Commercial real estate purchase and sale agreements can be lengthy and complex. Each purchase and sale agreement (P&S) is unique to the subject property, but most have similar structures and content. Four important threshold provisions in any P&S are: (i) the identification of the buyer and seller; (ii) the description of the subject property; (iii) the purchase price; and (iv) the closing date. While these provisions are almost always straightforward, many of the remaining provisions of a P&S are more nuanced. What follows is a summary of four important provisions that are often heavily negotiated. By being well-informed on these issues, both buyers and sellers can better navigate the complex landscape of commercial real estate transactions.
Representations and Warranties
Representations and warranties are often one of the most heavily negotiated sections of a commercial real estate P&S. In simple terms, a representation is an assertion of fact as of a certain date, and a warranty is a promise of indemnity if the assertion is not true. Buyers and sellers have competing interests when it comes to representations and warranties. Buyers prefer sellers to provide thorough representations and warranties concerning the property. Sellers, on the other hand, prefer that buyers rely on their own due diligence, and therefore seek to limit the representations and warranties they provide.
Typical seller representations center on the property’s use being in compliance with all easements and covenants of record and applicable laws (including zoning laws), the property not being subject to any litigation or liens (other than as disclosed in the buyer’s title commitment), and the environmental condition of the property.
In some instances, a P&S will state that the property is being sold “as is, where is, and with all faults.” Here, a seller makes no representations as to the condition of the property. Though not ideal, a buyer may be willing to accept an “as is” purchase if it already possesses intimate knowledge of the property, such as when the buyer has previously occupied the property as a tenant.
Contingencies
Contingencies are conditions that, if not satisfied by a certain date, permit a party to walk away from the transaction. Importantly for the buyer, the failure of a contingency will almost always entitle the buyer to retain its earnest money deposit. Common contingences in a commercial real estate P&S include:
- In many commercial real estate transactions, securing financing is critical for the buyer. In the event the buyer is unable to obtain financing on specified terms, either party may terminate the agreement.
- Satisfactory Title Review. Typically, buyers prefer to include a contingency which provides that, if the buyer is unsatisfied with its due diligence review of the title to the property (often due to undischarged liens, undisclosed easements, etc.), the buyer may terminate the agreement.
- Inspection; Environmental Assessment. A P&S will often afford the buyer the right to conduct an inspection of the property. In the event the inspection uncovers defects in the property that are unacceptable to the buyer, the seller will typically have an opportunity to remedy the defects within a set period of time. Additionally, for certain properties, the buyer may wish to obtain a Phase 1 Environmental Site Assessment (ESA), which serves to identify potential or existing environmental liabilities. In the event the buyer is unsatisfied with the results of these reviews, buyer may terminate the agreement.
The less contingencies that exist, the more certainty the seller has that the transaction will close. From the buyer’s perspective, including contingencies in a P&S helps to reduce the risk that circumstances outside of the buyer’s control will alter its ability or desire to close the transaction.
Indemnification
Indemnification provisions shift the risk of certain losses from one party to another. In the real estate context, sellers are in the position of having far more extensive knowledge of the subject property than their buyer counterparts. While the buyer will usually conduct its own due diligence, it still must rely to a certain degree on the seller’s representations about the property.
In the event the buyer suffers a post-closing loss due to a breach of the seller’s representations and warranties, the buyer may bring an indemnification claim against the seller to compensate for the loss. The specifics of the indemnification language will vary from deal to deal, including the type of indemnifiable losses, the survival period of the seller’s representations and warranties, the indemnification procedure (which usually includes the right of the indemnifying party to control any litigation), and any applicable limitations of liability.
Closing Costs
Buyers and sellers must also negotiate payment of closing costs. Each party will typically be responsible for its own legal fees and brokerage commissions. One of the larger closing costs in New Hampshire commercial real estate transactions is the New Hampshire Real Estate Transfer Tax. This tax is assessed at 1.5% of the purchase price. Standard practice in New Hampshire is for this tax to be split evenly between buyer and seller, though this can be negotiated.
While each commercial real estate transaction is unique, the aforementioned topics are often the most heavily negotiated provisions in a P&S. Understanding the competing interests of buyers and sellers can help to demystify the negotiation process and facilitate a mutually beneficial transaction.