What Needs to be in a Purchase Agreement for Commercial Real Estate?
It is not unusual for one party or the other to breach contract while a commercial real estate transaction is in process
Purchasing commercial real estate is often complicated, even for business owners who have bought and sold multiple properties in the past. With such high-value properties and so many industry-specific regulations, there is, unfortunately, a lot of room for costly error.
A thorough, airtight purchase agreement can help both the buyer and the seller avoid headaches and disputes along the way. Every commercial real estate purchase is different, so your real estate law attorney should review and customize your purchase agreement before each transaction. However, there are a few key elements that must be included in every contract for clarity and enforceability.
Usually, the purchase agreement specifies that the buyer agrees to buy the property pending an inspection. The contract needs to state this explicitly. It also needs to spell out a few more details about the inspection process.
In certain industries, the contract may state what specific types of inspections will be conducted. For example, the contract may state that plumbing, soil, and emissions inspections will be completed prior to closing. It should also include a date by which the inspection must be completed, and it should specify how long, post-inspection, the buyer has to terminate the agreement.
A purchase agreement must also specify what happens to the buyer’s deposit if they decide to terminate based on the inspection results. Oftentimes the buyer will forfeit the deposit, but some contracts specify that the deposit will be refunded if the inspection reveals certain problems.
Purchase Price and Financing Terms
A purchase agreement not only needs to specify the purchase price, but also how that purchase price will be met. What are the sources of financing? There are several types of loans available for the purchase of commercial real estate including conventional mortgages, bridge loans, and SBA loans. The purchase agreement should include the type of loan being used to finance the purchase, the name of the bank providing the financing, and the amount being financed.
The contract also needs to spell out the closing costs and how they will be provided. If the seller will be paying a portion of the closing costs, this must be specified. The projected closing date must also be explicitly listed.
Warranties of Property Condition
In order to ensure both parties are on the same page regarding the condition of the property, the purchase agreement needs to spell out the condition that can be expected. Commercial properties are often sold “as is” with no representations or warranties. There is nothing wrong with this approach, but it does need to be spelled out in the contract.
On the other hand, if the seller does wish to warranty the property in some way, the purchase agreement must mention these details. For example, if the seller wishes to guarantee a facility remains operational for five years, the purchase agreement must include this provision.
A Detailed Description of the Property
The purchase agreement should include not only a description of the building being purchased, but also of any additional property included in the purchase. This is where attention to detail is crucial. If any furniture, appliances, or fixtures are to be included in the sale, they must be mentioned. The agreement should also list any inventory to be included.
In addition to listing the items included in the sale, the contract should also describe the condition of those items. If, for example, an older forklift is to be included in the sale of a warehouse, the contract may mention the forklift’s brand, age, value, and the fact that it was in working condition as of a certain date. If there are any liens or securities against any of the property being conveyed, this must also be mentioned in the purchase agreement.
Remedies in Event of a Breach
It is not unusual for one party or the other to breach contract while a commercial real estate transaction is in process. This is why real estate law attorneys are always careful to include remedies for a breach in these contracts.
In other words, the purchase agreement must spell out what will happen to the agreement if either party fails to abide by the contract. Often, the purchase agreement will be made null and void if certain terms are violated.
An indemnification clause should also be included. This clause outlines the compensation each party will owe the other should the contract be breached. For example, the purchase agreement may specify that if the buyer backs out of the sale after a certain date, they will owe a certain amount to the seller. These funds are meant to compensate the other party for the time and money they invested in a sale that is no longer going through.
While these are some of the most important elements to include in a commercial real estate purchase agreement, they are not the only elements. Every commercial real estate transaction is different, and therefore a custom purchase agreement is necessary for the ultimate protection of the buyer and seller. Work with a real estate law professional to draft and review an agreement that’s appropriate for your transaction.
The trustworthy, experienced legal professionals at Munizzi Law Firm take a personalized approach and can help ensure your Florida real estate transactions go smoothly. Contact us to request a consultation and begin discussing your business needs.