The Essentials of Commercial Real Estate Sale and Purchase Agreements
The sales contract for a commercial real estate is complex. There are no real rules as to how long a commercial real estate contract must be or what it should be contain; some CRE contracts are just a page long and others can be made up of more than a 100 pages.
With that being said, there are provisions for both the buyers and sellers, that are included in most commercial real estate purchase agreements.
Before we delve into the essential provisions of the CRE agreements, let’s take a moment to understand their purpose.
What does the CRE purchase agreement do? Why is it needed?
Purpose of CRE Contracts
A CRE contract has various purposes. Firstly, it clearly states the rights of both parties’ obligations, liabilities and rights. It clarifies the steps that need to be carried out to finalize the agreement and close the transaction.
Generally people are inclined to make CRE contracts concise and simple but a contract that is thorough, with a long list of provisions that address as many issues as possible, is a lot more reliable in times of conflict.
Contract Form, Negotiation & Drafting
The seller’s lawyer usually prepares the first draft of the CRE agreement. Once the agreement is ready, it is shared with the buyer for input.
The contract will go back and forth between both parties until they agree on a final document. The final CRE agreement will include the below provisions, however, each one will be customized for the sort of property and the deal.
The more complicated the transaction is, the longer the negotiation will take.
Common Sale & Purchase Provisions in CRE Contracts
The contract will begin by identifying both parties and as well as the effective date. This will be followed by the “Whereas Clauses.”
1. “Whereas” Clauses
“Whereas” clauses are sometimes called “recitals”; they aren’t considered a component of the operative provisions of the contract. If any of the party’s wishes a “whereas” clause to be binding, it needs to be removed from the “whereas” section and inserted into the body of the contract.
2. Property Description & “As-Is” Term
On a CRE contract, the property can be defined in three ways: real, personal and other.
Descriptions of real property provide details of the land and a list of improvements that will be transferred to the buyer.
Descriptions of personal property will contain specific details of the specific parts of the property that are being sold (in case the seller decides to keep part of the property). The more detailed and itemized the list is, the better it is.
Other property interests refer to contract rights, lease terms, intellectual property, licenses and warranty.
3. Transfer Documents (Assignments, Deeds, Bills of Sale)
All property types are transferred via various instruments that consist of the following:
i. Deeds:
There are several types of deeds and each provides a different amount of protection to the buyers. The contract will state the type of deed that is going to be used in the transaction.
Here’s a list of the deeds that can be used, going from the one that offers maximum protection to the least:
- General Warranty Deed
- Special Warranty Deed
- Fiduciary Deed
- Quitclaim Deed
The buyer should speak to their commercial real estate agent about which deed is best for their situation.
ii. Assignments
A seller will convey their interests in contracts, leases, permits, licenses, intellectual property along with other items. The buyer will determine whether or not the stated items are assignable and if they would like to assume them. If they do, the seller transfers all interests listed in the assignments during closing.
iii. Bill of sale
If the transaction involves personal property then a bill of sale will be used. It will also list all transferable items.
4. Purchase Price, Adjustments & Earnest Deposit
The purchase price of a CRE agreement is usually a set figure which is subject to adjustments during closing. In some cases, the purchase price is based on sq. ft.
The contract will state the adjustments that will be made to the purchase price during closing. They usually include real and property taxes, expenses, rents and security deposits and assessments.
The contract will define who will hold the deposit; usually it’s the title insurance company.
5. Buyer’s Contingencies
Buyers don’t know everything about a property until they actually begin using it. The contract will give buyers a certain amount of time to review parts of the property that are important. During that time if the buyer is unsatisfied with particular items they give the seller a chance to fix them, accept them as it is or terminate the contract.
This part of the CRE contact will also contain the following:
- Buyer Financing
- Title Review
- Survey
- Inspections
- Commercial Tenant Leases
- Property-related contracts and expenses
- Land-use Approvals
- Environmental Review
6. Default Provisions
The agreement will state what will be considered “default”, how an uncured default and termination of contract will be handled.
The contract will also contain a method of resolution in case a conflict arises or if the contract is breached in some way.
7. Seller Representations & Warranties
If the seller is making representations and warranties, they need to be clearly mentioned in the contract.
8. Continuing Management, Insurance, Damage to Property
The buyer will need to ensure that the property hasn’t been damaged during the negotiation process. The property, at closing, should be in the same condition as it was when the buyer first entered the contract.
The buyer will demand that the seller maintains, leases and insures the property properly and does not make any changes to it without consulting them.
9. Broker Involvement
This part of the agreement will name all brokers and state who is responsible for paying them.
10. Boilerplate Provisions
Most CRE contracts will end with a few pages of “boilerplate provisions”.
These usually include the following:
- attorneys’ fees
- dispute resolution
- entire agreement clauses/merger
- force majeure
- forum selection/jurisdiction
- governing law/choice of law
- notice provisions
- involved parties, signature blocks, etc.
- the definition of the property
11. Closing
The Closing section will state when and where the closing will take place. If the closing doesn’t happen on the mentioned date the buyer has the right to terminate the contract.
During closing the following documents will be exchanged:
- Assignments and assumptions
- Bills of sale
- Title insurance policies
- Transfer deed
- Other related documents demanded by the title insurance company.
These are just the essentials of the CRE contract. The purchase agreement is extensive and it helps to have a trusted commercial real estate agent in your corner to ensure your interests are protected.
If you’re looking to purchase commercial real estate in Toronto, contact Pivotal Commercial Realty to connect with reliable and experienced commercial real estate agents.
