. Buyers must conduct thorough due diligence, ensure the alignment of terms from the LOI to the PSA, and protect their interests through representations and warranties. By following best practices and seeking professional legal advice, buyers can navigate the complexities of purchasing commercial real property effectively.
Photo caption: Commercial real property purchase and sale agreement – a buyer's perspective.
Disclaimer: All blogs on this site are provided for educational purposes only and do not constitute legal advice or opinion. They should not be applied to any specific situation without consultation with legal counsel. Strategy Law, LLP does not provide legal advice concerning matters discussed in a blog without formal engagement. No blog guarantees, warranties, or predicts the outcome of any legal matter or represents any form of guarantee or representation.
