Commercial Real Estate
Commercial Real Estate Agreements – Essential Provisions for Buyers
By Jason S. Buckingham
Apr 11, 2012, 15:09

Commercial real estate buyers should be sure to include the following provisions in their form of purchase and sale agreement:

1. Legal Description / Property to be Conveyed

It almost seems too simple to dwell on, but there is always a chance for mistakes to be made regarding the description of the real property. Buyers should ensure that a proper, complete legal description is attached and incorporated into the purchase agreement. The description should include any exceptions for easements that encumber the property, as well as descriptions of “easement parcels” that benefit the subject lot (for example, a right of way across a neighboring parcel for access). Any description used should be compared to the title report, seller’s vesting deed(s), and the seller’s existing loan documents.

Beyond the description of the real property, the contract should include broad language for the other property – fixtures, personal property, licenses and permits, contracts and leases – that will be included as part of the purchase.

2. Review of the Property

The only way to limit risk as a buyer is to know as much as possible about the property before becoming committed to close escrow. Therefore, a well-drafted purchase agreement should include a comprehensive list of documents (title, survey, financial information, leases, etc) and inspections (environmental, appraisal, termite, properly condition, etc) that the buyer is entitled to review and will also include extensive “conditions precedent” that the buyer must approve in writing before being obligated to close escrow.

3. Seller’s Representations and Warranties

This provision is where the seller discloses the existence or absence of known material facts, as well as affirming that information already provided to the buyer (such as the seller’s authority to sell the property) is free from errors or omissions. This provision is usually a heavily negotiated item because of the obvious difference between the buyer’s and seller’s needs and wants: the buyer needs all material information to make an informed buying decision, and wants the seller to provide all known information about the property; on the other hand, the seller wants to sell the property “as-is”, and needs the knowledge that, once the sale closes, the seller will not be subject to future liability related to the property. Some common issues that buyers ask sellers to represent and warrant include:

· Marketable title and authority to convey title to the buyer
· Any title encumbrances that run with the land
· Payment of all taxes
· Validity and current status of all required licenses and permits
· The absence of any hazardous substances and/or contamination, and an indemnity in favor of buyer if contamination traceable to seller’s ownership is later found
· ADA (Americans with Disabilities Act) compliance, and indemnity
· The absence of pending or threatened litigation related to the property

4. Close of Escrow

This provision sets forth the date(s) on, after, or before which escrow may or must close. Other customary closing issues are included here, such as: the form of deed to convey title, removal of title exceptions like the seller’s open loans secured by the property, perorations of payments received and made, and payment of recording fees and transfer taxes. A well-drafted close of escrow provision will give the buyer the right to terminate the purchase unless all the “conditions precedent” have been approved by the buyer in writing.

5. Risk of Loss

This provision sets forth how the buyer will be protected if the property is damaged, or if the government brings a condemnation proceeding against the property prior to closing. This provision usually includes a definition of “material” damage or loss, and a well-drafted risk of loss provision will give the buyer the right to decide whether to terminate the purchase or collect any insurance or condemnation proceeds.

6. Default and Remedies

When it comes to defaults, most buyers want two things:

· Set damages (usually a portion of the deposit) if the buyer defaults, and
· The right to force the seller to convey title if the seller tries to back out

Thus, buyer should include a liquidated damages provision as the seller’s sole remedy for a buyer breach, as well as the right for the buyer to demand “specific performance” for a seller breach. This provision usually includes notice and cure periods, and an attorney’s fee clause.

7. 1031 Exchange

This provision ensures cooperation if either buyer or seller is performing a 1031 exchange.

8. Assignment

This provision allows the buyer to assign the contract. A well-drafted assignment provision will allow the buyer to assign the contract without seller approval.