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Keys to Determine the Right Type of Commercial Real Property Purchase and Sale Agreement

Updated: Mar 13

By Lindsey Stapay - Westward Advisors

In an educational blog published by Tamara B. Pow, Esq.,a Business and Real Estate Attorney and a suggested real estate partner, it stated that, “the purchase and sale agreement (the “PSA”) is the central document for the sale of commercial real property and one of the most important.”

The details of the agreement are usually negotiated after the buyer and seller sign a Letter Of Intent (LOI), though the parties may skip the LOI and move straight to the PSA. Before devoting time and energy into negotiating the PSA, which is often a lengthy and time-consuming process involving numerous rounds of amendments before an agreement acceptable to both parties is achieved, a LOI should be utilized to ensure the parties agree on the basic conditions of the sale.

The party who provides the initial agreement has the advantage of being familiar with the document's terms and structure, whereas the other party must read and evaluate the entire agreement in order to grasp it and any necessary adjustments.

Initial items to note are:

  • Sale Price

  • Deposit Timing And Amount

  • Accurate Identification of The Parties and The Subject Property

  • Time Permitted for Due Diligence (Including Title Review And Objections)

  • Length of the Escrow Period, the Representations and Warranties provided by each Buyer And Seller

  • Buyer And Seller documents that must be delivered to the Escrow Holder before the Close of Escrow

  • Any Special Clauses that either Buyer or Seller want incorporated into the PSA

The party examining the PSA should ensure that the LOI's pre-negotiated terms are integrated into the agreement, and the PSA should be changed if it differs from the LOI. Because the sale price, deposit, subject property identification, length of due diligence, and escrow periods are often discussed in the LOI, a simple comparison against the LOI will confirm if these items are appropriately mentioned in the PSA.

During The Due Diligence Period

  • A preliminary title report should be obtained as soon as feasible since it enables access to documents listed in the title record that affect the property.

    • These documents are often mentioned as exceptions to the title insurance policy, and it is the responsibility of buyer's counsel to determine which exceptions should be deleted, as well as to clarify the buyer's responsibilities with respect to the exceptions that will remain, these are often agreements that run with the land.

  • The PSA should allow a buyer to request that the seller remove or change things highlighted in the title report, give the seller time to reply, and lastly provide the buyer the option to terminate the PSA without losing their deposit if the seller's response is not satisfactory.

  • Other due diligence items will vary based on the buyer's objectives for the property, and may involve things like getting a survey, testing the soil, inspecting existing improvements for dangerous hazards, and contacting the city about development plans and prospective zoning changes.

    • Experienced buyers who intend to redevelop the property will frequently negotiate a lengthy due diligence period to ensure that they will be able to secure the necessary permits and clearances. Otherwise they usually open to a shorter due diligence period.

Before The Due Diligence Period Ends

  • The buyer should be allowed to cancel the PSA without penalty and receive their deposit refunded in full (but will often be required to pay for escrow and title costs incurred). The money is non-refundable after the diligence time has expired and the buyer has not terminated the PSA.

“California PSAs typically include a liquidated damages clause which state that if a buyer breaches the PSA then the deposit shall be relinquished to the seller as liquidated damages,” Pow explained.

  • If a buyer breaches the agreement, it is usually after the diligence period because the buyer can no longer terminate it without penalty until the seller violates the terms.

  • From the buyer's perspective, representations and warranties (reps and warranties) cover issues such as the seller's authority to enter into the agreement and sell the property, whether the property is the subject of any lawsuits or threats of lawsuits, and whether the property violates any environmental or statutory laws.

    • They will also indicate that the seller has not filed bankruptcy and is not a foreign individual or barred person as defined by applicable statutes, that the property is not condemned, and that all third-party claims in the property have been revealed.

  • If the property is inhabited by a third-party tenant, the buyer should ask for a tenant estoppel as a closing condition and find out if the lease includes a Right Of First Refusal (ROFR) that allows the tenant to buy the property before anybody else.

    • If the lease includes a ROFR, the buyer will want assurance that the tenant is dismissing the ROFR before investing time and money in diligence, and the PSA should clarify that the diligence term does not commence until the ROFR is waived.

“Commercial real property in California is often sold on an As-Is basis, meaning a buyer accepts the property in its current condition without any warranties from the seller regarding the condition or use of the property. A buyer should confirm the As-Is clause makes an exception for the Seller reps and warranties specifically stated in the PSA to hold Seller accountable for these specific items,” Pow elaborated.

Escrow Closing

  • Closing instructions should be prepared by buyer's counsel, outlining the documents that a seller must place in escrow before the remainder of the purchase money can be transferred to the seller.

  • Some buyers want the option to prolong the escrow close, and sellers are more amenable to this offer if the extension right compels the buyer to pay an additional escrow deposit.

  • Acquire an extension option during the LOI or PSA negotiations, as a seller is not obligated to agree to a closing extension if it is not included in the contract.

  • If the seller refuses to change the PSA to allow for a closing extension, the buyer may be pressured to close on time or be held in default of the contract, putting the buyer's deposit at jeopardy.

  • Closing costs, which are normally divided according to county custom, although the parties will agree to distribute them differently, are a closing note on the close of escrow.

  • In either case, a buyer should double-check that the PSA appropriately indicates who is responsible for whose expenses, and that the settlement agreement matches the PSA.

All information deemed reliable but not guaranteed. Neither listing broker(s) or information provider(s) shall be responsible for any typographical errors, misinformation, and misprints and shall be held totally harmless.

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